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Legal matters

Tradie granted partial release from tax debt due to serious hardship

March 11, 2022

The AAT has granted a taxpayer a partial release from his taxation liability pursuant to s 340-5 of Sch 1 to the Taxation Administration Act 1953 (Cth) after finding that he would suffer serious hardship were he required to repay the whole of the debt.

Facts

The taxpayer was a carpenter who had been running his own building maintenance business via a trust. Following a relationship breakdown, he developed a drug addiction and recommenced a previous gambling addiction. He ended up accumulating debts, being pursued by debt collectors and neglecting his taxation obligations.

In early 2017 the taxpayer’s mother sought assistance from the ATO to stop her son from trading but her request was not actioned. In that same year a bailiff seized the taxpayer’s car. The taxpayer was forced to sell his house in March 2018. Of the surplus proceeds of $234,729 from the house sale, $180,000 was paid into his mother’s bank account. The mother used much of that to repay her son’s various debts (including child support, car registration and insurance expenses, orthodontist fees, a GST debt of $64,000, $15,000 to a debt collection company, a personal loan of $30,000 to herself and $15,475 owed to contractors used by the taxpayer in his business). Soon after, the taxpayer gave up running his own business and took up employment with a company that withheld tax from his salary.

The taxpayer sought to be released from his eligible taxation liabilities of $180,832, comprised of $126,480 of outstanding Pay As You Go Instalments and General Interest Charges (GIC) of $54,351. When the Commissioner refused to release him from his liabilities the taxpayer sought review by the AAT, arguing that he would suffer serious hardship if required to pay them.

At the time of the hearing the taxpayer had ceased gambling and using drugs, earned about $100,000 per annum (of which he had an approximate surplus of $1,097 per fortnight after living expenses) and had 2 daughters living with him (one of whom was an adult earning $1,725 per fortnight). However, due to expenditure of a discretionary nature, he had only $4,000 or so in his bank account. Another $14,000 remained in his mother’s bank account from the house proceeds. In order to determine whether serious hardship existed, the AAT applied the tests provided in Practice Statement Law Administration 2011/17: Debt relief, waiver and non-pursuit, ie the income/outgoing test, asset/liabilities test and other relevant factors test.

Decision

The AAT found that, even if the taxpayer repaid $1,000 per fortnight towards his taxation liabilities, they could not be repaid within a reasonable timeframe, thus the income/expenditure test was satisfied. The taxpayer also satisfied the assets/liabilities test as he had minimal to no assets that could be utilised to pay his taxation liabilities. His remaining funds were left over from the sale of his home, thus it was understandable that he retained them in case of housing or unemployment insecurity and should not be disadvantaged for not having applied them towards his taxation liability. However, the taxpayer had a poor compliance history (he had begun accumulating his current taxation liabilities immediately after a previous release from his eligible taxation liabilities of $59,037 had been granted in October 2014) and had structured his business in a way that contributed to his being in a position of hardship. Although the other relevant factors test weighed against him, the AAT was satisfied overall that the taxpayer would suffer serious hardship if required to satisfy the whole of his eligible taxation debt.

However, the AAT considered that the taxpayer should not be released in whole from his taxation liability as he had surplus funds he could apply towards its repayment. A partial release (ie the GIC component) of the liability would be sufficient to avoid serious hardship and would allow the taxpayer to repay the debt within a more reasonable time. A partial release was also a compromise that balanced the factors in the other relevant factors test that weighed against the discretion being exercised. Accordingly, the AAT set aside the decision under review and substituted it with a decision that the taxpayer be granted a partial release of his debt.

Source: Shaw v FC of T 2022 ATC ¶10-619; [2022] AATA 343, 1 March 2022.

Trust distribution

ATO ALERT ON PARENTS BENEFITING FROM TRUST INCOME OF CHILDREN

February 28, 2022

The ATO is reviewing trust arrangements where parents enjoy the economic benefit of trust income appointed to their children who are over 18 years of age (Children).

