ipa, tax & regulatory update - institute of public accountants · eligibility corporate tax cut...

IPA,

Tax & Regulatory

Update

Tony Greco FIPA

Institute of Public Accountants

Overview of Presentation

Overview1)Regulatory update

• Self Assessment

• Next election tax policy announcements

• FBT exempt vehicles

• Division 7A & UPE’s

• Tax Debt Transparency

• Allocation of profits Professional firms

• GST withholding property supplies

• Notifiable Data Breach

2)Black Economy Taskforce

3)Small Business Cash Flow

AFR - Friday, 16 Feb 2018

Self Assessment – Not always

ATO factsheet – “Check your clients’ income data before lodging”

When we receive a tax return and deem income is missing, we will adjust the return before issuing the notice of assessment. This means the assessment may differ from what your client expected

• ATO using pre-filling service to cross-check the data on your clients return

• Can use portal to message ATO of incorrect pre-fill information

Labor Party Tax Policy Announcements

$3,000 limit on managing tax affairs

• Designing tax policy around 48 taxpayers – excessive and disproportionate

• Life events – divorce, redundancy, sale of business, structuring

• Disputes, audits to respond to ATO !

• Complexity of tax system

• Label D10 – will be broken into three sub-components

• Interest charged by ATO/Litigation costs/other expenses managing tax affairs

Taxing Discretionary Trust distributions at 30%

• No carve out for active small businesses as compared to farmers

• Anomalies such as over taxation compared to the tax outcome if the beneficiary derived the income

directly

Whistle-blower rewards

where the whistle-blowers' information results in more tax being paid, to allow them to collect a share of

the tax penalty (capped at $250,000 or 1 per cent of the penalty figure, whichever is higher). This share

would be taxable as ordinary assessable income

Negative Gearing/ Capital Gains Discount

FBT Exempt vehicles – Private use

• Employee's use of the car is a fringe benefit and all of the private use of the car, including travel between home and work, is taken into account in working out when the car was used or available for the private use of the employee

• Exempt motor vehicles however have different FBT rules:• The private use of a motor vehicle is exempt from FBT if all of the following

conditions are satisfied:• the vehicle is a panel van, utility (ute) or other commercial vehicle (that is, one not

designed principally to carry passengers)

• the employee's private use of such a vehicle is limited to

• travel between home and work

• travel that is incidental to travel in the course of duties of employment

• non-work related use that is minor, infrequent and irregular (eg: occasional use of the vehicle to remove domestic rubbish).


The term “minor, infrequent and irregular” is not defined within the FBT legislation,

• there is virtually no case law or ATO guidelines to assist in this regard

• there is some very limited guidance offered in the Addendum to MT 2024 where the ATO indicates that “minor, infrequent and irregular” would include “the occasional use of the vehicle to remove domestic rubbish”


• New draft ruling : PCG 2017/D14 issued in December 2017 loosens shackles

• You may choose to rely on this draft Guideline if:• you provide an eligible vehicle to a current employee• the vehicle is provided to the employee to perform their work duties• you take all reasonable steps to limit private use of the vehicle and have measures in place to monitor

such use• the vehicle has no non-business accessories• the vehicle had a GST-inclusive value less than the luxury car tax threshold• the vehicle is not provided as part of a salary packaging arrangement and the employee cannot elect to

receive additional remuneration in lieu of the use of the vehicle, and• your employee uses the vehicle to travel:

• between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip

• no more than 750 kilometres in total for each FBT year for multiple journeys taken for a wholly private purpose, and

• no single, return journey for a wholly private purpose exceeds 200 kilometres.

ATO to disclose tax debts credit agencies

The MYEFO included an announcement that from 1 July 2017 the ATO can disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage those debts

This measure is part of the Government’s strategy to reign in overdue tax and improve transparency of taxation debts

Legislation has now surfaced – start date when legislation is passed

• will initially only apply to businesses with an ABN

• tax debt of more than $10,000 that is at least 90 days overdue

• Entity not effectively engaging to manage their tax debt• Effectively engaging

• Payment plan• Objection against tax decision

• Administrative tribunal/Federal court for review or appeal

• No active complaint from the entity with Inspector General Taxation• Excluded entities

• Deductible gift recipients

• Not for profits

• Government entities

• Complying superannuation entities

Note: Businesses will be given 21 days notice before ATO reports tax debt information in writing


• entity’s total tax debts :• income tax debts• activity statement debts, for example GST, Pay as You Go Withholding (PAYGW)• superannuation debts• fringe benefits tax debts, and• penalties and interest charges.

