As Australia edges closer to a federal election, the likelihood of the proposed changes to tax superannuation on balances exceeding $3 million being passed in the current Parliament has significantly diminished. However, the possibility of the legislation resurfacing early next year cannot be ruled out entirely, keeping the industry and affected individuals in a state of uncertainty.
The Government’s plan to increase the tax rate from 15% to up to 30% on earnings related to super balances above $3 million has faced strong resistance. Since the Bill was introduced 12 months ago, key objections have come from the Senate crossbench, industry representatives, and concerned Australians. The proposal to tax unrealised capital gains has been particularly contentious, with critics labelling it unfair and impractical—especially for farmers and retirees who might lack the liquidity in their super to pay such taxes.
For now, the Bill has been left out of this year’s legislative priorities, reflecting the Government’s struggles to secure enough support in the Senate. While this delay offers temporary relief, the Government’s commitment to the policy suggests it could feature prominently in the upcoming election campaign or be tabled when Parliament reconvenes next year, potentially up for it to be debated in Parliament’s February sitting. The political and practical implications of this proposal remain significant and unresolved. Even a delayed implementation could strain superannuation funds and individuals trying to adapt to the complex changes, as well as the Regulator scrambling to implement within the required timeframes.
Election Implications
If the Government chooses to take this measure to the next election, it could become a critical issue. The tax has already drawn parallels to controversial policies of the past, such as the franking credits proposal, which played a role in Labor’s 2019 election defeat. Critics argue that the perceived inequities from the proposed change to the superannuation tax could lead to a similar political fallout.
Responding to the Key Concerns
The opposition to the legislation stems from two primary areas:
Unrealised Gains: Taxing paper profits poses challenges for funds without liquidity to meet its tax obligations.
Threshold Indexing: The refusal to index the $3 million threshold means more members could be affected over time due to inflation.
Next Steps
Treasury’s approach to these concerns will be closely monitored. The delay potentially will now see the proposed changes remain as an election battleground. With various political players and stakeholders weighing in, it’s clear this issue is still unresolved.
In the meantime, it would be sensible to table a deferral of the tax start date from 1 July 2025 to at least 1 July 2026 to allow superannuation funds and the Regulator sufficient preparation time.
We will keep you informed of any future developments in the New Year, but for now, with the uncertainty surrounding this proposal, there is no immediate need to make changes to your superannuation arrangements.
This newsletter is current as of 28 November 2024, 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
The House of Representatives have today passed the Bill (Better Targeted Superannuation Concessions and Other Measures) that will introduce the Division 296 provisions.
Since the concept of Division 296 was developed, industry bodies have been lobbying for significant changes to the proposed legislation, with some of the requested amendments being:
that the $3 million total superannuation balance threshold be indexed
an alternative way to calculate earnings may be more appropriate so as to remove the taxation of unrealised gains / losses.
Despite the lobbying, the House of Representatives passed the Bill on 9 October 2024 with no amendments. It has been some delay in this outcome, and it remains uncertain whether the Bill in its current form will ultimately become law. As an example, given no amendments were made to the original Bill, the industry bodies have been advocating for the Senate to reject the Bill, which could gain traction.
It is noted however that for the Government to put the Bill forward on the 9th and have it passed through the House, they would be expecting to have the relevant support in the Senate for the Bill to pass through Parliament.
The next steps in the process through Parliament are as follows:
The Bill is now sitting with the Senate for the second time, where the Senate must pass the Bill in its current state, being the exact Bill that has moved through the House of Representatives.
Where the Senate requires amendments to the Bill, the Senate must request that the House of Representatives amend the Bill.
Where the House of Representatives disagrees with the amendments requested by the Senate, the Senate must then decide whether or not to agree with the original Bill (with no amendments).
Where no agreement between the Senate and the House can be reached, the Bill then needs to be reintroduced in a different form (back to the drawing board).
Therefore, there could still be further wrangling and changes before there is the full passage of this legislation.
What is Division 296?
The proposed Division 296 of the Income Tax Assessment Act 1997, to take effect on 1 July 2025 will impose a new tax on individuals who have a total superannuation balance of more than $3 million.
An individual’s total superannuation balance (TSB) is a summation of all the superannuation interests an individual has, including:
all accumulation accounts
all retirement phase accounts
an outstanding limited recourse borrowing arrangements (where entered into after 1 July 2018) – although for Division 296 purposes, these will not be included.
less any structured settlement / personal injury contributions.