The common feature of the arrangements is that trust income is appointed between members of the family group but in substance it is the parents who exercise control over and enjoy the economic benefit of the income.

According to TA 2022/1 the arrangements may display all or most of the following features:

  • the trustees of a discretionary trust (Trust), or the directors of a corporate trustee, are either one or two individuals who are the parents in a particular family (Parents)
  • income derived by the Trust is used during the year of derivation to meet the expenses of the Parents. These may be recorded as beneficiary loans made from the trustee to the Parents throughout the year
  • resolutions of the trustee for the year show one or more of the Children presently entitled to a share of the income of the Trust
  • the entitlements are for substantial amounts but do not generally result in the Children’s taxable income exceeding the threshold for the top marginal tax rate ($180,000).
  • amounts are not paid to the Children. Rather, at the actual or purported direction of the Children, the entitlements are satisfied by the amounts being either

– paid to their Parents, or

– applied against any beneficiary loans owed by the Parents

  • the parties contend that the entitlements are paid or applied in this manner because

– the Children are required to repay their Parents for expenses incurred in relation to their upbringing or while they were minors (for example, school fees, school uniform costs or their share of the family holidays)

– the Children are required to pay or repay their Parents amounts to meet their share of family costs for the current year in excess of amounts it would reasonably be expected an adult child would meet for their personal living expenses while they remain living at home or otherwise supported to some extent by their Parents (those amounts being, for example, a reasonable rate for their board, lodgings or rent if living away from home, or car expenses), or

– there is an agreement that the Parents will manage the pooled family members’ entitlements from the Trust for the benefit of the family members

  • there is no expectation or understanding that the Children’s income they derive from sources other than the Trust distributions will be used to either repay their Parents for expenses incurred when they were a minor or pay more than their reasonable share of the household expenditures, or be placed in a pool to be managed by the Parents for the benefit of the family members.

The ATO is concerned that taxpayers are entering into these arrangements to avoid tax on the net income of the trust by utilising the lower marginal tax rate applying to the Children in particular circumstances. The ATO may invoke applicable specific or general anti-avoidance rules to these arrangements.

Although the alert specifically considers arrangements involving the children of controlling individuals, the ATO is also concerned about similar arrangements involving other family members of controlling individuals that would have lower marginal tax rates than those of the controlling individuals.

The ATO is currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into these and similar arrangements. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny from the ATO.

Source: Taxpayer Alert TA 2022/1 Parents benefiting from the trust entitlements of their children over 18 years of age, 23 February 2022, accessed 23 February 2022.

share scheme

Employee share scheme and regulatory change

February 25, 2022

In the 2021 Federal Budget, the government announced that the ‘cessation of employment’ taxing point for tax-deferred employee share schemes (ESS) would be removed. The removal of cessation of employment is in line with recommendations made by numerous inquiries over the past 10 years to bring ESS provisions in Australia more in line with international expectations.

This announcement has made its way through the parliamentary process and has been given royal assent.

The new laws come into effect for ESS interests that come into existence on or after 1 July 2022.

The intention of employee share schemes is to provide favourable outcomes in terms of Australian businesses attracting and retaining talent. Overall, these changes have the potential to simplify the administration of offers of ESS interests, and ultimately streamline the regime as a whole.

ESS and deferred taxation

Since its inception in 1995, when an employee becomes an ESS participant and receives shares in a company for free or at a discount, it is a taxing event. Effectively, the individual would be paying tax on the gain as if it was paid as a monetary bonus. This is usually referred to as the market value of the discount on the ESS interest.

However, an employee can access deferred taxation on this discount where one of the following applies:

  • There is a real risk of forfeiture or loss of the shares/options under the conditions of the ESS.
  • The share/options are obtained under a salary sacrifice arrangement and the ESS interest does not exceed $5,000 in an income year.
  • There is a genuine restriction on the individual to immediately dispose of the rights under the ESS rules where the individual is receiving a beneficial interest in a right.

