Key Tax Development 2017

Key Tax Development 2017 Session 5 Peter C. Adams Key Recent Tax Developments - 2017 Taxpayer not entitled to deduct travel costs relating to spouse/carer (GREEN) WTPG and Commissioner of Taxation (Taxation) [2016] AATA 971 In 2013-14, the taxpayer, WTPG, was invited to attend and speak at a workrelated conference in the UK. All his own travel expenses were covered by his employer and the conference organisers. The taxpayer suffers from medical conditions and needs a carer to assist him with performing a number of daily tasks such as walking, showering, using the toilet and dressing. He paid for his wife to travel with him to the UK to act as his personal carer during his work trip. The taxpayer claimed a deduction for the travel expenses relating to his spouse s travel. 1

Lump sum workers compensation payment derived in year received Edwards v FCT [2016] AATA 781 In 2014-15, the taxpayer received a lump sum payout as statutory workers compensation for incapacity. The payment related to 2000-01 to 2005-06. The taxpayer, Mr Ian Edwards, left his job with the Australian Federal Police (AFP) in 2000 and commenced part-time work as a photographer in 2006. He had sustained injuries in the course of his employment with the AFP. In February 2015, as a result of an earlier AAT decision, the taxpayer was paid a gross lump sum payment of $86,088.77 by Comcare, pursuant to the Safety, Rehabilitation and Compensation Act 1988 (SRC Act). Broadly, the payment was a compensation for incapacity, and it related to the period from 30 November 2000 to 26 April 2006. Lump sum workers compensation payment derived in year received Edwards v FCT [2016] AATA 781 A private ruling confirmed that the lump sum payment was assessable in the year in which it was received. The taxpayer lodged his 2014-15 income tax return, including the lump sum payment as assessable income. The Commissioner subsequently issued a notice of assessment reflecting the self-assessed taxable income and allowing a tax offset for lump sum payment in arrears (LSPIA tax offset). The AAT held that the entire lump sum was derived, and therefore assessable, in 2014-15 and not in the earlier years. 2

- Tax Residency The backpacker tax legislative package finally passed both Houses of Parliament, after much debate and a number of amendments. The Acts received Royal Assent on 2 December. Working holiday makers are foreign workers on visa sub-class 417 and 462. Tax rates for working holiday makers, from 1 January 2017, are: 1. Does not exceed $37,000-15% 2. Exceeds $37,000 but does not exceed $87,000-32.5% 3. Exceeds $87,000 but does not exceed $180,000-37% 4. Exceeds $180,000-45% Employers of working holiday makers must register with the ATO. The ATO has issued a separate withholding schedule. Registration for employers already employing working holiday makers were required to register by 31 January. Employers that intend to hire working holiday makers will need to register with the ATO. Penalties may apply for failing to register. Review of substantiation exception for travel expense deductions The ATO has released a consultation paper in relation to improving its administration of the substantiation exception for reasonable travel allowance expenses. The ATO reports a disparity between travel allowances paid and deductions claimed for accommodation, meals, and incidentals. This has increased the incidence of checking of these claims, which has highlighted deficiencies and difficulties for employees in showing the amount claimed was incurred, or was incurred in gaining or producing their assessable income. 3

Review of substantiation exception for travel expense deductions The ATO acknowledges that there is a lot of confusion in the taxpayer community about how to apply the substantiation exception. Therefore it has released a consultation paper and seeking feedback on how it can improve its guidance and administrative practices in relation to the substantiation exception. Submissions are due by 22 November 2016. Interaction between royalties and business profits Articles Tech Mahindra Limited v Commissioner of Taxation [2016] FCAFC 130 This Full Federal Court decision concerns the Australia-India double tax treaty and the interaction between the business profits rule (Article 7) and the royalties provision (Article 12). The taxpayer is a resident of India which carries on business in Australia through a permanent establishment. During the relevant year, the taxpayer performed services for its Australian customers both in Australia and in India. 4