• tax debt information that will be reported:• unique identifiers for the entity, such as ABN and legal name• the balance of the entity’s overdue tax debts at the time of initial reporting• regular updates on the balance of the entity’s overdue tax debt until the entity no

longer meets the reporting criteria, and• a notification when the entity no longer meets the reporting criteria

Note: The tax file number of an entity will not be provided.


• The MYEFO confirms the ATO is owed $19b in overdue tax, approximately two thirds of which is owed by small businesses with a turnover under $2m. The rising level of debt, particularly in small business, presents a growing challenge for the ATO

• ATO debt is often pushed to the back of the queue, allowed to accumulate—often until the ATO pursue legal proceedings

• Need to consider the potential ramifications for small businesses of increase in transparency of overdue tax debts

• Clearly, there has never been a more important time to engage with the ATO to manage unpaid tax

• Safeguards - Credit reporting bureaus only have 2 days to remove tax debt data

Allocation of Profits within Professional Firms

• The ATO has suspended the application of its risk assessment guidelines for allocation of profits within professional services firms entitled "Assessing the risk: Allocation of profits within professional firms" (guidelines)

• Change of heart - after becoming aware of some arrangements with high risk factors that are not specifically addressed in the guidelines. The ATO did not specifically identify these high risk factors, apart from saying that they included the use of related party financing and self-managed superannuation funds (SMSFs)

• The ATO's risk assessment guidelines generally provide professional firms with a safe harbour from ATO review in relation to their structure, and in particular in relation to the application of Part IVA

• ATO concern about firms restructuring to take advantage of guidelines and Everett assignments

Allocation of Profits within Professional Firms

Guidelines, in effect, recognise that where business income is being generated by the business assets and/or employees of the practice, the profit of the practice can be legally distributed to the owners of a business, whether that is the partners of a partnership, shareholders of a company or beneficiaries of a trust

• There are 3 benchmarks that an Individual Professional Practitioners (IPP) can satisfy and if they satisfy any one of them, the IPP's profit allocation arrangements will be at low risk of being reviewed by the ATO. These benchmarks are summarised below

• The first benchmark is "Equivalent Remuneration". This looks at the level of remuneration that is being provided to the upper quartile of the highest band of professional employees providing equivalent services to the firm (equivalent to the services provided by the IPP)

• The second benchmark is "50% entitlement". This benchmark is satisfied if 50% or more of the income of the firm to which the IPP and their associated entities are collectively entitled (either directly or indirectly), in the relevant year, is assessable income in the hands of the IPP

• The third benchmark is "30% effective tax rate". This benchmark is satisfied if the effective tax rate (not marginal tax rate) is 30% or higher on both:

• The gross income from the firm to which the IPP is entitled; and

• The gross income from the firm to which the IPP and their associates entities are collectively entitled.

• The 30% effective tax rate is to be calculated by treating the income of the firm as if that income was derived by each entity after all other sources of income by the IPP and their associated entities and no account is taken of any tax deductions on the income from the firm

Eligibility Corporate Tax Cut

Two rate company tax has been a debacle – added complexity & franking implications

Taken long time to sort out definitive eligibility criteria and we have anomalies

• Eligibility Corporate Tax Cut 2015-16 & 2016-17 – must be carrying on a business and have an aggregated turnover less than the threshold.

• Eligibility Corporate Tax Cut – 2017-18Base Rate Entities (BRE) – must have an aggregated turnover less than the threshold and satisfy passive income test ( no more than 20% of passive income)

Expect to see amended tax returns for 2015/16 and 2016/17 years now that the dust has settled

Beware – some tax software programs impute franking at 30% rate so need to override

Work Related Deductions – Report on inquiry into tax deductibility

Recommendations

1. Maintain current personal income tax framework that allows taxpayers to claim deductions

for valid expenses

• Committee supports ongoing ability to claim legitimate deductions

2. That the ATO be instructed to analyse each detailed subcategory of tax deductions and

identify areas that it believes are particularly open to systemic abuse and over claiming

