Fringe Benefits Tax – The 2024 FBT Season is here!

09 May 2024

As the 2024 FBT year has ended, employers will be in the process of reviewing benefits provided during the year and ensuring they obtain and keep the appropriate records to support both the calculation of fringe benefits and the exemptions and reductions that are available.

We provide you with the latest updates and tips to assist you in managing FBT compliance obligations and completing 2024 FBT returns.
2024 FBT Rates and Thresholds

Key Dates

Who needs to lodge an FBT Return?

As a reminder, employers who have an FBT liability must lodge an FBT Return. If FBT instalments were paid during the year and the employer does not have an FBT liability for the year, an FBT return must be lodged to obtain a refund of the FBT instalments.

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– If an employer does not have an FBT liability, we still recommend an FBT return is lodged to ensure commencement of the three-year amendment period for which the Commissioner can generally amend FBT returns.
Increased ATO audit activity

Focus on Exempt Vehicles and Calculation of Car Fringe Benefits

The Australian Taxation Office (ATO) has recently seen a significant level of non-compliance in reporting car fringe benefits and has intensified its focus on car fringe benefits.

In particular, the ATO is paying close attention to employers who:
– Classify vehicles as an exempt eligible vehicle for FBT purposes.
– Have not considered if private use of the exempt vehicle during the FBT year was limited to work related travel and other private travel that is ‘minor, infrequent and irregular’.
– Allow employees to claim 100% business use of vehicles which are garaged at home.
– Do not obtain valid logbooks from employees.
– Incorrectly apply employee contributions to reduce the taxable value of car fringe benefits to nil.

The ATO has increased its efforts to identify employers providing utes, dual cabs and similar workhorse vehicles through its extended motor vehicle registries data-matching program with information obtained from states and territories regarding vehicles with a purchase price or market value of at least $10,000 that are transferred or newly registered.

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In our view, at a minimum, employers should ensure the following records are retained:
– Opening and closing on odometers for each vehicle.
– Employee declarations supporting the private use is no more than 1,000kms in total and no return journey exceeds 200 kms.
– evidence that the employers policy regarding limited private travel is enforced. 

Common Errors
The ATO has also reminded taxpayers of the following:
– FBT applies regardless of tax deductions or GST credits claimed.
– In relation to salary packaging arrangements, employers remain accountable for accuracy and any underpayment of FBT, penalties or interest charges so should not rely solely on estimates provided by a salary packaging provider.
– A travel diary (instead of an employee declaration) is required to be obtained from an employee who undertakes extended business travel during the FBT year (i.e. travel for more than five consecutive nights overseas or more than five nights within Australia if there is also a private purpose to the travel).

With increasing ATO activity, careful attention must be given to FBT compliance and lodgement of correct FBT returns, on the same basis as other tax liabilities. Misunderstanding how certain rules apply or inadequate record-keeping can draw ATO attention and trigger compliance action.
Recent Developments

1.     Identifying Employees versus Contractors

Employers are well aware that FBT is payable in resect respect of taxable fringe benefits provided to employees (and their associates) and that FBT is not payable in respect of benefits provided to independent contractors. Therefore, the distinction is very important from an FBT perspective.

Further to the two High Court decisions in the Personnel Contracting and Jamsek cases which changed the tests to be applied in determining whether the individuals concerned were employees or contractors, the ATO released the following:
Taxation Ruling TR 2023/4 Income tax: pay as you go withholding – who is an employee?
Practical Compliance Guideline PCG 2023/2 Classifying workers as employees or independent contractors – ATO compliance approach.

The purpose of TR 2023/4 and PCG 2023/2 is to provide guidance regarding the ordinary meaning of the term ‘employee’ and provide guidance to employers to assess the level of risk associated with classifying workers as employees or contractors.

As expected, the Ruling reflects the High Court’s decisions in Personnel Contracting and Jamsek stating that whether a worker is an employee is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute the relationship.

This classification is important from an FBT perspective in order to ensure that employers are correctly considering fringe benefits in respect of individuals who would be considered employees as a result of the High Court decisions, TR 2023/4 and PCG 2023/2.

We will be releasing a separate newsletter covering this important issue in more detail.

2.     Electric Cars

Use of the FBT exemption for electric vehicles has increased significantly since the exemption became available during the 2023 FBT year. As a recap, to access the exemption, the following conditions must be met:
– The vehicle must meet the definition of a ‘car’ under the FBT rules and therefore, cannot be a motorbike, e-bike or vehicle designed to carry a load greater than one tonne.
– The car must be a battery electric, hydrogen fuel cell or plug-in hybrid electric vehicle.
– The car must have been first ‘held and used for the first time’ on or after 1 July 2022.
– The original retail sale price must be below the luxury car tax threshold which is $89,332 for 2023/24.

Calculating Electricity Cost

The ATO has recently issued Practical Compliance Guideline 2024/2, Electric vehicle home charging rate – calculating electricity costs when a vehicle is charged at an employee’s or individual’s home which offers a shortcut method of 4.2 cents per kilometre for calculating electricity costs incurred when charging electric vehicles at employees’ homes, specifically in relation to zero-emission vehicles.

Home charging costs for plug-in hybrid vehicles must still be calculated using the actual cost. 

The ATO has further clarified that providing an employee with an electric vehicle charging station at their home constitutes a property fringe benefit that may be subject to FBT.

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– Electric cars which are exempt from FBT must still be disclosed as a reportable fringe benefit if the taxable value of an employee’s fringe benefits amount for the FBT year (including the exempt car benefit) exceeds $2,000.
– Employers can choose between the shortcut method outlined in PCG 2024/2 or the actual cost method for each car when calculating an employee’s electricity costs for charging a zero-emission vehicle at home.
– Where a choice is not made or where the vehicle is a plug-in hybrid vehicle, the actual cost method is required to be used to calculate an employee’s electricity costs.
– Where an employer chooses to apply the shortcut method, an employer needs to ensure records are still maintained, particularly distance travelled (e.g. odometer records) and an employee declaration for the electricity costs.
3.     Car Fringe Benefits

Employee Acquires Leased Car From Employer

The ATO has clarified there are no FBT implications when:
– an employee pays the residual value to acquire a car at the end of a novated lease agreement; or
– when an employer acquires a car at the end of an operating lease for its residual value and provides the car to an employee for the same value;
provided the lease in each scenario is a bona fide lease. This will be the case even if the market value of the car at the end a novated lease or operating lease period is higher than the residual value of the car.  

In contrast, an employer will have an FBT liability if a car is acquired under a hire purchase agreement and the market value of the car exceeds the residual value paid by an employee to purchase the car from the employer at the end of the hire purchase agreement. In this scenario, a property fringe benefit will arise and the taxable value of the benefit is equal to the market value of the car minus the residual value paid by the employee (or employee contribution).

Calculation of Car Fringe Benefits

The ATO has also updated its FBT guidance in relation to the following areas:
– Employers can elect to use the operating cost method to calculate the taxable value of a car fringe benefit even if a valid log book is not maintained. However, where this choice is made, the business use percentage of the car will be nil and no reasonable estimate of business kilometres can be used in the calculation. This method can sometimes result in a lower taxable value than the statutory method.
– A car fringe benefit is not taken to arise where a company car is undergoing extensive repairs, for example following a car accident. This concession does not extend to routine servicing, maintenance or minor repairs.

TIPS
– Consider whether the novated lease or operating lease is a bona fide lease for tax purposes.
– Exclude the days or period a car was in a mechanic’s workshop for extensive repairs when calculating the taxable value of a car fringe benefit.
– When providing a hire car as a replacement, employers can rely on the usual car’s logbook for business use confirmation.
4.     ‘Otherwise Deductible’ Travel 2

The recent case of Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676  highlighted the critical difference between FIFO employees travelling ‘on’ work versus ‘to’ work. Understanding this distinction is vital for employers when assessing the ‘otherwise deductible’ nature of travel expenses and therefore, whether the expenses are subject to FBT.

The Federal Court distinguished the circumstances in Bechtel against the previous leading case of John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82 by concluding that FIFO travel costs were incurred in respect of travel from home to work and were not ‘otherwise deductible’ to the Bechtel employees.  

In arriving at this decision, the Court considered the following factors:
– Employees were not rostered on duty until they started work at Curtis Island, near Gladstone in central Queensland (which was not a ‘remote area’).
– The complicated travel route to get to the project (by sea and air) did not demonstrate the employees were travelling in the course of work.
– Adherence to a code of conduct whilst travelling did not mean that the employees were under the ‘direction and control’ of the employer.
– A project allowance paid to employees was not a travel allowance and the employees were not paid whilst travelling.

