On October 6th, 2020, the Federal Budget 2020-21 was handed down which was delayed from usual time of May. The legislation has been introduced to present effect to the number of measures related to the tax declared on the budget night.

Some of the proposed changes in tax space involve:

  • Alterations in the company residence rules
  • Alterations to be made to CGT treatment of “granny flat” arrangements
  • Alterations to the threshold to access some small business concessions

COMPANY RESIDENCY

This rule is proposed to be modified like that a company which is incorporated offshore can be treated as Australian tax resident if it has any possible economic connection to Australia. The test will get satisfied if:

  • The core commercial activities of the company are undertaken in Australia
  • The central management and the control of company is in Australia

It means to alter the application of the current central management and control the test for company residency by creating a higher threshold rather than pursuing a business in Australia.

CGT Treatment of Granny Flats

The authorities have declared that the alterations will be made to assure that the capital gain will not conclude from the creation, termination, or variation of formal written granny flat arrangement. It includes granting of a right to relative to live with the taxpayer in exchange of the payments.

The grating of that right triggers CGT implications under CGT event D1 and is not possible to implement main residence exemption or general CGT discount to capital gains that arise under CGT event D1. Moreover, the market value substitution rules could conclude to capital gains under current rules. It is unclear till this stage that how the authorities will notice the issues related to tax that could arise in relation to these arrangements.

JobMaker Hiring Credits

The authorities have announced details of high-level in the budget related to the JobMaker hiring credit scheme. The bill that enables JobMaker has been introduced in the parliament but not has been passed. Moreover, treasury has released an exposure draft of the rules for consultation. 

Economic Recovery Package (JobMaker Hiring Credit) Amendment Bill 2020

This bill enables JobKeeper has been introduced into the Parliament and referred to the Senate Economics Legislation Committee. Likewise the JobKeeper rules, this bill provides Treasurer, the power to issue a legislative instrument setting out the rules for JobMaker scheme. 

EXPOSURE DRAFT – JOBMAKER HIRING CREDIT RULES

The exposure draft highlights the integrity provisions in which the employee headcount or payroll has inflated to get access of hiring credit. The consultation gets closed on November 27th, 2020.

Outline of JobMaker Hiring Credit

It must be noticed that the comments below provide assistance by Government and Treasury; however, the final details could be much different. The eligible employers have an access to JobMaker hiring credit for every new job created over 12 months from October 7th, 2020, for which they hired an eligible employee to claim at maximum period of 12 months from starting date of their employment. For eligibility of a business, following criteria must be met:

  • The business must possess ABN
  • Stay relevant with their tax lodgement obligations
  • Get registered for Pay As You Go (PAYG) withholding
  • Be reporting by STP (Single Touch Payroll)
  • Maintain efficient records of the paid hours worked by employee they are claiming the hiring credit

The business should also show that the worker is working for any additional job created from October 7th, 2020. In order to show that the job is additional, certain criteria must be met:

The criteria of “additionally” need that there is increase in the:

  • Headcount of total employee of the business in comparison to initial one of September 30th, 2020 and then to the prior reporting period
  • The total payroll of the business for the reporting period, in comparison to the September 2020 quarter and then to previous reporting period

In order to get the JobMaker Credits, the employers are required to register with ATO to make the claims quarterly, the claims starting from February 2021. The amount of JobMaker hiring Credit will be:

  • $200 each week for every eligible employee aging between 16 to 29
  • $100 each week for every eligible employee aging from 30 to 35.

NOTE:

The employers cannot make claim for JobKeeper and JobMaker hiring Credit for any employee at the same time.

DGRs required registering as the charities

The authorities have released the draft legislation that needs non-government deductible gift recipients (DGRs) to get registered as charities with Australian Charities. This requirement is applicable to 41 of the 52 general DGR categories and the amendments could extend the requirements of remaining 11 categories.