• ATO to rank these subcategories in order of size of the financial risk to Government

revenue and recommend amendments to law or policy where appropriate

3. Treasury be required to provide a clear estimate of the actual cost to Government revenue

of WRE’s

4. ATO review its compliance activity in relation to WRE’s

• $100 million of abuse was identified in a single year through a review of 1,000

taxpayers suggest considerable scope for additional savings

5. ATO continue with technological development and progress on pre-filing of returns to

support the implementation of the reform agenda and to simplify taxpayers interaction with

the tax system, with the eventual goal to minimise and ultimately remove the need for

taxpayers to amend pre-filled returns

Work Related Deductions

• Australia’s WRE system i.e. relatively generous

• Other countries more proscriptive or limited

• UK specifies a tighter nexus on work related expenses

• Option of claiming a standard deduction based on their occupation

• Alternatively employees can make a claim for the amount actually spent on eligible items subject to substantiation and the test of being incurred “wholly, exclusively and necessarily in the performance of an employee’s duties”

• New Zealand does not allow any work related deductions for employee

• Tax agent prepared returns still over 70 per cent

• Policy vacuum ATO will ramp up compliance• Tax Gap for individuals likely to exceed tax gap for companies

• Audits revealing wide spread errors

• Next Federal Budget justification for some tweaks

Work Related Deductions

Division 7A Unfinished business – unpaid present entitlements

Since 2009 when the ATO change its long standing treatment of UPEs (unpaid present entitlements) Division 7A has been a work in progress

Tax ruling TR 2010/3 which has effect from 16th December 2009 outlines the ATO’s view that a UPE between a trust and a private company beneficiary is the provision of financial accommodation to the trust for the purposes of Division 7A

PS LA 2010/4 assures taxpayers that the ATO would not apply Division 7A to UPEs that arose after 16th December 2009 where the funds representing the UPE are held on sub trust and the amounts held on sub-trust are invested using one of the three investment options set out in PS LA 2010/4

Option 1 in PS LA 2010/4 requires that the sub-trust lends the funds representing the UPE to the trust under a documented legally binding 7 year interest only loan with the principal repayable at the end of the seven years

• The ATO issued PCG 2017/13 in July 2017 which applies to a private company or trustee beneficiary of a trust sub-trust where the trustee:

• Validly adopted option 1 under PS LA 2010/4 on or before 30 June 2011; and

• Does not repay the principal of the loan when the loan matures in the 2017 income year or the 2018 income year

• PCG 2017/13 provides an important one-off stop gap solution for loans maturing under option 1 in the 2017 and 2018 income years only

• Need to convert those interest only loans into 7 year complying loans (S109N) principal and interest payments required



Where to from here

• The Board of Tax has made a number of recommendations in its Post Implementation review of Division 7A back in 2014 to the Government

• The Board of Tax in their review acknowledged that UPEs provide a significant source of funding used by business taxpayers for working capital purposes

• Most in the tax profession believe the Government will accept some of these recommendations as the way forward to resolving the long standing UPE issue

• The Board of Tax proposes a single compliant loan with a duration of ten years and better aligning calculation of the minimum interest rate with commercial transactions

• The single compliant loan however would extend not just to post 16th December 2009 UPEs, but also to UPEs from before that date and loans that arose from before 4th December 1997 to which Div 7A does not apply

Payment of GST on taxable supplies of certain real property

• Require purchasers of new residential premises and new subdivisions of potential residential land to make a payment of part of the purchase price to the ATO

• Under the new arrangements, purchasers will withhold the GST on the purchase price of new residential premises and new residential subdivisions, and remit the GST directly to the ATO as part of settlement

• Justification - These changes will prevent tax evasion by unscrupulous property developers that fail to remit the GST on sales of new residential premises and new subdivisions, despite having claimed GST credits on construction costs

• This failure to remit GST is often associated with “phoenixing" – where a developer dissolves its business and sets up a new entity to avoid remitting the GST to the ATO.

• Generally, the withholding obligation and all associated amendments apply in relation to supplies for which any of the consideration is first provided (other than consideration provided solely as a deposit) on or after 1 July 2018, whether or not the supply was entered into before, on or after the commencement of the amendments.

• The exception to this general rule is where the contract for supply was entered into before 1 July 2018, and consideration for the supply is first provided before 1 July 2020, providing a two year transitional period for pre-existing contracts.

• Where a contract is entered into before 1 July 2018, and consideration for the supply is first provided after 1 July 2020, then theamendments will apply.

