Australia: Key taxation developments

There have been a number of key taxation law developments and changes implemented or proposed recently that affect businesses and companies.

We have outlined the top issues. Click on each heading to see the details.

Small business tax concessions

Other than the reduction to the corporate tax rate to 27.5 per cent, there have been a number of other changes to concessional tax treatment available to small businesses. 

Additional conditions for Small Business Capital Gains Tax (SBCGT) Concessions

The Federal Government has passed legislation that restricts the use of the SBCGT concessions for the sale of assets that are shares in companies or interests in trusts. 

Where the asset subject to a CGT event is a share or interest the new legislation adds further conditions for taxpayers to access the SBCGT concessions. In addition to meeting the basic eligibility conditions for the SBCGT the taxpayer is also required to be either:

• a CGT concession stakeholder in the object entity (the entity that the taxpayer holds shares or interests in); or
• CGT Concession stakeholders in the object entity had a total small business participation percentage in the entity claiming the concession of at least 90 per cent.

The following conditions must also be met:

• Modified Active Asset Test – at least 80 per cent of the total market value of the assets of the object entity (not including shares or interests in other entities) plus a percentage of the total market value of the assets of any entity in which the object entity has a small business participation percentage must relate to active assets, financial instruments connected to a business carried by the entity or cash
• the taxpayer seeking to make use of the SBCGT concessions must have been carrying on a business immediately prior to the CGT event happening. However this condition will only apply where the taxpayer does not meet the maximum net asset test in relation to the CGT event
• the object entity must have carried on a business immediately prior to the CGT event happening and also must either be a CGT small business entity or satisfy the maximum net asset value test in relation to the CGT event.

These conditions are aimed at preventing larger entities from being able to access the SBCGT concessions but also add another layer of complexity in determining the eligibility of taxpayers.

This legislation received Assent on 3 October 2018 and will apply to CGT events occurring from 8 February 2018. Entities that have lodged their income tax returns and reported CGT events that may be affected by these changes may be required to amend their tax return.

Instant asset write off

The Federal Government has extended the $20,000 instant asset write off for small businesses until 30 June 2019. 

Businesses with turnover of less than $10 million will be permitted to instantly write off the purchase of capital assets with a cost less than $20,000. Any asset with a cost of $20,000 or more are not able to be immediately deducted in the businesses tax return and will need to be written off over time.

On 1 July 2019 the instant asset write off threshold amount will be reduced to $1,000.

Division 7A

Where a company makes a payment or provides a loan to a shareholder or associated entities of the shareholder these payments may be treated as unfranked dividends unless they are subject to a loan agreement that complies with the provisions in Division 7A of the Income Tax Assessment Act 1936  (Cth) (‘ITAA 36’).

Proposed amendments

In October and November of this year the Federal Government released a consultation paper for proposed changes to Division 7A loan provisions with the aim of simplifying the operation of the rules and making it easier for taxpayers to comply. It is intended that amendments made will apply from 1 July 2019.

The proposed changes include:

• removing the options for seven year and 25 year loan agreements and replacing them with a 10 year loan that does not require formal written documentation (though written or electronic evidence of the loan should be created). All seven year and 25 year loans already in existence on 1 July 2019 will be subject to transitional rules.
  Complying seven year loans in existence as at 30 June 2019 will be required to comply with the model and new benchmark interest rate for the 10 year loans but will retain their existing loan term. 
  For existing 25 year loans it is proposed that they will be exempt from a majority of the changes until 30 June 2021 where they will be required to be converted into a complying 10 year loan. Depending on the balance of the loan remaining or the length of the term on the loan at 30 June 2021 this may result in a significant increase in interest payable and amounts required to be repaid.
  In addition loans that were made before 4 December 1997 that are still in existence as 30 June 2021 will be deemed dividends unless they are paid out or made subject to a complying loan agreement before the lodgement of the company’s tax return for the 2021 financial year.
• removing the concept of a distributable surplus. Currently the amount of a deemed dividend under Division 7A is limited to the amount of distributable surplus of the company that made the payment or provided the benefit.
• clarification on whether unpaid present entitlements (UPEs) owed to a company by a Trust fall within the scope of Division 7A. Currently UPEs can be either be converted to a Division 7A compliant loan or may be subject to an arrangement where the value of the UPE is held on a sub-trust solely for the benefit of the company. 