Your total superannuation balance is the entirety of your super in all funds in Australia, and not on a per fund basis.
The Division 296 tax will be calculated based on the proportion of earnings pertaining to the amount of your total superannuation balance in excess of the $3 million threshold. A common misconception is that Division 296 imposes an absolute 15% tax on the amount exceeding $3 million. Instead, the tax is applied to the proportion of the relevant earnings above the threshold, allowing for a more balanced approach.
Division 296 Tax is calculated through a three-step process
1. Determine Division 296 Earnings by:
2. Determine the Proportion of Earnings over $3 million (to which the tax will be applied):
3. Application of the tax rate:
Where a negative earnings amount is calculated for the year, no tax is calculated, and the loss is carried forward to the following financial year to be offset against that year’s earnings.
How it Actually Works
The below example demonstrates the workings of the Division 296 tax.
An individual with total superannuation balances as listed in the table below, who withdraws a pension of $100,000 and makes concessional contributions of $30,000 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 value of the account is due to an increase in the value of existing investments in the fund.
Based on the above, this individual would expect to receive a Division 296 assessment of $43,088.
Key Takeaways
These rules do not impose a cap on the amount you can accumulate within superannuation.
These rules do not change the way that superannuation funds themselves are taxed, with 15% tax on earnings in accumulation phase (10% on long-term realised capital gains) and 0% tax on earnings in retirement pension phase.
Negative Division 296 earnings can be carried forward to offset future earnings, reducing future 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 to pay the liability, or release money from superannuation (excluding defined benefit funds) to settle the additional Division 296 tax.
Division 296 tax doesn’t apply to unrealised capital gains from the purchase date of the asset within a fund. Instead, it’s calculated on a year by year basis on any increase (or decrease) in value. Therefore, no reset of any cost base within superannuation will be required.
Individuals who wish to use superannuation sources to pay the tax will need to review the liquidity of their superannuation where the tax will apply to ensure sufficient cashflows to meet the additional requirements. In this regard, the first assessments won’t be expected to be issued until November 2026, depending on the lodgement of superannuation funds’ 2025/2026 annual returns.
The additional tax doesn’t double your tax rate (as has been implied); it applies only to calculate earnings on assets exceeding the $3 million threshold, with the effective rate varying based on your circumstances.
Where an individual has a defined benefit accumulation account, the payment of the calculated tax with respect to that account can be deferred, to be paid when the individual moves to retirement phase (with interest accruing).
Concerns with the introduction of Division 296
The most contentious issue through the introduction of Division 296 is that unrealised capital gains are captured, and the potential liquidity issues a tax liability creates for superannuation members holding illiquid assets. Unlike the operation of the capital gains tax provisions where this tax is only payable upon the sale of an asset and realisation of a gain, Division 296 introduces taxation on the annual increase in value of superannuation assets, regardless of whether the gains have been realised. Investors may be forced to sell such assets prematurely to meet their tax obligations. This disrupts the intended purpose of superannuation to provide retirement by way of the long-term growth of their retirement savings.
Next Steps
Notwithstanding this tax, most calculations that we have undertaken on the impact of these provisions has still resulted in superannuation remaining as the most tax effective investment vehicle in Australia. However, as each individual will be impacted differently based on their personal circumstances, there will not be a one size fits all solution.
As previously outlined, the industry bodies have not given up hope and are urging the Senate to strongly consider the major issues of indexation and taxation of unrealised gains and reject the Bill. As the Government do not have a majority position within the Senate, they will be relying on the Greens and Crossbenches to move the Bill over the line.
We will be monitoring the passage of this Bill in the Senate and will keep you informed.
In the meantime, where this legislation is likely to affect you, and you would like further clarification please reach out to our superannuation team who can assist you.
This newsletter is current as of 10 October 2024, 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
The Export Market Development Grants (EMDG) program has been a critical driver for Australian SMEs seeking to enter or expand in global markets.
To reinvigorate the program, Austrade, the agency responsible for administering the EMDG, is launching Round 4 in November 2024, following a strategic overhaul. This new round introduces key updates to improve the program’s focus and impact.
What’s Changed in Round 4?
Round 4 includes several important revisions that aim to better allocate funds and ensure more impactful outcomes.
Here are the highlights:
Revised Grant Tiers
New funding tiers provide a clearer structure, with higher maximum grants available depending on your business’s export stage, offering increased opportunities for qualifying SMEs.
