Tax Policy

Letter to Senator Cormann, Acting Assistant Treasurer on Earnouts

I had one of those “what are they doing” moments and sent this letter to the Government. I feel better now that I have written it but it won’t do anything… Come on Treasury, prove me wrong…


Many thanks for all your efforts, and those of your staff and your department, in managing the revenue laws of this country.

I was hoping you could let me know the progress of the proposed changes the the CGT treatment of earn out arrangements.

In October 2007 the then Commissioner of Taxation released a draft ruling (Draft Taxation Ruling TR 2007/D10) on this issue. In 2010 the then Assistant Treasurer announced legislative changes (Media release no. 098/2010) to overcome some some consequences of the Commissioner’s position. In 2013 the then Assistant Treasurer confirmed they would continue with this proposed legislative change (Media release no. 008/2013).

In addition the Treasury released a discussion paper and had consultation in 2010 and the Commissioner has allowed taxpayers to apply the law in expectation of what it will be under these changes back to 2007 (strangely the Commissioner says taxpayers must amend if the way they expected the law to be drafted is not as it finally is even though a taxpayer can only amend returns for 4 year – so there is no way that could amend 2007-2009).

It is unreasonable and unsustainable (and somewhat unbelievable) that both taxpayers have had to act based on a press release for over seven year and that the Treasury have not been able to draft appropriate legislation in the past four years.

Can you please raise this with the appropriate staff at the Treasury, and if possible, can you let me, and the tax community, know when this long awaited change will be made.

Thank you.

Income Tax

Rental property mistakes…

The Commissioner has let us know some of the common errors they find in returns with rental properties. And it is quite a list:

– Stamp duty on the transfer of property. Unless you live in the ACT this is a component of the cost base.

– Other expenses that should be in cost base that people claim deductions for, including renovation costs (claimed as repairs and maintenance) and solicitors fees for purchase of the property.

– Legal fees in relation to family divorce proceedings.

– Borrowing expenses claimed in a single year, instead of being spread over five years.

But above all the Commissioner is concerned about the following:

– “… apportionment of income and expenses based on ownership holdings…” Especially where there are different taxpayers at different marginal rates. All based on ownership not contributions…

– “…claiming of expenses for vacant land…”

– “…apportionment of expenses for holiday homes…” If you stay in the property you will have to prove it was a last minute decision as no one had rented it for that period or you need to apportion the costs.

While not mentioned by the Commissioner my favourite one is the deductions under a depreciation report. I repair the light fittings that have got damaged (repairs are deductible) and claimed a deduction in year one. In year three I get depreciation report that says I can claim the amount a second time (under Div 40 or 43)…. Woops

Income Tax Tax Policy

Why wont people prepare their own return?

In the 2012 year there were 12.7 individual tax returns lodged with the ATO. 9.2 million of these were lodged by tax agents. Given that just over a quarter of all of these individual returns were nil tax payable, this means that tax agents lodged about 6.9 million “tax payable” tax returns.

An uncomfortable aside thought is that if the average fee for these returns is at least $140, Australians are spending $1 billion on individual tax return preparation…

Apart from Italy (over 95% use an agent), Australia has the highest percentage use of tax agents for individual returns. The Scandinavian rate is a bit over 10% and New Zealand is a bit over 30%.

These countries use prefilling, and in some cases, totally prefilled returns. They also have simplified returns for certain taxpayers. They also use standard deductions rather than actual deductions.

We have had some prefilling of returns in Australia for some time and there has been limited change in self lodging. We also almost had a standard deduction when Treasurer Swan promised he would implement one, and then gave it up in an attempt to find a budget surplus (I imagine he is not good at finding the TV remote either).

This year we were given a new simple way to do simple tax returns. Called MyTax it is in my opinion brilliant for what it sets out to achieve. I sat and watched someone with no tax background knock out a correct return in eleven minutes (and they did not pretend they have $300 of unsubstantiated expenses like most of the bulk preparers do so their return was correct!)

But did people use it? It looks like we will get about 2.8 million using either MyTax or ETax to do their return… So the answer is no. This is no greater a percentage than lodged their own return before MyTax.

