Employment taxes update

Employment taxes and superannuation have been the subject of a raft of changes over the last few weeks, on both a State and Federal level.

To ensure that your business is up to date on the latest changes, we summarise the following key topics in this edition:

  1. WA payroll tax cut – modest saving around the corner for employers
  2. Resurrection of the Superannuation Guarantee amnesty
  3. Salary sacrificed super – integrity measures passed
  4. PAYG withholding and reporting – reminder about denial of tax deductions
  5. Director penalties regime – expansion to GST
  6. Superannuation Guarantee opt out rules
  7. Redundancy and early retirement payments – concessional tax treatment extended for over 65s

1. WA payroll tax cut – modest saving around the corner for employers

In a move to stimulate the Western Australian economy and create more jobs, last week the McGowan Labor Government announced new payroll tax measures to increase the payroll tax exemption threshold over the next two years to $1 million, as follows:

It is anticipated that raising the payroll tax threshold to $1 million will result in 1,000 businesses in WA no longer being liable for payroll tax and a further 11,000 businesses (making up around 70% of businesses in WA) receiving a payroll tax cut.

The increased payroll tax threshold will provide a modest tax cut for employers each year. For example, employers with a taxable payroll of $1 million are expected to save just over $9,000 in 2021, while employers with a taxable payroll of $3 million are expected to save nearly $6,500 in payroll tax.

The rate of payroll tax remains unchanged (being a tiered rate of between 5.5% to 6.5% depending on the relevant amount of Australian taxable wages).

2. Resurrection of the Superannuation Guarantee amnesty

The Federal Government has reintroduced the Superannuation Guarantee (SG) amnesty rules into Parliament. The previous bill lapsed on 1 July 2019, following the election of the Morrison Government.

If passed, the proposed law will provide a once-off amnesty for employers to voluntarily disclose past SG non-compliance and pay employees’ full super entitlements. The amnesty period will run for six months from the date the legislation receives Royal Assent.

In summary, the SG amnesty encourages employers to correct previous non-compliance by:

  • Allowing employers to make tax deductible SG catch up payments for the period commencing on 1 July 1992 to the quarter ending 31 March 2018. The amnesty does not apply to SG shortfalls relating to the period on or after 1 April 2018.
    • Under the current law, superannuation contributions are only deductible when paid and are due 28 days after the end of the quarter. Late payments incur the SG charge and contributions offsetting the SG charge are not deductible.
  • The administration fee ($20 per employee, per quarter) is waived where employers self-correct SG shortfalls within the amnesty period.
  • Penalties and general interest charge for failing to provide a SG statement (which can be up to 200 percent of the SG charge) are waived.
    • Importantly, if an employer fails to disclose an SG shortfall to the Commissioner, he will not be able to remit penalties below 100 percent of the amount of SG charge payable, outside the amnesty period.
    • This ensures that higher penalties will be imposed for employers who do not make voluntary disclosures regarding SG non-compliance during the amnesty period.

Importantly, the employer must pay the SG shortfall to the Commissioner during the amnesty in order for the protections afforded under the amnesty to be available. The amnesty disclosure must also be a first time disclosure, i.e. the SG shortfall that has not previously been assessed or be under examination by the ATO (e.g. existing audit activity).

The takeaway: As and when the law is passed, employers must act quickly to ensure they meet the six month disclosure period in order to be covered under the amnesty.

3. Salary sacrificed super contributions – integrity measures passed

Under the current law, where an employee salary sacrifices their future salary and wages into superannuation, the salary sacrificed amounts count toward the employer’s mandated minimum SG contributions. Further, employers have the benefit of calculating their SG obligations on a lower post salary sacrifice earnings base. This can result in the employee receiving less SG contributions from their employer.

Integrity measures were recently passed on 28 October 2019 which ensure that an employee’s salary sacrificed super contributions cannot reduce an employer’s SG charge. Employers are required to make SG contributions at the current rate of 9.5% on the employee’s pre-salary sacrificed salary earnings base (up to the maximum contribution base). These measures have effect from 1 July 2020.

The takeaway: Ensure that payroll processes and employment contracts are updated to correctly reflect employers’ SG contribution requirements to avoid any future SG shortfall exposure.

4. PAYG withholding and reporting – reminder about denial of tax deductions

Although not new law – the bill was passed in November 2018 – now is a timely reminder that from 1 July 2019, employers can only claim deductions for payments made to workers (employees or contractors) where:

  • pay as you go (PAYG) withholding tax has been withheld from the payment; and
  • the amount has been reported to the ATO.

Any payments made to a worker on which tax has not been withheld or reported to the ATO are ‘non-compliant payments’ and are not tax deductible. Penalties and interest may still be imposed for failure to withhold PAYG.

The takeaway: to ensure that payments to workers are deductible, it is critical that workers are correctly classified as either employees (and subject to PAYG withholding) or independent contractors. There are specific common law tests which must be applied to determine this.

Where an employer mistakes an employee for a contractor and failed to withhold or report a payment, the payment is still deductible if:

  • the employer obtained an invoice that quoted the contractor’s ABN; and
  • there were no reasonable grounds to believe that the ABN is not correct or not the contractor’s ABN.

The takeaway: employers must ensure that their reporting obligations are being met on a timely basis. This includes:

  • correct procedures are in place for identifying contractors and checking ABNs;
  • lodgement and payment of Business Activity Statements on time;
  • Single Touch Payroll reporting for each STP pay event on time; and
  • ensuring PAYG withholding amounts are withheld before payments are made to workers.

5. Director penalties regime – expansion to GST

Currently, the director penalty regime applies to PAYG withholding and superannuation guarantee charge (SGC) payment obligations. Where an employer fails to comply with their payment obligations, directors are personally liable for these liabilities.

Proposed law is before the Parliament to expand the director penalty regime to GST, Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) obligations. Under the proposed changes:

  • It is expected that from 1 January 2020, directors will have an obligation at the end of the relevant tax period to ensure that payment of their GST liability for the period is paid to the ATO by the due date (for example, 28 days after the end of the quarter for GST);
  • a director will then become liable for the assessed net amount or GST instalment on the payment due date;
  • as GST liabilities are self-assessed, the proposed rules also provide the Commissioner with an additional power to make an estimate of GST liability (including LCT and WET) where a GST return has not been lodged by the due date. The estimate amount is deemed to arise and be payable on the day the entity was required to lodge its GST return. This ensures that taxpayers cannot avoid the director penalty regime by non-lodgement of its GST obligations;
  • after the lodgement due date, the Commissioner can issue a Director Penalty Notice for the unpaid amount. The penalty will be equal to the unpaid liability;
  • the director then has 21 days from the issue of the DPN to pay the liability. A director penalty may be remitted where the outstanding liability is paid in full within 21 days of the issue of the DPN.

The takeaway: it is critical that BAS lodgements are made on time and payments made by the due date. If you are a business that is struggling to meet reporting deadlines, seek assistance from a tax adviser to liaise with the ATO to avoid imposition of director penalties.

Individuals taking on directorship roles must do their homework and understand the tax compliance history of the business, or risk personal exposure to tax and employee liabilities.

6. Superannuation guarantee opt out rules

New law has been introduced impacting eligible individuals with multiple employers.

From 1 January 2020, these individuals can apply to opt-out of receiving SG from some of their employers where they have multiple employers and will exceed the $25,000 concessional contributions cap for the financial year. This change aims to reduce the number of people inadvertently exceeding the cap. Contributions over the cap are taxed at the individual’s marginal rate, rather than the concessional 15% tax rate paid by the super fund.

In order to qualify for the opt-out rules:

  • the individual must have multiple employers;
  • the individual’s income for SG purposes is expected to exceed $263,156 per financial year (i.e. employer contributions would exceed the $25,000 annual cap);
  • the individuals must submit their application to the ATO 60 days before the start of the quarter that the exemption will apply to;
  • a new application must be made for each financial year. If approved, the individual and their exempted employers will receive a copy of the exemption certificate from the ATO;
  • individuals must still receive SG contributions from at least one employer;
  • where an individual opts out of receiving SG, there is no requirement for the employer to pay the opted-out amount as wages.

