What a waste of time…

I know the ATO is famous for wasting others time but what about when they waste their own time…

Today (18 October) the ATO released a draft Taxation Ruling (TR 2017/D7) titled “Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?” It is 78 paragraphs and 25 pages long, with 8 very detailed examples… Remember its purpose is to help us understand what the word “business” means in section 23AA… And then…

Today (18 October) the Government released a Bill into Parliament titled “Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017“. This Bill repeals section 23AA of the Income Tax Rates Act 1986 and replaces it with the following:

23AA Meaning of base rate entity

An entity is a base rate entity for a year of income if:

(a) no more than 80% of its assessable income for the year of income is base rate entity passive income; and
(b) its aggregated turnover (within the meaning of the Income Tax Assessment Act 1997) for the year of income, worked out as at the end of that year, is less than $25 million.

Did you notice that a certain word will no longer exists in section 23AA once this Bill receives Royal Assent? That is correct, there is no “business” word anywhere in the section.

So on the same day the Commissioner asks for feedback on his 25 page ruling on what the word “business” means in section 23AA, the Government introduces a Bill that will remove the word “business” from section 23AA.

Priceless…

 

Advertisements
Posted in Uncategorized | Leave a comment

Not more on rental property depreciation!

Sorry but I keep getting asked about the grandfathering provisions in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 that relate to claiming Division 40 depreciation on assets in rental properties. So this is the link I can just send to those asking me this question.

The Bill states this…

13 Application of amendments

(1) The amendments made by this Schedule apply to an entity, for income years commencing on or after 1 July 2017, for assets:

(a) acquired by the entity under contracts entered into; or

(b) otherwise acquired by the entity;

at or after 7.30 pm, by legal time in the Australian Capital Territory, on 9 May 2017.

(2) The amendments made by this Schedule also apply to the entity, for income years commencing on or after 1 July 2017, for any other asset acquired by the entity, if:

(a) the asset’s start time is during the income year that includes 9 May 2017 or during an earlier income year; and

(b) no amount can be deducted under Division 40, or Subdivision 328-D, of the Income Tax Assessment Act 1997 by the entity for the asset for the income year that includes 9 May 2017.

Therefore, from this application section we know that:

  1. Generally, if you purchased the asset or the rental property with the assets in it before 10 May 2017 you can claim Division 40 depreciation.
  2. The reason there is the word “Generally” in the first point is that there is a situation where you bought the assets before 10 May 2017 but you won’t be able to claim Division 40 depreciation. This is where you bought the property or the assets before 10 May 2017 BUT in the 2016/17 year (normally 1 July 2016 to 20 June 2017) you did not use the property or the asset as or in a rental property.

An example of item 2 would be where a taxpayer owns one home which they live in for years. In 2018 they decide to move to a bigger house but keep their old house as a rental property. They cannot claim Division 40 depreciation on the old property as in the 2016/17 year, the property was not a rental property.

So in summary, these new rules apply to properties that were both purchased before 10 May 2017 AND where used as a rental property for some time in the 2016/17 tax year.

Checklist to ask if someone asks you if they can claim Division 40 tax depreciation on a residential rental property:

  1. Is the entity that owns the property a company, a large super fund (not an SMSF) or a large investment vehicle? If so, they can claim Division 40 depreciation deductions.
  2. Are they carrying on a business which involved 30+ of properties taking up most of their week in managing? If so, they can claim Division 40 depreciation deductions.

Neither of these two will happen…

  1. Was the property purchased before 10 May 2017 AND if I look at your tax return I can see you claimed deductions on the property as a rental property for some time in the 2016/17 tax year? If so, you can claim Division 40 depreciation deductions.
  2. Is the property “new residential premises” when you purchased it and you have not used it as your residence or stayed in it for more than a couple of nights? If so, you can claim Division 40 depreciation deductions.
  3. Is there any depreciable assets that have never been used by others before (you bought them from a retailer) that you have never used privately (including if you stayed in the property for more that one or two nights)? If so, they can claim Division 40 depreciation deductions on just those depreciable assets.

Remember, if you are claiming Division 40 deductions under item 2 or 3 above, and you stay in the property, or let your family stay in the property for free, for a week, there will be no future depreciation deductions.

Posted in Uncategorized | Leave a comment

What is a Taxi?

Lets start with a definition… According to dictionary.com…

contradiction
kɒntrəˈdɪkʃ(ə)n
noun
  1. a combination of statements, ideas, or features which are opposed to one another.

When considering the exemption from FBT for certain taxi travel under section 58Z of the FBTAA86, the Commissioner states:

The exemption is limited to travel in a vehicle licensed by the relevant State or Territory to operate as a taxi. It does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi.

