Newsletter – November 2019

CGT and the family home: expats and foreigners targeted again

The Government has resurrected its plan to remove access to the main residence exemption for non-residents – a move that will impact on expats and foreign residents.

Back in the 2017-18 Federal Budget, the Government announced that it would remove the ability for non-resident
taxpayers to claim the main residence exemption. The unpopular measures were introduced into Parliament but
stymied. An election later, a recomposition of Parliament, and the Government has again introduced the reforms but in a modified form.

The proposed changes would apply from the original Budget announcement on 9 May 2017, so could impact on properties that have already been sold. However, a transitional rule would allow capital gains tax (CGT) events
happening up to 30 June 2020 to be dealt with under the existing rules as long as the property was held continuously from before 9 May 2017 until the CGT event.

That is, if you held a property from 9 May 2017 up until the sale date, the existing rules might continue to apply.

If the measures pass Parliament, a non-resident taxpayer would be prevented from applying the main residence exemption to the sale of a property, regardless of whether they were a resident of Australia for some or most of the ownership period.

For expats, there is a proposed exception to the new rules for situations where the individual has been a non-resident for 6 years or less and a specific life event occurred during the period of foreign residency. “Life events” refer to terminal medical conditions suffered by the individual or certain family members, the death of certain family members or a marriage or de facto relationship breakdown. That is, if you were working overseas for 5 years and your spouse died during this time, the exemption could still potentially apply to your former Australian main residence.

For non-resident individuals, there will be a significant flow-on impact if the legislation passes Parliament as:

  • They will miss out on a full or partial exemption under the main residence rules.
  • They will generally be taxed at non-resident rates (i.e., no or only partial tax-free threshold).
  • The CGT discount percentage could be less than 50%.
  • The cost base reset rules that sometimes apply to provide an uplift in the cost base of the property to its market value at the time it is first rented out, are unlikely to apply, and
  • The foreign resident withholding rules could impact on the cash flow position of the vendor.

Currently, individuals are generally not subject to CGT on the sale of the home they treat as their main residence.
If the home was your main residence for only part of the ownership period or if the home is used to produce income (for example, you use part of the home as a business premises or rent out part of the property), then a partial exemption may be available. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out or indefinitely if you don’t rent it out (the ‘absence rule’).

The main residence exemption is currently available to individuals who are residents, non-residents, and temporary residents for tax purposes. Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 is currently before the House of Representatives and is not yet law.

While you should plan for change, do not act specifically on these impending changes until they have passed Parliament.

If you are concerned about how these impending changes may impact you, please contact us.

Quote of the month
What is the difference between a taxidermist and a tax collector?
The taxidermist takes only your skin.
Mark Twain

Vacant land deduction changes hit ‘Mum & Dad’
property developments

Legislation that passed through Parliament last month prevents taxpayers from claiming a deduction for expenses incurred for holding vacant land. The amendments are not only retrospective but go beyond purely vacant land.

Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to
claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs.

The new laws, aimed predominantly at Mum & Dads (individuals, closely held trusts and SMSFs), prevent these deductions from being claimed. Since the new laws apply retrospectively to losses or outgoings incurred on or
after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in
place, the amendments will not only impact those intending to develop vacant land but those who have already acquired land to develop. This is the same target as previous tax changes that denied travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties.

The changes however, go beyond purely vacant land for residential purposes. Deductions could also be denied for land with a building on it, if that building is not ‘substantial’. The only problem is, the legislation does not clearly define what ‘substantial’ means. The Bill suggests that a silo or shearing shed would be substantial but a residential garage for example, would not meet the test.

If the new measures prevent holding costs from being claimed as a deduction, then they will generally be added
to the cost base of the asset for capital gains tax (CGT) purposes. This means that they can potentially reduce any capital gain made when you dispose of the property in the future. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base and these costs cannot increase or create a capital loss on sale of a property.

On the positive side, vacant land leased to third parties under an arm’s-length arrangement may continue to be eligible for deductions for holding costs after 1 July 2019 if the land is used in a business activity. Also, land used in a primary production business will generally be excluded from the new rules. However, deductions could still potentially be lost (at least to some extent) if there are residential premises on the land or that are being constructed on the land.