In our experience, many employers take the approach that the employee travel expenses are ‘otherwise deductible’ without reviewing contractual arrangements and considering the factors outlined above.

TIPS
– It is important that employers consider existing contractual arrangements with employees, particularly in respect of the point of hire and time at which employees are ‘rostered on’ and paid for travelling time.
– Employers should have well-documented working arrangements and policies regarding travel protocols, particularly regarding the direction and control the employer exerts over employees during the travel period.
5.     Proposed record keeping concessions for 2025 FBT year

A series of legislative instruments have been released by the ATO to simplify FBT record keeping for 2025 FBT year and reduce compliance costs for employers for certain benefits.

From 1 April 2024 (ie the 2025 FBT year), employers have the option to use alternative records (as determined by the Commissioner) instead of traditional travel diaries or employee declarations. 

We will be releasing a separate newsletter providing more details on the alternative record keeping requirements
Next steps

If you would like further information on FBT, employment taxes or assistance with your FBT obligations, please contact our FBT Team.

Authors:
Rachel Pritchard, Associate Director
Annie Barrett, Senior Manager
Monqiue Eeson, Experienced Consultant
This newsletter is current as of 09 May 2024, however, please note that announcements and changes are being made by the Government and the ATO regularly.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.
Contact our FBT Team:

Rachel Pritchard
Associate Director
Head of Human Capital & Corporate

Annie Barrett
Senior Manager
Human Capital

Mikaella Hooker
Senior Consultant
Corporate & Private Client Groups

Monique Eeson
Experienced Consultant
Tax Advisory

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Property investors, take note – Disruption with the Bowerman Decision

12 December 2023

The circumstances in which a loss realised on the sale of a residential property may be deductible was considered by the Administrative Appeals Tribunal (AAT) in a recent unusual decision that is likely to have an impact on both losses and gains realised on property.

This recent decision highlights the breadth of what constitutes a profit-making transaction. Whilst it might be understood that losses on the sale of a residence are capital in nature, the AAT’s decision asserted on the facts that since there was a profit-making intention at the time of acquiring the property, a deduction was allowable on revenue account.

Whilst not binding on other parties, this decision will be of interest to property owners and investors. Property investors enjoy access to a raft of tax benefits, with negative gearing, expense deductions and capital gains discounts on sale being worthy of mention.

Stating the obvious: all these profile of investors are united in their common goal, being to profit.

And in the facts of Bowerman and Commissioner of Taxation [2023] AATA 3547, the taxpayer was no different.

The Facts

At the time of the decision, Mrs Bowerman was an 86-year old self-funded retiree, described by the AAT as ‘savvy and entrepreneurial’. Over the decades, she and her late husband had built an investment portfolio which included shares, managed investment trusts and investment properties.

 Mrs Bowerman executed a contract for the purchase of an off-the-plan residence, the ‘Foreshore Boulevard Unit’. At this time, she intended to sell the family home in which she resided and use the sale proceeds to fund the purchase of the Foreshore Boulevard Unit to ultimately reside there.

Mrs Bowerman was informed that the construction of the Foreshore Boulevard Unit was going to be delayed until June 2020 and that she would be able to sell the family home for more than $2 million.

So, in November 2017, she executed a contract to purchase another off-the plan unit (the ‘Dune Walk Unit’) in the same development as the Foreshore Boulevard Unit for $1.2 million. The Dune Walk Unit was scheduled for completion prior to the Foreshore Boulevard Unit. At this time, Mrs Bowerman decided to sell the family home and move to the Dune Walk Unit whilst the construction of the Foreshore Boulevard Unit was ongoing. She planned to eventually sell the Dune Walk Unit and move into the Foreshore Boulevard Unit when construction would be completed.

Mrs Bowerman sold the family home in May 2018 for $2.23 million. The proceeds of this sale funded the purchase of the Dune Walk Unit which she moved into and lived in until July 2020.

Mrs Bowerman contracted to sell the Dune Walk Unit in April 2020, to fund the payment for the Foreshore Boulevard Unit. However, at that time due to the height of the Covid-19 pandemic, property prices had dropped and Mrs Bowerman was compelled to sell the Dune Walk Unit for a loss of approximately $265,000 which was settled in July 2020. The same month, Mrs Bowerman moved into the Foreshore Boulevard Unit where she resided thereafter.

Mrs Bowerman deducted the loss from her assessable income in the 2020 income year.

The Commissioner of Taxation disallowed the claim for the loss on the basis that the sale of the Dune Walk Unit was the realisation of a capital asset, that the loss was capital in nature and because the Dune Walk Unit was her main residence, she was not entitled to carry forward the losses from the sale.

The case came before the AAT to review the ATO’s objection decision.

The Decision

The AAT decided on 3 issues:

  1. Whether the loss on the sale of the Dune Walk Unit was deductible because it was incurred in gaining or producing assessable income. That is, was there an intention to make a profit on the sale of the Dune Walk Unit at the time it was acquired?
  2. If so, whether the deduction was denied because the deduction was of a private or domestic nature, particularly as the taxpayer lived in the Dune Walk Unit; and
  3. If the loss was deductible, whether it was incurred in the 2020 being the year the contract was signed or the 2021 income year being the year the sale contract was settled.

Issue 1: Was the loss deductible?

Mrs Bowerman relied on a principle from the High Court case FCT v Myer Emporium (1987) 163 CLR 199 that a profit from an isolated transaction involving the sale of property will be assessable if the taxpayer acquired the property for a profit-making purpose and the acquisition and sale of the property occurred as part of a business operation or commercial transaction. The profit-making intention is not required to be the sole or dominant purpose of entering into the transaction.

The AAT was satisfied that Mrs Bowerman had the profit-making intention required at the time she purchased the Dune Walk Unit and that her intention to live there was only subsidiary to her profit-making intention. A significant factor to the AAT’s decision on this issue was the ‘incontrovertible fact’ that prior to purchasing the Dune Walk Unit, Mrs Bowerman intended to re-sell the unit for a profit instead of holding it for long-term investment.

Mrs Bowerman’s profit-making intention was further inferred from her proactiveness in keeping abreast of expansions and sales in the development. The AAT considered that her purchase of the Dune Walk Unit was ‘opportunistic’ in nature, and was characteristic of a businessperson.

For these reasons, the AAT considered the purchase of the Dune Walk Unit to be a ‘commercial transaction’ and that the loss on the sale of the Dune Walk Unit was deductible.

Issue 2: Was the loss private or domestic in nature?

The AAT concluded that the loss incurred by Mrs Bowerman did not lose its connection to her profit-making intention simply because she resided in the Dune Walk Unit. It held that the loss was not of a private or domestic nature.

An important factor that seems to have been overlooked, is that a deduction is denied to the extent that it is a loss of a private or domestic. As Mrs Bowerman lived in the Dune Walk Unit for 26 months, arguably the loss should be apportioned.

Issue 3: When was the loss incurred?

This issue arose because Mrs Bowerman submitted that the loss was incurred on the sale in the income year ended 30 June 2020, being the income year in which the contract for the sale of Dune Walk was executed. She relied on and asserted that the Commissioner was bound by Taxation Ruling 97/7 which at paragraph [9] stated ‘a taxpayer who uses a cash receipts based accounting system need not necessarily have paid or borne a loss or outgoing in order for that loss or outgoing to have been ‘incurred’ for the purposes of section 8-1.’

On the other hand, the Commissioner argued that the loss was realised at settlement on the receipt of proceeds in the 2021 income year, not when the contracts became unconditional in the 2020 income year.

The AAT concluded that Mrs Bowerman was entitled to rely on TR 97/7 as it is a public ruling and binds the Commissioner and therefore, the loss on the sale of the Dune Walk Unit could be claimed in the income year ended 30 June 2020.

It should be noted that in the absence of the public ruling the loss would be normally incurred on settlement being in the 2021 year.

Implications

In the capital versus revenue distinction it has long been the position that the intention at the time of acquisition is key. The AAT reached their decision having regard to the strength of the taxpayer’s testament and evidence around her intention at the time of acquisition of the property being:

  1. The taxpayer knowing at the time of purchasing the Dune Walk Unit that she would have needed to sell this apartment to fund the completion of the Foreshore Boulevard Unit; and
  2. The taxpayer’s awareness of growth in the off the plan units in the development acknowledging that she probably would have made a profit had it not been for the COVID-19 restrictions.  In the AAT’s view this is the sort of approach a businessperson would do.