Interaction between royalties and business profits Articles Tech Mahindra Limited v Commissioner of Taxation [2016] FCAFC 130 The Full Court held that certain categories of payments referrable to the services performed in India were royalties for the purposes of Article 12. By application of Article 12(4), where the property, right or services in respect of which the royalties are paid are effectively connected with a permanent establishment in Australia, those royalties will be taxed under the business profits Article. The Full Court concluded that the royalties were not effectively connected with the Australian permanent establishment. Therefore, the taxpayer was subject to Australian tax under Article 12 on the gross value of the royalties, and not under Article 7 on the net amount after related deductions. Excess super contributions - special circumstances found on appeal Ward v Commissioner of Taxation [2016] FCAFC 132 The Full Federal Court overturned a AAT decision not to disregard the taxpayer s excess non-concessional contributions of $450,000 or to allocate them to another financial year. The circumstances were that the taxpayer, through misunderstandings involving his new and old advisers, exceeded the three year bring forward limit. The Court held that the ATT erred in determining that the excess contributions tax (ECT) was the natural and foreseeable consequence of the decisions of the taxpayer and his advisers. By doing so, the AAT put the imposition of the ECT outside the scope of special circumstances. 5

Registration terminated Code applies to personal conduct Kishore and Tax Practitioners Board [2016] AATA 764 The AAT has affirmed the TPB s decision to terminate the applicant s tax agent registration. The applicant, who was a registered agent, left his employer, which provided tax agent services. The TPB was satisfied that the applicant had breached s30-10 of the TASA by not acting honestly and with integrity towards the former employer around the time he left the firm. Registration terminated Code applies to personal conduct Kishore and Tax Practitioners Board [2016] AATA 764 The AAT was of the view that the Code of Professional Conduct of the TASA applies to all aspects of a person s conduct as a registered tax agent, whether that conduct be personal conduct as a registered tax agent, or professional conduct as a registered tax agent. The Code cannot be confined in its application, so as to require honesty and integrity only in relation to the provision of tax agent services 6

New residential premises: Properties did not satisfy five year rule FKYL and Commissioner of Taxation (Taxation) [2016] AATA 810 The taxpayer carried on a house construction business as a sole trader. She entered into building contracts to construct four residential properties on vacant blocks. The taxpayer did not claim any input tax credits (ITCs) for the purchases of the properties. She also claimed that they were purchased under the margin scheme. At the time that the taxpayer lodged her application with the AAT, she had not provided the ATO with written agreements which were necessary to show that the margin scheme applied. The properties were rented upon completion and then sold. The lease agreements provided that the tenants were to purchase the properties, and could rent the properties while saving for the deposit New residential premises: Properties did not satisfy five year rule FKYL and Commissioner of Taxation (Taxation) [2016] AATA 810 The taxpayer was of the view that the sales of the other three properties were not taxable supplies, and therefore not subject to GST, because they were all purportedly more than 5 years old when they were sold. The ATO disagreed with the taxpayer. The ATO was of the view that the property sales should be treated as sales of new residential premises and therefore subject to GST. Further, the ATO said that she was not entitled to use the margin scheme and consequently calculated her GST liability as 1/11 of the sale proceeds. The ATO allowed the taxpayer to claim some ITCs for construction costs and non-construction costs, to the extent that they did not relate to the periods of rent. 7

New residential premises: Properties did not satisfy five year rule FKYL and Commissioner of Taxation (Taxation) [2016] AATA 810 Under the terms of s40-75 of the GST Act, a supply of residential premises is subject to GST if the premises have only been used for making supplies of residential rent (which are input taxed supplies) for a continuous period of at least 5 years since: the premises first became residential premises, where the premises have not previously been sold as residential premises the premises were last substantially renovated, where the premises have been created through substantial renovations of a building; or the premises were last built, where the premises have been built, or contain a building that has been built, to replace demolished premises on the same land. After the 5 years of that sole usage, the residential premises lose their new status. This is known as the 5 year rule. New residential premises: Properties did not satisfy five year rule FKYL and Commissioner of Taxation (Taxation) [2016] AATA 810 As noted the taxpayer constructed four properties and rented them out before selling them to the tenants. The AAT concluded that the properties were new residential premises and therefore subject to GST. The properties satisfied the definition of new residential premises as they could not be said to have only been used for residential rent for at least five continuous years preceding the supply. Further, the margin scheme could not apply as the taxpayer could not show the written agreements with the purchasers that the margin scheme should apply. 8