FROM THE ATO

COVID-19 AND COMPANY LOSSES

The ATO has given assistance on companies that influenced by COVID-19 and utilising losses. The alterations to business operations could influence on whether the company is enabled to utilise carried-forward losses in the current year or the future income year. The company that has shut its business operations temporarily could be able to satisfy similar business tests in the future. If the company is carrying its operations of business in continuation, it will not fail similar business test since it has:

  • Lowered the scale of its business that includes if the activities have lowered to a minimum or are suspended entirely
  •  Temporarily closed or suspended the business just because of the reasons beyond its control that it intends to overcome.

To analyze whether the business of the company is still carried on, the following must be analysed:

  • Inactivity reasons – like whether the company actively hold itself out for a business though obtaining none
  • Whether there is the expectation to resume active operations within a specific time

The ATO makes its confirmation that the company does not fail the same business test as it has got JobKeeper payments.

Budget- Personal Tax Cuts and Withholding

The ATO has advised that the employers must make the adjustments in the payroll processes and systems to the tax cuts to be reflected in the take-home pay of an employee. The employers must ensure that they withhold the exact amount from salary or wages paid to the employees for any pay runs processed in their system not later than November 16th, 2020.

Non-Lodgement advice and Active ABN

If the client has an active ABN and are operating the business, they must lodge income tax return in all such scenarios.

If the client still has an active ABN, they don’t need to lodge a return even if there is not at all any business income to report. This seems to be because of ATO’s systems not being enabled to accept a non-lodgement advice when a taxpayer holds an active ABN for any part of the financial year. If any individual stops a business, then it is required to meet all the payment obligations and lodgement before requesting cancellation of ABN. It would not be possible to lodge a non-lodgement advice to advise the ATO that the returns in the future are not required, once the ABN has been cancelled.

CASES

Land Sold in the Course of an enterprise

San Remo Heights Pty Ltd v FC of T [2020] AATA 4023

The basic condition for a sale of property to be taxable supply is that the sale should be made in the course of an enterprise carried on by taxpayer. To exemplify, the sales of assets must not be subjected to GST if they have been used for private purposes.

In this scenario, the taxpayer was a company which sold some of the properties. The company got registered for GST and had argued that it didn’t stand liable for GST for the sales of the vacant land since they were not made in the course or furtherance of the enterprise.

The properties were vacant lots that were apparently not used for any purpose. The company carried on grazing and rental activities, however, it was accepted that the lots were not used in those activities. It was also noted that the company had not claimed income tax deductions or input tax credits for expenses or depreciation of the properties. The ATO maintained the company’s enterprise was broader and included the acquisition, subdivision and sale of the vacant lots.

The ATO took the position that the company didn’t establish land sales were not made in the course or of rental or grazing enterprise. Therefore, the AAT agreed with ATO and made confirmation that the sales were subjected to GST. The AAT was satisfied that the sales had no connection with rental activities and grazing. The lack of evidence that company needed to prove that the sales were not connected with any enterprise was the critical issue. Some other points were made by the AAT that includes long periods of inactivity and are not inconsistent with the activities being in the form of a business, and the company’s choice to not claim the deductions for the expenses must not alter the position.

SG and Employee vs Contractor

MWWD v FC of T [2020] AATA 4169

In this case a company which did not make any superannuation Guarantee Contributions for individual on the basis that they were not authentic contractor than an employee.  The individual and the ATO did not agree with this position. The position of ATO was based on the extended definition of an employee for the purposes of Super guarantee; this assures that a person is an employee under Super Guarantee rules which they are working under a contract which is completely for the labour of the person.

The decision set out detail of basic considerations that includes if:

  • The worker was paid basically for skills and labour
  • The worker had to freedom to delegate
  • The worker provided their own equipment and tools

The decision was based on the evidence and the terms of the contract.  According to AAT, even though the employer could exercise some control, this was exercised rarely.