There are also carve outs for land which has become vacant or which cannot be used to produce income for a
period of time due to structures being impacted by natural disasters or other events beyond the owner’s control.

The amendments do not apply if you (or certain related parties) carry on a business on the land or where the land is owned by companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.

Calculating Super Guarantee: The new rule

From 1 July 2020, new rules will come into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the
employer.

Under current rules, some employers are paying SG on the salary less any salary sacrificed contributions of the employee. Currently, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and they choose whether or not to include the salary sacrificed amounts in OTE.

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement. Let’s look at an example:

Pablo has quarterly Ordinary Time Earnings of $15,000 which would ordinarily generate an entitlement to $1,425 in SG contributions ($15,000 x 9.5%). He salary sacrifices $1,000 a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter.

However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer’s mandated SG obligation, and only makes a total contribution of $1,425, mostly consisting of the employee’s $1,000 salary sacrificed amount.

Under the new amendments, Pablo’s $1000 sacrificed contribution will no longer reduce the charge. Therefore,
the charge percentage would only be reduced by 2.83% ($425 / $15,000 x 100). As the employer is required to
contribute 9.5% of the OTE base, they must contribute an additional 6.67% to meet their minimum SG obligations. The employer has a shortfall of approximately $1,000 (6.67% x $15,000).

As sacrificed contributions no longer reduce the charge Pablo’s employer will need to contribute $1 425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, to avoid a shortfall and liability for the SG charge.

The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base.

Can the ATO take money out of your account? Your right to know

You might have seen the recent spate of media freedom advertisements as part of the Your Right to Know campaign. The prime-time advertising states that the Australian Tax Office (ATO) can take money from your account without you knowing. The question is, do you really know what powers the ATO have?

The ATO is one of the most powerful institutions in Australia with very broad and encompassing powers. Over
the last few years the approach has been to work with taxpayers to ensure that the tax they owe is paid. But this level of understanding only lasts so long and they will take action where taxpayers are unwilling to work with them, repeatedly default on an agreed payment plan, or don’t take steps to resolve the situation (these steps include an expectation that you go into debt to clear your tax debt). And, there are also circumstances where the ATO can swoop in where they believe there is a need to secure assets such as bank accounts if there is a risk of disposal or flight risk.

The ATO’s principal purpose is to collect the majority of the Federal Government’s revenue. According to an Inspector-General of Taxation’s report earlier this year, in 2016-17:

  • 88% of tax payments owing were made by the due date
  • 7% ($33.4bn) was paid within 90 days after the due date
  • 1.3% ($6.1bn) was paid within a year after the due date, and
  • $15 billion was left unpaid after a year.

At the end of the 2016-17 financial year, the total of undisputed collectable tax debt was $20.9 billion.

Here are just a few of the ATO’s powers to ensure that tax owing is collected:

  • Issue a garnishee notice to someone holding money on your behalf – for example a bank. For salary and wage earners, the ATO can require your employer to take part of your salary and pay it to them until your tax debt is paid. This is generally limited to a maximum of 30% of your salary. If you are a business, the ATO can go as far as accessing your merchant facility if you have credit owing.
  • Director penalty notice – Directors can personally incur penalties equal to their company’s unpaid PAYG
    withholding liabilities or superannuation guarantee charge. The Government wants to expand this to cover unpaid GST liabilities as well. If this debt is not paid, the ATO may issue a director penalty notice to start legal proceedings (and withhold any refunds due to the director).
  • Direction to pay super guarantee – if employers receive a direction to pay superannuation guarantee, any outstanding Superannuation Guarantee Charge must be paid within the period specified. It’s a criminal offence not to comply with this notice and may result in enforced penalties and/or imprisonment.
  • Impose a freezing order – for example, on your bank accounts. That is, without notice the ATO can freeze
    and then if required strip your accounts, particularly where they believe you have alternative sources of income. This freezing order cannot be initiated by the ATO but must be granted by a court.
  • Issue writs or warrants of execution, or warrants of seizure and sale. For example, they can force you to sell certain assets to pay your tax debts.
  • Winding up – liquidate your company or bankrupt you. Most taxpayers don’t believe how strongly the ATO will act. The ATO can commence winding up procedures before any dispute is decided. In 2017-18 the ATO bankrupted 470 taxpayers and wound up 1,282 entities. The ATO would argue that in many cases the wind up forces the inevitable and prevents further debt being incurred either to the ATO or other parties.