Fleet cars: simplified approach for calculating car fringe benefits PCG 2016/10 Fleet Cars: simplified approach for calculating car fringe benefits PCG 2016/10 provides an optional, simplified approach to working out the business use percentage component of the operating cost method to work out the taxable value of car fringe benefits in relation to fleet cars. This simplified approach is available for employers with a fleet of 20 or more cars and allows these employers to rely on a representative average business use percentage to calculate car fringe benefits for the fleet under the operating cost method. Fleet cars: simplified approach for calculating car fringe benefits PCG 2016/10 Fleet Cars: simplified approach for calculating car fringe benefits The guideline is applicable to an employer if all following criteria are met: the employer has a fleet of 20 or more cars the cars are 'tool of trade' cars employees are mandated to maintain log books in a log book year valid log books are held for at least 75% of the cars in the log book year the cars are of a make and model chosen by the employer, rather than the employee each car in the fleet had a GST-inclusive value less than the luxury car limit applicable at the time the car was acquired, and the cars are not provided as part of an employee's remuneration package (for example, under a salary packaging arrangement), and employees cannot elect to receive additional remuneration in lieu of the use of the cars. 9

Fleet cars: simplified approach for calculating car fringe benefits PCG 2016/10 Fleet Cars: simplified approach for calculating car fringe benefits The simplified, average business use percentage is calculated by: gathering all log books kept for each car in the fleet Determining which of those log books are valid confirming that valid log books are held for at least 75% of the cars in the fleet, and calculating the average of the business use percentages determined in accordance with each of the valid log books. The simplified approach can be applied for a period of five years. Industry severance scheme is not a unit trust (GREEN) ElecNet (Aust) Pty Ltd v Commissioner of Taxation [2016] HCA 51 The taxpayer is the trustee of the Electrical Industry Severance Scheme (the EISS). Under the EISS, employers within the electrical contracting industry may become members of the scheme and become obliged to make payments to the taxpayer in relation to their employees. These payments are credited by the taxpayer to accounts in the names of the relevant employees. The Trust Deed contemplates that, at such time as an employee s employment is terminated, the taxpayer is to make a severance or redundancy payment to that employee. The Commissioner issued a private ruling stating the view that the taxpayer is not a public trading trust for the purposes of Div 6C of the ITAA36. One of the grounds for this conclusion is that the EISS is not a unit trust within the meaning of Div 6C. 10

Industry severance scheme is not a unit trust (GREEN) ElecNet (Aust) Pty Ltd v Commissioner of Taxation [2016] HCA 51 The High Court has held that an industry severance scheme is not a unit trust for the purposes of Division 6C of Pt III of the ITAA36 Accordingly it is not a public trading trust, and therefore the trustee is not eligible to be taxed at the company tax rate. The primary reason for this conclusion is that the beneficial interest in the scheme (the trust estate) is not divided into units. Taxpayer not entitled to deduct travel costs relating to spouse/carer (GREEN) WTPG and Commissioner of Taxation (Taxation) [2016] AATA 971 In 2013-14, the taxpayer, WTPG, was invited to attend and speak at a workrelated conference in the UK. All his own travel expenses were covered by his employer and the conference organisers. The taxpayer suffers from medical conditions and needs a carer to assist him with performing a number of daily tasks such as walking, showering, using the toilet and dressing. He paid for his wife to travel with him to the UK to act as his personal carer during his work trip. The taxpayer claimed a deduction for the travel expenses relating to his spouse s travel. 11