As the quarter commencing 1 January 2020 is the first quarter that these rules are taking effect, the ATO has provided an extension to lodge the opt-out form to 18 November 2019.

The takeaway: employees choosing to opt-out of SG contributions should review their current employment contracts to ensure they are not disadvantaged by not receiving the reduced SG amount as an increase in their salary and wages.

7. Redundancy and early retirement scheme payments – concessional tax treatment extended for over 65s

New law was passed on 28 October 2019 to increase the concessional tax treatment of genuine redundancy and early retirement scheme payments provided to employees over the age of 65.

Prior to the change in law, payments in relation to an employee’s redundancy or retirement were only eligible to be concessionally taxed where the employee was under 65 at the time of their dismissal or retirement. Payments made to employees over the age of 65 were treated as ordinary ETPs and were not eligible to access the tax-free component.

From 1 July 2019, employees between the age of 65 and pension age (ranging from 65 years and six months to 67 years) can now access tax concessions which treat part of the genuine redundancy or early retirement scheme payment to be tax-free.

The tax-free component of the payment depends on the number of years of service of the employee. The amount in excess of the tax-free component is separately taxed under the Employment Termination Payment (ETP) rules. Different tax rates are applied depending on the amount and type of the payment and the age of the employee.

Next steps

For those interested in discussing the above changes in more detail and as well as any potential impact on you, please contact your Cooper Partners client engagement team.

A Property Tax Update – Take 2

Much can happen in 14 days in the property sector.  Since our Property Update issued earlier this month and our seminar held on 9 October 2019, we have seen the issue of further announcements impacting both property owners and property developers that we bring to your attention:

1.    Stamp duty cut for off-the-plan apartment purchases

2.    Restriction of tax deductions on vacant land

3.    Reintroduction of CGT main residence exemption Bill

4.    CGT incentives for affordable housing

5.    Sale of near new interest to foreign residents

6.    Keystart lending eligibility


1. Stamp duty cut for off-the-plan apartments

Off-the-plan apartment buyers in WA will receive a 75 per cent rebate on stamp duty for the next two years, capped at $50,000, under a stimulus package unveiled by the state government on 23 October 2019.

For a $500,000 apartment, the change would represent a stamp duty saving of more than $13,000.

No cap will be placed on the purchase price and multiple rebates will be available to the same applicant for additional unit or apartment purchases within the same or different developments.

Importantly, the discount will also apply to the 7 per cent foreign buyer surcharge, which was put in place in January, and to which the construction industry has long argued has caused demand from overseas buyers to plummet.  As such, the inclusion of the foreign buyer’s surcharge in the rebate is expected to provide WA apartment developers with a value proposition compared with other states.

The rebate will be available for the next two years to any purchaser who signs a pre-construction contract to purchase a new residential unit or apartment in a multi-tiered development.

2. Restriction of tax deductions on vacant land

Further to our recent Property Update (Click here to view) regarding the Government’s proposed changes to the availability of deductions for vacant landowners, we can now confirm that the Bill containing these proposed measures has been passed by both Houses on 22 October 2019 and now awaits Royal Assent.

The Bill was passed with three amendments to the measure which denies tax deductions for expenditure incurred in holding vacant land. The amendments take the form of exceptions to the measure and will apply to vacant land that is:

  • held by primary producers;
  • available for use in carrying on a business under arm’s length arrangements; and
  • structures affected by natural disasters or other exceptional circumstances (for up to 3 years).

However, despite the above exceptions, it does appear that the final measure may still have some unintended but potentially adverse outcomes for primary producers and holders of farmland.

For example, tax deductions will still be denied in the following situations:

  • A non-arms-length lease of farmland by parents to adult child (over the age of 18);
  • A non-commercial lease agreement between an entity controlled by parents and an entity controlled by an adult child; or
  • Where residential property either exists on the land or is being constructed on the farmland.

The measures will apply to expenditure incurred in respect to holding vacant land from 1 July 2019.

3. Reintroduction of CGT main residence Bill

As previously advised in our Property Update (Click here to view) both Australian and foreign resident individuals may currently access the CGT main residence exemption where the dwelling was previously their principal place of residence prior to the sale of the dwelling.  However, as part of the 2017/18 Federal Budget, amendments to the CGT rules were announced and legislation containing these changes was introduced to Parliament.  The Bill however lapsed when the 2018/19 election was called.

This Bill has now been reintroduced to Parliament as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, and proposes to remove the entitlement to the CGT main residence exemption for foreign residents other than where certain life events occur during the period that a person is a foreign resident where that period is 6 years or less.

A life event includes a terminal medical condition to the foreign resident, their spouse or their child under 18 years of age; death; and divorce or separation.

Impact on Australian Expats

Where the Bill is passed in its current form, there may be some adverse tax outcomes for Australian citizens who temporarily become non-residents for tax.  For example,  if you move overseas and rent out your family home, and then decide to sell your Australian home while still overseas, you will need to pay CGT on the proceeds of the sale.

The current law contains the six-year absence rule, which means that if the family home is sold within six years of moving overseas, an exemption from CGT is available.  This will no longer apply where the Bill is passed unchanged.

That being said, where Australian expats return to Australia (and take up their Australian tax residency again) and resume living in the property within six years, the main residence CGT exemption will be retained.

The measures will apply (where passed) from 7.30pm ACT legal time on 9 May 2017 (the application time) however, transitional provisions will continue the main residence exemption for CGT events that occur to certain dwellings on or before 30 June 2020, where the dwelling was held before the application time.

4. CGT incentives for affordable housing

The above Bill also contains measures to encourage investors to increase the supply of affordable housing by allowing resident investors in “eligible affordable rental housing” to obtain an additional 10% CGT discount (on top of the existing 50% discount). The additional CGT discount will be available to resident investors who hold affordable housing directly or through certain trusts.

However, to qualify for the additional discount, the affordable housing must be held for a period of at least three years from the start date of the measure and be managed through a registered community housing provider in accordance with state and territory housing policies and registration requirements.

This measure is proposed to apply to capital gains realised by investors from CGT events occurring from 1 January 2018 for affordable housing tenancies that start before, on or after 1 January 2018.

5. Sale of near new interests to foreign residents

The same Bill also contains a technical amendment that enables a reconciliation payment to be made by developers who sell dwellings to foreign persons under a “near new dwelling exemption certificate”.

By way background, the introduction of the near-new dwelling exemption certificate creates flexibility for property developers and enables them to sell near‑new dwellings (dwellings that have previously been subject to a failed settlement) to foreign persons without the requirement that the individual foreign investor seeks their own foreign investment approval for the purchase.

6. Keystart lending eligibility

Under the measures announced in the WA state government budget, Keystart’s existing income limits for borrowers have increased by $15,000 for singles and couples and by $20,000 for families until 31 December 2019. The income limits will revert to previous levels on 1 January 2020.

The temporary changes to Keystart lending rules follow the McGowan Government’s $421 million extension of its loan book in December last year, boosting its lending capacity to $4.8 billion.  Based on median loan values, the $421 million extension potentially equates to an extra 1,100 new home loans, providing a much-needed boost to WA’s housing construction sector which is expected to create new jobs and support the economy.

The measures will complement the existing first homeowner’s grants and stamp duty exemptions for first home buyers.

Next steps

For those interested in discussing the above changes in more detail and as well as any potential impact on you, please contact your Cooper Partners client engagement team.

A property tax update – what you need to know

In recent years, real property owners have been subject to a number of significant legislative changes. Changes to the taxation of real property has been in response to a number of factors, including housing affordability, tax avoidance and the impact that foreign ownership has had on the Australian property market.

In this tax update, we summarise the following issues impacting real property owners:

  1. Restricting tax deductions available for vacant land owners;
  2. GST on the sale of new residential dwellings;
  3. Clearance certificate requirements on settlement of real property transactions;
  4. Acquiring dwellings from a deceased estate – new guidelines on the main residence exemption;
  5. Specific changes impacting non-resident owners, including:
    – Proposed changes to the CGT main residence exemption; and
    – Vacancy fee for foreign owners of residential dwellings.

1. Restricting tax deductions available for vacant land owners

Currently, taxpayers may claim deductions for costs incurred in holding vacant land where that land is held for the purpose of earning assessable income or in carrying on a business. These costs include interest on borrowings, land taxes, council rates and maintenance costs.

