Tax Rambling

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:

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…

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.

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.

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.

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).

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”.

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.