This AAT decision only binds Mrs Bowerman and does not set a precedent for other taxpayers.

However, the decision raises a range of issues in relation to the revenue/capital distinction which will be concerning for property investors and those that buy, renovate and sell properties within a short period of time and argue held on capital account on the basis they have used the property as their main residence.

If the ATO adopts the principles of this decision, a gain on the sale of an investment property which might usually enjoy the CGT 50% discount might instead be taxable on revenue account at the taxpayer’s marginal rate. This could potentially give rise to far greater tax liability for the taxpayer than if the gain were assessed on capital account, as many would normally assume to be the case.

This decision would not generally impact the CGT position on any gain or loss on sale of a rental property. However, the application of the decision by the ATO could extend to where long-term property owners, such as farmers, decide to sell their land for commercial or residential development.

The low bar that the decision sets in relation to a profit-making purpose and the nature of a commercial transaction raises the question of how broad the ambit is for any gains or losses to be assessed on revenue account and thereby potentially losing the CGT discount. This has been a characteristic of the decision that has been criticised as being vulnerable to being overturned on appeal.

Next Steps

Unlike the facts of this case, most properties are sold for a profit. If the isolated transaction principle is to be applied to the profit on the sale of a property so that it is taxed solely on revenue account, the problem is that taxpayers will lose the ability to access the 50% general discount as well as other CGT concessions including the main residence exemption.

So is it that the ATO has lost this battle but may have won the war?

We will be paying close attention to any developments from this decision and any actions of the Commissioner in response. From the perspective of providing clarity on the isolated transaction principle, it would be helpful if the case goes on appeal to the Federal Court.

The team at Cooper Partners have extensive experience in advising and assisting property investors achieve their goals. For any questions or tailored advice, contact the Cooper Partners engagement team to see how this decision might affect you.

This newsletter is current as of 12 December 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

AAT Finds Against the ATO

13 October 2023

A recent decision by the Administrative Appeals Tribunal (AAT) has challenged the Australian Taxation Office’s (ATO) long-standing treatment of unpaid present entitlements (UPEs) as loans under Division 7A.

Background

Contrary to the view of tax professionals, the ATO has considered UPEs (i.e. distributions from trusts to corporate beneficiaries which have not yet been paid by the trust) to be in-substance loans under the Division 7A deemed dividend provisions. This ATO view was released by way of a Tax Ruling in December 2009 and was a shift of interpretation from its position taken prior to 2009.

In summary, the ATO’s view is that a corporate beneficiary with a UPE provides financial accommodation to a trustee if the company has knowledge of an amount owed by the trustee but does not demand payment, and therefore is effectively consenting to the trustee using the retained amount for trust purposes.

As a result, the ATO provided for concessional treatment of UPEs whereby the UPE could be put on a 7-year interest-only investment arrangement for the sole benefit of the company. As of 1 July 2022, such arrangements have been phased out by the ATO, requiring trustees to place UPEs on 7-year principal and interest complying loan arrangements.

It is worthwhile noting that the ATO’s views are not binding on taxpayers. Although there is no compulsion on a taxpayer to follow a Public Ruling, those who ignore and disregard Public Rulings may face severe penalties and interest. Accordingly, as the application of the law to UPE’s was contentious  and unclear, the majority of trust taxpayers decided it prudent to follow the ATO Rulings and guidance on this matter.

The Bendel Case

In the recent case of Bendel v FCT [2023] AATA 3074, the AAT challenged the ATO’s stance on UPEs. The key consideration was whether a UPE constitutes a loan under subsection 109D(3) and if Subdivision EA, which contains specific integrity rules that deal with UPEs, affects this interpretation.

Case Background

Mr Steven Bendel and his group of entities, which included the 2005 Trust (the Trust) and Gleewin Investments Pty Ltd (the Company), were at the centre of the case. 

The Trustee distributed the trust income for the 2013 to 2017 years to the Company and/or Mr Bendel. This is represented in the below diagram:

The distributions to the Company remained unpaid as at the Trust’s lodgement date. The financial statements of the Trust showed the UPEs as liabilities, and did not report or account for any separate sub-trust.

As part of a 2017 audit of the Bendel Group, the Commissioner issued amended assessments contending that the UPEs were loans within the meaning of subsection 109D(3) from the Company to the Trust, and thus were deemed unfranked dividends to the Trust, which in turn were assessable to the relevant beneficiaries.

As the Commissioner disallowed Mr. Bendel’s objections to the amended assessments, Mr. Bendel appealed to the AAT.

The AAT’s Verdict

The AAT ruled in favour of the taxpayer, asserting that a UPE to a corporate beneficiary is not a loan under subsection 109D(3).

The AAT’s decision went to the statutory context, which included the enactment of Subdivision EA:

  • If the AAT was to accept the Commissioner’s contention that section 109D embraces UPEs, this ‘raises the spectre’ of taxing two taxpayers in respect of the same UPE (the trust beneficiary via Division 6, and the company shareholder under section 109D).
  • Subdivision EA was introduced to tackle the issue of UPEs to corporate beneficiaries, where the trustee also made a loan or payment to the shareholder of the corporate beneficiary:
    • Subdivision EA was not intended to create a second dividend in addition to a section 109D dividend;
    • As Subdivision EA applies to particular circumstances, it is the lead provision;
    • Subdivision EA requires particular additional criteria to be present before taxable dividends can arise, such that not all UPEs are to be taken to be dividends
    • Notably, a corporate beneficiary’s knowledge of the UPE is not a criterion.

Accordingly, the statutory context is that the Government must not have intended section 109D to capture UPEs as loans.

Next Steps

The vast majority of trust taxpayers have in the last decade conformed with the ATO’s views on UPEs. The AAT’s decision casts doubt on the ATO’s current stance.

For now the matter is unresolved:

  • The AAT is an administrative merits review tribunal, and must be contrasted with judicial review in a court. AAT decisions are not law, and as such the ATO is not bound by this decision.
  • The ATO may issue a Decision Impact statement reinforcing the ATO’s alternative views.
  • It is more than likely the ATO will appeal this decision.

The Bendel decision will continue to shape discussions on UPEs and corporate beneficiaries in the tax landscape. Unless there is a change in legislation or an appeal to the AAT’s decision, taxpayers and their advisors find themselves in a state of uncertainty. For the ATO, a UPE remains a loan for the purposes of Division 7A, while for the AAT, a UPE is not a loan.

Relevantly, the potential application of section 100A to UPEs was not under review in this case. The ATO, as outlined in their PCG 2022/2, have indicated that where a corporate beneficiary’s UPE is left outstanding and made available for trustee retention of funds other than by way of commercial loan, the arrangement would not be considered low risk (green zone).

In the meantime, we will monitor the actions of the Commissioner closely, and for that matter, the Government – keeping in mind that the recommendations made by the Board of Taxation’s 2018 review into Division 7A has yet to be enacted into legislation.

Cooper Partners regularly advises on Div 7A and UPEs. If you would like assistance in navigating what the AAT’s findings in the Bendel case may mean for you and your arrangements, please contact your Cooper Partner’s engagement team to determine what if any action is required.

Author:
Maddy Watt, Principal

Contact Our Team

Michelle Saunders
Managing Director
Head of Strategy

Marissa Bechta
Director
Head of Taxation Advisory

April Sacco
Associate Director
Head of Private Clients & Growth

Maddy Watt
Principal
Technical Quality Tax Leader

Nick James
Principal
Private Client Tax Leader

This newsletter is current as of 13 October 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Unlocking the 20% Investment Boost Deduction

10 October 2023

In exciting news for businesses, the Treasury Laws Amendment (2022 Measures No.4) Act 2023, received royal assent on 23 June, 2023. This legislation introduced the technology investment boost being a 20% bonus deduction aimed at incentivising investments in digital technology and the digitisation of business operations.

The 20% Bonus Deduction Explained

The technology investment boost offers eligible entities a 20% tax deduction bonus on qualifying expenditures, with an annual cap of $100,000 for eligible expenses. This means that qualifying businesses can potentially benefit from a maximum bonus deduction of $20,000 per income year.

The bonus deduction is claimed in the 2022/2023 tax year for both the 2022 and the 2023 tax years’ deductions.

 If the bonus deduction is available in both financial years, the overall maximum bonus deductions increases to $40,000 for the year.

Eligibility Criteria 

To qualify for this boost, entities must meet specific criteria:

  • They must have an aggregated turnover of less than $50 million for the income year.
  • Expenditures must already be deductible under the tax law.
  • Expenditures must have been incurred between 7:30 pm AEDT on 29 March, 2022, and 30 June, 2023.

