In the last few months, COVID-19 has been at the forefront of everyone’s minds. However, in the background, the broader tax world has continued to tick along relatively unnoticed. In this article, we highlight some of the recent tax developments and upcoming deadlines or issues which may have gone unnoticed in the myriad of more immediate concerns, but which nevertheless may be of interest and importance to readers.
For the last few months, predominant in everyone’s minds has been the COVID-19 pandemic. From the introduction of restrictions, self-isolation and quarantines to the introduction of much needed economic stimulus packages across all levels of government in Australia, it has been hard to turn our minds to any non-COVID-19 related issues. However, while most of us have been focused on JobKeeper, the cash flow boost, the payroll tax relief offered by the State Governments and the various other economic packages, the broader tax world has continued to tick along relatively unnoticed.
The aim of this article is to highlight some of the recent tax developments and upcoming deadlines or issues that may have gone unnoticed in the myriad of more immediate concerns, but which nevertheless may be of interest and importance to readers. This article is not intended to be a comprehensive list of all the recent developments/deadlines, and only considers the various issues at a high level.
Upcoming deadlines
In the midst of all the COVID-19 confusion, it is easier to forget various upcoming deadlines, or miss announcements from the ATO regarding the implementation date of certain measures. We summarise some of these deadlines and announcements below.
Division 7A
The COVID-19 pandemic saw the ATO provide automatic lodgement deferrals for 2019 income tax returns lodged by tax agents and states that penalties would not be applied so long as returns are lodged by 30 June 2020.
As part of these deferrals, the ATO also noted that the time by which entities would need to take certain actions to avoid the imposition of a Division 7A deemed dividend (such as placing the loan on section 109N terms, or putting a UPE under a sub-trust arrangement) would be extended to the earlier of the actual date of lodgement of the relevant entity’s return and the deferred due date of lodgement.
In addition to the above, as many may remember, back in the 2016-17 Budget the Government announced that targeted amendments to improve the operation of Division 7A would be made. This was followed by various consultations and eventually a start date deferral to 1 July 2020. As we approach 1 July 2020 it is worth noting that we are still awaiting announcement of what form the Division 7A amendments will take and/or a further deferral of the start date to 1 July 2021 or beyond. Hopefully some clarity will be provided by the Government before 30 June 2020.
STP deferral for closely held payees
In relation to Single Touch Payroll, small employers (i.e. those with 19 or less employees) were to start reporting payments to their closely held payees (i.e. family members of a family business, directors/shareholders of a company, beneficiaries of a trust) from 1 July 2020. As a result of the COVID-19 crisis, the ATO has announced a deferral of this start date to 1 July 2021.
R&D application deferral
An extension of time to lodge R&D registration applications for the year 1 July 2018 to 30 June 2019 to 30 September 2020 has been announced. In addition, entities who are unable to lodge their applications by this date may request an extension of time.
Further, it was also announced that entities would be permitted to lodge ‘provisional’ Advance or Overseas Finding applications for the year 1 July 2019 to 30 June 2020 by 30 June 2020, with the provisional application only requiring specific minimal detail to be provided. However, the balance of the information required to assess applications must be provided by 30 September 2020.
Superannuation Guarantee Amnesty
The Superannuation Guarantee Amnesty was finally enacted on 6 March 2020. This amnesty seeks to encourage employers to disclose any superannuation guarantee shortfalls they may have since the commencement of the superannuation guarantee regime before 7 September 2020. By doing so, employers are intended to access more favourable tax treatment than they would otherwise receive under the rules. For further details regarding the amnesty, please refer to our companion article, SG Amnesty – Time to act.
Whilst the ATO has acknowledged that while they understand some employers wishing to seek the amnesty may be concerned about being able to pay the resulting liability, the law does not allow them to vary the due date for lodgment of an amnesty application and, therefore, employers must still apply by 7 September 2020 in order to access the amnesty.
Main Residence Exemption for foreign residents
Much has been made in the media and within the accounting/tax professions about the removal of access to the main residence exemption for foreign residents, the legislation for which only received Royal Assent on 12 December 2019. As most would be aware, the Government included a transitional rule allowing dwellings owned before 9 May 2017 (when the amendments were initially proposed by the Government) to access the main residence exemption as normal where they are sold on or before 30 June 2020.