The message is, make sure you are on top of your paperwork. If the ATO has queries or suspects something is not right, you need to be able to respond. The longer you take, or a lack of evidence, will only escalate the situation.

So, can the ATO take money out of your account without advising you first? With the support of the courts, absolutely and a whole lot more.

Are you paying your staff correctly? Woolworths $200m plus remediation

Woolworths is the latest company facing a fallout from the underpayment of staff. In what is believed to be the largest remediation of its kind, Woolworths have stated that they have underpaid 5,700 salaried team members with remediation expected to be in the range of $200m to $300m (before tax).

The discovery was made as part of a 2 year review following the implementation of a new enterprise agreement but could have been occurring since the implementation of the modern award in 2010.

In a statement, Woolworths stated: The review has found the number of hours worked, and when they were worked, were not adequately factored into the individual salary settings for some salaried store team members.

Interim back payments will be made to affected staff identified in the initial review before Christmas. Woolworths states that full remediation will be made as soon as practicable to all other staff impacted.

We cannot stress the importance of ensuring that staff are paid at the correct rates. If staff are underpaid, it is not simply a matter of making a catch-up remediation payment. Underpayment of superannuation entitlements in particular will incur significant penalties and charges. To ensure that your staff are paid at the correct rate, check the Fair Work Ombudsman’s pay and conditions tool and see their guide to audit your pay rates.

Newsletter – October 2018

Working from home: What deductions can you claim?

For a while now, the Australian Taxation Office (ATO) has been concerned about tax deductions individuals have been claiming for a whole host of expenses. The latest on their ‘hit list’ are home office expenses. We guide you through what you can and can’t claim if you work from home.

Last financial year, 6.7 million taxpayers claimed a record $7.9 billion in deductions for ‘other work-related expenses’ which includes expenses for working from home. While the ATO appreciates that technology has led to more people working from home and greater flexibility, they don’t believe that all of the claims being made are legitimate. Take the example of the school principal who claimed $2,400 for electricity and phone expenses incurred during the year. The principal had a letter from the school verifying that they were required to work from home outside of school hours but could not explain how she calculated the claim. The principal ended up voluntarily reducing the claim by 70%. Or, the advertising manager who claimed her rent as a tax deduction because she worked from home at irregular hours to manage the timeframes of overseas clients. Her deduction for rent was rejected.

A major bugbear for the ATO are the people who claim 100% of their expenses like mobile phone plans and internet services when they are mostly for personal use. If you claim 100% of your phone and internet and you are not running a business from home, you can expect the ATO to look closely at your claims (that goes for subcontractors as well!).

Working out the work related portion of your expenses

You need to be able to prove how you came up with your expense claim. This includes having a documented method of calculating the work related portion of that claim if the item you are claiming is used for private and work purposes. For phone and internet expenses for example, you might look at the number of work calls, the
time spent, or data downloads as a portion of the total bill. The other method is to complete the equivalent of a log book or diary over four weeks to track your work use of the item, then apply the work percentage over
that four weeks to your annual expense. If for example you used your phone for 20% of the time over the four weeks you documented in your diary, you could then claim 20% of your annual phone expense as a home office expense (assuming your circumstances don’t change across the year).

What can you claim?

Working from home

A lot of people do some sort of work from home. It might be simply answering emails on the couch or working from home a few days a week. So, what can you claim if you’re putting in extra hours?

If you don’t have a dedicated work area but you do some work on the couch or at the dining room table, you can claim some of your expenses like the work-related portion of your phone and internet expenses and the decline in value of your computer. This of course assumes that your employer doesn’t reimburse you for your phone and internet expenses and you purchased your computer for yourself.

You can claim up to $50 for phone and internet expenses without substantiating the claim (although the ATO may still ask you to prove that you actually incurred the expense), or you can work out your actual expenses (see Working out the work-related portion of your expenses).

If you have a dedicated work area, there are a few more expenses you can claim including some of the running costs of your home such as a portion of your electricity expenses and the decline in value of office equipment (see Working out the work-related portion of your expenses).