However, as part of the 2018/19 Federal Budget, the Government was concerned that some taxpayers are claiming deductions for costs associated with holding vacant land where it is not genuinely held for the purpose of earning assessable income.

To combat this, proposed legislation is currently before the Senate which in essence restrict non-business entities such as individuals, family trusts and SMSFs from negative gearing on their vacant land investments from 1 July 2019 unless the vacant land is used or held available for use for the purpose of carrying on a business (such as property development of primary production) conducted by either:

  1. The vacant land owner; or
  2. An affiliate, spouse or child of the vacant land owner; or
  3. Certain ‘connected entities’ of the land owner or its affiliates.

These rules however do not apply to vacant land owners that are a corporate tax entity, superannuation plan (other than a SMSF), managed investment trust, public trust, or certain unit trusts or partnerships.

As such, many private vacant land owners who are not running a business (e.g. where vacant land is held with the intention of constructing rental properties) will no longer be entitled to claim deductions for their land holding costs from 1 July 2019.

In the ‘plain vanilla’ scenario of Mum and Dad taxpayers purchasing a vacant block of land with a view to build a new rental property, under the current rules, the holding costs would be deductible, as there is a clear intention to earn assessable income in the future.

However, under the proposed changes, Mum and Dad will no longer be able to claim these holding costs (e.g. interest on borrowings) until the rental property has been constructed and legally available for occupation and available for lease. Any costs incurred during the planning and construction phase and even prior to receiving an occupancy permit will no longer be deductible under the new changes.

Because of the definition of ‘vacant land’ which requires that a ‘substantive permanent building’ or ‘substantive permanent structure’ be on the land (both of which are defined terms), there is a risk that where a residential property is being unoccupied during periods of renovation, the property may fall within the definition of vacant land and holding costs associated with the property will be denied for that period. The proposed law is currently silent on this scenario.

Importantly, these new rules will apply regardless of when the land was purchased and there is no grandfathering of vacant land assets acquired prior to the Federal Budget announcement.  Further, there is no Commissioner discretion to waive these rules.

Key takeaways

  • If you hold vacant land or unoccupied residential dwellings, consider how these proposed changes will impact your 2019/20 tax return;
  • Maintain detailed records of all holding costs during the vacancy period, including documentation supporting when and if the land is used in carrying on a business; and
  • Seek advice if you are unsure whether the buildings and structures on your land meet the required tests under the proposed changes in order for the property to not be defined as vacant land.

2. GST on the sale of new residential dwellings

Changes were made to GST laws last year which now require purchasers of new residential dwellings (being dwellings not previously sold as residential premises) or newly subdivided land to pay a GST directly to the ATO as part of the settlement process.

However, these rules impact not just new residential dwelling vendors, but all residential dwelling vendors and suppliers, as they are now required to provide a written notice to the purchaser prior to settlement to advise whether the sale is subject to GST withholding and whether the margin scheme applies. Significant penalties may be imposed where the vendor and supplier fails to provide this written notice to the purchaser.

Key takeaways

  • If purchasing new residential property or newly subdivided land, be aware of any new acquisitions post 1 July 2018 and your GST obligations;
  • Land developers should be aware of the cashflow impact where relying on the margin scheme under these new rules.

For further information, please click here to view our previous article on this topic

3. Clearance certificate requirements on settlement of real property transactions

As part of the Foreign Resident Capital Gains Withholding Tax (FRCGW) rules, Australian resident vendors are required to obtain a clearance certificate from the ATO prior to settlement.

Where a clearance certificate is not obtained, the purchase of the real property is required to withhold 12.5% of the purchase price at settlement, where the real property has a market value of $750,000 or more.

Where the purchaser withholds the 12.5% tax, this amount is not a final withholding tax and the vendor can claim a credit for part, or all of the amount withheld at settlement on lodgement of their tax return for the relevant year.

Key takeaways

  • When buying and selling real property above the $750,000 threshold, consider your CGT withholding obligations and ensure that clearance certificates have been obtained prior to settlement. Where the vendor is a foreign resident or a clearance certificate has not been provided to the purchaser, the purchaser is required to withhold 12.5% of the purchase price to the ATO.

For further information, please click here to view our previous advice on this topic.

4. Acquiring dwellings from a deceased estate – new guidelines on the main residence exemption

Most taxpayers are aware that if they dispose of a dwelling that is their main residence and it is not used to produce assessable income, any capital gain or loss is disregarded under the CGT main residence exemption.

This exemption also applies where an individual inherits a dwelling from a deceased estate which was the deceased’s main residence, and the individual disposes of the property within two years of the deceased’s death. However, the Commissioner has the discretion to extend this two year period in certain situations.

The ATO has recently released a Practical Compliance Guideline which details when the Commissioner’s discretion will be exercised and provides a safe harbour for taxpayers. Where the safe harbour conditions are met, the individual may lodge their tax return as if the Commissioner had exercised his discretion.

Broadly, the safe harbour conditions outlined in the Guideline are:

  • During the first two years after the deceased’s death, more than 12 months was spent addressing:
  1. Either the ownership of the dwelling or the will is challenged;
  2. A life or other equitable interest given in the will delayed the disposal of the dwelling;
  3. The administration of the deceased estate is complex and delayed the completion of administration; or
  4. Settlement of the contract of sale of the dwelling is delayed or fell through for reasons outside your control.

Key takeaways

  • If you have inherited real property under a will, consider if the main residence exemption will apply to you where you intend to sell the property;
  • ·Seek tax advice where the sale is more than two years after the death of the deceased, to consider if Commissioner discretion to access the main residence exemption is likely to be granted and whether you can rely on the new safe harbour.

5. Specific changes impacting non-resident owners

a. Proposed changes to exclude main residence exemption

Under the current tax law, both Australian and foreign resident individuals may access the CGT main residence exemption where the dwelling was previously their principal place of residence prior to the sale of the dwelling.

As part of the 2017/18 Federal Budget, it was announced by the Turnbull government that changes should be made to the CGT rules so that foreign residents will not be entitled to claim the exemption where their main residence is sold.

The bill containing these changes was then introduced to Parliament, however it lapsed when the 2018/19 election was called. At this stage, a new bill has not yet been reintroduced. However, in the coming months we expect to see these CGT main residence rules be tightened as previously announced by the former Liberal government and fresh proposed changes drafted.

b. Vacancy fee for foreign owners of residential dwellings not residentially occupied

One area that has not received much air time is the vacancy fee which applies to foreign owners of unoccupied residential dwellings.

This fee applies to dwellings that not residentially occupied or rented out for more than 183 days in a ‘vacancy year’ and is payable on lodgement of a vacancy fee return. The vacancy fee is generally the same amount as the foreign investment application fee.

A foreign resident owner of a residential dwelling must lodge a vacancy regardless of whether the dwelling has been occupied or made available for rent where:

  • The foreign resident made a foreign investment application for residential property after 7.30pm AEST on 9 May 2017;
  • The foreign resident owner purchased the dwelling under a New Dwelling Exemption Certificate that a developer applied after 7.30pm AEST on 9 May 2017.
  • In order to meet the definition of residentially occupied, for at least 183 days in a vacancy year:
  • The owner or a relative of the owner must genuinely occupy the dwelling as their residence;
  • The dwelling must be genuinely occupied as a residence subject to a lease or licence for a minimum term of 30 days; or
  • The dwelling must be genuinely available as a residence on the rental market with a minimum term of 30 days.

Importantly, this would exclude short term rentals such as AirBnB rentals.

Next steps

For those interested to learn about the above changes in more detail and the traps to avoid in practice, do not hesitate to contact your Cooper Partners client engagement team.

Superannuation Update September 2019 – Investment Strategy, Borrowings and Contributions

Investment Strategy, Borrowings and Contributions

In this update we will discuss some recent ATO activity, measures being introduced that impact self-managed superannuation funds (SMSFs) and some contribution strategies to consider:

  1. ATO issues investment strategy warning to SMSFs with property and borrowings
  2. Super Guarantee opt-out and how it will apply
  3. Non-arm’s length expenses
  4. Borrowing arrangements and the impact on Total Super Balance (TSB)
  5. Downsizer contribution – big take-up with $1 Billion contributed. Are you eligible?
  6. Carry-forward concessional contributions – can you utilise this measure?