New Allocation Process
Moving to a ‘first come, first served’ system, Austrade will assess and allocate grants based on the order in which applications are received. Once the available funds are exhausted, no further grants will be awarded, making early application crucial.
Tightened Eligibility
More stringent turnover requirements and a sharpened focus on businesses with viable export plans ensure the program is now more selective in its approach.
Target Market Focus
The program is now closely aligned with Australia’s Southeast Asia Economic Strategy, prioritising exports to Southeast Asia as well as other key regions such as the US, UK, India, and China.
Enhanced Requirements for Representative Bodies
Representative bodies seeking grants must now provide detailed plans of how they’ll support SMEs through export marketing initiatives and training programs.
Stricter Compliance
A more robust compliance framework includes increased probity requirements, and applicants will need to demonstrate they meet ethical standards and are up to date with tax obligations.
Grant Funding by Tier
In Round 4, the maximum amounts available under each tier for FY 2025-26 and FY 2026-27 are as follows:
Tier 1 (Export Ready): $20,000 to $30,000 per FY
Tier 2 (Exporting within Existing Markets): $20,000 to $50,000 per FY
Tier 3 (Expanding into New Markets): $20,000 to $80,000 per FY
Representative Bodies: Up to $50,000 per FY (no minimum amount)
While the funding caps have increased, businesses should be mindful that the eligibility criteria have also become more demanding.
Key Change: First Come, First Served Allocation
In a significant departure from previous rounds, Round 4 introduces a ‘first come, first served’ assessment and allocation model. This means businesses need to be prepared to submit applications as soon as the grant window opens, as funds will be allocated on a rolling basis until they are depleted.
With the high demand expected, many eligible businesses may miss out simply due to the speed at which funds are claimed.
Stricter SME Eligibility Requirements
The eligibility criteria have been updated, requiring SMEs to meet specific annual turnover benchmarks for FY 2023-24. These new thresholds include:
Tier 1: Minimum turnover of $100,000
Tier 2: Minimum turnover of $500,000
Tier 3: Minimum turnover of $1 million
Additionally, businesses must be able to invest at least $20,000 of their own funds into export marketing activities. Tier 3 applicants must show they are expanding into Austrade’s identified ‘key markets’ to qualify.
These tighter rules are likely to reduce the number of eligible businesses, especially smaller exporters.
New Market Focus for Tier 3
A targeted approach to export markets has been introduced for Tier 3 applicants. Austrade has identified specific regions—most notably Southeast Asia—as priority markets, reflecting the government’s broader economic strategy. Other key markets include the US, UK, and India.
While this focus aims to align Australia’s export efforts with strategic international growth areas, it may present challenges for exporters targeting different regions.
Ensuring that applicants are fully compliant with their tax obligations
Demonstrating that export products are of significant Australian origin
Adhering to ethical business practices that safeguard Australia’s trade reputation
Next steps
The updates to the EMDG program bring both opportunities and challenges. On one hand, the clearer structure and potentially larger grant amounts could provide greater financial support for exporters. On the other hand, the tighter eligibility criteria and the new ‘first come, first served’ process may exclude some businesses that previously benefited from the program.
We encourage SMEs to prepare thoroughly and submit applications early to maximise their chances of securing funding. The funding pool remains fixed, so timely action is key to avoiding disappointment.
Cooper Partners can assist you in navigating these updates, assessing your eligibility, and selecting the best tier for your business.
If you have questions about Round 4 or any other government grants, please contact your Cooper Partners engagement team on 08 6311 6900.
This newsletter is current as of 04 October 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.
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
The ATO recently announced that they will be directing resources towards reviewing rental property related claims for the 2024 year.
With their enhanced data matching capabilities, it has become easier for the ATO to identify when mistakes have been made. Furthermore, changes to the tax rules dealing with rental properties over the last few years have also increased the level of risk in this area.
This article, the first in a series of newsletters covering tax related matters when investing in property, discusses these key risk areas.
The ATO had also indicated that capital gains tax will be an area of focus. One of the specific examples provided by the ATO was properties that have been used as a main residence by the owner, and that have also generated income from short term rental activities.
These factors signal that the ATO will be actively monitoring taxpayers whose returns raise red flags, ensuring any discrepancies are promptly addressed.
