In The Xpress Lane – October 2017 Quarterly Update

A quarterly tax update

Cooper Partners is now providing a summary of the top 5 hot-button issues from the tax world garnered during the last quarter that you might not otherwise have noticed.  A super quick way to stay current on the “need to know” tax developments that are relevant to you.

In this quarterly “In the Xpress lane”, the following is covered:

  1. Cross border debt by junior explorers
  2. Company tax rates for under $10M turnover
  3. Draft ATO ruling on the deductibility of travel expenses
  4. $20,000 instant asset write off
  5. ATO provides a further 7 years to repay certain corporate beneficiary entitlements

Latest ATO discussions re cross border debt and junior explorers

The ATO is currently drafting guidance on interest free loans and how the new arms-length principles under transfer pricing will apply to these arrangements. This will be relevant for junior explorers who are investing outside Australia.

To date there has not been an ATO ruling covering the Commissioner’s view on interest-free loans from related entities.

In the recent WA Tax Convention in August, the ATO said that it doesn’t really have an issue with interest free loans during the pre-feasibility stage, as banks would unlikely have lent to these explorers for such activities.

However, post-feasibility, the entities will need to consider the group’s overall cost of debt. A low interest rate would usually be acceptable despite jurisdictional risk. Considerations include:

  1. If there is capacity to take on debt, then how much?
  2. The level of gearing where a higher gearing ratio will indicate less capacity to take on debt.

The new ATO guidelines won’t focus on factors, but will pose key questions like whether there is a reasonable expectation that an arm’s length party would have provided interest bearing loans.

It is expected a draft tax determination will be issued before January 2018.

The ATO will also issue a Practical Compliance Guideline which will provide further guidance on when an interest free loan is at low risk and not likely to be subject to audit.

It is expected that the term “quasi equity” will be dead.

Cooper Partners will keep you up to date on any developments.

Passive investment companies excluded from small business tax rate

The government has released draft legislation clarifying that passive investment companies and corporate beneficiaries of family trusts will not be able to access the lower tax rate for small businesses.

A recent media release from Minister for Revenue and Financial Services Kelly O’Dwyer revealed that the policy decision made by the government to cut the tax rate for small companies was not meant to apply to passive investment companies.

Previously, there was uncertainty around this with a draft ruling from the ATO stating that passive investment companies constituted carrying on a business making an inference that such companies and corporate beneficiaries of family trusts could access the lower tax rate .

The exposure draft bill amends the tax law to ensure that a company will not qualify for the lower company tax rate if 80% or more of its income is of a passive nature such as dividends and interest.

There are some unintended scenarios that may fall out with the new over layered test when determining the lower tax rate. The rules have been changed so that as soon as 80% of a company’s income comes from ‘passive’ sources, it cannot use the lower tax rate, irrespective that its aggregated turnover is less than $10M. Passive income includes dividends, interest, royalties and partnership and trust distributions attributable to passive sources.

One area of concern is the year-to-year nature of the test. We may find that active businesses may unintendedly fall in the higher tax rate due to interim business inactivity. There could be scenarios where businesses are sold and whether these gains effect the ratio combined with the effect where money just sits in the bank account earning interest.

Due to the tracing rules, corporate beneficiaries of trusts that carry on an active business may be able to take advantage of the lower tax rate. A similar tracing approach applies to dividends received from companies in which a shareholding of at least 10 per cent is held. This will mean holding companies of subsidiaries won’t be disadvantaged due to the dividends received. The amendments only apply to the year ended 30 June 2017 and later years.

Cooper Partners will road-test the 80% threshold through our relevant client base to determine the impact.

In the meantime this draft legislation is currently under industry consultation.

Draft ATO ruling on deductibility of travel expenses

The Commissioner released a draft tax ruling TR 2017/D6, on deductibility of travel expenses, which reflects the ATO’s current view of the taxation treatment of contemporary working and travel arrangements following the pivotal John Holland case with the creation of a new ‘special demands’ travel category.

The ATO’s tax treatment of travel expenses is now clearer since it revised and explained its view of the treatment of many common travel expenses and the ruling includes numerous new and interesting examples of both deductible and non-deductible travel expenses.

However, there are new concepts that need further clarity such as duration and location issues as well as further guidance on how travel between such locations should be treated. In the final ruling, we would like to see the ATO define ‘remote work location’ and include scenarios to address modern work practices.

It would be appropriate to introduce a time frame when travel costs are generally deductible in short term arrangements, as being more consistent with mobility industry standards combined with the general time limits for taxing employment income in Australia in most of Australia’s international double tax agreements.

This ruling has far reaching consequences particularly for employers and those that have been relying on an understanding of the application of the “otherwise deductible rule to reduce FBT exposure. Furthermore, we believe employees receiving travel allowances will be impacted with this new ruling as to what they will be able to claim against this allowance.

In the meantime we encourage you to consider how TR 2017/D6 will impact the deductibility of your employee’s travel expenses. Please contact your Cooper Partners engagement team if you require assistance.

$20,000 instant asset write off

This is the final year of the $20,000 instant asset write-off – to be abolished from 1 July 2018.

Until 30 June 2018, Small Business Entities (SBE’s) can claim an immediate write-off for most depreciating assets used in their business if the asset costs less than $20,000 and the below time frames are met. In broad terms, SBE’s are entities that are carrying on a business and have an annual turnover of under $10 million. This includes the turnover of any connected entities and affiliates.

Being in its final year of operation, the timing requirements around the instant asset write-off are important. To claim a deduction in 2017/2018, the asset must have been acquired on or after 1 July 2017 and first used or installed ready for use in your business on or before 30 June 2018.

If you miss the deadline (i.e. if the asset is not being used in your business or installed ready for use on or before 30 June 2018) then the write-off threshold reverts to $1,000.

Missing the deadline may result in a disadvantage cash-flow outcome for your business than if the deadline is met due to the potential tax savings. But you should not let tax distort or blur your commercial instincts – as you don’t get any extra cash than you would otherwise have under the old rules, you should continue to only buy assets that fit within your business plan.

ATO provides further 7 years to repay certain corporate beneficiary entitlements

The ATO has released Practical Compliance Guideline 2017/13 which will allow trusts to refinance unpaid entitlements (‘UPE’) of corporate beneficiaries for an additional 7 years, where those unpaid entitlements are due to be repaid by the trust by 30 June 2018. This can provide a significant cash flow benefit where you would otherwise have been required to repay such arrangements.

The guidelines relate to unpaid entitlements of corporate beneficiaries to the income of a trust that were converted to a 7-year interest only loan. Under these new guidelines, the ATO will allow the unpaid amount of the UPE to be converted to a Division 7A complying 7-year loan. However, the new loan must provide for principal and interest payments over the additional 7-year term.

The ATO will not accept the refinancing to be done on an interest-only basis or refinance through a 25-year interest and principal loan.

The new Division 7A compliant loan must be put in place prior to the earlier of actual or due date for lodgement of the corporate beneficiary’s income tax return for the year in which the 7-year interest only loan matures which may for many be around May 2019.

The ATO have made no comment at this time whether this position will be extended further to UPEs that are due to be repaid in later income years. We will continue to monitor any announcements in this regard.

What to do now?

Cooper Partners will be reviewing client’s existing UPE arrangements to determine what action is required in light of the ATO’s new guidelines. In the meantime if you have any queries regarding the above please contact your engagement team members.