Running a business from home

If your home is your principal place of business, you might be able to claim a range of expenses related to the portion of your home set aside for your business. What the ATO is looking for is an identifiable area of the home used for business. Take the example of a hairdressing business that runs out of the hairdresser’s home. One room is dedicated as a salon and is not used for any other purpose other than the salon. For the portion of the house taken up by the salon, the hairdresser can claim running expenses such as electricity and the interest on the mortgage.

The downside to claiming occupancy expenses such as interest on a mortgage is the impact it has on your tax-free main residence exemption for capital gains tax (CGT) purposes. In general, your home is exempt from CGT when you sell it. However, if you use your home to earn assessable income like the hairdresser, then you might only qualify for a partial exemption on the sale. If you are claiming part of your home as a business expense, then it is unlikely that any gain you make on your home will be fully CGT-free. You might also need to obtain a valuation of your home at the time it was first used to generate business income.

What home office expenses can be claimed?

  1. Running expenses – if you have a dedicated work area such as a study set aside for work, the essentials to keep the work area running like electricity, cleaning, office equipment etc., can be claimed as an expense. Of course, any claim can only be for the work-related portion of the expense. If your family use your home office as well or you use it for personal use, then you can only claim a portion of the expense. Running expenses can be claimed:
    • at a fixed rate of 45 cents per hour – you will need to track either the actual amount of time you work from home or keep a log book over 4 weeks that can be applied to your expenses across the year.
    or
    • as an actual expense – to claim an actual expense you need to document the total expenses for lighting, cleaning, heating and cooling for your home for the year, work out the floor area of the part of your home that you use for work as a percentage of the total floor area, and then work out the percentage of the year you used that part of your home exclusively for work.
  2. Occupancy expenses – expenses such as rent, interest on your home loan, property insurance, land taxes and rates can only be claimed if your home is your ‘place of business’ and no other work location has been provided to you. A place of business is unsuitable for any other use other than business, like a doctor’s surgery connected to a home or a hairdressing salon in a room of the house. Occupancy expenses can be claimed by calculating your total expenses × floor area × percentage of year that part of your home was used exclusively for work. Generally, occupancy expenses are not a deduction available to employees.
  3. Work related phone and internet expenses – unless you run your business from home and you have a dedicated phone and internet line it’s unlikely you can claim 100% of your phone and internet expenses. If your employer provides you with a phone, you cannot make any claim for these expenses. If you are a casual worker you cannot claim a deduction for phone rental expenses. For the rest of us, you can claim up to $50 for phone and internet expenses without substantiating the claim (but the ATO still might expect you to prove the claim), or you can work out your actual expenses. Claims for actual expenses can be made by working out the work-related use of the phone and internet and then applying that percentage to the expenses.
  4. Decline in value – for depreciable assets such as computers and printers, you might be able to claim decline in value if the cost of the item was over $300. Decline in value deductions might also be available for office furniture used for work purposes in a home office, but not if the individual is using the fixed rate of 45 cents per hour to claim running expenses.
Expenses Home is principal workplace with dedicated work area Home not principal workplace but has dedicated work area You work at home but no dedicated work area
Running expenses Yes Yes No
Work-related phone & internet expenses Yes Yes Yes
Decline in value of a computer (work related portion) Yes Yes Yes
Decline in value of office equipment Yes Yes No
Occupancy expenses Yes No No

Source: Australian Taxation Office

 

What does the China/US trade war mean to Australia?

As the bilateral trade war between the US and China heats up, Australia is caught between its cultural and military ties to the US and its strong economic relationship with China.

At the annual United Nations General Assembly President Donald Trump threw fuel on the trade war fire by stating that “…regrettably we found that China has been attempting to interfere in our upcoming 2018 election…against my administration. They do not want me or us to win because I am the first President ever to challenge China on trade….and we are winning on trade …we are winning at every level.” Following the speech President Trump told a press conference that, “China has total respect for Donald Trump and for Donald Trump’s very, very large brain.” China’s Foreign Minister Wang Yi stated that, “We did not and will not interfere in any country’s internal affairs and we refuse to accept any allegation of interference.” It was just another day in the media juggernaut that is President Trump.