1. ATO issues investment strategy warning to SMSFs with property and borrowings

At the end of August, the ATO sent a letter to approximately 17,700 SMSFs regarding the fund’s investment strategy. This was a targeted campaign by the ATO to SMSFs who held at least 90% of its assets in a single asset class (i.e. property), and also had in place a limited recourse borrowing arrangement (LRBA).

Why did the ATO contact Trustees?

Under the superannuation law, a Trustee of an SMSF must formulate and review regularly an investment strategy that also considers:

  • Risk and return on investments;
  • Diversification of assets;
  • Liquidity of investments and cash flow;
  • The ability to discharge liabilities; and
  • Insurance considerations and cover for the members.

Specifically, the ATO letter appeared to be targeting the diversification aspect of the above. Recently, the ATO provided a further update on this campaign and stated:

We were concerned that these SMSF trustees may not have given due consideration to diversifying their fund’s investments and the risks associated with a lack of diversification when formulating and reviewing their investment strategy.

They also provided that this lack of diversification together with the borrowing could lead to a significant loss where the sole asset loses value.

What should you do?

Where your SMSF fits the above profile (i.e. has majority of its assets invested in property with an LRBA) or you haven’t reviewed your strategy recently, you should review the investment strategy and ensure it satisfies the above requirements of  risk, return, diversity, liquidity, ability to discharge liabilities and insurance. You should also ensure that you have appropriate support and reasons for any fund investments.

2. Super Guarantee opt-out and how it will apply

The Super Guarantee (SG) opt-out was introduced to Parliament in May 2018, where high-income earners who had multiple employers, had the choice to opt-out of receiving mandated employer contributions. This would allow individuals who received contributions from multiple employers and as a result exceeded their concessional contribution cap (currently $25,000), to opt-out of receiving compulsory contributions to remain within the cap and avoid any excess contribution issues. The original legislation lapsed prior to the Federal Election.  In July 2019, this measure was re-introduced and is now waiting Royal Assent to become law.

Points to note where you would like to utilise this measure:

  • The employee will need to apply to the ATO for an employer shortfall exemption certificate;
  • Certificates can be issued to different employers. However, at least one employer must still make SG contributions for the employee;
  • The application needs to be made 60 days before the first day of the quarter in which the exemption is to apply;
  • The application can be refused by the ATO;
  • Just because an individual opts-out to receive SG, the employer is not required to pay the opted-out amount as wages. The employee will need to negotiate this with the employer. This is an important point to note, as employees may be disadvantaged if they apply for the certificate but haven’t arranged with their employer to ensure that the amount not contributed to superannuation is received as salary and wages

3. Non-arm’s length expenses

Non-Arm’s Length Income (NALI) is a concept whereby income derived by an SMSF is taxed at the top marginal rate where the income has arisen from an investment where the parties were not dealing on an arm’s length basis.

This concept has been extended to Non-Arm’s Length Expenses (NALE), where the income, or gain on sale of asset, will be subject to the NALI rules. where expenses incurred by a fund with respect to an asset are not arm’s length.

For example, where an SMSF holds property under a borrowing arrangement and derives arm’s length rent, but does not pay an arm’s length interest rate on the loan, this will be considered NALE and as a result the investment will be tainted with a NALI classification. This would result in the rental income and any future realised capital gain on the sale of the property being subject to NALI and taxed at the top marginal rate, as opposed to tax at 15% in the fund, or 0% (for 100% pension funds).

4. Borrowing arrangements and the impact on Total Super Balance (TSB)

A member’s TSB is generally the total amount they have in superannuation across all of their accounts (however, there are some modifications).

Where a person’s TSB exceeds certain thresholds, they become ineligible for particular provisions, including (but not limited to):

  • The ability to make carry forward concessional contributions, where TSB exceeds $500,000 (discussed in further detail below);
  • Non-concessional contributions, where TSB exceeds $1,600,000; and
  • Spouse offset.

This is relevant to SMSFs who also have an LRBA in place. New law has been introduced and upon receiving Royal Assent (which is expected to occur shortly), will include the outstanding balance of certain LRBAs in the member’s TSB.

Points to note:

  • Applies to LRBAs commenced after 1 July 2018;
  • Only applies to members who have satisfied a condition of release with a nil cashing restriction (i.e. over age 65 or attained preservation age and retired), or those whose interests are supported by assets that are subject to an LRBA with a related party.
  • Does not apply to LRBAs in place before 1 July 2018 and refinanced after 1 July 2018.

What does this mean?

For members where this law may have application it may cause the members TSB to exceed $1.6 million and prohibit them from making non-concessional contributions (as an example). These contributions may be required in order to fund any loan repayments.

Accordingly, anyone considering undertaking an LRBA where they may fall under this new measure as they have retired or the loan is with a related party, it is worthwhile considering the impact this will have on their overall strategy.

5. Downsizer contribution – big take-up with $1 Billion contributed. Are you eligible?

The ATO has recently revealed that members have contributed $1.1 billion to superannuation from the superannuation downsizer measure since it’s introduction on 1 July 2018.

The downsizer measure allows members over age 65 to contribute up to $300,000 from the proceeds of the sale of their home to superannuation, subject to certain requirements.


  • You are over age 65 at the time of the contribution;
  • You or your spouse owned the property for more than 10 years;
  • The property is in Australia and is not a caravan, houseboat or mobile home;
  • The property is covered in full or part under the main residence exemption;
  • The contribution is made from the proceeds of the sale to superannuation within 90 days;
  • You make a choice to make a downsizer contribution in the approved form;
  • You have not previously made a downsizer contribution.

Points to note:

  • A downsizer contribution does not count towards the contribution caps;
  • The member’s total super balance is not taken into account, i.e. the member can have more than $1.6 million in super and still make a downsizer contribution;
  • The work test does not have to be satisfied, which is 40 hours of gainful employment in a 30-day consecutive period;
  • $300,000 can be contributed by each spouse;
  • The property doesn’t have to be your main residence at the time of the sale. As long as it was your main residence at some stage throughout the ownership period, whereby the member is going to claim some of the main residence exemption, this provision is available;
  • Utilising this provision does not make you ineligible to make other contributions to superannuation (where you are separately eligible to make such other contributions).

6. Carry-forward concessional contributions – can you utilise this measure?

We are now into the second financial year regarding the carry-forward concessional contribution rules, which means individuals can start utilising this measure.

Since 1 July 2018, an individual can carry forward their unused concessional contributions for a maximum of five years.  The individual may be able to contribute these unused amounts to superannuation provided their total superannuation balance at the commencement of the financial year in which the contribution is made is less than $500,000.

For example, if you have a total superannuation balance of $400,000 at 1 July 2019 and have made $10,000 of concessional contributions (including employer contributions) to superannuation during the 2018/2019 financial year, you may be able to make up to $40,000 of concessional contributions to superannuation during the 2019/2020 financial year ($15,000 carried forward from the 2018/2019 year and the 2019/2020 cap of $25,000).

How can we help?

If you would like to know how you are affected by these changes or need assistance, please contact your Cooper Partners engagement team.



Fringe Benefits Tax – Getting you ready for FBT in 2019

With the end of the 2018/19 FBT year now upon us, we provide you with the latest updates to get you ready for the FBT season, including the ATO’s audit hotspots.

1. Latest FBT rates and thresholds

For the 2019 FBT year, the FBT rate will remain the same at 47% with the associated Type 1 and Type 2 gross-up rates also remaining the same as last year.


Other rates and thresholds are as follows:


Key FBT dates to be aware of:


2. Revised exempt vehicle record keeping guidelines

In July 2018, Practical Compliance Guideline (PCG) 2018/3 Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles was introduced. The PCG applies to the 2019 FBT year and later years and represents a safe harbour from record keeping where certain conditions are met. The previous draft PCG has been updated to allow employers to satisfy the record keeping requirements where the employer has a policy in place limiting private use of the vehicle and obtains assurance from the employee that their private use is limited to the use outlined in the PCG.