When considering whether Uber drivers should be treated as taxis for GST, the Commissioner said they should and won a Federal Court Case saying all Uber drivers are taxis, forcing all Uber drivers to register for GST from their first dollar, rather than $75,000 turnover (Uber BV v. Federal Commissioner of Taxation [2017] FCA 110)

So when being a taxi is good for taxpayers (FBT exemptions) the Commissioner says Uber is not a taxi, but when being a taxi is bad for taxpayers (having the remit GST from the first dollar earned) the Commissioner says Uber is a taxi.

The worst part is that, when he is made aware of this contradiction he puts out a discussion paper asking what he can do. The answer is easy… avoid contradictions.

 

 

 

 

 

Posted in Uncategorized | Leave a comment

Who gets the 27.5% Company tax rate?

You would think this is an easy question to ask… But it is not.

The rules seem pretty easy. They are:

  • A corporate tax entity carries on a business in the income year;
  • The aggregated turnover of the corporate tax entity for the income year is less than:
    • for the 2016-17 income year — $10 million;
    • for the 2017-18 income year — $25 million;
    • for the 2018-19 income year and following — $50 million.

But we now have arguments as to what is a “business” and what if the turnover is under the threshold but 99% of the income does not come from the business but from passive income?

Well the Government will make this clear by adding another condition to the above conditions. It is…

the corporate tax entity does not have base rate entity passive income for that income year of 80 per cent or more of its assessable income for that income year.

So if you are a company running a business this year with a turnover of $50,000 as long as $10,001 was from a business (20+%) the company will get the 27.5% rate, even though the remainder of the turnover comes from rent, interest…

But as that passive income could be dividends from listed companies with 30% imputation credits attached, we may not want the 27.5% rate, but prefer the 30% rate so we can pay out 30% dividends.

Posted in Uncategorized | Leave a comment

Einstien on Income Tax

Albert Einstien used a tax agent called Leo Mattersdorf. He told the following story a few years after Einstein’s death in 1955…

One year while I was at his Princeton home preparing his return, Mrs Einstein, who was then still living, asked me to stay for lunch. During the course of the meal, the professor turned to me and with his inimitable chuckle said: “The hardest thing in the world to understand is income taxes.” I replied: “There is one thing more difficult, and that is your theory of relativity.” “Oh, no,” he replied, “that is easy.” To which Mrs Einstein commented, “Yes, for you.”

I claim to know a bit about tax, have a Science degree and am working my way through a Masters of Astronomy and I agree with Einstein. Tax is substantially harder.

My ten year old son understands the basics of relativity but still does not know all 51 CGT events (useless public school system).

Posted in Uncategorized | Leave a comment

Tax Depreciation Bill in Parliament

The Bill to limit tax depreciation for residential buildings has started its process through the Parliament.

I have discussed these changes before, firstly when they were announced on Budget night, and second when draft legislation was released for consultation.

But now we have the Bill in Parliament and in the next few weeks the Parliament will be voting on making this law. So it is time to stop hoping these changes might just go away.

The legislation is almost exactly like the draft law (which I have covered before) and so, generally the only way to get any Division 40 depreciation deductions on a RESIDENTIAL rental property is to have acquired the rental before 10 May 2017 or to have acquired “new residential” property, but in either case you can have never have used it as your residence as you have always been renting it out.

CHANGES FROM THE DRAFT LAW #1 – Incidental or occasional use

And this lead to the only substantial change from the draft law. The law states that you cannot claim depreciation on any asset used in a rental property if the asset was “previously used”.

An asset is ‘previously used’ for an entity if:

  • the entity is not the first entity that used the asset or installed the asset ready for use (within the meaning of Division 40) other than as trading stock;
  • the asset is used or installed ready for use during any income year in premises that are, at that time, a residence of the entity; or
  • the asset is used or installed ready for use during any income year for a purpose that is not a taxable purpose, other than incidental or occasional use.

So if someone owned it before you and they are not a retailer you cannot claim depreciation deductions. If you used the asset in a building that was your residence you can’t claim a deduction. And if you used the asset in a building that was used for a “purpose that is not a taxable purpose”, then you get not claim unless the use was incidental or occasional.

The concern from the draft law was that if I had a rental property at a wonderful holiday location, and if I stay in my rental property for one night I would lose all future deductions. To stop this happen the Bill allows “incidental and occasional use”.

The EM states:

For example, spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use

One weekend… And it also states:

staying at the property for one evening while carrying out maintenance activities would generally be incidental use.

One night… ouch

CHANGES FROM THE DRAFT LAW #2 – buying almost new residential…

These amendments do not apply to an asset held by that entity that was installed in premises supplied as new residential premises if:

  • no entity has previously been entitled to any deduction for the decline in value of the asset; and
  • either:
    • no one resided in residential premises in which the asset has been used before it was held by the current owner; or
    • the asset was used or installed in new residential premises (or related real property) that were supplied to the entity within six months of the premises becoming new residential premises, and the asset had not been used or installed in a residence before that use or installation.