Qualifying Expenditures

The expenditures eligible for the investment boost must be primarily for the purpose of enhancing the business’s digital operations or digitising its overall operations.

The expenditure should have a direct link to the entity’s business operations. Here are examples of eligible items:

  • Digital Enabling Items –  this includes computer and telecommunications hardware and equipment, software, internet costs, systems, and services that facilitate computer network usage.
  • Digital Media and Marketing –  expenses related to audio and visual content that can be created, accessed, stored, or viewed on digital devices, including web page design.
  • E-commerce –  goods or services that support digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services, and advice on digital operations or digitizing operations.
  • Cyber Security –  costs related to cyber security systems, backup management, and monitoring services.

While this list is not exhaustive, a good guideline is to consider whether the expenditure would have been incurred if the business didn’t operate digitally. This approach allows for other eligible expenses, such as;

  • advice on digitising the business,
  • leasing digital equipment, and
  • repairs/improvements to eligible assets that aren’t capital works.

GST Considerations and Depreciating Assets

For qualifying businesses registered for GST, the bonus deduction is calculated on the GST-exclusive amount of the expenditure.

If the expenditure pertains to a depreciating asset, the asset must have been used or installed ready for use before 1 July, 2023.

The bonus deduction is calculated based on the asset’s cost, regardless of the depreciation method. However, if the business sells the asset within the relevant period, the bonus deduction cannot be claimed for that expenditure.

Examples

To illustrate the application of the bonus deduction, consider these examples:

  • A Pty Ltd purchased laptops for $132,000 GST inclusive which were delivered prior to 30 June 2023. The company, registered for GST, opted for the temporary full expense (TFE) for depreciation. It can claim a $20,000 bonus deduction (20% of the $100,000 cap) in its 2022-23 tax return, in addition to the $120,000 deduction under TFE in its 2022/2023 return.
     
  • B Pty Ltd pays monthly subscription fees totalling $4,800 pa (GST exclusive) for a cloud service. In its 2022-23 tax return, it claims a total deduction of $6,000, including the 20% bonus deduction for 2022 and 2023. This is made up as follows:

Excluded Expenditures

The bonus deduction cannot be claimed for certain expenses, including salary and wages, capital works costs, financing costs, training, or education costs (which may be eligible for the small business skills and training boost), and expenses forming part of trading stock costs.

Can the Technology Boost apply to existing commitments or only new technologies?

While there’s limited guidance on what constitutes “digital operations”, the boost aims to help businesses adopt new technologies for efficiency, growth, and resilience.

The rules don’t mandate that expenses must be new or related to new technologies. Nor does it require to relate to projects to digitise after the commencement date.

The ATO clarified that subscriptions, whether old or new, can qualify if they relate to digital operations. For example, cloud accounting subscriptions and internet costs should qualify, as long as they meet basic conditions and are incurred during the specified period.

Therefore, the focus should be on when the expense is incurred, not its historical duration.

Next Steps

In preparing the 2023 tax return, now is the time for eligible businesses to explore the opportunities presented by the 20% investment boost deduction as well as the temporary full expensing, both limited to expenditure incurred by 30 June 2023 and where depreciable assets installed and ready or use by 30 June 2023.

When identifying a qualifying expenditure, ensure;

  • There is a direct and strong link between the expenditure and your entity’s digital operations or digitising its operations.
  • You have correctly calculated the entity’s aggregated turnover.
  • You have correctly identified when the expenditure was “incurred” and have records to support this.
  • That any depreciating assets which might qualify for the boost were used or installed ready for use by 30 June 2023 (the rules are different for in-house software allocated to a software development pool).
  • You consider whether any apportionment may be required if some expenditure was used for digital and other purposes (for example, both print and digital advertising; or printers used for both scanning and printing etc.)
  • The expenditure does not fall within specific exclusions.

If you would like Cooper Partners to review any claim under this Technology Investment Boost please contact our team.

Authors:
Maria Adisa, Consultant
Michelle Saunders, Managing Director

This newsletter is current as of 10 October 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

Contact Our Team

Michelle Saunders
Managing Director
Head of Strategy

Marissa Bechta
Director
Head of Taxation Advisory

April Sacco
Associate Director
Head of Private Clients & Growth

Maddy Watt
Principal
Technical Quality Tax Leader

Nick James
Principal
Private Client Tax Leader

Maria Adisa
Consultant
Taxation Advisor

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Government releases $3m super tax reform draft legislation

06 October 2023

What You Need to Know

On 3 October 2023, the much-anticipated draft legislation for the Government’s Better Targeted Superannuation Concessions was unveiled. These changes are set to kick in on 1 July 2025.

Stay the Course

The draft legislation closely mirrors the initial proposals outlined in the consultation paper, with minor adjustments made in response to feedback.

Division 296 aims to level the playing field by reducing the concessional tax treatment of superannuation earnings for individuals whose total superannuation balance (TSB) exceeds the $3 million threshold.

The 15% Tax Twist

If your TSB crosses that $3 million mark, you may face an additional 15% tax on your superannuation earnings.

Starting from 30 June 2026, the new provisions will assess your TSB at the end of each financial year.

If it exceeds $3 million, further calculations will follow:

  1. Determining the proportion of your superannuation above the $3 million threshold.
  2. Identifying the superannuation earnings related to the portion exceeding the threshold.
  3. Applying the 15% additional tax on those earnings.

The proportion of earnings subject to the additional tax hinges on comparing your current year TSB to your prior year superannuation balance, applicable only if your TSB exceeds $3 million.

Your superannuation earnings for the year will be based on changes in your opening and closing TSB, factoring in specific member withdrawals and contributions made throughout the period, as defined in the draft legislation.

The tax of 15% is then applied accordingly:

Addressing Concerns

At the original consultation paper stage released back in March 2023, numerous criticisms were voiced, including concerns about defined benefit funds, member deaths, limited recourse borrowing arrangements (LRBA), unallocated reserve accounts,  a lack of consideration for Division 296 or 293 taxes and non-indexation of the $3M threshold.

A primary concern was the inclusion of unrealised capital gains and losses on investments held within superannuation plus without regard to any CGT discounts when calculating the funds earnings. This poses particular challenges for self-managed superannuation funds with substantial unrealised capital gains and less liquid assets, such as properties.

The impact of this is that the net unrealised capital gains (the growth in value of the investment each year) would form part of the earnings to be taxed under the new Division to the individual (with no adjustment for the CGT discount) and upon the later sale of the investment, the fund would also be subject to tax on the net realised capital gain – potentially doubling the tax impact.

While Treasury has made some adjustments, such as exempting members from the tax in the year of their passing, introducing a TSB adjustment for LRBAs, and deferring the additional tax for defined benefit funds, disappointingly they have maintained their stance on taxing unrealised gains.

The Government announced that they believe the calculation to be the most fair and equitable method which could be used, based on currently available data from previously instated TSB laws.

The Silver Lining

  • For Division 296 purposes, outstanding LRBAs won’t be included in your TSB, offering a more precise snapshot of your superannuation interests.
  • In the year of death, you won’t be liable for Division 296 tax.
  • For defined benefit interests, the tax liability is deferred until a member benefit becomes payable, with a settlement period of 21 days after the first member withdrawal.

Key Takeaways

  • These rules do not impose a cap on the amount you can hold within superannuation.
  • Negative superannuation earnings can be carried forward to offset future earnings, reducing tax implications.
  • The ATO will assess and calculate Division 296 tax annually, with payment due 84 days after assessment.
  • Individual taxpayers can use personal funds or release money from superannuation (excluding defined benefit funds) to settle the additional Division 296 tax.
  • The Division 296 tax doesn’t apply to unrealised gains from the purchase date. Instead, it’s calculated based on TSB at year-end compared to the prior year, effectively allowing for a reset of investment values.
  • The additional tax doesn’t double your tax rate; it applies only to earnings exceeding the $3 million threshold, with the effective rate varying based on your circumstances.

How it Works

The below example demonstrates the workings of the additional tax.

Take an individual with a TSB, with member balance components listed in the table below, who withdraws a pension of $80,000 and makes concessional contributions of $27,500 in the 2026 financial year.

Note, the only cash inflows for the fund in the 2026 financial year are the contributions made. The increase in the TSB is due to an increase in the value of existing investments in the fund.

Based on the profile this individual member would expect to receive a Division 296 assessment of $41,747.

