Tax News | Views | Clues
Higher Education HELP Changes Announced
The Government has announced a package of reforms to higher education – the Higher Education Reform Package – to take effect generally from 1 January 2018. Under the package the maximum student contribution will increase from 1 January 2018, but there will be no up-front fees and no deregulation of fees.
A new set of repayment thresholds will be introduced from 1 July 2018, affecting all current and future Higher Education Loan Program (HELP) debtors.
Maximum student contributions will also be increased, phasing in by 1.8% each year between 2018 and 2021 to cumulate in a 7.5% total increase.
TIP: Already have a HELP debt, or thinking about undertaking more study? Talk to us to find out how these changes may affect you.
Super Reforms From 1st July 2017
Rolling Back Excess Pension Balances
If you are a member of a self managed super fund (SMSF) you may need to take action before 1 July 2017 to avoid exceeding the new $1. 6 million transfer balance cap. You can do this by requesting that the trustee of your SMSF commutes some or all of your income streams, rolling the amount over as an accumulation interest within the SMSF or withdrawing it from the SMSF as a lump sum.
Capped Life Expectancy and Market-Linked Pensions
The value of “capped defined benefit income streams” will count towards an individual’s pension transfer balance cap of $1.6 million from 1 July 2017. However, capped defined benefit income streams cannot, of themselves, result in an excess transfer balance. This is because they generally cannot be commuted and cashed as a lump sum. Modified rules that will apply to achieve an equivalent tax outcome for defined benefits.
If a pension or annuity from a life expectancy or market-linked income stream (MLIS) product is payable, a credit arises in the person’s transfer balance account equal to the “special value” of the superannuation interest that supports the income stream.
There will be additional income tax consequences for people with defined benefit pension income exceeding the defined benefit income cap ($100,000 for a financial year).
Where a deceased fund member’s superannuation interest is cashed to a dependant beneficiary as a death benefit income stream, a credit will arise in the dependant beneficiary’s transfer balance account. The amount and timing of the transfer balance credit will depend on whether the recipient is a reversionary or non-reversionary beneficiary.
Draft Legislation: LRBA Integrity Measures for Pension Cap
New exposure draft legislation contains integrity measures for limited recourse borrowing arrangements (LRBAs) as part of the Government’s super reform legislation.
The exposure draft proposes to include LRBAs in fund members’ total superannuation balance and the $1.6 million pension transfer balance cap. The changes seek to address concerns about SMSF members’ ability to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not currently captured by the transfer balance cap regime. The amendments will only apply in relation to borrowings entered into on or after the Bill is enacted.
Deductions for Super Funds: Major Ruling Update
The ATO has issued an important ruling to clarify its views on the deductions available for superannuation funds.
Superannuation funds are generally restricted to claiming deductions to the extent that they are incurred in producing assessable income. The new ruling sets out the acceptable methods for apportioning tax deductions for expenses incurred in partly gaining non-assessable income.
The ATO has also clarified its views on deductions for the costs of establishing a fund, managing the related tax affairs and amending trust deeds.
TIP: The ATO has extended the due date for lodgment of 2015–2016 SMSF annual returns from 15 May to 30 June 2017.
Bill to Reduce Corporate Tax Rate
The Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 has been introduced to progressively extend the lower 27.5% corporate tax rate to all corporate tax entities by the 2023–2024 income year. The corporate tax rate will then be cut for all corporate tax entities, phasing down to a 25% tax rate for the 2026–2027 and later income years.
Foreign Owners of “Ghost” Property
The 2017–2018 Federal Budget announced that the Government will introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor.
Tougher Residency Rules for Pensioners
The Government has announced it will revise the residency requirements for claimants of the Age Pension and Disability Support Pension (DSP). From 1 July 2018, claimants will be required to have 15 years of continuous Australian residence before being eligible to receive the Age Pension or DSP, or meet other, more specific, time requirements.
Chevron: Interest Rate on Borrowing Not Arm’s Length
In a major transfer pricing judgment, the Full Federal Court has unanimously dismissed Chevron Australia’s appeal, finding that its loan arrangement with its related US company Chevron Texaco Funding Corporation was not at arm’s length and the Commissioner was justified in denying Chevron Australia’s interest deduction claims.
Draft Guideline on Cross-Border Related-Party Financing
The ATO has released a Draft Practical Compliance Guideline that sets out its compliance approach to the taxation outcomes associated with a related-party financing arrangement. It makes no direct reference to the Chevron decision, but has clearly been produced as a risk assessment tool for entities that engage in broadly similar related-party financing arrangements.
The ATO assesses related-party financing arrangement risk using a framework of six risk zones, ranging from white zone (arrangements already reviewed and concluded by the ATO) and green zone (low risk) to red zone (very high risk).