For ESS interests that commence before 1 July 2022, the taxing point is deferred until:

  • the employee ceases employment
  • there is no longer a real risk of forfeiture or loss
  • there is no longer a genuine restriction of the disposal of the interest, or
  • 15 years has elapsed following the acquisition of the share.

Legislative changes

The amending legislation removes the ‘cessation of employment’ taxing point for deferred ESS interests. It will apply to ESS interests that commence on or after 1 July 2022.

This means that an employee is not subject to tax liability at a time when they may not be able to monetise the ESS interest. This removes a barrier not only from a cash flow point of view but also in a situation where the interest may fall in value between the taxing point and future vesting date.

Regulatory relief for ESS

There are currently a range of obligations for employers undertaking an ESS under the Corporations Act 2001. These include additional disclosure requirements, the need for an Australian Financial Services License, and obligations regarding advertising, hawking and the on-sale of financial products.

The proposed changes in regulations that accompany this exposure draft are attempting to make it easier for businesses by providing greater flexibility around ESS offers. Any proposed changes will not be effective until after any proposed legislative amendments receive royal assent.

Unlisted companies offering ESS interests “for free”

If an ESS is offered to directors and employees and does not require payment to participate, the scheme can be operated by the company without an Australian Financial Services Licence. There will also be no disclosure requirements that apply to offers under the scheme. Subsequently, general financial advice can be provided and there are no mandatory restrictions on hawking and advertising the products.

Currently, “free” ESS schemes can only have relief from stringent ASIC obligations when there is an annual limit on the amount that can be offered to participants. From 1 July 2022, this limit will increase from $5,000 per annum to $30,000.

Unlisted companies offering ESS interests for monetary consideration

The main aspect of the proposal for regulatory relief for an unlisted company offering an ESS interest for monetary consideration is a streamlined form of disclosure with ASIC.

Importantly, there is also a proposal to cap the number of securities offered in order to be entitled to simplified reporting treatment. Over the course of 3 years, the amount offered in an ESS scheme will not be able to exceed 20% of the company’s issued capital.

Source: CCH iQ

Self-managed superannuation funds residency safe harbour to extend

August 26, 2021

The Government announced that it will relax residency requirements for self-managed superannuation funds (SMSFs) by extending the central control and management test safe harbour from 2 to 5 years. Another planned change related to SMSFs is the removal of the active member test. These 2021 federal budget measures are expected to have effect from 1 July 2022, subject to the passing of legislation.

The proposed changes will allow SMSF and small fund members to continue to contribute to their fund while temporarily overseas. This will make contribution rules the same for overseas members of small and large funds, such as Australian Prudential Regulation Authority (APRA) regulated funds. SMSF members can retain the flexibility to keep and contribute to their preferred fund while experiencing overseas work and education opportunities.

Complying superannuation funds

Funds that are complying super funds are eligible for concessional tax treatment. If a fund stops being an Australian super fund because it does not satisfy the residency rules, it may become non-complying. Its assets (less certain contributions) and its income are then taxed at the highest marginal tax rate. Unless the fund can retain its complying status, the funds should be rolled over to a resident regulated super fund and the non-complying fund wound up.

To meet the current definition of a complying fund, a fund must pass 3 residency tests, one being that the central management and control of the fund is ordinarily in Australia (TR 2008/9).

Central management and control test

The central management and control (CM&C) of a superannuation fund depends on the who, when and where of the strategic decision-making processes and activities of the fund.

The strategic and high-level decision-making processes of a super fund include:

  • formulating the investment strategy for the fund
  • reviewing and updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments, and
  • determining how the assets of the fund are to be used to fund member benefits.

Activities to do with the daily operation or administration of the fund do not constitute CM&C as they are not strategic in nature.

The “who” exercising the CM&C is determined based on who actually performs the high-level duties in relation to the fund. It is not sufficient that they have the legal responsibility to do so. There may be situations where a person other than the fund trustee is exercising the CM&C of the fund, for example, the trustee may have delegated their duties and powers to another person.

The “where” of the CM&C is determined by where the key strategic decisions of the fund are made, and the high-level duties are performed, regardless of the residency of the person/s exercising CM&C.