These are the conditions which must be met to satisfy the record keeping exemption:

  1. The vehicle provided to a current employee is an ‘eligible vehicle’ and is provided to the employee to perform their work duties. Please click here to view eligible vehicles.
  2. The vehicle’s GST inclusive value is less than the luxury car tax threshold at the time the vehicle was acquired (i.e. $66,631 for the 2019 year);
  3. The vehicle is not provided as part of a salary packaging arrangement;
  1. The employee uses their vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip;
  2. The employer has a policy in place that limits private use of the vehicle and obtains assurance from their employee that their use is limited to private journeys (other than home to work travel) which are:
    • No more than 1,000 kilometres in total; and
    • No return journey exceeds 200 kilometres.

Where employers are satisfied that the conditions in the PCG are met, the following records should ideally be maintained:

  • Declarations should be obtained from employees to show that the private use is no more than 1,000 kilometres in total and no return journey exceeds 200 kilometres; and
  • Evidence that the employer has a policy in place limiting private travel.

3. Don’t get caught out with an invalid logbook

In a recent Private Binding Ruling sought by an employer, the Commissioner did not accept a logbook that was backdated to a previous FBT year to calculate a car fringe benefit under the operating cost method. This was on the basis that the records maintained did not meet the substantiation requirements for a valid logbook. The employer used diary records and calendar appointments to recreate the logbook and provided an estimate of the number of kilometres travelled, however could not confirm the odometer readings. There were also inconsistencies between the logbook and records maintained.

This raises the importance of a logbook being prepared correctly to be considered valid. If a logbook is not valid, the statutory formula method, at the rate of 20% of the base value of the car, must be used to calculate the amount of a car fringe benefit.

These are what a valid logbook should contain:

  • When the logbook period begins and ends (i.e. identify the relevant 12-week period);
  • The car’s odometer readings at the start and end of the logbook period;
  • The total number of kilometres the car travelled during the logbook period;
  • The business-use percentage for the logbook period;
  • The number of kilometres travelled and reasons for each journey, start and finishing dates and odometer readings at the start and end date of each journey.

A new logbook will be valid for five years, however, where the business use percentage of a logbook changes by more than 10%, a new logbook will need to be completed.

4. ATO guidance on travel related benefits – still in draft but applies now

In 2017, the ATO issued Draft Taxation Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? While TR 2017/D6 is still yet to be finalised, the draft ruling applies to the 2019 FBT year and onwards in relation to employee travel expenses.

In determining whether travel benefits are ‘otherwise deductible’ and therefore not subject to FBT, employers should consider whether an employee is required to travel as part of performing their work-related duties having regard to the guidance provided in the draft ruling.

It is important to note that the previous 21 day rule for distinguishing travelling for work versus living away from home has been withdrawn and new guidance has been provided by the ATO.

For further details on the ATO guidance on travel expenses, please click here.

5. No escape for frequent flyers

It is becoming common for businesses to accrue frequent flyer reward points for airline travel, with these points accruing separately to an individual’s frequent flyer points. A recent Private Binding Ruling issued by the ATO confirms that where frequent flyer points are transferred to an employee’s frequent flyer account under an Airline Business Rewards Program, this will give rise to a fringe benefit at the time the points are transferred to the employee (subject to the minor benefits exemption).

The taxable value of the benefit is to be determined using the notional value of the property i.e. the amount the employee could be expected to pay under an arm’s length transaction.

Where the employee uses the frequent flyer points for work-related travel, the taxable value of the benefit may be reduced under the otherwise deductible rule. However, practically this may not be able to be determined until long after the frequent flyer points have been transferred to the employee.

6. ATO audit hot spots

In 2019, the ATO have announced the following areas as a particular audit focus:

  • Private use of motor vehicles – the ATO have increased audit activity to capture employers failing to identify or report vehicles used privately as well as incorrectly applying exemptions.
  • Employee contributions – the ATO are using data matching software to find mismatches between income tax returns and FBT returns where contributions have not been disclosed as income or overstated to reduce the taxable value in the FBT return.
  • Non-lodgement – the ATO are focusing on employers failing to identify fringe benefits and miscalculating benefits such that the taxable value is reduced to nil. We recommend that where employers are registered for FBT and the taxable value is nil, an FBT return is lodged instead of a notice of non-lodgement as this will avoid an unlimited amendment period.
  • Living-Away-From-Home Allowance (LAHFA) – the ATO have expressed concern that LAHFAs are not being calculated correctly. Errors include claiming a reduction for ineligible employees, failing to obtain declarations, claiming a reduction for invalid circumstances and failure to substantiate.
  • Car parking valuations – situations that will attract the ATO attention include using inappropriately low market valuations, fees for car parking facilities incorrectly classified as a commercial car park and insufficient evidence to support the lowest fee for the car parking rates used.

Future Developments to watch

7. Exempt fringe benefits may be caught – Division 7A proposed changes

As part of the Government’s proposed reform to the deemed dividend provisions (Division 7A ), an amendment has been proposed affecting the interaction between Division 7A and the FBT rules in relation to the provision of exempt benefits by a private company to an employee (who is also a shareholder or associate of a shareholder) from 1 July 2019. By way of background, Division 7A contains anti-avoidance measures that prevent private companies from making tax-free distribution of profits or assets to shareholders or their associates by way of loans, payments or the use of property.

If the proposed amendments go ahead, a payment/provision of an asset from a private company to a dual capacity individual (someone who is an employee and a shareholder of the company) must constitute a fringe benefit in order to be excluded from the Division 7A rules. Accordingly, legitimate employment-related benefits provided to a dual capacity individual which are exempt from FBT will become subject to Division 7A.

Commonly provided FBT-exempt benefits which may be impacted by this proposed change include:

  • The provision of eligible work-related items (e.g. laptop computer primarily used in an employee’s employment);
  • Certain FBT-exempt living-away-from-home and relocation benefits;
  • Provision of an exempt vehicle; and
  • Minor benefits that are exempt from FBT.

These changes are very likely to significantly increase the FBT cost for closely held and family owned businesses operating out of private companies.

Your next steps

If you would like further information on how FBT may impact you, please contact our FBT team:

Super balance over $1.6m? You should review your position now

Super balance over $1.6m? You should review your position now

Changes to the rules around superannuation effective 1 July 2017 mean anyone with a substantial super balance should review their estate planning immediately. If they don’t, anyone they pass their super to may face the prospect of tax penalties, and even the possibility of being disinherited. 

How the new regime deals with our super when we die

On 1 July 2017, the final reforms under the new superannuation regime came into effect. These change what’s possible when it comes to passing super to a surviving spouse and could have major tax implications if you have a substantial balance in your SMSF.

  • There is now a limit of $1.6 million to how much you can most tax effectively keep in super;
  • When a member dies, the spouse doesn’t get the benefit of the deceased’s limit, only their own, so the effectiveness of the limit halves;
  • The effect of this limit is compounded by another rule which prevents spouses holding their deceased’s super in accumulation phase for their own benefit. 

What do you need to do?

If you’re affected by these changes, you need to make sure your estate planning around your super considers the new regime. If it doesn’t, your super may be taxed more than it would otherwise be, or may not end up where you want.

You should also ensure that the mechanisms in your SMSF give effect to your intentions.  After all, any death benefit nomination you make won’t be effective unless it is in line with both the superannuation laws and your fund’s trust deed.

For this reason, we recommend that you review:

  • Any nominations or death benefit documentation under your SMSF
  • Any documents affecting pensions under your fund
  • Your fund’s trust deed, especially any requirements it makes for payments and instructions
  • How your fund deals with trustee succession
  • Your will and other structures to make sure they reflect your intentions.

How we can help

Cooper Partners specialises in estate planning for SMSFs. We can review all your estate planning documents, including your trust deed, to analyse any risks and make sure your super goes where you intend. We can also help ensure your wealth stays within the family – and in a tax effective way.

To arrange an estate planning health check, contact Jemma Sanderson on (08) 6311 6903 or jsanderson@cooperpartners.com.au 

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.