Taxpayer not entitled to deduct travel costs relating to spouse/carer (GREEN) WTPG and Commissioner of Taxation (Taxation) [2016] AATA 971 The ATO disallowed the deduction under s8-1 on the basis that the expenses were of a private or domestic nature. Further, s26-30 denies a deduction for the travel costs of a relative who accompanies a taxpayer on work-related travel. The taxpayer submitted that denying the taxpayer a deduction constituted discrimination under the Disability Discrimination Act 1992 (Cth) (DDA) and that s26-30 is inconsistent with the DDA. Taxpayer not entitled to deduct travel costs relating to spouse/carer (GREEN) WTPG and Commissioner of Taxation (Taxation) [2016] AATA 971 The AAT has decided that a taxpayer suffering from medical conditions and requiring daily personal care is not entitled to deduct travel costs incurred so that his wife could accompany him on a work-related trip as his carer. The deduction was denied under s8-1, although s26-30 would also have applied. The cost were viewed as private and domestic under section 8-1 and relative related expenditure under s26-30 Further, the denial of the deduction did not constitute discrimination under Commonwealth law. 12

Trust resolutions held to be valid (GREEN) - TVKS v FCT [2016] AATA 1010 The individual taxpayer was a beneficiary of the Woodchester No. 4 Trust and the Bristol Trading Trust. In May 2013, the Commissioner issued amended assessments to the taxpayer for 200506 and 2006-07. The Commissioner increased her taxable income from $9,000 to $10.1 million for 2005-06, and from $9,500 to $3.2 million for 2006-07. The Commissioner made the amendments as a result of increases to the trusts net incomes, which were distributed to the taxpayer. Archer Property Pty Ltd (Archer Property) was the trustee for the Woodchester No. 4 Trust. On 30 June 2006, Archer Property resolved to distribute 100% of the income of the trust, as defined in the deed for the income year ended 30 June 2006 to the taxpayer (Archer Property Resolution). In December 2015, the taxpayer executed a Disclaimer of Entitlement to Income in respect of each trust. The documents stated that she disclaims and rejects absolutely any entitlement to any income, capital or gift from the trusts, from 1 July 2005. Trust resolutions held to be valid (GREEN) - TVKS v FCT [2016] AATA 1010 The AAT considered a number of issues. These include: whether the taxpayer s deeds of disclaimer are effective to prevent her being presently entitled to the net income of the two trusts whether the Archer Property Resolution was ineffective as the trust deed only permitted Archer Property to distribution Net Income. 13

Trust resolutions held to be valid (GREEN) - TVKS v FCT [2016] AATA 1010 The AAT handed down a decision that these particular distributions from d on the basis trusts comprise assessable income of the beneficiary taxpayer This was held on the basis that the taxpayer s purported disclaimers of interest were invalid, and that the trust resolutions were effective in distributing the income to her. UPE written off as bad debt is not deductible - TD 2016/19 TD 2016/19 sets out the Commissioner s view that a beneficiary of a trust is not entitled to a deduction under s25-35 of the ITAA97 for an amount of unpaid present entitlement (UPE) to trust income that the beneficiary purports to write off as a bad debt. In the TD, a UPE is a beneficiary s right to receive an amount of trust income and/or capital that: a. arises as a result of the beneficiary having been made presently entitled to that amount, and b. has not been satisfied (including by being paid to or as directed by the beneficiary, or by being effectively converted into a loan from the beneficiary) or effectively disclaimed. 14

Fuel disbursements included in aggregated turnover - Doutch v FCT [2016] FCAFC 166 The taxpayer, which operates an oil and gas drilling business, received amounts from clients in respect of fuel disbursements associated with drilling work. The Full Federal Court held that the amounts formed part of the taxpayer s aggregated turnover for the purposes of the small business CGT concessions eligibility tests. The fuel disbursements were ordinary income derived in the ordinary course of carrying on a business. Home office expenses on floor area basis - HWZG v FCT (Taxation) [2016] AATA 1017 The AAT has affirmed the Commissioner s decision on the deductibility of a taxpayer s home office expenses. In order to arrive at a fair and reasonable apportionment on a floor area basis, it was necessary to include the taxpayer s driveway and corresponding open carport area in the total floor area. Where areas of a property are used for business purposes and included in the floor area related to the income earning activity, then it is fair and reasonable that similar or equivalent areas of the property that are used for private purposes are included in the total floor area. 15

