Government set to re-think the backpacker tax

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Editor:  Basically, the ‘backpacker tax’, as announced, would see backpackers who work in the agricultural industry during harvest time being taxed at 32.5% from their first dollar of income.

Last month, the National Farmers Federation issued a media release slamming the tax and its negative effect on the agricultural industry, which relies heavily on backpackers. 

It pleaded for a more reasonable tax of about 19%.

The Deputy Prime Minister and the Assistant Agriculture and Water Resources Minister have announced a review into taxation arrangements for the Working Holiday Maker visa program.

The review’s scope will cover taxation and superannuation arrangements under the program.

The review is intended to ensure the right measures are in place to support the two key growth sectors of agriculture and tourism.

“We know about 40,000 backpackers work in agriculture for a few months each year, the majority in horticulture at seasonal peaks,” Deputy Prime Minister Barnaby Joyce said.

“The clear aim is to make sure we have a balanced and equitable approach to the tax status for workers here on visas – we do not want to risk a slide into black market employment in agriculture and tourism,” Assistant Minister Anne Ruston said.

GST audit alert: Selling residential property that has been rented

If you have claimed input tax credits (ITCs) on construction costs and then rented out this residential property, you are on the ATO’s audit target list. This is especially the case where the property has now been sold.

Tough economic times have meant that for many property developers, the apartments or properties they had built for sale have been held onto and rented, awaiting a change in the property market conditions.

From a GST perspective, the fundamentals are – if you build a residential apartment and rent it out you can’t claim ITCs on the costs of construction.  If you build and sell a residential apartment you can claim ITCs, and you also will have to pay GST on the sale.  Where a developer has developed an apartment intending to sell it and then decides to rent it, the GST treatment is a whole lot more complicated.

The Commissioner issued GST Ruling GSTR 2009/4 Goods and services tax: New Residential Premises and Adjustments for Changes in Extent of Creditable Purpose setting out his view of how GST applies in these circumstances.  Essentially, it focuses on intention – if you intend to make a taxable supply (ie. the sale of new residential apartments) then you can claim full ITCs.  If that intention changes to residential renting (which is an input taxed supply) the law requires you to make an adjustment to the amount of ITCs (on construction costs, for example) that you previously claimed.

Importantly, if you cannot show that you ever had a sale intention, or the ATO thinks that any expected sale was so far in the future that you were just running a rental enterprise, you would generally have to pay back all the ITCs originally claimed.

The rules about how much you may be required to pay back to the Commissioner are different if you change your intended use of a residential apartment (from sale to rental), and different again if you had two intentions at the same time (sale and rental) after you correctly claimed input tax credits on construction costs.  The challenge is to work through the very complicated adjustments to determine the extent of creditable purpose rules and identify if you have to pay back any ITCs.  The difficulty is to prove to the Commissioner in an audit, which of the rules will apply.

To make life even more difficult, the actual adjustment steps that need to be worked through can be extremely complex, and the Commissioner has been successful in audit and in court when he has disputed the calculations developers have used to work out how much ITCs they needed to pay back.

As always, it is better to be prepared than wait for the ATO to call for an audit.  The ATO are allowing “voluntary disclosures” in regard to this matter, however it is important to be aware of the GST consequences before you get caught in the ATO’s audit radar.

As a first step, you should consider the ITCs that were claimed during the construction phase of residential developments.  This is the starting figure that the Tax Office will be looking at. If there has been a chance of intention, there is a high probability that the Commissioner may want to charge penalties and interest as well as request a repayment of the ITCs that were claimed.

The actual adjustments to calculate this are complex and time consuming.  We can assist in this process having attended to a number of GST audits in this area recently.

ATO reminder – What’s new for small business?

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Editor:  The ATO has issued a timely reminder before the end of the financial year on the changes announced in last year’s Budget.

Instant asset write-off – simpler depreciation rules
Small businesses can immediately deduct the business portion of most (new or secondhand) assets if they cost less than $20,000 and were purchased between 7:30pm on 12 May 2015 and 30 June 2017.

From 1 July 2017, the threshold will return to $1,000.

Accelerated depreciation for primary producers
From 12 May 2015, primary producers can immediately deduct the costs of:

  • fencing – previously deducted over a period up to 30 years; and
  • water facilities – previously deducted over three years.

They can also deduct the cost of fodder storage assets over three years, instead of 50 years.

Deductions for professional expenses for start-ups
From 1 July 2015, small businesses are entitled to certain deductions when starting up a small business.

The range of deductible start-up costs includes professional, legal and accounting advice, and government fees and charges.

FBT changes for work-related devices
From 1 April 2016, small businesses will not incur an FBT liability if they provide their employees with multiple work-related portable electronic devices that have similar functions.

These include devices that are primarily used for work, such as laptops, tablets, calculators, GPS navigation receivers and mobile phones.

Small business income tax offset
From the 2015/16 income year, an individual is entitled to a tax offset on the tax payable on the portion of their income that is from:

  • net small business income from sole trading activities; and/or
  • their share of net small business income from a partnership or trust. 

The income tax offset can reduce the tax payable that relates to the individual’s small business income by 5% (up to $1,000) each year.

The ATO will work out the offset based on the total net small business income reported in a client’s income tax return.

Company tax cut for small businesses
For income years commencing on or after 1 July 2015, the small business company tax rate has been reduced from 30% to 28.5%.

