Tax Rambling

“I just have to have the documentation to prove my work related deductions.” Wrong. If you don’t have the substantiation you don’t have a deduction. Subsection 900-15(1) states…

To claim a work expense as a deduction you need to pass two tests. The first is the normal deduction rules and the second is you have written evidence. If you are a tax agent and someone who is an employee asks if they can claim a deduction for a work expense, your answer should end with “but only if you have written evidence that proves the expense. No substantiation, no deduction.”

Put simply, without paper and electronic evidence, that shows the name of the supplier, amount of the expense, what was purchased, when it was purchased and the date the document was produced, then the expenses is non-deductible.

In a recent Ruling, the Commissioner covers the specific exceptions and relief from substantiation provided in Division 900.

The first exception is where the total of work expenses is $300 or less. However, to claim this exemption records must be kept showing how the amount of the claim was calculated – taxpayers cannot just claim $300 without some record of what they spent the $300 on.

The second exemption is where the total of laundry expenses is $150 or less. Just like before, records must be kept showing how the claim was calculated.

The third exemption is where an allowance is received for travel expenses or overtime meal expenses that is less than the amount considered reasonable by the Commissioner. While the normal record keeping rules do not apply, some form of records must be kept showing how the amount of the claim was calculated and that it was incurred.

Ten minute video on the business credits under the Covid-19. Enjoy

Redbacks Yearbook 2020

If you look carefully you can find the amount those dodgy large corporate group dodge their tax affairs (illegally avoiding $2 billion in tax each year), but it is hard to see next to the ridiculously large amounts that small businesses (illegally avoiding $11.1 billion in tax each year – over 70% due to not declaring cash sales), individuals (illegally avoiding $8.4 billion in tax each year – around 80% dodgy work related deduction claims) and GST (illegally avoiding $5.2 billion in tax each year – mostly small businesses not declaring cash payments).

For the decades I have been involved in tax policy in this country, the biggest problem with our tax system is not loopholes or large business structuring… It has been dodgy small businesses not declaring cash and dodgy individuals (and sometimes their dodgy tax agents – the most recent research in Australia shows tax agent prepared returns make more mistakes on work related deductions than self prepared returns) making up deductions.

Lets not increase rates or bring in new taxes. Lets just fix the dodgy individuals and small businesses.

I’m “on call” so my travel to and from work is not private… Wrong… Sometimes…

According to Draft Taxation Ruling TR 2019/D7, titled “Income tax: when are deductions allowed for employees’ transport expenses?”, travel of an employee while ‘on call’ may not be private, even if it is between home and a regular place of work. Importantly, just awaiting a call from their employer to attend a regular place of work, does not stop the travel to work being private. To not be private, the employee’s duties must have “substantively commenced at their home and the employee is required to travel to a regular place of work to complete those particular duties.”

For example…

Christine is a highly trained computer consultant who is involved in supervising a major conversion in computer facilities which her employer provides for its customers. This requires her to be on call 24 hours a day. In order to assist in diagnosing and correcting computer faults while she is at home after her normal work hours, Christine’s employer installs specialised equipment at her home. Typically, matters can be resolved by Christine at home with the use of this equipment but if the problem cannot be resolved at home, Christine travels to the office in order to progress the matter further.

Christine’s travel between her home and the office every day is private travel between her home and her regular work location. The costs of this travel are not incurred in gaining or producing her assessable income. However, in circumstances where Christine is called to correct a fault after hours and where she commences work on that fault at home but has to travel to her employer’s premises because she cannot rectify it at home, the cost of travel between her home and the office will be deductible. Although this travel is between her home and a regular work location, the cost of these abnormal journeys are deductible because Christine commences substantive work prior to leaving home and then completes that work once she attends the office. Christine does not choose to do part of the work of her job in two separate places, but rather the two places of work are a fundamental part of Christine providing specialised support arising from the nature of her special duties. The expenses she incurs in travelling to the office in such circumstances are incurred in gaining or producing her assessable income.