Significant changes expected to Division 7A rules from mid-2019

The Division 7A provisions within the Tax Act play a critical role in governing how individuals borrow money from their businesses or tax effectively finance investment activities. In a move that may surprise many who already struggle to follow this technical area, the Australian Government appears set to change these rules from as soon as 1 July 2019. The proposed changes could create cash flow issues for many as a result of shorter or altered loan terms, higher interest payments and more immediate principal repayments. For this reason, we are encouraging clients to urgently review the proposed changes and consider their Division 7A–related strategies.

What is Division 7A?

Division 7A is a tax integrity rule that applies to shareholders of private companies, which may include individuals or trusts. If the company makes a payment or provides a loan to a shareholder, the government will treat the funds as unfranked dividends that add to the recipient’s taxable income – unless they use the Division 7A provisions to convert the amount into a complying loan.

These loans currently run for seven years unsecured or 25 years, if the shareholder agrees to provide property as security. During that time, the shareholders must repay the principal and pay interest, at the ATO Commissioner’s benchmark interest rate (currently 5.30%). Division 7A also extends to debt forgiveness and the private use of company owned assets, such as a boat or holiday house.

What is changing?

The government flagged its intention to revise Division 7A in the 2016/17 Federal Budget and has since provided some safe harbour conditions in anticipation of making amendments. It has now released a new consultation paper that provides further detail on the potential shape of the new regime and indicates it might be in place as soon as 1 July 2019. While the new rules are yet to be finalised and must still be legislated, our view is that the paper indicates the likely shape of the new rules. Given there is broadly bipartisan support for the changes, we also believe they may be passed.

Here is a summary of the proposed changes, each of which is discussed in detail below.

  • Loan terms will change from a maximum of seven or twenty-five years to a flat ten years.
  • The interest rate on 7A loans will increase from 5.30% to 8.30% (rates are as of today).
  • Interest repayments will be calculated on the amount owing at the start of a financial year, even if funds are repaid during the year.
  • There will be no limit on deemed dividends, due to the abolition of the distributable surplus.
  • Unpaid present entitlements will be caught in tax law and must become 10-year principal and interest Division 7A loans.
  • Calculation of repayments and interest will be simplified and the need for written loan agreements will be removed. It will also become easier for taxpayers to correct any inadvertent errors.


The following scenarios show the potential implications of the changes for an individual who has borrowed from his or her private company, and a private group that currently uses a corporate beneficiary.

Example 1

Raymond, a shareholder of XYZ Pty Ltd  withdraws $50,000 from the private company to partly fund his family holiday. As at 30 June 2019, Raymond has not reimbursed XYZ Pty Ltd for his getaway and the $50,000 remains outstanding as at the lodgement due date for XYZ Pty Ltd. Under the existing Division 7A rules, Raymond can place the $50,000 on a 7 year complying loan agreement at an interest rate of 5.2% (current rate for the 2019 year). The minimum yearly repayment required to be made prior to 30 June 2020 would be $8,704 (interest component being $2,600). Contrast this to the proposed changes, the loan term will change to a maximum of 10 years and the interest rate will be 8.3%. Under the proposed changes, the minumum yearly repayment would be $9,150 (interest component being $4,150). An increase in the interest component and miniumum yearly repayment required which will cause Raymond some cash flow issues.

Example 2

A variation to the above example would be if Raymond’s Trust, the Barona Family Trust makes XYZ Pty Ltd entitled to $100,000 of its share of profits for the year ended 30 June 2019 and does not actuall pay this amount to the company. The existing treatment of this unpaid present entitlement (UPE) would be for the Trust to place the UPE on sub-trust for 7 or 10 years on interest only terms (unless repaid prior to the lodgement due date). For the year ended 30 June 2020, interest income of $670 would be raised in the accounts of XYZ Pty Ltd with no principal amounts requiring repayment until the end of the loan term. Under the proposed changes, the interest only sub-trust option will no longer be available and the UPE must be placed on loan terms under the new 10-year loan model (unless repaid prior to the lodgement due date of the private compay). The minimum yearly repayment required for the year ended 30 June 2020 in respect of this UPE would then be $18,300 (interest component being $8,300).  As you can see, the changes are likely to lead increased strain on cashflow and a requirement for this group to find an unexpected $17,630 in loan repayments by June 2020.

Proposed changes in detail

Simplification of loan terms

The current Division 7A rules require a minimum yearly repayment over the term of the loan (currently seven years for unsecured loans and 25 years for a secured loan). The discussion paper proposes that from 1 July 2019, all new loans must have a maximum term of 10 years, whether the loan is secured or not. Consistent with the existing rules, the loan term would begin at the end of the income year in which the advance is made.

The annual benchmark interest rate which is currently set by the ATO Commissioner (currently 5.30%) is to be based on the small business, variable indicator lending rate as published by the Reserve Bank of Australia before the start of each income year (8.30% as of September 2018).

The minimum yearly repayment will be simplified to consist of a principal and interest component that is easy to calculate. The principal component will be equal annual payments of the initial principal advance divided by the term of the loan.

The interest component will be the interest calculated on the opening balance of the loan each year using the benchmark interest rate as previously mentioned. Interest will be calculated for the full income year, regardless of when the repayment is made during the year (except in Year 1).

If the loan is repaid earlier, interest will not be charged for the remaining years.

Transitional rules

Existing seven-year loans

All complying seven-year loans in existence on 30 June 2018 will have to comply with the new proposed loan model and new benchmark interest rate to remain compliant, but will retain their existing terms. That is, they cannot be extended to 10 years. Current loan agreements with written reference to the benchmark interest rate should not have to be renegotiated under this option.

Existing 25-year loans

All complying 25-year loan agreements in existence on 30 June 2019 will remain as is until 30 June 2021, at which point they can restart as a new 10-year loan. However, the interest rate payable for these loans during this period will have to equal or exceed the new benchmark interest rate.

Pre-1997 loans

Loans made before 4 December 1997 predate the introduction of Division 7A. However, under the proposed transaction rules any outstanding pre-1997 loans will need to transition to a 10-year term from 30 June 2021 if they are not already statute barred. This provides a two-year grace period before the first repayment is due, with the loan to be repaid over the subsequent 10 years. The taxpayer will have until the lodgement day of the 2020/21 company tax return to either pay out the amount of the loan or put in place a complying loan agreement, otherwise it will be treated as a dividend in the 2020/21 income year. The first repayment will be due in the 2021/22 income year.

Abolition of distributable surplus limit

The amount of the deemed dividend under Division 7A is currently limited to the distributable surplus of the private company that provides the benefit. The distributable surplus is essentially the net assets of the private company, which represents past and current profits.

The amendments will remove the concept of distributable surplus, resulting in no limit on a deemed dividend amount. This is contrary to the original intent and operation of the Division 7A integrity rule. A deemed dividend should emulate the situation of a real dividend where it is a distribution made out of profits.

Unpaid present entitlements to be included in tax law

An unpaid present entitlement (UPE) arises when a trust makes a private company a corporate beneficiary, thereby entitling it to a share of its profit, but does not pay the profit amount to the company in a given year. This is a common approach in private groups and the government’s proposed changes could have a significant impact on many from a cash flow point of view.

Currently, UPEs generally do not have a prescribed tax treatment under tax law. However, the Commissioner has taken the view that UPEs are generally within the scope of Division 7A under the extended meaning of a loan per the tax legislation unless the funds representing the UPE are held for the sole benefit of the private company.

This view is outlined in Taxation Ruling 2010/3 which applies to UPEs that arise after 16 December 2009. The Commissioner states that the funds can be held for the sole benefit of the private company if they are placed on sub-trust arrangements for seven or 10 years on interest-only terms with repayment of the principal at the conclusion of the loan.

The proposed changes state that all UPEs that arise on or after 1 July 2019 will need to be either paid to the private company or put on complying loan terms under the new 10-year loan model prior to the private company’s lodgement day, otherwise there will be a deemed dividend. That is, both principal and interest payments are required to be made each year, with the first due 30 June 2020.

The government is considering whether any transitional rules for sub-trusts that arose after 16 December 2009 should be introduced and whether pre-16 December 2009 UPEs should be brought within Division 7A. At this stage, it is unclear what the government will decide.


Given the complexity of Division 7A, it’s common for taxpayers to rectify inadvertent breaches – typically after their accountants have prepared their annual tax return. Traditionally this has been a laborious and expensive process involving a formal application to the Commissioner of Taxation.