The maximum franking credit that can be allocated to a frankable distribution is unchanged at 30%, even if a small business is eligible for the 28.5% tax rate.

Editor:  If you need to discuss any of the above please contact our office – preferably before 30 June

Small business restructure rollover relief

The Federal As part of the 2015 Federal Budget announcement, the Government announced that it would introduce a rollover relief for small businesses wanting to change their business structure.

The proposed legislation will provide much more flexibility for small businesses to change their business structure, such as from individuals or companies to family trusts, trusts to trusts, without being subjected to adverse income tax outcomes. It is proposed that the draft legislation will apply from 1 July 2016.

Requirements for the Rollover Relief

To be eligible for the rollover, the following requirements must be satisfied:

  • the proposed restructure must be a genuine restructure;
  • the entities must be either a Small Business Entity (“SBE”), an affiliate or connected entity of an SBE or a partner in a partnership that is an SBE;
  • the restructure must not result in a change of the ‘ultimate economic ownership’ of the transferred assets;
  • the transferred assets must be CGT assets that are active assets; and
  • both the transferor and transferee must be Australian residents for tax purposes.

Genuine restructure

The first criterion for eligibility for the rollover is that the transfer of the asset must be a genuine restructure. A ‘genuine’ restructure is determined having regard to all of the facts and circumstances surrounding the restructure. Examples of factors that would indicate a genuine restructure include:

  • it is a bona fide commercial arrangement undertaken to enhance business efficiency,
  • the business continues to operate following the transfer, through a different entity structure but under the same ultimate economic ownership,
  • the transferred assets continue to be used in the business,
  • the restructure results in a structure likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business,
  • the restructure is not artificial or unduly tax driven, and
  • it is not a divestment or preliminary step to facilitate the economic realisation of assets.

Safe harbour

A safe harbour rule is available to provide certainty to small businesses where, for three years following the rollover:

  • there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) transferred under the restructure,
  • those significant assets continue to be active assets, and
  • there is no significant or material use of those significant assets for private purposes.

Ultimate economic ownership

The restructure must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. The ultimate economic ownership refers to natural persons. As such, where the assets are held by a company, trust or partnership, the ownership must be traced to the natural person owners of the interests in these interposed entities that will ultimately benefit economically from the assets. Where there are more than one individual involved, their shares must have the same proportionate ownership after the restructure.

Discretionary trusts

Discretionary trusts may be able to meet the requirements for ultimate economic ownership on their facts. For example, a trust may be non-fixed for the purposes of the income tax law but, because there is no practical change in which individuals economically benefit from the assets before and after the roll-over, there will not have been a change in ultimate economic ownership on the facts.

However, given the nature of a discretionary trust, it may mean that it is not possible to determine proportionate ultimate economic ownership of the assets of the trust. Therefore if a discretionary trust seeking to use the roll-over (either as transferor or transferee) is a family trust, they may instead meet an alternative ultimate economic ownership test.

In the case of discretionary trusts, the alternative test states that a transaction will be taken as not having the effect of changing the ultimate economic ownership of assets where:

  • immediately before or after the transaction took effect, the asset was included in the property of a discretionary trust that was a family trust; and
  • every individual who, just before or just after the transfer took effect, had ultimate economic ownership of the asset was a member of the family group of that family trust.

To be treated as a family trust, a trust must make a Family Trust election.

Tax planning in April

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Government has previously announced that all tax policy will be reviewed to rein in the budget deficit. Items such as superannuation, taxation of multinationals and changes to negative gearing and even a potential lift in the GST rate were all touted as potential reforms. As the process has unfolded the Government has appeared to back away from many of the proposed reforms.

With the public mood and that of the cross benches firmly opposed to any upward or outward changes to the GST, the Government may be forced to compromise to achieve some savings, and this may see changes to the Superannuation regime once again.

Areas that may be targeted include:

  • Caps or increased taxes on Concessional Contributions (though Non Concessional Contributions may also be targeted);
  • Taxation of Assets supporting pensions when the level of member benefits, or the income derived on these benefits, exceeded a concessional threshold;
  • Taxation of Pensions for those over the age of 60;
  • A Restructure of the Lump Sum Tax regime, which may affect the taxes on Lump Sums for retirees aged 60 and above;
  • Changes to the rules around Limited Recourse Borrowing Arrangements; and,
  • Further changes to the Centrelink and Veterans Affairs assessment of Pensions paid by Superannuation Funds.

All of the above changes are likely as they can be said to target mainly the “rich” and those well off enough to be able to afford to go without these concessions. If these changes are to be made they will most likely be announced on budget night with the changes coming into place on that night. All current arrangements should remain untouched.

As tax planning is an activity usually carried out in May or early June each year, if these changes are passed on budget night many taxpayers will have already lost access to these concessions rendering many tax planning strategies useless.

It may therefore be wise to start the tax planning process now especially where that strategy involves using your SMSF. Planning for some of these changes includes:

  • Making Concessional Contributions and Non Concessional Contributions (including drawdowns and re-contributions);
  • Payment of annual pension entitlements;
  • Planned Lump Sum drawdowns;
  • Realisation of significant capital gains on Superannuation assets;
  • Limited Recourse Borrowing Arrangements for the acquisition of new assets, including assets in unit trusts or companies;
  • Centrelink and Veterans affairs planning where Superannuation pensions are concerned.

By taking these steps prior to the May Budget you will reduce the risk that you will lose the benefits of these concessions should touted changes be announced on budget night.