In 2017, the US imported well over $500bn worth of products from China. The US trade deficit in the same year was over $811bn of which China accounted for around 46%. From China’s perspective, the US market accounts for 19% of all Chinese exports and US imports represent 8% of China’s imports.

The trade war between the US and China escalated in September when the US imposed a further round of tariffs on US$200bn worth of Chinese goods, bringing the total value of Chinese goods impacted by the trade war to approximately US$250bn. The tariffs start at 10% and rise to 25% on 1 January 2019. President Trump has threatened to impose tariffs on a further US$267bn worth of goods if China retaliates.

China has responded by imposing tariffs of between 5% and 10% on a further round of US goods bringing the total value of imports targeted to US$110bn. China has released a White Paper on the China-US trade friction that states, “China is the world’s biggest developing country and the United States is the biggest developed country” and both have benefited from the development of relations. The paper points out that “China represents the No. 1 export market for US airplanes and soybeans, and the No. 2 export market for US automobiles, IC products and cotton.” But, the new administration has “abandoned the fundamental norms of mutual respect and equal consultation that guide international relations.”

Economists predict that the trade war may continue to the point where all Chinese goods imported into the US and all US goods imported in China will be impacted.

To date, Australia has avoided any significant impact from the trade war. This is not the case for Canada that saw the Trump administration impose a 25% tariff on steel imports and 10% on aluminium imports. The US imports approximately US$29bn of steel with 17% of that from Canada (accounting for approximately 88% of total Canadian steel exports). Australia was one of the few countries excluded from the tariffs although the US only accounts for 0.8% of Australian steel and 1.5% of aluminium exports.

The issue for Australia is the potential reduction in China’s GDP growth. Currently, mainland China is Australia’s largest two-way trading partner representing over 28% of Australia’s export market (the US represents 6.3%) and over 18% of our imports. A slowdown in China’s growth spells a slowdown in imports reducing the value of Australia’s export market and impacting Australia’s growth.

While Australia is not directly impacted by the bilateral trade war, there is a potential danger that consumer sentiment might be damaged with consumers unwilling to spend and instead taking a ‘wait and see’ approach.

Quote of the month

“Live as if you were to die tomorrow. Learn as if you were to live forever.”
– Mahatma Gandhi

Reminder on cents per km car expenses rate

The cents per kilometre car expense rate increased from 66 cents to 68 cents per kilometre from 1 July 2018. Employers who use the cents per kilometre rate to pay car allowances for employees should ensure that car allowance rates are up to date. If more than 68 cents per kilometre is paid, employers need to withhold tax on the excess amount under the PAYG withholding system.

New immediate deduction for primary producers

Legislation that passed Parliament last month will enable primary producers to claim an immediate deduction for fodder storage assets such as silos and hay sheds used to store grain and other animal feed. The deduction is available if the primary producer first uses the asset or has the asset installed and ready for use on or after 19 August 2018. The immediate deduction can be claimed in the year the expense is incurred. Prior to this date, primary producers could generally only deduct the cost of these assets over 3 years.

This is one of several measures announced as part of the Government’s package of drought assistance measures which are intended to aid drought-affected farmers.

Confusion reigns over superannuation transfer balance cap

A recent speech by the ATO’s Assistant Commissioner for Superannuation demonstrates the very practical problems with the new superannuation rules.

The $1.6 million transfer balance cap (TBC) that limits the amount you can hold in a superannuation pension requires trustees to be aware of how close they are to this limit at all times. To ensure that this cap is not breached, trustees need to report common events that may impact on a member’s pension account. Trustees should have already reported pre-existing pensions (pensions members were receiving just before 1 July 2017 that they have continued to receive and which are in retirement phase on or after 1 July 2017).

This new event-based reporting requirement is causing a few headaches with the wrong information or no information being reported. Common ‘events’ that need to be reported include:

  • The start of new retirement phase pensions
  • The full or partial pay-out of a pension (commutation), and
  • Some limited recourse borrowing arrangements.

Some information does not need to be reported including withdrawals from accumulation accounts, standard pension payments, or investment earnings or losses made on or after 1 July 2017.
To make the reporting process work, it’s essential to keep us up to date as events occur. If you are not sure, just give us a call or drop us a line – it’s better to be sure.

 

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