As the 2022 financial year comes to a close, practitioners will be working closely with their clients to ensure they meet their income tax obligations. Although not comprehensive, this article seeks to highlight some of the recent tax developments for consideration as practitioners finalise and implement their clients’ year end plans as well as some of the key changes that apply from 1 July 2022.
Some key tax matters to consider for FY2022
As we approach 30 June, trustees and their advisors are reminded to review and understand the terms of the relevant trust instrument and to ascertain what powers the trustee has in respect of the administration, determination and distribution of trust income and/or capital.
As highlighted in the recent case Commissioner of Taxation v Carter  HCA 10, a poorly drafted trustee resolution that purports to give effect to distribution of trust income that is inconsistent with the terms of the trust deed may have unintended consequences such as causing the purported distribution for an income year to be ineffective. Similarly, if the resolution to distribute trust income is made after year end (or an earlier date specified by the trust deed), this may also result in the distribution being ineffective . If the purported trust distribution becomes ineffective, it will result in the net income of the trust being assessed to either the trustee (at the top marginal tax rate) or default beneficiaries (if applicable).
Trustees and their advisors may wish to refer to the ATO Trustee Resolutions Checklist to assist with ensuring that their trust distribution resolution for this income year is indeed effective.
Draft TD 2022/D1 Division 7A UPE & Trusts
In the past the ATO has provided a range of guidance (i.e., TR 2010/3 and PS LA 2010/4) on the treatment of unpaid present entitlements (UPE) owing to corporate beneficiaries from a Division 7A perspective. Under the existing approach, if funds representing the UPE are held on sub-trust for the sole benefit of the private company beneficiary, then a Division 7A loan will not arise.
In the recently released draft guidance (TD 2022/D1 Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of financial accommodation?), the ATO is proposing to withdraw existing guidance, TR 2010/3 and PS LA 2010/4, with effect from 1 July 2022. However, the ATO has indicated that it will not devote compliance resources to sub-trust arrangements and that the withdrawn guidance would apply provided those arrangements were entered into before 1 July 2022.
If the current ATO proposed position in TD 2022/D1 is finalised, then taxpayers will need to consider whether to make Division 7A complying loans for UPEs made to a corporate beneficiary for income years ending on or after 30 June 2023.
Whilst the draft determination, when finalised, is proposed to only apply from 1 July 2022, in view of the ATO draft guidelines on s. 100A, it may be worth considering whether trust distributions to corporate beneficiaries for this and later income years be fully discharged instead of being held on sub-trust arrangements – and if the funds are required by the trustee, then the company could lend the funds back under a complying Division 7A loan agreement.
Going forward, how a trustee resolves to distribute trust income to a corporate beneficiary will be a critical element in determining the timing of the UPE becoming a Division 7A loan. Broadly, under the ATO’s proposed position, in a non-sub-trust situation where:
- the amount is expressed as a fixed amount from trust income, then a Division 7A loan is taken to be made in the year in which the present entitlement arises;
- the amount is expressed as a percentage of trust income, then a Division 7A loan arises in the year in which the quantum of the amount is ascertained and the corporate beneficiary can demand immediate payment from the trustee of their present entitlement (this is typically after the end of the income year in which the present entitlement arises when trust accounts are finalised).
In a sub-trust situation, the ATO takes the view that if the funds representing the amount held on sub-trust are used by a shareholder or associate of a shareholder, including the trustee of the main trust, such an arrangement would amount to a Division 7A loan arising from the corporate beneficiary to the shareholder or associate (as the funds are no longer held for the corporate beneficiary’s sole benefit).
For UPEs that are currently placed under sub-trust arrangements, it will be important for records to be maintained to substantiate that the monies representing the UPE are in fact set aside for the sole benefit of the corporate beneficiary (rather than being intermingled or used by the main trust).
Trust distribution arrangements – s. 100A risk assessment
In the recent 2022 Victorian Tax Forum organised by The Tax Institute, ATO Assistant Commissioner in the Office of Chief Tax Counsel, Justin Dearness said that the draft guidance on s.100A (PCG 2022/D1 and TR 2022/D1) will not be finalised before 30 June 2022. However, the ATO is looking at publishing a one page document before 30 June 2022 highlighting some key features of arrangements that in the ATO’s opinion could fall within the red zone risk framework.
The Assistant Commissioner reiterated that the draft guidance on s. 100A would not apply retrospectively to present entitlements to income conferred before 1 July 2022, for those taxpayers who in good faith followed the 2014 guidance about reimbursement arrangements. At this stage the ATO has not considered what evidence is needed to support a defence of good faith reliance.
If trust distributions made within a family group is considered to be at low risk, the ATO expects that there will be objective evidence that either proves or helps to prove that the arrangement is outside the parameters of s. 100A. At this stage the ATO is unable to provide any guidance as to the types of substantive evidence required, other than that taxpayers need to have evidence to show what they did. An example of evidence alluded to by the Assistant Commissioner in the seminar include an acknowledgment from the presently entitled beneficiary of the receipt of income, but followed by the qualification that the mere existence of documentation needs to be supported by other evidence.
So, what can practitioners do? At least for now, practitioners will need to be aware of the ATO’s s. 100A risk assessment framework and if there are perceived risks associated with your client’s arrangement, they should be made fully aware of the inherent risks. Contemporaneous documentary evidence becomes pivotal – if an arrangement is considered to be low risk practitioners are recommended to document why your client’s circumstances meet the requirement of the ‘s. 100A green zone risk framework’. It may be that trust entitlements for this and later years be fully discharged and when funds are required, be placed on commercial terms or, where applicable, Division 7A terms.