There have been numerous calls for the government to defer this deadline due to COVID-19, especially as various restriction (social distancing, isolation, and travel restrictions) have made it difficult for foreign residents to arrange for sales and the housing market has slowed considerably. However, as at the time of this publication, the 30 June 2020 deadline remains unchanged.
Company tax rates
Currently, companies that qualify as ‘base-rate entities’ (currently a company with aggregated turnover of less than $50 million whose base rate entity passive income represents 80% or less of their assessable income) are subject to an income tax rate and franking rate of 27.5%. In the confusion of COVID-19 it has been easy to forget that as of 1 July 2020, this tax rate and the franking rate is decreasing to 26%. Consideration of this decrease in both rates should be given when undertaking year-end tax planning, particularly in relation to the change in the franking rate.
The tax rate and franking rate for all other companies remains unchanged at 30%.
Recent case law developments
Greensill’s case: Non-residents and non-TAP related capital gains received through non-fixed trusts
Historically, there was a view that due to the operation of Division 855 of the ITAA 1997, a non-resident beneficiary in receipt of a capital gain arising from the disposal of an asset that does not qualify as taxable Australian property (TAP) would not be assessed on that capital gain in Australia. This was regardless of whether the distributing trust was a fixed or a non-fixed trust.
Recently this view has been challenged, with the ATO releasing TD 2019/D6 last year, stating it’s view that while section 855-40 disregards a non-TAP related capital gain a non-resident beneficiary receives from a fixed trust, no part of Division 855 provides a similar outcome where the distributing trust is a non-fixed trust. Whilst this may appear to be a new position from the ATO, the ATO has previously stated its view in ATO ID 2007/60 that any such capital gain or loss is assessable to the trustee under Subdivision 115-C of the ITAA 1997 and is not disregarded under Division 855 of the ITAA 1997. Given that Division 855 commenced in 2006, the ATO do appear to have been consistent in holding this view.
This view has now been confirmed by the Federal Court in Peter Greensill Family Co Pty Ltd (as trustee) v Federal Commissioner of Taxation [2020] FCA 559.
Facts
In each of the 2015-2017 financial years, the trustee of an Australian discretionary trust made capital gains from the disposal of shares which were not TAP, which were then distributed 100% to Mr Greensill, a non-resident beneficiary. The capital gains were treated as being non-assessable in Mr Greensill’s hands.
Subsequently, the Commissioner assessed the trustee under section 98 of the ITAA 1936. This was on the basis that the capital gains were attributed to Mr Greensill under Subdivision 115-C of the ITAA 1997 and could not be disregarded under Division 855 of the ITAA 1997.
The trustee contended that Mr Greensill’s capital gains were made ‘from a CGT event’ in relation to non-TAP assets and, therefore, disregarded under Division 855.
Decision
In finding in favour of the Commissioner, the Federal Court considered the interaction of Divisions 6 and 6E of the ITAA 1936, Subdivision 115-C and Division 855 of the ITAA 1936. In essence, it was held that:
- the capital gain had been made by the trust, who was not a foreign resident nor a trustee of a foreign trust, therefore section 855-10of the ITAA 1997 did not apply to disregard any of the trust estate’s capital gains;
- the capital gain recognised by Mr Greensill was an amount that had been attributed to him under Subdivision 115-Cof the ITAA 1997 and was not a “capital gain capable of being the subject of s 855-10(1)” as it is not a capital gain from a CGT event – which requires a direct connection between the CGT event and the capital gain and “…was not intended to apply to an amount which is “attributable to a CGT event” which occurred to another person, even where that other person is a trustee”.
The judgement did note that if Mr Greensill had made the capital gain directly, then section 855-10 would have applied and that Division 855 does allow for the disregarding of capital gains made through a fixed trust.
Comment
Whilst many will be hoping that this decision is appealed, the potential implications for those discretionary trusts wanting to distribute capital gains to non-resident beneficiaries will need to be considered not only for tax planning purposes for the year ended 30 June 2020, but for coming years as well.
Greig’s case: Taxpayer permitted to deduct $11.85 million loss on share disposal
The treatment of gains and losses in relation to the disposal of shares either on capital or revenue account has long been a minefield.