The proposed changes will require such UPEs to be converted into complying loans by 30 June 2020.

The inclusion of a self-correction mechanism to assist taxpayers with promptly rectifying any breaches of Division 7A. 

• Currently Taxpayers are required to apply to the Commissioner to exercise a discretion to either disregard a deemed dividend or allow the dividend to be franked. The exercise of the discretion is usually subject to conditions that require the taxpayer to make catch up payments of interest and principle as if a complying loan had been put in place when it was originally required. The process for applying the Commissioner to exercise his discretion imposes significant compliance costs and creates uncertainty for the taxpayer.
• The proposed changes would allow a taxpayer to self-assess their eligibility for relief from Division 7A and then take any appropriate steps to correct the treatment of the payment or benefit by converting it into a complying loan and making any necessary catch up payments.
• The addition of safe harbour rules relating to companies that provide the use of assets. Where a company provides a shareholder or an associate of the shareholder with the use of an asset a dividend is deemed to arise for the amount that would have been paid for the use of the asset if it had been provided on an arm’s length basis less any amounts that were actually paid. Depending on the asset provided it can be difficult for taxpayers to determine the arm’s length amount of the benefit provided.
• The proposed amendments provide a formula for determining the arm’s length amount of the benefit provided, however taxpayers will be able to continue to use their own calculations.
• There are also a number of technical changes that are intended to improve the operation of the provisions and provide “certainty” to taxpayers.

Taxation Determination

The Australian Taxation Office (‘ATO’) has recently released Taxation Determination TD 2018/13 relating to whether s 109T of the ITAA 36 will apply to a payment or loan made by a company to another entity interposed between the company and a shareholder or a shareholder’s associate where that payment or loan is a commercial transaction.

The tax determination has stated that s 109T will apply to commercial transactions where the Commissioner of Taxation considers that a reasonable person would consider that the payment or loan was made as part of an arrangement to provide a benefit to a shareholder or a shareholder’s associate.

Research and Development Tax Incentive

Following on from the 2016 review into the Research & Development (R&D) Tax incentive the Government introduced a bill on 20 September 2018 for the amendment of the R&D tax incentive that has the stated purpose of improving the integrity of the tax incentive. 

The proposed amendments include:

• Increasing the R&D expenditure threshold from $100 million to $150 million and making the threshold a permanent feature of the law;
• Linking the R&D tax offset for refundable R&D tax offset claimants to claimants’ corporate tax rates plus a 13.5 percentage point premium (for entities with aggregated turnover of less than $20 million);
• Capping the refundability of the R&D tax offset at $4 million per annum (however, offset amounts that relate to expenditure on clinical trials do not count towards the cap); and
• Increasing the targeting of the Incentive to larger R&D entities with high levels of R&D intensity, reducing the benefits provided to certain entities undertaking R&D activities and increasing the benefit to others.

Large entity R&D intensity incentives

Entities with aggregated turnover of $20 million or more for an income tax year will be entitled to a R&D tax offset equal to their corporate tax rate plus one or more marginal intensity premiums. The intensity premiums apply to notional deduction within a range of R&D intensity where the entity’s R&D expenditure (notional deductions) are expressed as a proportion of the entity’s total expenses.

Integrity measures

The Bill also includes measures aimed at enhancing the integrity of the R&D Tax Incentive by ensuring that entities cannot obtain inappropriate tax benefits and by clawing back the benefit of the Incentive to the extent an entity has received another benefit in connection with an R&D activity.

Where an entity benefits from a government recoupment (such as a grant or reimbursement) in relation to expenditure that is also eligible for the R&D tax offset, a clawback applies to reverse the double benefit that arises.