An analysis of the worked example shows how the calculation incorporates the net unrealised capital gains of an individual’s TSB.

The Next Steps

The draft legislation’s consultation period runs until 18 October 2023, and significant lobbying efforts are expected, addressing the concerns mentioned earlier.

Furthermore, The Greens party, while not rejecting the draft legislation, has pledged to use their senate position to delay its progress until the Government considers introducing or enacting the proposal for superannuation on paid parental leave.

In the meantime, we will keep you informed as these superannuation changes continue to evolve.

If you would like further details or assistance with respect to any of the above changes, superannuation in general, or wish to have your position reviewed in light of the above, please contact our Superannuation Team.

Author:
Lindzee-Kate Tagliaferri, Manager

CONTACT OUR SUPERANNUATION TEAM:

Jemma Sanderson
Director
Head of SMSF & Succession

Financial Adviser No:
001 000 382

Christie Butler
Senior Manager
Estate Planning

Matt Miceli
Senior Manager
UK Pension Transfers

Lindzee-Kate Tagliaferri
Manager
SMSF Services

Chrisselle Kelly
Manager
SMSF Services

This newsletter is current as of 06 October 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

Cooper Partners Financial Services Pty Ltd AFSL 000 327 033

The information and opinions in this presentation were prepared by Cooper Partners Financial Services (“CPFS”) for general information purposes only. Case studies and examples are included for illustrative purposes only.

In preparing this newsletter CPFS has not taken into account the investment objectives, financial situation and particular needs of any particular investor. The information contained herein does not constitute advice nor the promotion of any particular course of action or strategy and you should not rely on any material in this presentation to make (or refrain from making) any decision or take (or refrain from making) any action. The financial instruments, services or strategies discussed in this publication may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Fringe Benefits Tax – Are you ready for the 2023 FBT Season?

05 April 2023

As the end of the 2023 FBT year has arrived, we provide you with the latest updates and tips to ensure you are ready for the 2023 FBT return preparation season. 

2023 FBT Rates and Thresholds

Key Dates

Who needs to lodge an FBT Return?

Employers who have an FBT liability must lodge an FBT Return.

If FBT instalments were paid during the year and the employer does not have an FBT liability for the year, an FBT return must be lodged to obtain a refund of the FBT instalments.

TIPS

  • If an employer does not have an FBT liability, we recommend that an FBT return is lodged to ensure commencement of the three-year amendment period for which the Commissioner can generally amend FBT returns.

ATO Audit Activity

The ATO have announced increased FBT audit activity in respect of employers who are not declaring fringe benefits and paying the correct amount of FBT. The ATO suggests that the ‘tax gap’ for underpaid FBT is around 20% of the overall FBT which should be payable, which is mainly attributable to employers who are not participating in the FBT system when they provide benefits to employees.

The ATO’s view is that many employers:

  • Do not fully understand the FBT rules and their FBT obligations;
  • Are failing to retain the appropriate documentation to reduce the taxable value of fringe benefits (eg declarations and documentary evidence);
  • Are treating vehicles as ‘exempt vehicles’ for FBT purposes when the vehicles do not satisfy the exempt vehicle criteria;
  • Are incorrectly failing to include benefits provided to ‘contractors’ who should in fact be classified as employees.

With increasing ATO activity, careful attention must be given to FBT compliance and lodgement of correct FBT returns, on the same basis as other tax liabilities.

Recent Developments

1.     FBT exemption for electric cars

In a bid to promote the adoption of electric vehicles, the Government has introduced an FBT exemption for qualifying electric cars.

For the exemption to apply, the following conditions must be satisfied:

  • The car is a ‘zero or low emission vehicle’, ie certain battery electric vehicles, hydrogen fuel cell electric vehicles and plug-in hybrid electric vehicles;
  • The car benefit was provided to a current employee on or after 1 July 2022;
  • The car is first held and used on or after 1 July 2022; and
  • No amount of luxury car tax has become payable in respect of the car (the luxury car tax threshold for fuel efficient vehicles is currently $84,916).

Unless the transitional requirements are satisfied, the exemption for plug-in hybrid vehicles will cease for car benefits provided from 1 April 2025.

TIPS

  • The rules for the exemption for electric cars are very specific and should be carefully considered to ensure the exemption is available.
  • Electric cars which are exempt are still required to be disclosed as a reportable fringe benefit. Therefore, the same record keeping rules that currently apply to car fringe benefits also apply to electric cars.
  • Electric cars can be salary packaged by employees.

Be on the lookout for our detailed newsletter on the electric car exemption to be released next week.

2.     Commercial car parking – expanded definition

From 1 April 2022, updated Taxation Ruling TR 2021/2: Car Parking Benefits will apply whereby the ATO has broadened its view of the definition of a ‘commercial parking station’ to include ‘special purpose’ car parking facilities such as shopping centres, hospitals, universities and airports.  

Employers who provide car parking to employees that is located within one kilometre of a special purpose car parking facility may now be subject to FBT on such car parking benefits.

TIPS

  • Where employers provide car parking outside of the CBD (ie business premises located in the suburbs), the treatment of the parking should be reviewed as there may now be commercial parking stations within the one kilometre radius.
  • If the lowest fee charged by the commercial parking station for all day parking is $9.72 or less on 1 April 2022, a fringe benefit does not arise.
  • Where parking provided to an employee is not in a commercial parking station, employer entities with an aggregated turnover of less than $50 million for the year ended 30 June 2022 may be eligible for the small business car parking exemption provided the other exemption criteria are satisfied.

3.     Employees versus Contractors

Distinguishing between employees and contractors is important in the context of FBT (as well as PAYG Withholding and Superannuation obligations), as FBT is payable in respect of employees (and their associates) but not contractors. Where employers incorrectly classify individuals as contractors, an FBT liability and penalties can arise if the ATO conducts a review and concludes the individuals are in fact employees.

Two important High Court decisions were handed down in 2022 which clarified the ordinary or common law meaning of ‘employee’, being the Personnel Contracting[1] and Jamsek[2] cases.

Broadly, the High Court‘s view is that where the terms of the parties’ relationship is comprehensively committed to a written contract, the status of the worker should be determined based on the legal rights and obligations in the contract. Further, the ‘totality of rights’ in the contract should be used to determine who has the right to exercise control over the person’s work and therefore whether the person is working in the payer’s business.

The ATO subsequently released Draft Taxation Ruling TR2022/D3: Income Tax: Pay As You Go Withholding – Who is an Employee and Draft Practical Compliance Guideline PCG 2022/D5: Classifying Workers as Employees or Independent Contractors – ATO Compliance Approach to provide guidance on classifying a worker as an employee or an independent contractor.

  • [1] CFMMEU v Personnel Contracting Pty Ltd 2022] HCA 1
  • [2] ZG Operations & Anor v Jamsek & Ors [2022] HCA 2

TIPS

  • Employers should review their existing and new contracts with individuals to ensure the legal rights under the contract give effect to the desired classification of workers.
  • Under the PCG, the arrangement is more likely to be considered low risk and the ATO will not devote audit resources where:
    • There is evidence that both parties agree on the classification;
    • Performance of the arrangement has not deviated significantly from the agreed contractual rights;
    • Specific advice was sought by the payer confirming the correct worker classification; and
    • The payer is meeting the correct tax, superannuation and reporting obligations based on the correct classification.
  • Seek advice to ensure that your assessment of contractors can be supported or whether the business faces tax risk which should be addressed.

4.     Entertainment expenses – ‘Frequent’ Benefits

Entertainment benefits provided to employees are steadily increasing now that Covid restrictions have eased and more employees are travelling again. These benefits require careful analysis in respect of each employee to ensure the correct treatment for FBT purposes.

TIPS

  • The minor benefits exemption for expenses less than $300 (including GST) only applies where the benefits are ‘irregular and infrequent’. Therefore, where an employee is regularly provided with entertainment benefits (eg client lunches and dinners), the minor benefits exemption is unlikely to apply.
  • The ‘actual method’ for determining entertainment fringe benefits commonly results in a better outcome for employers (rather than the ‘50/50 method’). The minor benefits and property on workday exemptions are not available if using the 50/50 method to calculate entertainment fringe benefits. (Note: the actual method requires more detailed record keeping regarding who attended each event).
  • Entertainment expenses which are not subject to FBT are not deductible for income tax purposes and GST credits cannot be claimed.

5.     Proposed Record Keeping Concessions  

A series of exposure drafts have been released with the aim of simplifying FBT record keeping and reducing compliance costs for employers who maintain good records in relation to travel diaries and certain relocation transport expenses.