If a related-party financing arrangement falls outside the low risk category, taxpayers can expect the ATO to monitor, test and/or verify the taxation outcomes of the arrangement.
Car Expenses for Transporting Equipment Disallowed
A taxpayer working as a stevedore has been denied a deduction for car expenses incurred in transporting equipment to and from work. The Administrative Appeals Tribunal (AAT) decided that it was not necessary for the taxpayer to take home her hard hat, safety glasses, hearing protection or headlight to clean them, and her overalls were laundered by the employer. Accordingly, she could only justify transporting her shirts, trousers and occasional wet weather gear, which were not bulky. The car expenses were therefore not deductible.
TIP: The ATO pays attention to unusual claims when it comes to work-related expenses. We can help you maximise your tax return while staying within the rules.
Draft Legislation: Financial Complaints and Dispute Resolution
As part of the 2017–2018 Budget, the Government announced that it would create a new one-stop shop for financial disputes – the Australian Financial Complaints Authority (AFCA) – to be established by 1 July 2018. AFCA will replace the existing framework of the Financial Ombudsman Service (FOS), Credit and Investments Ombudsman (CIO) and Superannuation Complaints Tribunal (SCT). These existing bodies will continue to operate after 1 July 2018 to work through their existing complaints. Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms.
TAX PLANNING BULLETIN
There are many ways that entities can defer income, maximise deductions and take advantage of other tax planning initiatives to manage their taxable income. Taxpayers should be aware that they need to start the year-end tax planning process early in order to maximise these opportunities. Of course, those undertaking tax planning should be aware of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide a number of tax savings.
Deferring Assessable Income
• Income received in advance of services being provided is generally not assessable until the services are provided.
• Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
• A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If disposal of an asset will result in assessable income, the taxpayer may consider postponing the disposal to the following income year.
• Rollover relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.
• Review all outstanding debts before year-end to identify any debtors who may be unable to pay their bills. Once you have done everything in your power to seek repayment of the debt, you may consider writing off the balance as bad debt.
• Corporate tax entities’ entitlements to deductions for prior year losses are subject to certain restrictions. An entity needs to satisfy the “continuity of ownership” test before deducting prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the same business test.
• A deduction may be available on the disposal of a depreciating asset if you stop using it and expect never to use it again. It’s a good idea to review asset registers for any assets that fit this category.
• Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to certain conditions.
• Non-business taxpayers are entitled to an immediate deduction for assets that are used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
• Self-employed and other eligible people are entitled to a deduction for personal superannuation contributions, subject to meeting conditions.
• Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent, to avoid breaching the “benchmark rule”.
• Loans, payments and debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and their associates. Shareholders and entities should consider repaying loans and making payments on time, or have appropriate loan agreements in place.
• Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
• Companies may consider consolidating before year-end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
• Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on trustees’ tax planning.
• Trustees should consider whether a family trust election (an FTE) is required to ensure that any losses or bad debts incurred by the trust will be deductible and that franking credits will be available to beneficiaries.
• Taxpayers should avoid retaining income in a trust, because it may be taxed in the hands of the trustee at the top marginal tax rate.
Small business entities
• From 1 July 2016, the small business turnover threshold has increased from $2 million to $10 million. However, thresholds for the small business CGT concessions remain at $2 million turnover or $6 million net asset test and small business tax discount has a $5 million turnover threshold.
• In addition, from 1 July 2016, the income tax rate applicable to small business companies carrying on a business has reduced to 27.5%. The reduction will progressively apply to other companies based on their aggregated turnover in the years in question.
• Small business entities are entitled to an immediate deduction for certain pre-business expenditure.
• Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.
• An optional rollover is available for the transfer of business assets from one entity to another for small business owners who change the legal structure of their business.
• A CGT “look-through” treatment is available for eligible earn out arrangements.
Capital Gains Tax
• Taxpayers may consider crystallising any unrealised capital gains and losses to improve their overall tax position for an income year.
• From 1 July 2017, the concessional contributions cap will be reduced to $25,000 (this includes employer contributions, salary sacrifice contributions, insurance premiums paid by an employer) and the non-concessional cap will be reduced to $100,000 for all super fund members
• Individuals who have not already reached their concessional or non-concessional contribution cap for the 2016–2017 tax year should consider making more contributions before 1 July 2017, when the reduced caps will be introduced.
• Individuals with salary sacrifice superannuation arrangements may want to have early discussions with their employers to help ensure contributions are allocated to the correct financial year.
• For the 2016–2017 income year, the general tax-free threshold available to Australian resident taxpayers is $18,200.
• The temporary 2% debt levy that was introduced in 2014–2015 on taxpayers with a taxable income in excess of $180,000 is due to expire on 30 June 2017.
When the levy expires, there are advantages for affected taxpayers to defer recognising income and capital gains until after 30th June, 2017 and to accelerate deductions prior to 30th June, 2017.