Payment of GST on taxable supplies of certain real property

The withholding amount is 1/11th of the contract price for fully taxable sales (reduced to 7% for margin scheme sales). Settlement adjustments are ignored and the withholding is based on the stated contract price only.

Purchasers will have 2 options in relation to the withheld GST:

• remit it to the ATO on or before settlement; or

• give the vendor a bank cheque on settlement (made out to the Commissioner).

• All vendors of residential premises/residential land (including developers, investors and private home owners) will need to provide a notice to the purchaser before settlement advising whether GST withholding applies

• Failure to do so will be a strict liability offence attracting a fine of $21,000 for individuals and $105,000 for companies

Notifiable Data Breaches

Significant potential implications for tax practitioners

• This legislation applies to Tax File Number (TFN) recipients in relation to their handling of TFN information. A TFN recipient is any person who is in possession or control of a record that contains TFN information, and TFN information is information that connects a TFN with the identity of a particular individual.

• The net effect of the existing privacy laws and the laws that will come into effect on 22 February is that tax practitioners who are handling documents which contain a TFN and connects that TFN to a particular person, will need to take extra care to ensure that:

• They have taken all reasonable steps to handle personal information including information pertaining to TFNs to protect that personal information from misuse, interference or loss, and from unauthorised access, modification or disclosure; and

• If there is a suspected or known breach to take immediate steps to limit any further access or distribution of the affected personal information or possible compromise of any information; and

• If there are reasonable grounds to believe that the data breach is likely to result in serious harm to any individuals whose information is involved, the person responsible must notify the individual concerned and the Australian Information Commissioner of the eligible data breach.

Notifiable Data Breaches

• In determining whether it is so likely to result in serious harm, you must have regard to:• the kind of information;

• its sensitivity;

• whether the information is protected by security measures;

• whether any security measures that are in place to protect the information could be compromised;

• who has obtained or could obtain the information;

• whether a person could have obtained information or knowledge which could circumvent the relevant security technology or methodology;

• the nature of the harm; and

• any other relevant matter (see s26WG of the Act).

• Non-compliance could result in heavy penalties

• What does all this mean for a registered tax agent who is communicating with his client and others in circumstances where documents are passing between them, where a TFN and the relevant person to whom the TFN pertains is identified?

• In a practical sense, what it means is that first you have to take reasonable care to ensure that information is appropriately protected. Clearly, this would include taking reasonable steps to protect electronic records in relation to all known problems such as invasive computer viruses. Appropriate, up-to-date software protection is essential

• Secondly, as a result of the new legislation, a practitioner who knows that there has been a compromise of the privacy of the information, or who recklessly fails to discover such a compromise in circumstances where by taking reasonable steps it would have been discovered, is likely to be in breach of the legislation

• This does not mean that information containing TFNs and their connection to the referable individual cannot be passed between agent and others. It does however mean that care needs to be taken to ensure that it is appropriately protected information, and that if there is a breach for whatever reason, that the agent should have known about by making reasonable enquiries, they will have a problem

• In most cases, there will be no problem unless an agent either deliberately ignores what is a clear breach of the privacy of the individual concerned, or sticks his or her head in the sand and by so doing deliberately sets about not detecting a breach

• Reasonable steps taken by agents to detect and discover a breach should ensure compliance with the legislation

Superannuation

Now that we have a transfer balance transfer cap, taxpayers are looking for ways to top up lower spouse balances

Contribution Splitting

• You can split up to 85% of your employer and salary sacrificed contributions and transfer it to your spouse’s super account

Spouse contributions

• In 2016–17, you could claim the maximum tax offset of $540 for contributions you make to your spouse's eligible super fund if, among other things, the sum of your spouse's assessable income, total reportable fringe benefits and reportable employer super contributions is $10,800 or less. The tax offset amount gradually reduces for income above $10,800 and completely phases out when the income reaches $13,800

• On 1 July 2017, the spouse income threshold increased, meaning more people are eligible to claim the tax offset for the 2017-18 and future financial years. You can claim the maximum tax offset of $540 if:

• you contribute to the eligible super fund of your spouse, whether married or de-facto, and

• your spouse's income is $37,000 or less. The tax offset amount will gradually reduce for income above this amount and completely phases out when your spouse’s income reaches $40,000.