Increase to penalty unit In its MYEFO 2016-17, the Government announced that the Commonwealth Penalty Unit will increase from $180 to $210 on 1 July 2017. It will be indexed every three years in line with CPI. A new Black Economy Taskforce The Government has announced that it has established a whole of government taskforce to crackdown on the black economy. Typically, the black economy refers to people who operate entirely outside the tax system or who are known to tax authorities but deliberately misreport their tax (and superannuation) obligations. The black economy can also include those engaged in organised crime. The Black Economy Taskforce will provide an interim report to Government in March 2017 and a final report in October 2017. 16

Certainty letters for 2016 Since November, the ATO has been sending certainty letters to some individuals to confirm their 2016 tax return is finalised. The ATO will not conduct further review or audit of their tax return, but taxpayers are still required to keep their tax records. Work-related expense deduction risk profiles The ATO has developed work-related expense deduction risk profiles for tax practices based on a comparison of the practice s clients work-related expense claims with those made by similar taxpayers. The ATO will share these risk profiles with some tax professionals where their clients claims appear higher than expected. 17

Commissioner s new Remedial Power Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016 The Commissioner can only exercise the Remedial Power (to modify law) where: the modification is not inconsistent with the intended purpose or object of the provision; the Commissioner considers the modification to be reasonable, having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object; and the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible Commissioner s new Remedial Power Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016 Before exercising the power, the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken. This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances. This is consistent with the approach to amendments of primary legislation, which are subject to public consultation. In addition, the Commissioner will consult with a technical advisory group (which will include private sector experts, the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power. According to the EM, Parliament expects 18

Commissioner s new Remedial Power Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016 A modification does not apply to a taxpayer if it would produce a less favourable result for them, or for any other taxpayer. According to the EM, favourable could mean either that: a tax liability is reduced, or the costs of complying with the taxation law are reduced, or overall, taking into account changes in liabilities and compliances costs, the modification is favourable. A taxpayer needs to self-assess whether a modification is less favourable to it, and whether it must therefore treat the modification as not applying to itself and to any other entity. Deduction for tools could not be substantiated Ishaq and Commissioner of Taxation (Taxation) [2017] AATA 35 (17 January 2017) The taxpayer was employed as an aircraft maintenance engineer with an airline. After qualifying as a tradesman, he decided to buy his own tools, as the ones provided by the employer were insufficient. He acknowledged that the employer had a tool crib comprising of large tools calibrated for the specific planes, which would be loaned to the workers as appropriate. 19

ax Update Deduction for tools could not be substantiated Ishaq and Commissioner of Taxation (Taxation) [2017] AATA 35 (17 January 2017) The taxpayer searched for tool sets on Gumtree and found snap-on tools that he wanted to purchase, advertised for $28,000. He phoned the vendor, a Mr Owen Shaw, and negotiated a price of $24,750. The taxpayer claimed that the transaction took place at his home in September 2013 and that he paid for the tools in cash from his gambling winnings, which he kept at home. The taxpayer also said that Mr Shaw prepared and provided him with a tax invoice for the sale of the tools. The tax invoice was handwritten with Mr Shaw s contact details and a description of the tools. The taxpayer stated that he sold the tools in November 2015 as he no longer needed them for work. The taxpayer claimed the cost of the tools as a tax deduction. The Commissioner disallowed the deduction. Deduction for tools could not be substantiated Ishaq and Commissioner of Taxation (Taxation) [2017] AATA 35 (17 January 2017) The AAT did not allow a deduction for the cost of the tools. The taxpayer failed to discharge his onus of proof as to the excessiveness of the Commissioner s assessment. The AAT was not satisfied that the taxpayer incurred any expense in purchasing snap-on tools. The taxpayer also did not persuade the AAT that it was necessary for him to purchase snap-on tools for his line of work. The taxpayer did not produce any independent evidence with respect to the snap-on tools. For example: there was no record of the Gumtree advertisement; There were no photos of the snapon tools; Nor did the taxpayer produce any witness statements of people who may have sighted the tools at his workplace. 20