In the recent Full Federal Court decision in Greig v Federal Commissioner of Taxation [2020] FCAFC 25, the Court not uncontroversially overturned the decision by the Federal Court to allow a full-time employee taxpayer to claim a deduction for losses of $11.85 million on the basis that the transaction was ‘entirely commercial and business-like’, the principle established by the High Court in Myer Emporium.
Facts
The taxpayer, Mr Greig, was a full-time senior executive who invested in the share market with the help of financial advisers and returned gains and losses from these investments on capital account.
One of the taxpayer’s investments was in Nexus Energy (a listed company), with the taxpayer acquiring $11.85 million worth of Nexus Energy shares through 64 transactions over a couple of years. When Nexus was placed into administration in 2014, the taxpayer’s shares were compulsorily transferred and cancelled for nil consideration following court proceedings. This resulted in the taxpayer incurring a loss $11.85m and $507,198 legal fees in opposing the proceedings. The taxpayer sought a private ruling from the Commissioner regarding the deductibility of these amounts, with the Commissioner ultimately ruling that the amounts were not deductible. The taxpayer subsequently lodged a return on this basis, before objecting to the notice of assessment on the basis that the amounts should be allowable deductions. This objection was ultimately disallowed.
Decision
In the Federal Court, the issue was decided in favour of the Commissioner. The single judge accepted that the taxpayer had acquired the Nexus shares for the purpose of obtaining a profit, but found that the acquisitions were not acquired in a business or commercial transaction, nor were they acquiring in carrying on a business of dealing in the Nexus shares. Ultimately, the loss of $11.85m and $507,198 legal fees were not deductible under s 8-1 of ITAA 1997 on the basis that the acquisition was ‘essentially a private investment by an investor’.
This decision was overturned on appeal, with the majority of the Full Federal Court finding that not only did the taxpayer acquire the shares for the purposes of profit-making, but also that the acquisition of the shares was made in a ‘business operation or commercial transaction’ or ‘commercial’ dealing within the Myer Emporium principle. Accordingly, the taxpayer was entitled to claim deductions for the loss and the legal fees incurred.
Interestingly, comments were made that the taxpayer had not proven that these shares had been acquired in a meaningfully different way from his other shares such that “it will be a matter for the Commissioner to consider whether to reassess the Taxpayer’s other gains from share trading”.
Comment
The findings of this case reinforce the need to consider the specific facts of a case when determining whether amounts from share trading are on capital or revenue account, and that long-held assumptions that share trading by a private individual are generally on capital account may not always be correct.
SWPD: Native forest land as an active asset
In SWPD v Federal Commissioner of Taxation [2020] AATA 555, consideration was given to whether native forest land was considered to be a passive asset, or an active asset in relation to a forest business.
Facts
The taxpayer purchased land from a forestry operation in 1992. The property was predominantly covered by native forest and was 343.95 hectares. Prior to purchase, the native forest had been selectively logged and a plantation of approximately five hectares of native trees had been planted. During the ownership period, no harvesting activities took place. The activities that were carried out at the property including maintaining the roads and fences, clearing fallen logs, eradicating gorse weed and establishing a new access road. In April 2016, the taxpayer sold the property. Whilst the taxpayer originally did not seek to apply the CGT small business concessions to the sale of the property, he subsequently objected to his notice of assessment on the basis the concessions should apply. The Commissioner disallowed the objection on the basis that the taxpayer was not carrying on a business, and the CGT asset did not satisfy the active asset test.
Decision
The AAT ultimately found in favour of the taxpayer, holding that the taxpayer was carrying on a business and, therefore, satisfied the basic conditions to access the small business CGT concessions. This was on the basis that:
- the taxpayer was able to demonstrate his profit-making purpose in entering into the transaction.
- the scale of the limited activities during the ownership period was due to the growth period of the forestry industry where nothing else needed to be done apart from ‘sit back and watch it grow’.
- the activities were carried out in a business-like manner as there were no activities that the taxpayer should have done but did not do compared to others who run forestry businesses.
Comment
The question of whether an asset is active is one of the key requirements to access the small business CGT concessions. Given the ATO’s recent focus on the use of land in businesses (consider the recent Eichmanns case), the Tribunal’s finding may seem surprising. Time will tell if the ATO will seek to appeal this matter.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.