The government is now proposing a self-correction mechanism that allows taxpayers to voluntarily rectify inadvertent breaches of Division 7A without penalty and without lodging an application for the Commissioner’s consideration. This should reduce effort and compliance costs.

Extension to review period

The review period in which the Commisioner can amend a tax return has been extended to 14 years after the end of the income year in which a loan, payment or debt forgiveness gave rise – or would have given rise – to a deemed dividend.

New safe harbour rules

The consultation paper proposes new safe harbour rules that provide certainty and simplicity for taxpayers. This includes formulas to calculate the arms-length value of a company’s asset that is being used by a shareholder or their associate.

Summary: positives and negatives

Your next steps

The government’s proposed changes are significant and, if passed in their current form, will have major implications for many companies, individuals and private groups as soon as mid-2019.

We urge clients and others to review their Division 7A–related strategies to ensure they will not be disadvantaged by the changes, and to make the most of any emerging opportunities. Even if the final regime is slightly different, it is clear that the government is paying close attention to Division 7A.

It is especially important to consider cash flow – particularly for those with UPEs owing to a corporate beneficiary and for which principal and interest repayments may become due from 30 June 2020.

Some of the responses we are already working on with clients include quantifying the potential impact of the changes, considering selling or refinancing assets, and creating new structures.

For more information or to discuss your situation, please contact our private clients team:


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.

Foreign subsidiaries could be Australian tax residents under new ATO ruling

Companies have until 30 June 2019 to review operations

Foreign incorporated companies could be classed as Australian tax residents under a new ATO ruling, unless they change their governance arrangements by 30 June 2019.

The ATO’s ruling overturns the established position on how to determine where a company’s central management and control is located. Australian-based groups with foreign subsidiaries and those investing through foreign incorporated companies should assess their corporate structures immediately if they want to continue as non- tax residents.

From a board’s eye view to a more holistic approach

Central management and control has traditionally been held to reside in a company’s board of directors. This meant that if the board met outside of Australia, the company was treated as non-resident for tax purposes.

That position changed in early 2017 when the ATO withdrew an earlier decision on the matter (TR 2004/15) and updated its view in a draft ruling (TR 2017/2D).

The ATO changed its position in light of the High Court of Australia decision in Bywater. In that case, the High Court ruled that central management and control didn’t necessarily reside in a company’s board if that board abrogated its decision-making authority to another party and merely rubber-stamped its decisions without considering whether they were in the company’s best interests.

Central management and control key to tax status

The ATO confirmed its draft ruling recently in TR 2018/5 Income Tax: central management and control test of residency.

Its new position is that central management and control is more closely linked to where decisions are really made, rather than where the board meets. In particular, it has ruled:

  1. If a company’s central management and control is located in Australia, it will be considered to be conducting business in Australia and will be an Australian tax resident.
  2. A company doesn’t have to trade or invest in Australia to be considered an Australian tax resident. By basing its central management and control in Australia, it will be held to be conducting business here.
  3. Determining where a company’s central management and control is located is a matter of assessing where high-level decisions are made. High-level decisions include determining the direction of the company, as well as its policies and the types of transaction it will enter. They don’t include overseeing the company’s day-to-day operations.

Factors relevant to central management and control

When determining where a company exercises its high-level decision-making capacity – and therefore where central management and control reside – the ATO says it will now consider:

  • Where the people exercising central management and control make their decisions;
  • Where the company’s governing body meets;
  • Where the company declares and pays dividends;
  • Whether the nature of the business dictates where control and management decisions are made; and
  • Where the minutes or other documents recording high-level decisions are made.

Carrying less weight, but also relevant is:

  • Where the people controlling and directing the company’s operations live;
  • The location of the company’s books, register of shareholders and registered office;
  • Where the company holds shareholder meetings; and
  • Where shareholders live.

The impact of the ATO’s revised position

There is now a materially higher risk that foreign incorporated subsidiaries will be classed as Australian tax residents. The adverse tax implications of this could include:

  • Double taxation. The foreign company may have to pay tax in Australia on its worldwide income while still retaining its tax residency in another jurisdiction.
  • Denial of deductions. If the foreign company and its income are brought into an Australian tax consolidated group, the ATO may deny certain deductions, including interest deductions.
  • Removal of concessions. The company may lose any entitlement to concessions for controllers of controlled foreign companies (CFCs). This could include exemptions from Australian tax on foreign dividends, as well as any reductions in capital gains or losses from the disposal of foreign shares.

Complying with the ATO’s approach

To help companies understand and comply with its new approach, the ATO has also released Practical Compliance Guideline PCG 2018/D3. This provides guidance on how companies can determine:

  • The location of their central management and control;
  • Where their high-level decision making happens;
  • Whether a person is a real decision maker or merely influential; and
  • What activities constitute central management and control and what is day-to-day management.

What do you need to do?

The ATO Guideline provides that companies who want to continue being treated as non-tax residents have until 30 June 2019 to change their governance arrangements so that central management and control is exercised outside of Australia. Companies must also meet a number of ATO conditions or they will be subject to the new ruling.

This means that if you have an interest in a foreign incorporated company, we strongly recommend that you:

  1. Review your structure and governance arrangements;
  2. Analyse where the central management and control of any foreign incorporated companies really lies; and
  3. Make certain that you properly document any board meetings and other records so that you can prove how and where key decisions are made.

If you’d like help to perform these reviews or if you have any questions on how the ATO’s ruling affects you please contact Rachel Pritchard rpritchard@cooperpartners.com.au  or Robyn Dyson rdyson@cooperpartners.com.au or call (08) 6311 6900.


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.

In The Xpress Lane – January 2018 Quarterly Update

A quarterly tax update

Cooper Partners summary of the top 5 hot-button issues during the last quarter — a super quick way to stay current on the “need to know” tax developments that are relevant to you.

In this quarter’s “In the Xpress lane”, the following is covered:

  1. Clarity on company tax rates
  2. ATO’s view on carrying on a business
  3. Warning!  Super Guarantee Compliance
  4. ATO to disclose overdue businesses tax debts to credit agencies
  5. What to look for in Tax Risk Management

Clarity on company tax rates

In our last quarter’s edition of this newsletter, we informed you that the Government released an exposure draft Bill for comment in September 2017 to clarify exactly which companies are eligible for the legislated tax cuts.

Since then there have been two important new developments in late October 2017:

  • the introduction of an amending Bill into Parliament, and
  • the issuing of an ATO draft public ruling.

We clarify how these developments impact the company tax and franking credit rates going forward.

To recap the following are the applicable company tax rates.






$2 million




$10 million




$25 million



2018/2019 to 2023/2024

$50 million




$50 million




$50 million



2026/2027 onwards

$50 million



2016/2017 Company Tax Rate

Eligible companies with a turnover of less than $10 million will enjoy a tax rate of 27.5% in 2016/2017. Eligibility depends entirely on a company being a Small Business Entity (i.e. carrying on a business with an aggregated turnover of less than $10 million).

The original exposure draft for this tax rate change sought to introduce the eligibility concept of a “Base Rate Entity” (BRE), and of “passive income”. The amending Bill subsequently removed this criteria for the 2016/17 year. Therefore, the current eligibility criteria of needing to be a company carrying on a business applies for 2016/2017.

2017/2018 Company Tax Rate

Any company that is a “Base Rate Entity” in 2017/2018, will be eligible for the company tax rate of 27.5%. “Base Rate Entity” is defined as a company that has an aggregated 2017/2018 turnover of less than $25 million. The amending Bill removed the requirement to carry on a business and replaces it with a requirement that the company’s ‘passive income’ must not exceed 80% of its assessable income. If it does exceed this, then the company will not qualify for the 27.5% tax rate. Passive income’ is defined to include the following:

  • Portfolio Dividends
    (on shares with less than 10% voting interest)
  • Rent
  • Interest
  • Royalties
  • Franking Credits
  • Net Capital Gain
  • To the extent attributable to any of the above, amounts included in assessable income from a partnership or trust.

Trap: The passive income test is based on assessable income and not net income. So, it is irrelevant where say rental properties produced a loss.