It looks like we have been convinced (and in many respects conned) that either the risks are too high, or we wont get as large a refund if we lodge our own return. The third reason often given is that it is too hard. Now It is not it is too hard, given how easy MyTax is.

It might be that people who used an agent before just continued to use them, and that over time more people will lodge using MyTax. It might be as people realise how easy it is the percentage of self preparers will go up.

But if you had to judge the first year of MyTax on the statistics, it is a fail. Lets hope it is much better next year.

Legislation Tax Policy

What are we waiting for in tax and super – Announced but unenacted changes…

Next year we will be looking at a Government White paper on reforming the tax system (what did I do in 2008 on the Henry Review?!?!?!). And this time we will review the tax system with failing public finances.

But before we start, once again, coming up with the simple, equitable, efficient and adequate tax system, lets remind ourselves of what is still on the Governments to do list for tax and super legislation.

It is not a very long, or very interesting list (this is my best guess of what is still to be donned if I have missed one let me know). And once you get past item 7 it is only the very big end of town that will be interested…

  1. Employee share scheme changes including “start up” concessions from 1 July 2015
  2. Non resident withholding tax for capital gains from 1 July 2016
  3. Capital gains tax — look-through treatment for earn out arrangements FROM 1 JULY 2007 – HURRY UP TREASURY!
  4. Reduce company tax rate by 1.5% as a part of implementing a parental leave scheme
  5. Enhance the information reported to the ATO to improve taxpayer compliance
  6. GST — Limiting the ‘connected with Australia’ rules
  7. GST — Replacing the going concern rules with a reverse charge
  8. Introduces a new tax regime for managed investment trusts
  9. Investment manager regime prospective arrangements
  10. Strengthening certain integrity provisions in the scrip for scrip roll-over.
  11. Amendments the tax hedging rules
  12. Treats an investor in an instalment warrant as the owner of the underlying asset for tax purposes
  13. Loss recoupment rules — work for multiple classes of shares
  14. Functional currency rules — extending the range of entities that can use a functional currency
  15. Debt/equity tax rules — limiting scope of integrity rule
  16. Taxation of financial arrangements — foreign currency regulations — technical and compliance cost savings amendments
  17. Changes to the Offshore Banking Unit regime

Not much to get excited about…


Making super for employers “a little bit” easier

Nothing is for free – except the Small Business Superannuation Clearing House. So have you thought about whether you or your clients should be using this system?

The Small Business Superannuation Clearing House is a free online super payment service run by the ATO for small businesses with 19 or fewer employees. It allows businesses to make one secure electronic transaction and the clearing house distributes the super contributions to employees’ nominated super funds.

There are some cool little youTube clips showing how it works, and it looks pretty good.

Even better is that the Government has announced they want to make this service available to more businesses. From 1 July 2015, rather than having to have 19 or fewer employees, an employer will only need to have an annual turnover below the small business entity turnover threshold, which is currently $2 million.

And did I say it was free…


End of Limited Recourse Borrowing Arrangements? And a whole lot more!

I do hope so…

In the final report of the Financial System Inquiry undertaken by David Murray, the main recommendation that applies to Self Managed Super is to remove the exception to borrowing for limited recourse borrowing arrangements. I have seen this done wrong so many times and the ATO states that a large percentage of private rulings requests that are receiving for these arrangements have related party components that make the income non arms length income. So lets kill the idea before thousands of SMSFs find that they are non complying due to less than diligent advisors…

SIDE NOTE: If you are considering these arrangements… consider fast. Early next year the government will respond to these recommendations and I would expect them to remove this opportunity…

But the really interesting thing about the report is it has a go at super tax concessions, and then puts the boot into other tax concession… just before the start of a white paper tax review. Coincidence?