What is the ATO targeting?
For tax time 2022, the ATO has announced four key tax areas of focus:
- record keeping;
- work-related expenses:
- rental income and deductions; and
- capital gains from crypto assets, property and shares
(refer ATO factsheet QC 69605).
In relation to work related expenses the ATO is reminding taxpayers not to double dip their tax deductions this tax time. According to the ATO a common mistake is taxpayers using the short-cut method for claiming working from home expenses and then claiming additional expenses such as mobile phone, internet bills, depreciation of equipment and furniture, separately in their tax returns.
Temporary Full expensing & loss carry back tax offset
Businesses and their advisors should be fully aware of the temporary full expensing (TFE) concessions introduced to assist with business cash flow during the pandemic. The TFE and loss carry back tax offset concessions have been extended for another year to 30 June 2023. The ATO Temporary Full Expensing factsheet outlines the qualifying conditions for access to that concession, and the ATO Loss carry back offset factsheet sets out the qualifying conditions for access to the loss carry back tax offset concession. For eligible corporate entities, where the claim for TFE in FY2022 results in a tax loss, and given that the loss carry back provides a refundable tax offset, it may be worth considering whether to choose to carry back this year’s tax loss to specific earlier income years that had an income tax liability. Note: If a taxpayer does not choose to carry back the loss it may be carried forward for use in a later income year under the normal rules.
Changes effective from 1 July 2022
Super Guarantee rate increase & the removal of the $450 per month threshold
Currently employers are required to provide super guarantee (SG) support for those employees who are over 18 years old and who earned $450 or more (before tax) in a calendar month. Employees aged under 18 years do not generally qualify for SG support unless they work for more than 30 hours in any week for a single employer and earned $450 or more (before tax) in a calendar month.
For this year the SG contribution is 10% of an employee’s ordinary time earnings. Key changes from 1 July 2022 are:
- the percentage rate is set to rise to 10.5%; and
- the $450 per month minimum SG threshold will also be removed.
Thus, going forward employers will be required to pay increased SG payments for all employees over the age of 18 no matter how little they earned each month, as well as for those aged under 18 years who work for more than 30 hours per week.
Now is the time for employers and their advisors to prepare for these changes so they are able to meet their additional SG commitments. Employers should also ensure that their payroll and accounting systems are updated to correctly calculate their employee’s SG entitlement effective from 1 July 2022.
Single Touch Payroll Phase 2
Most employers should already be reporting salary and wages paid to employees through single touch payroll (STP) and may have transitioned or are in the process of transitioning to STP Phase 2. STP Phase 2 significantly increases the data required to be reported to the ATO and allow the ATO to validate PAYG withholding amounts and estimate SG amounts.
The mandatory start date for STP Phase 2 reporting was 1 January 2022. Nonetheless, employers may start reporting at a date later than the mandatory date if the ATO has granted a deferral to their digital service provider (DSP). If an employer requires additional time to transition to Phase 2 reporting that is beyond their DSP’s deferral date, they must apply to the ATO. The ATO STP expansion (Phase 2) delayed transitions factsheet provides further information of the application process.
We note the ATO has highlighted, in law administration practice statement PS LA 2021/3 Remission of additional SGC, their use of pay-event data when assessing employers’ SG obligations. Thus, if an employer fails to voluntarily disclose late or non-payment of SG contributions by the relevant due date, the ATO has indicated they will undertake compliance action. Given the level of data being provided and made available to the ATO, as well as the forthcoming SG changes as outlined above, employers and their advisors are encouraged to be proactive in ensuring the integrity, accuracy and timely lodgement of their payroll data.
Changes to tax deferred employee share scheme
Employers who provide employees and their associates with employee share scheme (ESS) interests under an ESS have certain reporting obligations. For tax deferred schemes, employers are required to report certain information to the ATO by 14 August following the financial year in which a taxing event has occurred.
ESS interests that are subject to deferred taxing point will have tax deferred until the earliest of:
- vesting, exercise (in the case of options), and removal of any sale restrictions;
- cessation of employment; and
- 15 years from grant.
From 1 July 2022 the cessation of employment as a deferred taxing point is removed and this change applies to all new and existing ESS interests that have not had their taxing point before 1 July 2022.
Where an employee ceases employment on or after 1 July 2022, the earliest of the remaining deferred taxing points (where the ESS scheme qualifies for deferred taxation) will instead apply. Of course, individual ESSs may have terms or conditions which require that ESS interest be disposed of upon the cessation of employment and so for some individuals this change may not have a significant impact.
Due to this change, the ATO has announced that if an employee with an ESS interests ceases employment on or after 1 July 2022 employers are no longer required to report to the ATO. However, employers will need to continue to maintain records of ESS awards that will have a taxing point post termination as well as personal details of their former employees to facilitate future ESS reporting obligations.
Employers may wish to review their ESS rules in relation to whether it contains a cessation of employment condition to determine whether this would still trigger a disposal and taxing point to occur.
Whilst uncertainty still remains for many SMEs that operate through discretionary trusts, it is hoped that the tax developments highlighted in this article provide a framework to assist practitioners to manage their clients tax obligations as well as planning ahead for FY2023.