MKT Tax Q&A


Each week MKT’s tax advisors receive scores of phone calls from accountants within their Premium Accountants Network and the general Accountants Network seeking our advice on tax issues relevant for their clients.  These are a selection of the most interesting and topical. This material should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own circumstances.


        
September 2018

Debt Forgiveness

Q: A client’s trust borrowed money from a related party but has since made losses to the point where the trust has no assets and is not capable of repaying the loan. If the related party lender forgives the loan will that give rise to a capital gain in the Trust?

A: No capital gain will arise because the Trust is not disposing of an asset, rather it is being released from a liability. However it is likely that the Commercial Debt Forgiveness Rules will apply to the Trust whereby the amount of the debt forgiven will be applied to reduce, in order, the Trust’s tax losses, then capital losses, then deductible expenditure (such as a depreciable assets written down value), then finally the CGT cost base of CGT assets. If there remains an excess amount of forgiven debt it is ignored for tax purposes

Superannuation Guarantee Charge

Q: If a client fails to pay their superannuation guarantee for their employees on time they are required to lodge Superannuation Guarantee Statements and pay interest and penalties on the overdue contributions. The interest and penalties are not deductible but what about the Superannuation Contribution?

A: Once a superannuation guarantee payment is late the contribution itself forms part of the Superannuation Guarantee Charge. The entire Superannuation Guarantee Charge is non-deductible. So in effect the client not only has to pay interest and penalties but also loses the deduction for the superannuation contribution. A big stick to ensure you make the contributions on time!

Deduction for Employee Bonus

Q: An employee has met the conditions as at 30 June to receive a cash bonus for their performance in the 2018 financial year. The criteria states that the Bonus is not payable until 31 August. When can the Employer claim a tax deduction for the Bonus?

A: An employer can claim a deduction for an expense that they are definitively committed to. That is, where the employer is “completely subjected” to a pay a sum of money. The sum need not be precisely ascertained, provided it is capable of reasonable estimation at that time. Therefore given the employer is committed to pay the bonus and that bonus is capable of reasonable estimation as at 30 June 2018, the Employer can claim a deduction then even though the amount remains unpaid until 31 August 2018.



July 2018

CGT Small Business Concessions - The $6M Net Asset Value Test

Q: A client is selling their small business and we are determining whether they (including their connected entities) satisfy the $6M Net Asset Value Test. They have a Family Trust that owns their holiday home. The home has never been rented and is only ever used by their family, is that home excluded as a personal asset?
       

A: Unfortunately the market value of the holiday home is included in the $6m test even though it is solely used for the personal use of the family. This is because the personal use asset exclusion only applies to assets held by individuals and not family trusts.


GST Withholding on Property

Q: When is a vendor required to issue a notice to purchasers regarding the GST withholding status of the property they are selling?

A: From 1 July 2018, all vendors are required to issue a notice to purchasers prior to settlement advising whether the purchaser must withhold GST. If withholding is required, the notice must also include details of the vendor’s name, ABN, amount to withhold and the date the payment must be made to the ATO. REIWA has a standard withholding notice form to be completed by the vendor.


GST Withholding on Property 

Q: Do the new GST withholding rules apply If our contract was signed prior to 1 July 2018?

A: No. But only if the contract is signed prior to 1 July 2018 and settlement occurs before 1 July 2020. 
According to Draft Law Companion Ruling LCR 2018/D1, paragraph 7, an exception to the withholding rules applies where a contract for taxable supplies of new residential premises or taxable supplies or potential residential land, was entered into before 1 July 2018. If this is the case, the purchaser will not be required to make a payment to the Commissioner on the supply if consideration for the property is paid before 1 July 2020.



May 2018

       
Q: Is a SMSF able to claim reduced input tax credits on tax and audit fees incurred?                 

A: From 1 July 2012, a new reduced input tax credit (RITC) item 32 applies to 'recognized trust schemes'. These include approved deposit funds, pooled superannuation trusts, public sector superannuation schemes and regulated superannuation funds, but do not include SMSFs. 

Under the new item 32, a superannuation fund that is a recognized trust schemes will be entitled to a reduced input tax credit at a rate of 55% for purchases to the extent those purchases are made on or after 1 July 2012 and are not specifically excluded under item 32. As expenses relating to the tax or auditing affairs are not specifically excluded from item 32, a superannuation fund that is a recognized trust scheme will be able to claim a reduced input tax credit of 55% of the GST incurred on tax and audit fees to the extent those purchases are made on or after 1 July 2012. 

As an SMSF is not a recognized trust scheme it will not be able to claim any reduced input tax credits on tax and audit fees incurred, where the expenses relate to the tax or auditing affairs of the superannuation fund. 

Q: When is an entity entitled to use the margin scheme concession? 

A: The margin scheme enables the GST on certain sales of real property to be calculated on a concessional basis (GST Act 1999 Div 75) provided certain conditions are met. 