The “when” a CM&C of a fund is ordinarily in Australia is determined by whether in the ordinary course of events, the CM&C of the fund is regularly, usually and customarily exercised in Australia. If the CM&C of the fund is being temporarily exercised outside Australia, this will not prevent the CM&C of the fund being “ordinarily” in Australia at a particular time.

Temporary absences from Australia

The subject of the proposed change is the length of time that the CM&C of a super fund is still considered ordinarily in Australia despite being temporarily outside of Australia. The CM&C of a fund will be “temporarily” outside Australia if the person or persons who exercise the CM&C of the fund are outside Australia for a relatively short period of time and during that time they exercise the CM&C of the fund overseas.

While the CM&C of a fund can be outside Australia for a period greater than the current test period of 2 years, the absence must be temporary in nature. Conversely, it will not be considered “ordinarily” in Australia at a time even if the period of absence is less than the test period if the CM&C of the fund is deemed not temporarily outside Australia. This is determined based on the facts and circumstances of the fund and cannot be established in retrospect.

Active member test

One of the other current residency tests is the “active member” test, where to satisfy the test, a fund:

  • has no active members, or
  • it has active members who are Australian residents and who hold at least 50% of either:

– the total market value of the fund’s assets attributable to super interests, or

– the sum of the amounts that would be payable to active members if they decided to leave the fund.

For the purposes of this test, a fund member is an “active member” if they are a contributor to the fund or contributions to the fund have been made on their behalf. This means that if their share of the fund balance exceeds 50% of the balance of all active fund members, a fund’s members would either have to stop making contributions to the fund while overseas, or make super contributions into an APRA-regulated fund.

The removal of the active member test will be beneficial for SMSFs and smaller super funds, as they are more often impacted by this test than funds with larger membership. It will reduce the need of SMSF members being forced to open a new account with or roll over super into APRA-regulated funds while overseas, only to transfer their contributions back to an SMSF on return — preventing an unnecessary and costly compliance burden.

Also, it will provide an opportunity for family members added to an SMSF to take over the high-level decision making of the fund to be able to make contributions and become active members in their own right.

ATO COVID-19 considerations for SMSF residency

The Australian Taxation Office has recently stated considerations if the individual trustees of an SMSF or directors of its corporate trustee are stranded overseas due to COVID-19 international travel restrictions. In the absence of any other changes in the SMSF or the trustees’ circumstances affecting the other conditions, the ATO does not intend to use compliance resources to determine whether the SMSF meets the relevant residency conditions.

Source: CCH iQ

“Prepayments of rent” on Capital Account

May 24, 2021

Rent income

“Prepayments of rent” on Capital Account

The Full Federal Court has dismissed the taxpayers’ appeal from the decision reported at 2020 ATC [2020] FCA 544 after agreeing with the primary judge that upfront payments made as part of lease and licence agreements to operate McDonald’s stores were capital in nature.

 

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Holiday home rental deductions being targeted

March 6, 2019

Holiday home rental deductions being targeted

Recently the ATO issued a media release in which they have committed a greater focus on the deductions claimed by individuals for holiday homes. This focus is centred on whether these properties are genuinely available for rent in the periods which are indicated by taxpayers.

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Legal expenses from workplace claim found deductible

March 6, 2019
Legal Fees

Legal Expenses

Are work-related legal expenses deductible? YES!

A recent private ruling has highlighted instances where legal expenses are considered deductible under the general provisions of ITAA 1997 s 8-1. Under the provision, a deduction is allowed for legal expenses which are incurred in order to earn assessable income or in carrying on a business.

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What is the “permanent place of abode” in Tax Residency?

March 6, 2019

Tax Residency

Changing Tax Residency Becomes Easy?

The Full Federal Court of Australia has overturned a previous court ruling that effectively made an individual a tax resident of Australia in the 2011 income year. During that year, the individual in question was living in Bahrain and working in Saudi Arabia, however, had family and financial investments in Australia.

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