These proposed rules are not yet law and will likely apply from 1 April 2023 (ie the 2024 FBT year).

The rules allow employers to rely on alternative records where certain conditions are met, rather than obtaining travel diaries and declarations in what appear to be quite limited circumstances.

As such, recordkeeping remains critical for the reduction of FBT for the 2023 FBT year.

Next steps

If you would like further information on FBT, employment taxes or assistance with your FBT obligations, please contact the authors of this article.

Contact the Author:

Rachel Pritchard
Associate Director
Head of Human Capital & Corporate

Amy Carter
Senior Consultant
Human Capital & Private Client Groups

Mikaella Hooker
Senior Consultant
Corporate & Private Client Groups

This newsletter is current as of 05 April 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Further Detail: Cap on Superannuation Tax Concessions

02 March 2023

Following our newsletter from last week, on 28 February 2023 the Prime Minister and Treasurer announced their plans for a cap on superannuation balances that would be eligible for concessional tax treatment.  This cap is $3 million.  For benefits in superannuation greater than $3 million, an additional 15% tax will apply to earnings on assets above that amount. It is expected that this change will impact approximately 80,000 Australians, or 0.5% of the population with a superannuation account

Key Items

The announcement was very high level, with headline items as follows:

  1. The cap would not be indexed.
  2. The cap would apply from 1 July 2025 to future earnings, and therefore would not be retrospective.
  3. This timeframe is after the next election, so people can vote accordingly, although legislation will be introduced and could be passed before the election.
  4.  It doesn’t alter the level of money that people can accumulate in superannuation overall, but rather the tax concession that applies to the earnings.
  5. All other rules with respect to superannuation will remain the same including:.
    • Contribution rules
    • Preservation and access to benefits
    • Tax treatment of contributions
    • Tax treatment of benefit payments

As per the media storm last week, such an announcement was expected, with much speculation about the limit (would it be $3 million or $5 million), and also what the tax rate may be.  It was expected that any announcement would not force money out of superannuation where the limit was exceeded, but would reduce the tax concessions available.

Further Detail

Further details were released yesterday in a 1 March 2023 Treasury paper, with the following areas to note:

  1. 15% tax would apply to the earnings where the total superannuation balance (TSB) at the end of a financial year is over $3M.
  2. The tax would be in addition to the tax position on the amount under the $3M:
    • if the amount under the $3M is all in pension phase, then you would still receive the pension 0% tax rate on that proportion of the earnings, with the proportion of the earnings that relates to the over $3M threshold being taxed at 15%;
    • if the amount under the $3M is all in accumulation, then the earnings amount below the $3M would be taxed at 15%, and the amount above would be taxed at an additional 15%.
  3. The amount of any earnings within the member account for the year would be a reference to the difference between the total superannuation balance (TSB) at the end of a financial year and the beginning of the financial year, with adjustments for contributions (net of tax) and withdrawals.
  4. The proportion of earnings that would then be subject to the additional tax is based on the TSB at the end of the current year, less the $3M threshold, divided by the TSB of the current year.
  5. Accordingly, unrealised capital gains will be included in any calculation, as the TSB refers to market values.
  6. If an individual makes an earnings loss in a year (including an unrealised loss), it can be carried forward to a future year.
  7. The first test time will be 30 June 2026, and the first notices of assessment will be issued during the 2026/2027 financial year once super fund’s have reported the relevant balances (this could be as far out as May / June 2027 in terms of the lodgement due dates for SMSFs).
  8. Individual’s can choose whether to pay the additional tax personally, or the super fund pays it.

Examples (from the Treasury Paper):

Calculation of Earnings:

Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

This means Carlos’s calculated earnings are:

  • $10 million – $9 million + $150,000 = $1.15 million

His proportion of earnings corresponding to funds above $3 million is:

  • ($10 million – $3 million) ÷ $10 million = 70%

Therefore, his additional tax liability for 2025-26 is:

  • 15% × $1.15 million × 70% = $120,750

Carry forward of earnings loss:

Dave is 70 and has two APRA-regulated funds and one SMSF. At 30 June 2025, his TSB across all funds was $7 million. During 2025-26, he withdraws $400,000 from his SMSF and makes no contributions. At 30 June 2026, his TSB across all funds is $6 million.

This means Dave’s calculated earnings are:

  • $6 million – $7 million + $400,000 = – $600,000

His proportion of earnings corresponding to funds above $3 million is:

  • ($6 million – $3 million) ÷ $6 million = 50%

The earnings loss attributable to the excess balance is $300,000. Dave can carry forward the $300,000 to offset future excess balance earnings.

At 30 June 2027, Dave’s funds make earnings on his excess superannuation balance of $650,000. He carries forward the earnings losses attributable to his excess balance at 30 June 2026 of $300,000 and is only liable to pay the tax on $350,000 of earnings.

This means his tax liability for 2026-27 is:15% × $350,000 = $52,000

Preliminary Musings

Although the detail will only be evident once the draft legislation has been released, we provide the below preliminary comments:

  1. Not indexing the cap is likely to be highly criticised, as it will not keep pace with inflation and general increases in value, and therefore ultimately be unfair (and not align with the objective of superannuation).
  2. The way the formula works is that there can be the situation where the effective tax rate on the earnings above $3M is not 15%, but a lot lower, depending upon the extent to which the member accounts are over the $3M threshold.
  3. There is no comment with respect to the impact of the individual paying the tax rather than the fund – it would then add to the TSB in the following year, so could exacerbate any excess in the following year.
  4. The payment of the tax itself may well be 12 months and beyond from the end of the financial year, depending on the timing of the issue of the notices.
  5. From the examples, there doesn’t seem to be a proportionate concession when applying previous proportionate losses. This is generally a complex area in applying carry forward losses, so no doubt Treasury wanted to simplify any initial draft.
  6. The proposed additional tax is to be calculated on the growth of the members account and not on realised income and gains. This is a major deviation in terms of current fiscal policy and tax law.
  7. Given the earnings component is based on differences in value, and not on realised earnings there could be some cashflow implications where assets are illiquid, and a tax liability needs to be paid. 
  8. As the additional tax is based on paper gains, if an investment is highly valued in one year and then becomes worthless, there may be tax payable upfront where no actual gain is realised in the future, which doesn’t align with the fairness principal in the proposed objectives of superannuation.
  9. There could be situations from a death benefits perspective when the tax position is prohibitive, and also where realised capital gains are subject to double taxation. 
  10. Individual’s may be disincentivised to make extra contributions to superannuation, as they no longer benefit from the tax concessions that encourage the accumulation of superannuation above a certain limit.  If they have the option of investing within superannuation or outside, under the current rules superannuation can be compelling as there is concessional treatment on any realised capital gain on the sale of an asset, with the trade-off being unable to access the proceeds net of tax for lifestyle spending. If those concessions are not available, then people may prefer to invest entirely outside of superannuation as they would likely be paying similar to the corporate tax rate, and would be able to access the funds from the sale of a capital growth asset at any time and not be subject to preservation or access restrictions (albeit with some additional tax implications if they want to spend the money for personal lifestyle outgoings).
  11. The operation of the limit may give rise to some valuation arbitrage, particularly in light of the benchmark being the TSB at 30 June of each year, (i.e. a comparison of a higher TSB at 30 June 2025 for comparative purposes for the following year).
  12. The operation of the limit may motivate some members who are eligible to withdraw money out of superannuation in the lead up to a 30 June so as to remain under the threshold to mitigate the additional tax.  Where the $3M TSB threshold is not exceeded, then the additional tax won’t apply.  In saying that, if the individual is not far over, then the proportionate additional tax payable is not that prohibitive given the formula. 

Given the statistics that this announcement would only impact 0.5% of the population, it is expected that it won’t sway any election results (in contrast to Labor’s previous franking credit removal debacle).

Next Steps

We await any draft legislation with no doubt substantial consultation amongst the industry bodies, before we can provide further guidance on any restructuring requirements.  As noted above, the devil will be in the detail in the legislation, as to the precise intricacies and operations of the proposal contained in the consultation paper.

In the meantime, there no need for immediate action, and continue as normal with respect to your superannuation.  Where you are looking to invest in a more substantial asset within superannuation, it may be appropriate to give us a call to discuss the implications and considerations, particularly where you are below age 55 to 60, and the expectation is that the proposed investment will generate a reasonable return that may push you over or close to the limit.  As always, if you want to discuss further, or have any other general superannuation questions, please reach out to any member of our super team.