Black Economy Task Force

• Whole of Government strategy to combat black economy

• Address underlying causes rather than symptoms – focuses on incentives, deterrents and measures which limit opportunities for participation

• Strengthening identity regimes, moving to non-cash world, visible enforcement

• Goes beyond tax, embraces joint agency action

• Practical and implementable to avoid more regulatory red tape – tailored and targeted

• Compliments other reviews under way

• Phoenixing

• Modernisation of business registers

• Underpayment of superannuation

• Money laundering

• Beneficial ownership

• Whistleblower

… and it’s more than simply a ‘tax problem’

Policy considerations

… We estimate it is up to 50% larger than the 2012 ABS estimate

Why do we think it’s growing?

Margin

pressures

New business

models and

forms of work

Increased

sophistication

of criminal

enterprise

Perceptions

of risk

(lack of

enforcement)

Tax and

compliance

burdens

Multinationals

not paying

fair share

Migrant communities

and social

norms

The non-cash trend… … But where are the $100 notes?

Observations and opportunities…

The role of tax professionals and stopping the black economy…

Black Economy Task Force

Likely recommendations

1. ABN register – real time verification (consolidation registers ASIC, Business names, TFN), banning, periodic renewal ( Licence to do business )

2. Amnesty for small businesses followed by enforcement blitz3. Individual identity – digital passport for interactions public agencies4. Taxable payment reporting – extend to high risk sectors5. Reporting system for sharing economy6. More visible enforcement7. Non –cash business model incentives – considered low risk if compliant/NPP developments8. Cash free economy – economy wide cash limit $10,0009. Electronic payment wages – STP & payment 10. Non deductibility of undocumented contractor payments and cash wages11. Procurement restricted to firms with good tax record12. Strict liability offences – quotation of a false ABN, paying wages in cash, exceeding cash limit, applying for an

ABN on someone else’s behalf without consent13. Personal Services Income reform

Single Touch Payroll – stage 1

The Government intention is to broaden implementation of Single Touch Payroll reporting requirements so that they apply to all employers, regardless of the number of employees- Substantial employers (20 or more on 1st April 2018) start from 1 July 2018- All employers regardless of the number of employees start from 1 July 2019

• ATO likely to introduce a transition period of two years including a voluntary take-up period of 12 months leading up to 1 July 2019, followed by grace period for the next 12 months

• a non-flexible start date of 1 July 2019 for small businesses with a substantial and repeated history of poor compliance with super guarantee or PAYG withholding (i.e.no grace period applies)

IPA position - As a partial offset for the costs of implementation and encouragement for early take-up, a targeted incentive should be considered for micro businesses with less than 5 employees

Cash flow coaching to help small business

Under financial pressure and not confident

Research shows:

almost half of small businesses are under financial pressure within the first year of starting business and this increases in years 1-3

Why is cash flow education needed?

Cash flow is a big concern for small business:

90% of small business failures are due to poor cash flow (Kate

Carnell, Small Business and Family Enterprise Ombudsman)

More than 60% of small businesses cease operating within three years (ABS

September 2015) I want to know more

about tax and super but I

feel I have lost my

confidence because I am

under financial pressure

with my business.

(Source: ATO New Small Business Education Research 2016)

Small Business

owner

Co-designed with tax professionals and small business

Delivered through ‘business coaching’ conversations

Suitable for any stage of the business lifecycle

Simple and practical cash flow resource

Improves small business performance

Opportunity to use your own brand on the Kit

The Cash Flow Coaching Kit


Reaching small business

Tax professionals play a critical role as the people small business trust and rely on the most

You are well placed to know what your clients need

As a new business

owner, it showed me

how what I had in my

head was going to work

in the real world

The Cash Flow Coaching

Kit has helped my client’s

realise that managing

their cash flow is critical to

their success

It has shown my clients,

in an easy to

understand way, what

tax and costs they have

to pay going forward

It gave me a great insight

into my business and has

helped me to make some

really good decisions for

the future

Restaurateur

Tax Professional

Tax Professional

Construction

A value-added advisory service offering

Flexible framework to educate small business clients

A resource for regular cash flow conversations

Can be used one-to-one or in a group session

The clever design makes it simple for small business clients to understand

More information

The ATO is running face to face workshops and webinars for tax professionals from March, where you can learn more about delivering the Cash Flow Coaching Kit.

Visit the ATO display stand to find out more and register your interest.

Benefits for tax professionals


Service Design winner

Public Service category

”…This is a full solution across tools and advisor

experience and deserves to be recognised at the

highest level.”Good Design Awards Jury

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