2016/2017 Franking Credit Rate

If a company’s 2016/2017 aggregated turnover was less than $10 million, dividends paid in 2016/2017 by a company that is “carrying on a business” is subject to a maximum franking credit rate of 27.5%.

2017/2018 Franking Credit Rate

Currently, if a company’s 2016/2017 aggregated turnover was less than $25 million, dividends paid in 2017/2018 by a company that satisfy the passive income test is subject to a maximum franking credit of 27.5%.

Take Away Points for 2017/2018 and subsequent years

  • corporate beneficiaries merely holding passive investments conceivably will miss out on the reduced company tax rate;
  • companies that carry on active businesses such as managing large portfolio of properties or companies that have a large one-off capital gain in a year may miss out on the reduced company tax rate;
  • when varying 2017/2018 PAYG instalments keep an eye on the 80% passive income tax test as instalments at 30% tax rate may be more correct and thereby impacting the extent of any variation;
  • consider the applicable tax rate to determine the correct franking of any dividends;
  • ascertain whether fall below passive income test and whether any actions required pre 30 June;
  • consider classification of income in trusts and impact of distributing such income to corporate beneficiaries on the passive income test noting that for tax the ATO are of the view you can only stream, for tax purposes, franked dividends and capital gains.

ATO’s view on carrying on a business

At approximately the same time that the Bill amending the company tax rate was introduced to Parliament, the ATO released draft Taxation Ruling TR 2017/D7 setting out its view on exactly when a company is “carrying on a business”.

While this is not relevant for the eligibility of the lower company tax rate for 2017/2018 onwards (as this depends on the passive income test), it is relevant for the lower company tax rate in the years 2015/2016 and 2016/2017. The draft ruling provides the following examples of what constitutes ‘carrying on a business’.





Dormant companies with retained profits and a bank account in which it earns small amounts of interest sufficient only to cover its ASIC fees


Companies engaged in the preliminary activity of investigating the viability of carrying on a particular business


Family companies with an unpaid present entitlement (UPE) from a family trust that have not demanded payment from the trust and also not entered into any arrangement with the trust to receive any profit from the UPE


Family companies whose only income is trust distributions from a discretionary trust which it distributes partly in cash to the shareholders with the balance held in a non-interest bearing bank account pending distribution to other shareholders. The company also has no other assets.


Corporate beneficiary companies who invest their distributions (e.g. enter into complying Division 7A agreements and derive interest income)


Passive investment companies either those just holding rental properties or share portfolios


Going Forward

The above information is based on a Bill currently before Parliament, and a draft Ruling. As such, the law is not yet settled nor has the ATO’s view in the ruling been finalised. However, depending on the final law and ruling, many more companies may now be eligible for both the lower company tax rate and, because of the ATO’s wider interpretation of ‘carrying on a business’, the Small Business Entity concessions. This may in turn require amendments to previous year tax returns to claim these concessions and lower tax rates.

Cooper Partners will monitor the progress of this Bill and draft ruling and once passed will contact our clients for those where a review of the applied company tax rate and any other small business concessions is warranted.

WARNING! Super Guarantee Compliance

In a measure to boost employer Superannuation Guarantee compliance, the Government announced proposed reforms to the way super funds report to the ATO. An exposure draft bill has now been released in order to introduce these integrity measures, which also would give the ATO power to issue directions to take specific actions to employers in default of their obligations.

Super funds will soon be required to report contributions received from employers more frequently, at least monthly, to the ATO. This in turn will enable the ATO to identify and take prompt action against employers who are not meeting their Superannuation Guarantee obligations, whilst also permitting the ATO to disclose information to employees that are affected by employers’ failure to comply.

Additionally, to aid Superannuation Guarantee compliance the Government will:

  • Improve the effectiveness of the ATO’s recovery powers including strengthening the Director Penalty Notice regime and the use of security bonds for high-risk employers.
  • Enable the ATO to direct an employer (or a person associated with the employer, including Directors or Executives) to undertake approved education courses relating to superannuation guarantee obligations, if they have failed to comply.
  • Give the ATO the ability to seek court ordered civil or criminal penalties in the worst cases of non-compliance including employers who are repeat offenders, or employers who do not comply with a specific direction issued by the ATO.
  • Give the ATO the ability to issue a direction to an employer requiring payment of the superannuation guarantee charge (including an estimate) by a particular time period.

In the meantime until these reforms are passed, the Government is focussing on employers who are not paying their workers Superannuation Guarantee or who are paying it late. The due dates are important because, by law, if you are even one day late you are required to lodge an SG Charge Statement with the ATO. The introduction of criminal penalties to the late payment of superannuation guarantee charge, unlike of other debts owed to the ATO, reflects the Government’s focus on ensuring that employees receive all of their entitlements from employers on a timely basis.


In view of these changes, as a matter of some urgency, all employers should review their current Superannuation Guarantee compliance processes.

Are you;

  • correctly identifying Ordinary Time Earnings;
  • calculating the correct Superannuation Guarantee amounts payable; and
  • paying contributions on time?

We can assist you by conducting a SGC Health check and make sure you ready before 1 July 2018. Contact your Cooper Partners engagement manager if you wish to discuss further.

ATO to disclose overdue businesses tax debts to credit agencies

The Government announced that the ATO would be allowed to report to Credit Reporting Bureaus (CRB) the tax debt information of entities that don’t effectively engage with the ATO to manage those tax debts.

Under present laws, the ATO is not authorised to report this information because of confidentiality of taxpayer information provisions in the Tax Acts.

The Government has announced that it will allow the Australian Taxation Office (ATO) to disclose tax debt information of businesses to registered credit reporting bureaus (CRBs). The ATO will only be able to disclose tax debt information of a business where certain criteria are met.

The measure will commence following the passage of legislation.

CRBs may include the tax debt information in their credit reports which are available for purchase by parties who wish to use this information to make an informed decision on the credit worthiness of a business.

While the specific circumstances and exceptions for disclosure will be subject to public consultation and confirmed through the passage of law, the ATO will only disclose tax debt information of a business to a CRB if the business meets all of the following criteria:

– it has an Australian Business Number (ABN);
– it has a tax debt, of which at least $10,000 is overdue by more than 90 days; and
– it is not “effectively engaging with the ATO to manage its tax debt”.

Effective engagement is said to be either entering into a formal payment plan in relation to the debt, lodging a Part IVC objection against a taxation decision to which the debt relates or appealing to the Administrative Appeals Tribunal for review or appealing to a Court against a decision to which the debt relates.

The ATO will notify a business if they meet the reporting criteria, advising that they have 21 days to respond before their tax debt information is reported to CRBs.

If you have any queries in relation to this please contact your Cooper Partners engagement director or manager.

What to look for in tax risk management

In recent ATO reviews of taxpayers, tax risk management has become a focus of their risk reviews. It plays an important part in the ATO’s decision making about whether to progress from the review to an audit and impacts their tax risk rating of a company.

At present the ATO is focussed on the existence of policies and procedures. But it will be soon change to implementation and strict adherence to these policies.

Tax risk management should be a part of good corporate governance. Accordingly, it is appropriate to review your Company’s risk management.

So what should you look out for:

At the board level:

  • a well-documented tax control framework;
  • tax strategy determined and reviewed;
  • clear role and allocated responsibilities;
  • the board is informed appropriately and timely;
  • periodic internal testing is undertaken.

At the management level:

  • well documented controls;
  • well understood roles and responsibilities;
  • transaction sign off procedures;
  • sufficient capability of tax matters;
  • controls in place to identify significant transactions;
  • data is appropriately retained and accessible and integrity not compromised;
    record keeping policies;
  • policy around advising the board on tax matters;
  • advisor engagement;
  • maintaining reconciliations and explanations between accounting and tax return disclosures;
  • ongoing training and keeping up to date for tax law developments and administration changes

For public companies and large private companies, the ATO view establishing and implementing tax risk management is no longer an option and must be an integral part of corporate governance. It may seem to not add a lot of value but it is an investment worth making to foster better relations with the ATO.

Cooper Partners’ team of specialists in tax dispute resolution is able to assist you in the development of your tax risk management manual and also conducting periodic internal testing of compliance with your procedures and policies.

If you wish to discuss any of the above in further detail, please contact Michelle Saunders or Marissa Bechta on (08) 6311 6900.

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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