No deduction for overtime meal expenses no allowance Kael and Commissioner of Taxation (Taxation) [2017] AATA 38 (20 January 2017) The taxpayer was emplyed by a building business. He worked during the day on building sites and did paperwork in the evenings. He often worked on weekends. Before the beginning of each income year, the employer would set the taxpayer s salary for that year. The starting point of the calculation was an amount greater than the relevant salary under the relevant industrial award. The salary also included an amount to cover regular overtime, an amount for work done at home, an amount to cover out-of-pocket expenses, and an amount for the taxpayer to use his car for work purposes. The taxpayer was paid a fixed amount weekly. At the end of each income year, when the taxpayer s tax return was prepared, an estimate was made of how much overtime he had actually worked during that year and (commensurately) how much he had spent on food and drink to do with that overtime. No deduction for overtime meal expenses no allowance Kael and Commissioner of Taxation (Taxation) [2017] AATA 38 (20 January 2017) The taxpayer claimed deductions for work-related expenses, relevantly included overtime meal expenses. He claimed that he received an allowance under the award to buy food or drink to do with overtime. The AAT concluded that the taxpayer was not entitled to claim any deductions for overtime meal expenses. The law (s32-50) only permits a deduction for overtime meal expenses if the taxpayer was paid an allowance under an industrial instrument to buy the food or drink. The AAT found that the taxpayer did not receive an allowance under the relevant industrial award. In fact, he did not receive an allowance at all, under an award or otherwise. The taxpayer s salary was not calculated under the award: the award base salary was used only as a starting point, and the taxpayer s salary was set higher than that. 21

Intangible capital improvements pre-cgt assets TD 2017/1: Income tax: capital gains: can intangible capital improvements made to a pre-cgt asset be a separate asset for the purpose of subsections 108-70(2) or (3) of the Income Tax Assessment Act 1997 (ITAA 1997)? Subsection 108-70(2) deems a capital improvement to be a separate CGT asset from the original asset if the following conditions are met: a. The improvement is to a pre-cgt asset. b. The improvement s cost base is more than the improvement threshold for the income year in which the CGT event happened to the original asset. c. The improvement s cost base is more than 5% of the capital proceeds from the event. TD 2017/1 confirms that intangible capital improvements can be a separate CGT asset from the pre-cgt asset to which those improvements are made if the relevant threshold tests are satisfied. ATO scrutiny of re-characterised trading income TA 2017/1: Re-characterisation of income from trading businesses Taxpayer Alert TA 2017/1 describes the ATO s concerns about arrangements which attempt to fragment integrated trading businesses in order to recharacterise trading income into more favourably taxed passive income. Specifically, the ATO s concern arises where a single business is divided in a contrived way into separate businesses. According to the TA, the income that might be expected to be subject to company tax is artificially diverted It is diverted into a trust where, on distribution from the trust, that income is ultimately subject to no tax or a lesser rate than the corporate rate of tax. 22

Extending GST to low value imports Treasury Laws Amendment (GST Low Value Goods) Bill 2017 Draft legislation to extend GST to low value imported goods was introduced into the House of Representatives on 16 February. The amendments make supplies of goods valued at $1,000 or less at the time of sale connected with the indirect tax zone if the goods that are supplied are offshore low value goods. This ensures that such supplies are subject to GST, consistent with equivalent supplies made within Australia. The law takes effect on 1 July 2017. Work-related expense deductions denied Vakiloroaya and Commissioner of Taxation (Taxation) [2017] AATA 95 (31 January 2017) The taxpayer claimed work-related motor vehicle expenses, self-education expenses and other work-related expenses. The AAT denied the motor vehicle expense deduction as he did not prove that his travel by car was work-related and not private in nature. The AAT also denied most of the self-education expense deductions on the basis that they were not related to his employment or were capital in nature. Finally, the AAT denied various other work-related expense deductions because the taxpayer could not substantiate the expense, or the expense was incurred in a different year, or the expense did not have the necessary nexus to assessable income. 23

Project income not exempt under s23af Wilson and Commissioner of Taxation (Taxation) [2017] AATA 119 (1 February 2017) The taxpayer was a contractor for the US Army. He travelled to Afghanistan to perform services for the US Army. The AAT determined that the income derived from this work is not exempt under s23af ITAA36. The projects were not approved projects. There was no evidence that the Trade Minister determined that those projects were in the national interest, or exercised their discretion to approve them in a written and signed document. 24