Anti-phoenixing measures

In order to prevent the illegal activity of companies going into liquidation to avoid paying creditors and employee entitlements and then reforming as new companies new measures were announced that create new offences for conducting phoenix activities and prevent Director’s from evading liability or prosecution. The proposed measures also include an extension to the Director’s Penalty Notice (DPN) regime to include taxation liabilities such as GST, luxury car tax and wine equalisation. 

Currently the Tax Administration Act 1953  (Cth) allows the Commissioner to make estimates of a company’s unpaid amounts of PAYG Withholding and Superannuation Guarantee charges. The Commissioner can then issue a DPN to the Directors that makes them personally liable for the payment of those liabilities.

The exposure draft for the new legislation includes amendments that will extend the Commissioners ability to make estimates of unpaid liabilities and to issue DPNs for the payment of those liabilities to GST, luxury car tax and Wine equalisation tax.

In addition the measures proposed will authorise the Commissioner to retain tax refunds for a taxpayer who has failed to lodge a return or provide other information that may affect the amount that the Commissioner would be required to refund.

Legal professional privilege

The ATO generally respects Legal Professional Privilege (LPP), however where information that should be subject to LPP has been provided to the ATO through dubious means without the client waiving LPP, the Commissioner asserts that he is obligated to make use of that information to make assessments of the client’s taxable income.

In a proceeding that is set to be heard by the High Court, Glencore has had documents that were part of the Paradise Papers stolen and published. The ATO has obtained copies of these documents and is seeking to rely on them in pursuing Glencore for unpaid tax. 

Glencore asserts that the documents are subject to LPP and is seeking an injunction to prevent the ATO from making use of the information.

A previous decision by the Federal Court found that the Commissioner was able to make use of any information available to him for the purposes of forming an assessment regardless of how it came into the Commissioner’s possession.

Reliance on correspondence from the Australian Taxation Office

The decision of the full Federal Court in Pintarich v Deputy Commissioner of Taxation [2018] FCAFC 79 ruled that a taxpayer was unable to rely on correspondence issued by the ATO regarding the details of a payment arrangement he had entered into. The majority judgment of the Court determined that as the correspondence had been automatically generated by a computer and without a mental process accompanying it, the correspondence did not constitute a decision that the taxpayer was entitled to rely upon.

While the facts of the case include conflicting accounts of the discussions between the taxpayer and an ATO officer regarding the terms of the payment arrangement, the decision potentially absolves the ATO of responsibility for any inaccuracies in correspondence that is issued to taxpayers.

The taxpayer had sought leave to appeal in the High Court but his application was refused on the basis that it had insufficient prospects of success.

Clients with settlement agreements for taxation liabilities should exercise caution in regards to correspondence they received from the ATO and may wish to contact the ATO directly if they wish to confirm the contents of the correspondence.

Potential changes to imputation credits

One of the policy announcements made by the Federal Labor Party during the year involves a change to tax offsets for imputation credits on share income. 

The proposed changes will make the tax offsets provided by imputation credits non-refundable. Currently where a shareholder has imputation credits that are in excess of their tax liability, the excess amount will be refunded to the shareholder. However, under the proposed changes the imputation credit tax offsets will be lost.

The Labor party has stated that pensioners in receipt of a government pension will be exempt from the changes, however the group that will be most adversely affected are likely to be retirees with Self Managed Superannuation Funds (SMSFs).

As large superannuation funds have aggregated assets they will be able to continue to make use of all of the imputation credits as the members in accumulation phase that are subject to tax. Where all members of a SMSF are in pension phase the income earned on their pension accounts are tax free (subject to the transfer balance cap) and so the tax offsets on the imputation credits are unable to be utilised. A number of retirees have come to rely on the refund of the imputation credits as a part of their income, they may have to consider making changes to the mix of investments in their superannuation fund if the proposed changes ultimately eventuate after the next federal election.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.