Under ATO scrutiny are the following expenses:
Repairs and Maintenance v New Assets
Interest deductions
Double dipping claims
Second-hand depreciating assets
Holiday Homes
Rental properties and travel expenses
Repairs and Maintenance v New assets
Whilst the ATO recognises that landlords need to fix broken items in a rental property, a common misunderstanding is that all expenses are outright deductible.
The ATO is targeting “careless capital expense claims”.
Repairs and Maintenance: These expenses are deductible when they restore an item to its original condition.
New Assets: Items such as dishwashers, ovens, or fridges need to be claimed over their effective life.
If you are replacing an item because it was irreparably broken or chose not to repair it, this expense would not qualify for an outright deduction.
When using a rental agent, it’s common for new asset purchases to be classified as repairs and maintenance, so we will often check these are accurately treated when preparing your tax return.
In general, costs incurred by landlords are considered capital in nature and not deductible if:
The extent of the work carried out represents a replacement, renewal or reconstruction of the entirety of an asset.
The work results in a greater efficiency of function in the property, therefore representing an ‘improvement’ rather than a ‘repair’; or
The work is an initial repair (meaning it addresses damage that existed at the time of property purchase).
Interest Deductions
Be cautious not to mix the purpose of your loans.
The ATO provides an example where taxpayers refinanced or redrew a loan on their rental property, used the funds to upgrade their personal vehicle, and then claimed the full interest charged on the investment loan for the year as a rental interest deduction.
In cases where part of the loan was used for private purposes, the interest must be apportioned and only the portion related to the rental property can be claimed as a deduction.
“Double dipping” Claims
Rental agents often pay expenses directly to suppliers (e.g. plumbers), deducting these costs from the amount remitted to the property owner, while also providing the owner with a copy of the invoice.
The ATO have announced that they will be acquiring property management data for 2018–19 through to 2025–26. This will arm the ATO with information to data-match to taxpayer’s income tax return disclosures and ensure not only that assessable income derived from rental properties and CGT on disposals of properties are correctly reported but also associated rental deductions are correct.
Be careful not to claim expenses that are already included in property agent’s summary reports, as this could lead to double claiming.
However, if you personally pay for any rental property expenses that are not captured in the rental agent’s statement, be sure to include these additional expenses in your tax return.
Second-hand depreciating assets
Second-hand depreciating assets for residential rental properties are depreciating items that have been previously used or installed ready for use by you or another entity. In most cases, they are assets that were existing in either:
a property when you purchased it, or
your private residence that you later rent out.
In these scenarios, depreciation on second-hand assets is not deductible to individual and discretionary trust entities.
Holiday homes
This a reminder that where your rental property is not “genuinely available for rent” to the public, the expenses should be reduced to reflect any private use of the property.
Where your property is only returning minimal income, the Commissioner would be looking for evidence that:
The property was actively being advertised where it was not being rented out, and
The property is being advertised for realistic rates with no unrealistic restrictions that could hinder it’s availability for rent.
Rental properties and travel expenses
Generally, where you are an individual or trust you can’t claim any deductions for the cost of travel you incur relating to your residential rental property.
Travel expenses include the costs you incur on car expenses, airfare, taxi, hire car, public transport, accommodation and meals to:
Inspect, maintain or collect rent for a rental property you own or have an ownership interest in.
Travel to any other place if it is associated with earning rental income from your existing rental property (for example, visiting your real estate agent to discuss your current rental property).
Next Steps
Maintaining thorough and accurate records is essential for managing your rental property’s tax compliance.
Ensure you keep detailed documentation of all income and expenses related to the property, including receipts, invoices, and bank statements. Record the purpose of each expense and retain evidence of any repairs, maintenance, and asset purchases.
If using a rental agent, keep copies of their statements and any additional invoices you receive directly. Proper record-keeping not only supports accurate tax reporting but also provides evidence in case you fall under ATO scrutiny.
Stay tuned for our next two newsletters which will be issues over the coming weeks;
Recent Tax Updates Related to Property Investments
Commercial Property and Tax Considerations
If you would like further information about the contents of this newsletter, please contact your Cooper Partners engagement team on 08 6311 6900.
This newsletter is current as of 20 September 2024, 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
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.
TIP – 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 exempteligible 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.
TIP 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.
TIPS – 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.
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
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
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:
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?
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
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:
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
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.
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.
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
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.
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
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:
Determining the proportion of your superannuation above the $3 million threshold.
Identifying the superannuation earnings related to the portion exceeding the threshold.
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.
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
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
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
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