1. Is there a “taxable supply of real property”? 

2. Have he supplier and the recipient of the supply agreed in writing that the margin scheme is to apply (GST Act s 75-5(1))? 

If both of the above conditions are satisfied it is necessary to determine whether there are any circumstances that would negate the entitlement to use the margin scheme. This would be the case if the property was acquired under any of the following circumstances: 

  • The supplier acquired it under a taxable supply on which the GST was worked out without using the margin scheme. 
  • The supplier acquired it by inheritance and the deceased person had acquired it through a supply that was ineligible for the margin scheme. 
  • The supplier acquired it from another GST group member, and the last supply of the property from a non-group member had been ineligible for the margin scheme. 
  • The supplier acquired it from the operator of a joint venture in which the supplier was a participant, and the operator had acquired it through a supply that was ineligible for the margin scheme. 
  • The supplier acquired it as a GST-free supply of a going concern, a farm or subdivided farm land, from an entity that was registered or required to be, and that entity had acquired it through a taxable supply on which GST was worked out without applying the margin scheme. 
  • The supplier acquired it for no consideration from an associate that was registered or required to be, where the supply by that associate was not a taxable supply in the course of an enterprise, and the associate had acquired the property through a taxable supply on which the GST was worked out without using the margin scheme. This exclusion can also apply where, for example, a government entity acquires the property for no consideration from an associate without the associate technically making a “supply”. 

If none of the circumstances in (a) to (f) applies, and there is a taxable supply where the supplier and recipient have agreed in writing to apply the margin scheme, the entity would then be entitled to utilise the margin scheme. 


March 2018

SMSF’s and claiming reduced input tax credits 

Q: Given that a superannuation fund will predominantly make financial supplies (that is, the provision of an interest in the superannuation scheme), is it entitled to reduced input tax credits (RITCs)?
                   

A: Yes, it is entitled to RITCs (ie claiming 75% of total ITC) to the extent that: 

           
  • the acquisition relates to making financial supplies 
  • the acquisition is listed as a reduced credit acquisition under Division 70 of the GST Regulations


Family Trust Elections

Q: Can a family trust make retrospective family trust elections (FTE)? 


A: In order for the family trust to be able to make a retrospective FTE from 1 July 2009 it must satisfy the following two conditions throughout the entire period: 
  1. The trust must pass the family control test at all times during the period. 

  2. Any conferrals of present entitlement to income or capital during the period, or actual distributions of such amounts, must have been made to the specified individual or members of the specified individual’s family group.

Thus, if a family trust wanted to make a retrospective FTE from 1 July 2009, information on the trust going back to 1 July 2009 needs to be examined in order to ascertain if these two conditions have been satisfied.

FBT on Meal Entertainment 

Q: One of our Directors is often required to travel for work and when away the company pays for her meals, either by way of the corporate credit card or by way of reimbursement to the Director. How will the company treat these meals for FBT purposes?
                                      

                                    
A: FBT applies to Meal Entertainment provided to employees and/or their associates. A director is an employee and therefore meals provided to (or reimbursed to) a Director could constitute Meal Entertainment and therefore be subject to FBT. However, meals consumed whilst travelling in the course of the Director’s employment are not considered Meal Entertainment and are therefore not subject to FBT. You must keep records to show that the meal was consumed whilst the director was travelling, such as the restaurant receipt showing the date, location of the restaurant and number of guests, together with evidence to show the employee was travelling for work purposes, i.e. a diary or meeting calendar entry. Keeping these records will reduce the FBT payable by the company (and enable the cost of the meal to be tax deductible).

February 2018

Selling Solar energy in your Superannuation Fund 

Q: My client has a property owned by their family trust being rented to a related party. Can their superannuation fund spend $50,000 to purchase some solar panels and charge for the electricity generated?

A: The short answer is yes but only if the net assets of the fund are greater than $1,000,000. As the commercial property is not owned by the fund the fund will effectively be leasing plant and equipment to a related party and not business real property, the asset will therefore be treated as an in house asset and therefore the value will need to be less than 5% of the funds assets. Care should be taken where the investment will be close to the 5% limit as a drop in asset value of other assets could cause this investment to exceed the 5% limit.

Replacement Asset under the Small Business Roll-over Relief

Q: What type of assets qualify as a replacement asset for Small Business Roll-over Relief purposes?

A: The replacement asset (or the fourth element expenditure of a CGT asset) must be an active asset. This may include a car or a depreciating asset, but not trading stock. Shares or trust interests can qualify provided they are active assets (e.g. they must generally satisfy the 80% test) and the taxpayer or a connected entity is a CGT concession stakeholder in the company or trust. If the taxpayer is an interposed entity, the CGT concession stakeholders together must have a direct or indirect small business participation percentage of at least 90% in the taxpayer.