CONTACT OUR SUPERANNUATION TEAM:

Jemma Sanderson
Director
Head of SMSF & Succession

Financial Adviser No:
001 000 382

Matt Miceli
Senior Manager
UK Pension Transfers

Christie Butler
Senior Manager
Estate Planning

Lindzee-Kate Tagliaferri
Manager
SMSF Services

Chrisselle Kelly
Manager
SMSF Services

This newsletter is current as of 02 March 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

Cooper Partners Financial Services Pty Ltd AFSL 000 327 033

The information and opinions in this presentation were prepared by Cooper Partners Financial Services (“CPFS”) for general information purposes only. Case studies and examples are included for illustrative purposes only.

In preparing this newsletter CPFS has not taken into account the investment objectives, financial situation and particular needs of any particular investor. The information contained herein does not constitute advice nor the promotion of any particular course of action or strategy and you should not rely on any material in this presentation to make (or refrain from making) any decision or take (or refrain from making) any action. The financial instruments, services or strategies discussed in this publication may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives.This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Treasurer Announcement – Objectives of Superannuation

23 February 2023

You may have heard that the Federal Treasurer, the Honorable Jim Chalmers, released a consultation paper on 20 February 2023 with draft wording for the objectives of superannuation in Australia to be enshrined in Legislation.

The proposed wording is as follows:

“The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.” 

This is the second release since 2014 of proposed wording – initially undertaken by the previous government based on recommendations made in the 2014 Financial Systems Inquiry.  Draft legislation released in this regard in 2016 lapsed in 2019 given agreement couldn’t be reached on the wording.

Implied Criticism of Current Superannuation

The announcement on 20 February had substantial press attached to it, particularly with respect to comments regarding limiting the ability for Australians to access their superannuation too early, which arguably wouldn’t align with the above objective.  This included criticism of the COVID-19 measures that enabled those Australians who had lost their jobs or had a substantial cut to their income as a result to COVID to access up to two lots of $10,000 from their superannuation.  Indeed, this did result in many Australians then no longer having superannuation benefits. However, it is considered by most Australians that it was appreciated and necessary to ensure that they were able to be financially viable. 

That measure was temporary, and there are very limited other circumstances where individual’s can access their superannuation prior to retirement, restricted to compassionate grounds or because of financial hardship.  These provisions are quite difficult to be eligible for, and have limitations on what can be accessed, but have been a welcome backstop for many Australians to ensure that they could pay for vital medical treatment, or ensure that the bank wouldn’t foreclose on their home.  There have been proposals to enable those subject to domestic violence to be able to access the superannuation of the offender in order to move on with their lives and rebuild. 

Superannuation is to provide for the retirement of Australians, which is why even the exceptions outlined above are difficult to qualify.  The intention of super providing for retirement is also reflective in the concessional taxation treatment of superannuation, incentivising the accumulation of superannuation through contributions, especially given access to superannuation is not until at least age 60 (currently). 

Superannuation in Australia is one of the most robust pension and superannuation systems in the world, and has been accredited in past as being the reason that Australia isn’t as badly afflicted by global shocks to economic markets. given the regular superannuation guarantee contributions being made to superannuation by employers (currently 10.5% of salary).  It is also the most tax effective investment vehicle in Australia, which is one of the reasons that many Australians aim to build up wealth within such structures for their retirement, and also over their lifetimes to manage the tax position of their family. 

The tax-effectiveness of super has resulted in some substantial wealth being accumulated within superannuation – particularly for those Australians who had the capacity to make significant contributions to superannuation from their available resources pre 2006 when there was no limit on the level of contributions that could be made from after-tax money to superannuation.  This is further enhanced by investment returns experienced since that time, and also the fact that there is no requirement (unlike prior to 2007) for individual’s to withdraw money out of superannuation where they are not working and have reached retirement age. 

The level of wealth that is in some superannuation accounts is due to be paid out of superannuation over the next 10 to 20 years.  This is because upon the passing of a member who may have a substantial super account, the bulk of it must be paid out of the superannuation environment, even where they have a spouse, as the spouse is only able to retain an amount within superannuation up to their Transfer Balance Cap. 

Accordingly, the main criticisms of the current superannuation platform are:

  • there are circumstances when people have been able to access their retirement savings in recent times that shouldn’t be permissible, as superannuation should be to provide for retirement and ensure that our system is sustainable.
     
  • Superannuation is not a vehicle to build substantial wealth in a tax effective way – it is to provide for a dignified retirement, and therefore it is inappropriate for there to be large member balances in superannuation.

Previous Substantial Changes to Superannuation

Over the past 20 years, there have been two substantial changes to superannuation (of most note) that required consideration for many Australians, particularly those at or approaching retirement:

  • In 2007 with the introduction of superannuation contribution limits, removal of Reasonable Benefit Limits making pensions, and any super drawdowns over age 60 being tax-free.
     
  • In 2017 with the introduction of the Transfer Balance Cap, limiting the amount of assets that could be held in retirement phase pension accounts that were exempt from tax, and further limiting the contributions being able to be made to superannuation. 

Implications of the Announcement

It is understandable that with the proposed objectives announced, there is some concern regarding what this announcement means for superannuation savings going forward. 

For now, the proposed wording is subject to consultation, due 31 March 2023, where professional bodies and other interested parties will provide their feedback on the proposed wording. 

Where any legislation in this regard is introduced and passed by parliament, it in itself doesn’t mean that there will be substantial changes to superannuation That is the overriding objective of enshrining the objective is to prevent any substantial changes in the future and unnecessary tweaking, whilst ensuring that Australian’s have confidence in the system where a reasonable amount of their salary is directed to superannuation from a young age. 

It is acknowledged, that the passing of legislation in this regard does then pave the way for changes in the future by a Government, where the basis of those changes may be from an equitable and sustainable perspective, in accordance with the objectives. 

It is impossible to crystal ball gaze in this regard, and indeed if any adverse changes were proposed, there would be substantial consultation and feedback from the industry, and also lead-time in order to make any strategic changes as required. 

The Next Steps

As and when there is at least draft legislation, we can at that point meaningfully speculate regarding any subsequent changes that may be announced.  The federal Budget on May 9 2023 will provide further insight in this regard, and either confirm or deny other rumours that have been circulating regarding limiting the amount of assets that people can accumulate overall in superannuation. 

Accordingly, we suggest no action is required until further announcements.  It is not necessarily advisable (where you might be eligible) to be withdrawing your superannuation pre-emptively for changes that may not occur. This is particularly given that the ability to make contributions to superannuation under current legislation is restrictive. 

If you would like further details or assistance with respect to any of the above changes, superannuation in general, or wish to have your position reviewed in light of the above, please contact our Superannuation Team.

CONTACT OUR SUPERANNUATION TEAM:

Jemma Sanderson
Director
Head of SMSF & Succession

Financial Adviser No:
001 000 382

Matt Miceli
Senior Manager
UK Pension Transfers

Christie Butler
Senior Manager
Estate Planning

Lindzee-Kate Tagliaferri
Manager
SMSF Services

Chrisselle Kelly
Manager
SMSF Services

This newsletter is current as of 23 February 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

Cooper Partners Financial Services Pty Ltd AFSL 000 327 033

The information and opinions in this presentation were prepared by Cooper Partners Financial Services (“CPFS”) for general information purposes only. Case studies and examples are included for illustrative purposes only.

In preparing this newsletter CPFS has not taken into account the investment objectives, financial situation and particular needs of any particular investor. The information contained herein does not constitute advice nor the promotion of any particular course of action or strategy and you should not rely on any material in this presentation to make (or refrain from making) any decision or take (or refrain from making) any action. The financial instruments, services or strategies discussed in this publication may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
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Taxing the crypto world

03 February 2023

More than a million Australians now own at least one cryptocurrency. Despite its elusive status as an unregulated and decentralised asset and numerous warnings about its volatility, it does not escape the reach of the Australian tax authority.

With its cryptocurrency data matching program, the Australian Taxation Office has been able to keep track of any cryptocurrency transactions since 2019. Whether you have been a regular trader of cryptocurrency or just made a one-off sale, it is likely you will see these details appear on your ATO pre-fill report when you log into your personal myGov Account. Therefore, it is important to understand your tax responsibilities.

Investor vs Trader

The ATO has laid out different tax rules for investors, and for taxpayers who earn regular income from trading in cryptocurrency.