Here are some of the other recommendations in the review…

  • Enshrine in legislation the objectives of the superannuation system. If the aim is to keep people off the aged pension then the super system is a total failure. The percentage of aged people who will be on the aged pension has not changed from 1992 and all the modelling says it won’t change. The $30 billion a year in concessions DOES NOT save $30 billon in aged pension costs, no where near it! So if this is the aim of the super system and it is written in the law it will be pretty easy to remove it…
  • Introduce a formal competitive process to allocate new default fund members to MySuper products. This would mean the cheapest fee default fund gets all new My Super members for a period. The Unions are about to scream…
  • Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid. Isn’t this the case now? No! Our friendly Unionist, is an EBA, can lock their member and those working in that area who are not members into their some fund and the employee cannot get out! More screaming!
  • Require trustees to pre-select a comprehensive income product for members’ retirement. We all know that if we get our super at 60 and the pension starts (will start for most of us) at 70 we blow our super in ten years and then let the taxpayers fund the rest of our lives. This idea is to discourage lump sums over annuity products. Don’t worry it does not apply to SMSFs;

Here are some of the “observation” that are aimed straight at the tax review…

  • Aligning the earnings tax rate across the accumulation and retirement phases.
  • Options to better target superannuation tax concessions to the objectives of the superannuation system. In other words, get rid of most of the concession.
  • Lowering the non-concessional contribution cap or having a cap on funds held in super and requiring members to take amounts out of super above these caps.
  • Reduce the CGT discount to limit the benefit of negatively geared properties (Some journalist AGAIN are banging on about negative gearing when it is not the deductions that are the problem but the capital concessions).
  • Remove imputation – After you show me how you unscramble an egg. Get over it as it is not going to happen!
  • Make financial supplies taxable supplies for GST. This might work as it will be argued this is “picking on the evil banks”. But don’t worry, someone will say “unfair” and the media will forget to look at the real policy discussion and report what the latest polly said on twitter about it.

Sounds like a great start for a tax review when there is a $40 billion structural deficit and a crazy Senate…

Legislation Planning Idea Super

The End of Excess Contributions Tax Mark 2

In the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 we finally get the final rules that will allow the refund of excess non-concessional contributions. We have discussed this change when it was released as draft legislation. But the final legislation is different from the draft legislation in the following ways:

There is no longer a requirement an amount withdrawn from a superannuation fund must be from the member’s tax-free component. Therefore, a release authority payment will always reduce the taxable component of a superannuation interest in accumulation phase.

The time limit for a superannuation fund to pay a release amount to the member has been increased from 7 days to  21 days.

The fund will only release 85% of the earnings they calculate. However, 100% of the earnings will be taxed in the taxpayer’s amended tax return, but the taxpayer will get a 15% offset for the earnings tax the fund will pay.

These are three great changes…

Cases GST

Will the full federal Court ever learn…

Just under a year ago I wrote the following regarding the full Federal Court decision in MBI Properties…

So the supply was defined form a literal rather than a practical perspective and led to a ridiculous outcome.

But remember the Federal Court also found that there was no supply by Qantas when people did not turn up for their flight… A decision laughed off by the High Court who took a practical rather than a literal view of what is a supply.

And remember the Federal Court also found that there was no supply on a forfeited deposit in Reliance Carpets… A decision laughed off by the High Court who took a practical rather than a literal view of what is a supply.

No points for guessing what the High Court will do.

Maybe the Federal Court might one day accept it is the Federal Court and not the High Court, read the Constitution (i can’t talk as I failed Constitutional Law) and start making GST decisions that the High Court does not need to overturn. I can only hope…

Well, this week the High Court has unanimously found for the Commissioner, holding that the conditions for the operation of s 135-5 were met. And just as expected the High Court said the Full Federal Court

…was wrong to reason that the only relevant supply was on the grant of the lease by South Steyne to MML, and the Full Court in South Steyne was wrong to conclude that MBI made no supply to MML.

Is it worth reminding the Full Federal Court that they only exist due to an Act of a Parliament (Federal Court of Australia Act 1976). And the only reason that Act could be created by that Parliament was that in 1900 the Constitution was adopted – a Constitution that forms one court to sit above all other Courts – the High Court.

So if the High Court, generally unanimously, keeps interpreting the GST laws in a practical way rather than a technical way, like in Qantas, like in Reliance Carpets, like in MBI Properties… maybe the Full Federal Court should start doing the same. Maybe the Federal Court should remember who they are.

If a part time tax boffin, part time Thomas the Tank Engine watcher (who I am) knows what the outcome of a Federal Court appeal will be a year in advance, then it should be obvious to much brighter tax minds than me…