Capital Work Deductions and Clawback Provisions

Q: If a taxpayer who purchased an existing property does not have the information regarding the construction costs incurred by the original owner and, as a result, does not claim any capital work deductions, is he/she subject to the clawback provisions?

A: Strictly speaking, the clawback provisions (e.g. the cost base is reduced to the extent the capital work deductions could have been claimed) still apply even if the taxpayer does not have the information and is therefore unable to claim a deduction. However, under Practice Statement PS LA 2006/1 (GA), the Commissioner will not apply the provisions where the taxpayer can demonstrate he does not have the information on the construction costs and does not seek to deduct any amount in relation to the expenditure.



November 2017

                   

GST and entitlement to input tax credits                       

Q: Can you claim the goods and services tax (GST) included in the purchase price of a motor vehicle used in your enterprise as input tax credits (ITC)? 

A: Yes. As long as you are purchasing a motor vehicle to use in connection with your enterprise, you are entitled to claim the GST included in the purchase price and running costs of the vehicle as ITCs. However, you must reduce the ITC amount by the proportion the motor vehicle is used for private purposes, and is not used for the purposes of carrying on your enterprise. 


You are allowed a partial ITC for the GST included in the price of the goods and services you use partly in the course of or furtherance of your enterprise. 


Section 11-25 of the GST Act states the amount of the ITC for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the ITC for a creditable acquisition is reduced if the acquisition is only partly creditable. 

The amount of the ITC you can claim on an acquisition that is made for a partly creditable purpose is provided in subsection 11-30(3) of the GST Act: 

[Full input tax credit x Extent of creditable purpose x Extent of consideration] 

where: 

extent of consideration is the extent to which you provide, or are liable to provide, the consideration for the acquisition, expressed as a percentage of the total consideration for the acquisition. 

extent of creditable purpose is the extent to which the *creditable acquisition is for a *creditable purpose, expressed as a percentage of the total purpose of the acquisition. 

full input tax credit is what would have been the amount of the input tax credit for the acquisition if it had been made solely for a creditable purpose and you had provided, or had been liable to provide, all of the consideration. 


New Company and Franking Deficit Tax (FDT)


Q: Will a private company operating in its first income year be liable for Franking Deficit Tax if it declares fully franked dividends and its franking account balance is in deficit at the end of the income year? 

A: Generally, a company operating in its first income year is not required to pay any income tax until the following income year. Therefore, when it declares a fully franked dividend in its first year of operation, the franking account balance will be in deficit at the end of the income year. It is therefore subject to FDT however, a special provision applies to ensure that the company is not penalised with a reduction in its FDT tax offset. To do so the company is required to lodge a franking account tax return and pay the FDT by 31 July, but can then claim the full FDT tax offset in its income tax return.


Cost of Managing Tax Affairs


Q: Can a taxpayer claim the cost of managing the tax affairs of another entity? 

A: The taxpayer can claim a deduction on expenditure incurred in relation to the tax affairs of another entity to the extent that they are related to compliance with an obligation imposed by a Commonwealth law. Common examples include an employer’s costs relating to PAYG Withholding, an entity’s or individuals tax matters (including preparation of their tax return) and director penalty notices.


October 2017

Dividends/Loans and Payroll Tax

Q: Can payments made to shareholders by way of dividends (rather than salaries or wages) be subject to Payroll Tax in Western Australia?

A: Provided the payments are not made to an employee in his/her capacity as an employee (rather, they are made in any other capacity, for example as a shareholder), the OSR accepts that the payments will not be subject to Payroll Tax.

Small Business Restructure Rollover (SBRR) and Shares 

Q: Can a Small Business Entity utilise SBRR involving the transfer of shares from one entity to another?

A: To be eligible, the shares must be active assets in a limited sense that they must be used, or held ready for use, in the course of carrying on a business by either the entity, its affiliate or connected entity.  Therefore, shares in companies are generally not eligible for the SBRR.

Capital Gains Tax - Deferring inclusion of income until after settlement time

Q: Can you defer including a capital gain in relation to the sale of a property until settlement or change of ownership occurs?

A: Where a property is sold, a capital gains tax event occurs at the time that the contract is signed.  Therefore, any capital gain realised will need to be included in your income tax return in the income year that the contract is signed. 

Generally, settlement of the property occurs at a later date and in some cases that date occurs in a later income year to the signing of the contract. 

Paragraph 3 of Taxation Determination TD 94/89 states that a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs, being settlement. 

Where the income tax assessment for the appropriate year has already been issued it will be the taxpayers responsibility to amend the assessment once settlement has occurred. 

Income tax assessments that are amended to include an amount of omitted income may give rise to interest on the shortfall amount.  However, as discussed in TD 94/89 at paragraph 5, where the amendment is made within a reasonable time the discretion to remit the interest is likely to be exercised. It is generally accepted that within a period of one month following settlement would be reasonable.