But travel remains private where an employee awaits at home for advice from their employer whether they are required to work, in a sense on ‘standby’, and does not commence any substantive duties at the place where they receive the call or request from their employer.

Linda is a nurse. Sometimes Linda is required to be on standby duty. If Linda is called by her employer while she is on standby duty, she travels from her home to the hospital and starts her shift once she gets there. Linda’s travel is between her home and a regular work location with short notice of her start time. The travel does not occur on paid work time and accordingly, the expenses are a prerequisite to Linda’s income earning activities. The transport expenses Linda incurs in travelling from her home to the hospital are private and not deductible.

At call to work where you are (business) or at call to come into work (private). You can’t just say its not private because I am “on call”.

How many franking credits can I attach to this dividend, 30% or 27.5%?

I have been asked this question countless times since we introduced Base Rate Entities and the lower company tax rate of 27.5%. It is not a hard question to answer, but the Commissioner has made the answers easier by finalising Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income.

Have a look at these examples (all starting from para 53):

59. Kookaburra Co was founded on 1 July 2017.

60. As Kookaburra Co did not exist in the prior income year (the 2016-17 income year), its 2017-18 corporate tax rate for imputation purposes is 27.5%.

If the company did not exist in the prior year, you can frank at 27.5%.

But if the company did exist in the prior year then it works out its corporate tax rate for imputation purposes by assuming that its aggregated turnover, BREPI and assessable income are the same as in the previous income year.

61. Swan Co has been carrying on a business since 1 July 2014.

62. In the 2016-17 income year, Swan Co was dormant and had no aggregated turnover. Swan Co’s 2016-17 assessable income was nil, and so its BREPI was nil.

63. As Swan Co existed in the 2016-17 income year, the corporate tax rate for imputation purposes of Swan Co for the 2017-18 income year is determined as the corporate tax rate for the 2017-18 income year based on the assumption that its aggregated turnover, BREPI and assessable income are the same as the 2016-17 income year.

64. As Swan Co’s assessable income and BREPI for the 2016-17 income year are nil, it has no more than 80% of its assessable income as BREPI. As Swan Co has no connected entities or affiliated entities in the 2016-17 income year, Swan Co’s aggregated turnover for the 2016-17 income year is nil, its aggregated turnover is less than the relevant threshold for the 2017-18 income year. Therefore, its corporate tax rate for imputation purposes for the 2017-18 income year is 27.5%.

And yes, it is possible that the company tax rate for a year is different to the imputation or franking rate for the year.

68. In the 2017-18 income year, Cockatoo Co had an aggregated turnover of $48 million. Cockatoo Co’s 2017-18 assessable income was 82% BREPI.

69. In the 2018-19 income year, Cockatoo Co had aggregated turnover of $46 million. Cockatoo Co’s 2018-19 assessable income was 75% BREPI. Cockatoo Co’s 2018-19 aggregated turnover was below the aggregated turnover threshold of $50 million, and its BREPI was below the 80% threshold. Therefore, it was a base rate entity, with a 2018-19 corporate tax rate of 27.5%.

70. Cockatoo Co has a 2018-19 corporate tax rate for imputation purposes of 30%. This is because it is assumed its aggregated turnover, BREPI and assessable income are the same as the previous income year. As such it is assumed that, for the purposes of determining the corporate tax rate for imputation for the 2018-19 income year, Cockatoo Co’s aggregated turnover is the same as the 2017-18 income year, being $48 million, of which 82% is BREPI. Although the aggregated turnover is below the threshold of $50 million, its BREPI is above the 80% threshold. Accordingly, its corporate tax rate for imputation purposes is 30%.

Simple!

 

 

In my small town (Canberra) we love property development which we can sell to well paid public servants. But there is something strange about Canberra (more than one thing but stay on point Ken). We don’t own our land, we lease it off the government for 99 year.

And after the Gloxinia case (Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46) developers thought they were on a GST winner.

These developers often do their developments on land they have acquired under a long-term Crown lease that is automatically renewable, with the Commonwealth holding the reversion. They are set up like this:

• A developer enters into a contract for sale with a government agency to acquire a Crown lease over land in the ACT for a monetary purchase price.
• On completion of the contract (that is, once the developer has paid the full monetary purchase price to the government agency), a government agency is required to grant the Crown lease to the developer.
• The contract is contingent upon the developer entering into a project delivery agreement (PDA) with a government agency prior to or at the same time of entering into the contract.
• The Crown lease and the PDA provide that the developer must complete building works within a specified time period, for example, within 48 months from the date of the commencement of the Crown lease.

When the developers sell the land, they generally use the margin scheme, being the difference of what they bought the land for, against what they paid for it. But what is the “purchase price”? Everyone agrees it includes the case the developer pays for the lease of the land. But what about the costs of the developer building the houses, roads, drains… on the land?

People have argued that, under a contract that requires them to build all these (the PDA), it is consideration for the purchase of the land. And that makes the margin very small. The example in the draft Determination released recently (GSTD 2019/D1) has the developer buying the land for $5 million, doing $100 million of work on the land and let say selling it for $150 million. This would mean the margin is not $145 million (with about $14 million of GST payable), but rather is $50 million (with about $5 million of GST payable) – with the developer paying $9 million less in GST.

I know you are screaming that for the margin scheme to apply, they can’t claim input tax credits on the purchase price of the land. So if they spent $100 million on the building, they will have to give back all the GST. You are 100% right except, unfortunately for the Commissioner, the developer claimed all the GST on the development and now 4 years have past so they can’t amended their BAS to give it all back.

Effectively, we claim all the GST incurred on doing the development and they when we sell the property we don’t have to add GST when selling most of the development.

BUT IT DOES NOT WORK – In Draft Goods and Services Tax Determination GSTD 2019/D1 Goods and services tax: development works in the Australian Capital Territory the Commissioner states…

5. However, the building works and the associated site works a developer completes under a building arrangement are not consideration for the supply of the Crown lease by the government agency under section 9-5. While the developer is required to complete these works within a certain time period after acquiring the Crown lease, this stipulated timeframe does not make these works non-monetary consideration for the supply of the Crown lease.

What does this mean for my client who has treated the development costs as consideration for the supply of the Crown lease?

When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.

If you a private ruling or a settled dispute, you don’t have to do anything. If not, the margin you used is wrong and you should amend (if it is within the four year amendment period).

But most importantly, can we stop saying “Gloxinia” randomly at people we see walking down the street that we think might be property developers?

You know you are not funny when you have to start a blog post with “please understand this is an attempt at humour and not some political/moral/ethical statement.” Simply put, I thought it might make you laugh…

I’m angry! Really angry! Its 2019 and still the Government wants to regulate what type of love is acceptable, what type of love is “natural”. In my town of Canberra we have had roundabouts to celebrate “Marriage Equality”, but it looks like the Government has decided that it won’t allow love to go any further.

You see the Commissioner of Taxation has recently reversed a position he has had since 2003 (ATO Interpretative Decision ATO ID 2003/589) and has said some love just is not “natural”…

In a recent draft Taxation Determination, the Commissioner has considered whether a certain type of love can be “natural”. In the commercial debt forgiveness rules in Division 245 of the ITAA97, where a debt is forgiven, the lucky party that no longer has to pay the debt can have some bad tax consequences. But this does make sense…

Example

Friendly Bank loans Ken $1,000 which he used to buy a widget machine. As the machine in less than $30,000 and Ken uses this in his business he gets an immediate deduction for the $1,000.

But Ken convinces the bank to forgive the debt. So what has Ken actually paid for the widget machine? $0, nil, nothing. So what do the commercial debt forgiveness rules do? deny deductions (and losses) like these.

But there is an exemption. If rather than Friendly Bank making the loan it was Ken’s amazing wife, who loves him dearly and forgives the loan. Division 245 excludes a debt forgiven for reasons of natural love and affection from the application of the commercial debt forgiveness provisions.

But who can show “natural and affection” according to the Commissioner?

The Commissioner has just decided that poor defenceless companies and trusts, merely trying to get along in a hard world, might be able to love, but they are no longer able to show “natural love”.

Being serious for a second, he has decided that if my wife was the director or trustee and wanted forgive the loan from the company or trust to me, that loan cannot be exempt as the company or trust cannot show natural love.

So lets protest. Companies and trusts should not be discriminated against. Let’s paint roundabouts the colours of companies and trusts – I suggest concrete grey and asphalt back are good colours for this.

Recently I have been complaining that the Commissioner has decided the word “taxi” in the GST Act includes an Uber (so Ubers have to register for GST and so he gets more GST) but in the FBT Act the word “taxi” does not include an Uber (so the FBT exemption for taxis does not apply to Ubers and he gets more FBT).

But now the Government has released draft legislation to make amendments that are “minor technical changes to correct typographical and numbering errors, bring provisions in line with modern drafting conventions, repeal inoperative provisions, remove administrative inefficiencies and update references.” But hidden in this draft legislation is the following…

1.60 The Bill amends the definition of ‘taxi’ in the Fringe Benefits Tax Assessment Act 1986 to resolve administratively difficulties with the former definition which resulted from ride sharing providers entering entry into the market.

1.61 Formerly, the Fringe Benefits Tax Assessment Act 1986 defined a taxi as ‘a motor vehicle licenced to operate as a taxi’. As a result of ride sharing providers entering into the market, this has become difficult to administer as the meaning of ‘licensed to operate as a taxi’ is highly contentious and may differ considerably between the states and territories depending on their licensing laws.

1.62 To avoid these difficulties, the new law replaces references to a ‘taxi’ with ‘a car used for taxi travel (other than a limousine)’. The term ‘taxi travel’ is defined as having the same meaning as in the A New Tax System (Goods and Services Tax) Act 1999, namely, ‘travel that involves transporting passengers by taxi or limousine, for fares’. This preserves the existing policy of covering vehicles used for travel involving transporting passengers for a fare by way of a car but not including luxury cars such as limousines.

If the definition of “taxi” in the FBT Act is exactly the same as in the GST Act, the Commissioner will have no choice to change his opinion on what the term “taxi” means in the FBT Act and therefore have to extend the taxi FBT exemptions to Ubers.

For years now, organisations like the Tax Justice Network and various news outlets have screamed about how evil multinationals and large corporates are regarding avoiding tax. The explain the utopia we could live in if they were required to pay the tax the law states they should pay.

Lets hope they love reading this…

The ATO estimates the 2015-16 income tax gap for the small business sector to be approximately 12.5%, or $11.1 billion, with over $7 billion (or over 64% of the total value of the gap) being attributed to black economy behaviour.

and…

The ATO has previously released the net income tax gap for large corporates, estimated at 4.4 per cent or $1.8 billion in 2015-16, and the net income tax gap for individuals not-in-business for 2014-15, is estimated at 6.4 per cent, or $8.7 billion.

In summary, as I am sure they will need to read this twice…

• Large corporates avoid $1.8 billion a year through non compliance with the tax laws, which is 4.4% of all the tax they should pay.
• Individuals not in business avoid $8.7 billion a year through non compliance with the tax laws, which is 6.4% of all the tax they should pay.
• But coming in first place by a country mile are small businesses who avoid $11.1 billion a year through non compliance with the tax laws, which is 12.5% of all the tax they should pay.

And if you want to consider this on a worldwide basis, this looks bad…

Small business tax gaps that have been released overseas range from 9% to 30%.

So the next time someone wants to fund some amazing new Government program and tells you they want to do it through fixing “large corporate tax avoidance”, let them know that large corporates are by far the most compliant taxpayers in Australia and that the evil taxpayers in this country (and in many other countries) are small business owners and workers.