So there is a new “6 month rule”. Why have they done this?

Allowing entities to access the exception for assets only used or installed in new residential premises supplied within six months of the premises becoming new residential premises ensures that entities acquiring tenanted apartments are not disadvantaged.

How does this work in practice?

Hannah purchases two apartments off the plan from Developer Co. The apartments are supplied three months after completion – one is already tenanted and the other is vacant.

In addition to the construction of the apartments, Developer Co has fitted out the apartments, installing ready for use depreciating assets including curtains and furniture prior to settlement and the transfer of the title to Hannah. Developer Co has also fitted out the shared areas of the complex in which the apartment is located, installing ready for use a range of deprecating assets that are the joint property of the apartment owners.

All of these assets are new at the time of installation. As these assets were first installed by Developer Co, not Hannah, they are previously used and a deduction would not be available under the general rules established by these amendments.

However, a deduction is still available to Hannah for the depreciating assets (including Hannah’s share of the assets installed in the shared areas of the apartment) for the period she holds the assets as:

  1. The assets have been installed ready for use in premises that were supplied to Hannah as new residential premises or in other real property supplied as part of the supply of residential premises;
  2. Developer Co has not claimed any deduction for the decline in value of the assets (and nor has any other entity); and
  3. either (excluding assets installed in the common property):

 

  • for assets in the first apartment, the assets were only used or installed in the apartment, which was supplied to Hannah as new residential premises within six months of the apartment first becoming residential premises; or
  • for assets in the second apartment, no entity has resided in residential premises in which the assets have been installed before Hannah held the assets.

 

CHANGES FROM THE DRAFT LAW #3 – More examples – none of which are comforting…

There are also some additional examples…

if a developer installs an asset in premises it intends to sell, this will generally constitute use as trading stock. If the developer rents out the property containing the asset while it seeks to find a purchaser, the property and hence the asset are used, at least in part, for a purpose other than as trading stock and the asset would be previously used in the hands of any subsequent purchaser (subject to the exception outlined below for assets used or installed in certain new residential premises).

No depreciation deductions if a developer rents out the premises and then sells it…

if an individual acquires a new apartment and uses it as their residence in an income year before renting it out, any assets used in the premises would generally have been used wholly for personal use or enjoyment during that income year. The individual would not subsequently be able to access any deductions for the decline in value of those assets while it is being rented out.

No depreciation deductions if you live in the house…

 

 

Posted in Uncategorized | Leave a comment

What Dual Citizenship Issues Can Mean For Tax

Screen Shot 2017-09-04 at 6.59.57 am

It is not hard to imagine that one of the many members of the House of Reps will find they have fallen foul oft section 44 of the Constitution, the section that stops dual citizens from sitting in the House.

This will lead to a by-election and could potentially could lead to a change in Government.

If this happens, by 1 July 2018 there could be a massive number of changes to the tax system as the Opposition has already released its tax policies. So it is worth remembering what these policies are. We have discussed these all before but lets put them all in one place.

The Discretionary Tax Distribution Minimum Tax of 30% on any distributions from discretionary trusts to individuals who have an effective tax rate of less than 30%. But this does not apply to charitable trusts, testamentary trusts, special disability trusts and farming trusts.

The removal of negative gearing deductions for anything other than losses made on new residential property. That means no deductions if you borrow to buy shares and the shares pay no dividends that year.

Reducing the CGT discount rate to 25%.

Limit the 27.5% company tax rate to either companies with turnovers less than $2 million or $10 million. It is unclear if the amount is $2 million if they will reduce the small business threshold back to $2 million.

Decrease the threshold at which the Division 293 tax applies to $250,000. Currently, if your adjusted income is greater than $300,000 you pay an additional 15% contributions tax on super contributions. This threshold will be reduced.

Changes to large business taxation like removing the safe harbour rule from thin capitalisation so that businesses can only use the worldwide gearing ratio, change the MEC rules for consolidated groups, reduce the public reporting rules for private companies from $200 million to $100 million, and make the country by country transfer pricing documentation publicly available.

Limited the tax deduction that individuals can claim for managing their tax affairs to $3,000. This will just mean after $3,000 any fee will now be described as accounting advice???

Increase the highest marginal tax rate to 49% by effectively reintroducing the temporary budget levy. And by 1 July 2019 with the increase in the medicare levy this rate will become 49.5%.

Limit the 0.5% increase in the medicare levy that is going to happen on 1 July 2019 to pay for the NDIS to taxpayers earning more than $87,000.

Posted in Uncategorized | Leave a comment