On the contrary, while the contract allowed delegation and also for the worker to undertake work for other parties, this was also not utilised. The position in relation to the worker providing their own equipment pointed slightly more toward an independent contractor relationship. In terms of payment, the worker was not paid a regular wage, and he was not paid for time off. Invoices were provided to the applicant and that were paid in respect of work that was completed. Based on the facts, the AAT considered that the relationship the parties actually established is a hybrid that exhibits some of the features of an employment arrangement and some of the features of an independent contracting relationship. Overall, the AAT concluded that parties were dealing with each other as principals and that the individual was not an employee or deemed employee for SG purposes.

Working holiday visas and tax residency

Gurney v FC of T [2020] AATA 3813

This case emphasizes the benefits to consider the residency of individuals in Australia in the working holiday visas. The ATO indicated that the individuals using these visas must be treated as non-residents; the position relies on the facts of every case.

In this case, the taxpayer entered Australia on working holiday visa having a long-term visa without getting aware of the processing time for such visa. The intention and expectation of taxpayer was that they must be able to alter the arrangement and this will allow them to remain here indefinitely.

To this end the taxpayer sought to establish permanent accommodation and seek more permanent style employment, with the view of becoming a resident. The taxpayer was not able to secure the visa arrangements that they sought and after some months they dropped their plans and then returned to UK. The taxpayer considered that they were tax resident for the time they were in Australia. However, the ATO argued that they remained a resident of UK.

The AAT held that the taxpayer must be considered a resident for period of 9 months they were in Australia. The distinguishing fact was that the taxpayer had an intention to stay in Australia and had actively sought to make that a reality, getting the working holiday visa as a substitute for long-term visa. The taxpayer arrived having an intention to live in Australia in continuation to live there till it became clear that he would not be enabled to achieve his goals.

LEGISLATION

Budget Measures enacted Treasury Laws Amendment Bill 2020 – Tax Plan for Coronavirus Economic Recovery

Legislation has been passed providing effect to the basic tax changes declared in 2020-21 Federal Budget, this involves loss carry back rules, immediate expensing rules for the depreciating assets and changes to R&D tax offset.

Loss carry-back tax offset

The new rules allow the companies which has aggregated turnover of less than $5 billion which have loss in 2020 to 2022 income years to carry back the loss and apply it against the taxable income of the company in 2019 to 2021 income years where there is tax liability in earlier years.

The amount of the loss carry back tax offset for income year is quite lesser than the company’s loss carry back tax offset components and the individual’s franking account balance at the end of current year. The amount must not exceed:

  • The amount of previous tax paid by the entity
  • The account balance of an entity at the end of income year for which the refundable tax offset is to be claimed

Immediate Expensing of Depreciating Assets

These alterations permits businesses with turnover of not more than $5 billion to deduct the cost of eligible depreciating assets that are first held, and used for taxable purposes between 2020 budget time. The businesses are also able to deduct full cost of improvements to these assets and to previous eligible depreciating assets that is made during this period. Foe being eligible, the assets acquired should be:

  • First held, and first used or installed ready for use for a taxable purpose, after 7:30 PM ACT time on 6 October 2020 and by 30 June 2022; and
  • Located in Australia and principally used in Australia for the principal purpose of carrying on a business

 The assets which are let out on depreciating asset leases do not seem to be excluded from these rules, although the taxpayer would need to be carrying on a business under general principles to access these rules.

Alterations to the R&D tax incentive

Following the latest review of R&D tax incentive, the authorities have declared a range of alterations to the operation of the rules. These will require to be examined in detail for influenced entities, these changes include:

  • Enhancing the R&D expenditure threshold from $100 million to $150 million and creating the threshold as a permanent feature of the law
  • By linking the R&D tax offset available for entities entitled to the refundable R&D tax offset to the company’s corporate tax rates, standardising the benefits, plus 18.5% point premium.
  • Enhancing the generosity of R&D Tax incentive for large R&D entities with greater level of R&D intensity. In this, larger R&D entities with aggregated turnover of $20 million or more for the income year are entitled to R&D tax offset that equals their company tax rate with one or more marginal intensity premiums.

Some of the additional charges have been made with respect to the clawback rules that are related to the situations where the companies recoup some R&D expenditure or get income from the sale of the outcomes of research and development activities.

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