An investor holds cryptocurrency as a stock over an extended period with the aim to build wealth through profit made from long term capital gains. Majority of Australian users fall in this category. Thus, any profits earned, or losses incurred will be subject to capital gains tax (CGT). Selling, buying, trading, or exchanging to another cryptocurrency will trigger CGT.

On the upside, where the investor is an individual they will pay 50% less tax on crypto gains if held for one year or more before disposing. Any capital losses will only be able to be offset against future capital gains ( derived from any asset class)  rather than being be able to be claimed against other types of ordinary income.

A trader is one who actively generates income from cryptocurrency, and functions as a business. In other words, there is an intention and purpose to generate profit from purchase and sale of cryptocurrency. Traders often have business plans, strong record-keeping, and a very high quantity of trades. For this purpose, the disposal will be treated as income and taxed at marginal income tax rates and not relevant for CGT.

If you are earning income by running a crypto-trading exchange, mining business or regular buying and selling for short term gains, the ATO will consider you a trader.

Personal use assets

One of the common misconceptions taxpayers  have about this exemption is that cryptocurrency valued under $10,000 are not taxable. The ATO considers cryptocurrency as a non-personal use asset if it were held or used:

  • As an investment;
  • Intention to making a profit; or
  • Carrying on a business.

The personal use asset exemption only applies in rare circumstances where cryptocurrency was purchased and used or disposed of immediately to purchase personal goods or services.

Furthermore, the ATO will regard cryptocurrency as a hobby if the individual can demonstrate that the digital currency was acquired for a personal technological interest rather than profit-making purposes. However, given the nature of the cryptocurrency, it is difficult to persuade the Commissioner that digital currencies are obtained as a hobby.

The longer the cryptocurrency are held, the more likely the ATO will classify it as an investment.

Loss or stolen private key

In some situations where the cryptocurrency private key is lost or stolen, a capital loss can be claimed on the value of the digital currency. The ATO provides detailed information on what proof you may need to justify claiming a tax loss:

  • When the key was acquired and lost;
  • The wallet address that the key relates to;
  • The cost incurred to acquire the lost or stolen digital currency;
  • The amount of cryptocurrency at the time the key was lost or stolen;
  • The wallet was held by you;
  • That you own the hardware that stores the wallet; and
  • Transactions to the wallet from a digital currency exchange for which you hold a verified account or that is linked to your identity.

Cryptocurrency and Fringe benefit tax

If your business pays an employee using cryptocurrency as a salary sacrifice, then the payment would be classified as a fringe benefit. Where there is no salary sacrifice arrangement, the payment would be classified as salary or wages and PAYG withholding taxation on the value that is calculated in AUD will apply.

Record keeping

Maintaining accurate records of any cryptocurrency transactions will help you stay ahead of your tax obligations.

A key challenge we have experienced is translating the sometimes-complex technical language and extracting data into a functionable format. 

Record-keeping includes noting:

  • Transaction date
  • Cryptocurrency value (in AUD) on the date of transacting
  • Transaction purpose and trading party details

Board of Taxation review of the tax treatment of digital assets and transactions

The Government has tasked the Board of Taxation with undertaking a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia, including crypto assets.

The review was to be completed by 31 December 2022.

It is contemplated that the review will consider the:

  • current taxation treatment of digital assets & transactions in Australia, and emerging tax policy issues,
  • taxation of digital assets and transactions in comparative jurisdictions and how international experience may inform the taxation of digital assets and transactions within Australia, and
  • possibility of changes to Australia’s taxation laws and/or their administration, and what those changes should be in the context of digital assets and transactions, both for retail and wholesale investors.

We will keep you abreast of the outcomes of this review but in the meantime the ATO guidance in determining any tax liability should be adhered.

Next Steps

Blockchain is a continuing area of development which are challenging traditional laws.

From our wealth of experience in revenue tax law we can provide advice on the following areas of cryptocurrency:

  • the income tax treatment of cryptocurrency transactions;
  • applications for private binding rulings regarding the appropriate income tax treatment of cryptocurrency dealings;
  • advice on the GST implications when trading cryptocurrency and transacting in cryptocurrency.

Stay ahead by contacting the authors of this article to understand your tax implications pertaining to your crypto transactions.

Authors:

Michelle Saunders
Managing Director
Head of Strategy

Maria Adisa
Consultant
Taxation Advisor

This newsletter is current as of 03 February 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

ATO shifts its view on Corporate Beneficiary UPEs and Division 7A

25 August 2022

The ATO has issued their finalised view on when an unpaid present entitlement (UPE) owing to a corporate beneficiary constitutes the provision of financial accommodation for the purposes of Division 7A.

This new approach applies to trust entitlements that arise on or after 1 July 2022.  

For trust entitlements that arose on or before 30 June 2022 the current approach will continue to apply.

What is the new approach? 

Division 7A ( Div 7A) of Pt III of ITAA 1936 operates to prevent private companies from making tax-free distributions of profits to shareholders or their associates by way of payments, loans or forgiven debts.

A private company will be taken to pay an unfranked dividend if it makes a loan to a shareholder or their associate and the loan is not either fully repaid before the company’s lodgment date or falls within the exclusions.

For the purposes of Div 7A, a “loan” includes a provision of credit or any other form of financial accommodation.

It is relatively common practice for trustees to distribute trust income to a corporate beneficiary.

Company beneficiary with UPE

A private company beneficiary with a UPE will provide financial accommodation to a trustee if it has knowledge of an amount that it can demand immediate payment of from the trustee and does not demand payment.

Where the company and the trustee have the same directing mind and will, the company is taken to have knowledge of the amount when the trustee does.

In this circumstance, the company is taken to have consented to the trustee continuing to use the retained amount for trust purposes.

As a result, the company provides financial accommodation to the trustee under the extended definition of a loan.

The ATO clarifies in their view that the time when a beneficiary’s entitlement is known will typically arise after the end of the financial year, that is, in the income year after the entitlement arises.

Typically, the distributable income of a trust for an income year can only be determined with sufficient certainty to quantify the amount of an entitlement when the financial statements are finalised.

Key timeline

The main difference with this new approach from the ATO, is that as of 1 July 2022, no longer are Trustees able to place the UPE arrangements initially on 7 year interest only arrangements to then extend into a further 7 year principal and interest complying loan.

Refer to the below example which highlights a potential timeline in relation to a UPE that was subsequently put on a complying loan agreement under the new revised ATO approach.

The time when the amount of a beneficiary’s entitlement is known will typically arise after the end of the income year, that is, in the following income year, in which the entitlement arises.

Therefore, UPEs arising during the 2022-23 income year may generally give rise to the provision of financial accommodation in the following year (i.e. 2023-24).

Sub-trusts to phase out

Sub-trust arrangements were often used where the amount in the sub-trust was invested in the main trust in working capital, plant and equipment, or real property acquisitions.

The interest-only feature was commercially attractive to private groups enabling trading or property trusts to finance their business or property investments on interest only terms.

While the ATO will accept sub-trust arrangements, the requirement is that the funds on sub-trust need to be held for the exclusive benefit of the corporate beneficiary, and not used by a shareholder or associate of that corporate beneficiary, including by the main trust. This means that few, if any, are likely to enter into these type of sub-trust arrangements. 

Clarification for pre-16 December 2009 UPEs   

The ATO have clarified that: 

  • taxpayers can continue to rely on the ATO’s past approach in relation to trust entitlements that arose on or before 30 June 2022 whereby such UPEs can be placed on interest only arrangements for no longer than 7 years. Presumably, these arrangements can then be converted to a complying principal and interest only loan after the initial interest only 7 year period;  and
     
  • their recent finalised view does not apply to unpaid present entitlements arising before 16 December 2009. Accordingly, these arrangements can continue where qualify, to be placed on interest free terms.

What does the final ATO release mean for you? 

  1. Where a trust declares present entitlements and either pays those in full or the UPE is discharged and placed on complying Division 7A loan terms, the effect of the finalised ATO view should be minimal.  
     
  2. Where there has been a practice of interest only sub-trust arrangements, the change in ATO views will be a material change for present entitlements arising on or after 1 July 2022.
     
  3. Care and review is required to ensure up to date year end resolutions, accounting, and loan documentation for the 30 June 2023 year to ensure compliance with the final ATO’s view on the operation of Division 7A.

Next Steps

Cooper Partners regularly advises on Division 7A and UPEs. If you have any questions about what the ATO views may mean for you and your arrangements, please contact your Cooper Partner’s engagement team to review your situation and determine what action is required.

Authors:

Michelle Saunders, Managing Director

Nicholas James, Senior Manager

This newsletter is current as of 25 August 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy