FBT Planning Stuff Tax Policy

The end of salary packaging???

The Government has just released draft legislation in relation to the capping rules for exempt fringe benefits that can be provided by public hospitals, ambulance services, registered public benevolent institutions and registered health promotion charities.

I should quickly say it is exactly as was announced on Budget night – from 1 April 2016 the total amount of salary packaged meal entertainment and entertainment leasing facilities that employees of these entities will be able to salary package is $5,000. (By the way, as my wife is a doctor at the public hospital, I have to get my 8 and 4 year old sons married by 1 April 2016 so my wife can salary package the costs of their wedding…)

But what is more interesting is that these changes only apply to benefits where there is a “salary packaging” arrangement.

For the first 20 years of the FBT Assessment Act 1986 there was no difference between whether a fringe benefit was “salary packaged” or not. But recently, changes have been made to limit the FBT concessions and exemptions to situations where the benefit is not provided under a salary package arrangements.

In 2008 the FBT Assessment Act 1986 was changed so that the exemption provided by section 41 would no longer apply to food or drink provided to an employee as part of a salary sacrifice arrangement.

In 2012 the FBT Assessment Act 1986 was changed so that:

  • Concessions that apply to the valuation rules in respect to in-house expense payment benefits, in-house property benefits and in-house residual benefits do not apply to benefits under a salary packaging arrangement.
  • The specific exemption that applies to residual benefits in respect to private home to work travel through public transport, where the employer and associate are in the business of providing transport to the public, does not apply where the benefit is provided in-house and where the employee accesses the benefit under a salary packaging arrangement.
  • The annual reduction of aggregate taxable value of $1,000 does not apply to in-house benefits where the employee accesses the benefit under a salary packaging arrangement.

This draft legislation is the third time the Government has limited FBT exemptions and concession so they do not apply to “salary packaging” arrangements.

Given that there is now a definition of “salary packaging” in section 136 of the FBT Assessment Act 1986, it is very easy to amend this Act so that any exemption or concession in the FBT law does not apply where there is salary packaging (interestingly my auto correct keeps changing this to slurry packaging…).

As there will be no car manufacturing in Australia in 2017 why would not the Government consider saving $800 million a year and make it so that the statutory method for calculating the FBT on cars only available if the car is not salary packaged.

Cases Income Tax

Can I claim a deduction for travel to work?

NO! Well maybe No.

The Full Federal Court in the John Holland Group case has concluded that the costs of certain travel for fly-in-fly-out employees travelling to work can be deductible (so if paid for by the employer there will be no FBT payable under the otherwise deductible rule).

In this case the employees lived in Perth and worked in Geraldton. The employer required to employees to be at Perth airport at a certain time each week, in uniform, and during the time in the airport, on the plane and travelling to the site (including no alcohol and language rules).

The Federal Court concluded that the employment started at the airport. Therefore the travel on the flight is deductible.

What does this mean for my trip to work today?

First, this case will probably be appealed by the Commissioner to the High Court.

Second, if you are at the direction of your employer during the travel (method and timing defined by the employer) like most FIFO arrangements it will be deductible.

Third, I am sure that if I sign an agreement with my employer to leave for work at 7:30, catch the 451 bus, wear a uniform, and not drink and swear on the bus (what will I do now on my bus trip?) the Commissioner will NOT let me claim a deduction. This decision is similar to the situation of an emergency surgeon who is called at home and gives the theatre staff instructions before jumping in the car. The work started on the phone so the travel is deductible. To get a deduction for the travel we need to show we have started working before the travel started.

Fourth, employers with FIFO employees will not have to pay FBT on the travel costs.

I can’t wait for the High Court case.


Tax training rules

I know the idea of thinking about the best way to explain the tax system is not the first thought of the day for most people… But to start today…

This is what I think should occur in every tax training event or tax training document. Here are my six tax training rules.

1. The session or document must be “evolutionary”, being that they need to start from first principles and not assume substantial previous knowledge. With a technical discipline like taxation, once you have missed a learning step it is often not possible to engage later in the training.

2. The session or document must explain the “why”, being that it is easier to understand a certain provision of taxation legislation, if you first understand why the policy makers wanted such a provision to exist.

3. The session or the document must be “relevant and practical”, being that it cannot merely be a discussion of the provision of the legislation, but must discuss how a taxpaying entity would apply and comply with the provision, and how a revenue authority would collect any revenue that flows from the provision and ensure compliance with the provision.

4. The session or document must be “empowering”, being that those trained are confident to apply the provisions after they have left the session or read the document as they feel they have a detailed understanding of its purpose, its operation and its outcomes.
5. The session or document must be “open and respectful”. As taxation legislation and administration is very difficult to understand, the session must allow for participants to feel comfortable to ask open questions and responses must be respectful.

6. The session or document must be “fun”. Taxation training can be thought of as “boring” and if this is the case participants will engage less and be less confident as a result. Therefore, a tax technical session must be fun for the participants.

In addition to these six “taxation training” principles, it is important to apply general adult learning principles as proposed by Malcolm Knowles in 1970. These include:

1. Autonomous and self directed learning.

2. Learning that allows for an accumulated foundation of experience and knowledge.
3. Learning that is goal oriented.
4. Learning that is relevant.
5. Learning that is practical.
6. Learning where participants are shown respect.
Many of these factors are in my six tax training rules.

Now I have to live up to my rules.

Income Tax Planning Idea Tax Policy

The negative gearing myth exposed

If we stopped negative gearing on 1 July 2015 it would reduce the budget deficits across the next four years by $2.94 billion. Sounds amazing…

The budget deficits over the next four years are well over $80 billion combined!

Can we please accept that proposed changes to super by the Opposition ($1.2 billion a year or $4.8 over four years) or changes to multinational tax by the opposition ($3.2 billion over four years) or removing negative gearing get us NO WHERE NEAR a balanced budget.

All these proposals combined are less than a 15% solution… And these are the big three tax issues!

You cannot solve the budget deficits by taxing alone. And that just leaves cutting spending.

Can we please have a mature debate or do we just keep saying “it is only a revenue problem…”

Income Tax Tax Policy

A fundamental change to Division 7A (stuck in a review for another year!?!?)

You can’t just say this and do nothing…

The Government has FINALLY released the very long awaited post implementation review into Division 7A . This review started in 2012 and was to be the place where the Government, through the Board of Taxation, consider making Division 7A less painful. Specifically, in 2013 the Board were told to consider (aka solve) the Commissioner’s change of position in December 2009 in relation to Unpaid Present Entitlements to corporate beneficiaries.

But unbelievably, in the press release where the Assistant Treasurer released this review, he 100% chickened out and said “They will be carefully considered alongside the submissions we have received from all parts of the community in response to Re:Think, the tax discussion paper.”

So the response the Government makes to this long awaited review, which has great recommendations that will really help businesses stuck with Division 7A issues, is to hand the review recommendations to another review.

A review of the review… Embarrassing! And this from a Government that complained about the way the previous government handled reviews.

But what does the Board of Taxation recommend… Changes that would fundamentally change Division 7A. In summary:

For general Division 7A loans

  • There should be no requirement for a formal written agreement between the parties, just written or electronic evidence showing that a loan was entered into must exist by lodgement day.
  • The statutory interest rate would be set at the start of the loan and fixed over the term of the loan.
  • The maximum loan term would be 10 years.
  • The prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows:
    • 75 per cent of the original loan by the end of year three;
    • 55 per cent of the original loan by the end of year five;
    • 25 per cent of the original loan by the end of year eight; and
    • 0 per cent of the original loan (that is, fully repaid) by the end of year 10.
  • Subject to meeting the maximum loan balances, there would be no specified annual principal repayments.
  • Interest would be able to be accrued annually but would have to be paid by the end of years three, five, eight and 10.
  • Basing the amount of any deemed dividend on the amount of the shortfall in the payment required.
  • Transitioning all pre existing Division 7A loans and pre 1997 loan to the new 10 year loans from the application date of the new provisions.
  • Enacting a self correction mechanism where certain errors are made.

In relation to Unpaid Present Entitlements to Corporate Beneficiaries…

  • Introducing a legislative amendment that allows trusts to make a once and for all election for loans from companies, including UPEs owing to companies to be excluded from the operation of Division 7A.
  • Making the election by completing a label in the trust’s tax return by the due date for lodging the return for the year of income in which it is made.
  • Ensuring that a trust that makes such an election forgoes the CGT discount on capital gains arising from assets other than goodwill and ’intangible assets inherently connected with the business carried on by the trustee’;

Yes these changes would be amazing and solve most, if not all of the problems with Division 7A. The Government has had this report since November 2014 and have only released it today (Friday afternoon before a long weekend) so they can dump it in another review.

Embarrassing (opps – I said that before).

Income Tax Tax Policy

Div 7A and UPEs – The Assistant Treasurer Chickens out

I will write more about the Board of Tax report on Division 7A tonight, but I just sent this to the Assistant Treasurer…

I refer to your press release of today.

We have been waiting for you to release the Board of Tax report on Division 7A since 2012 as we knew it would recommend fixing the absolute mess made by the Commissioner’s position from December 2009 that Unpaid Present Entitlements to corporate beneficiaries are subject to Division 7A.

And the Board of Tax report perfectly solves the problems we have had to survive through since 2009.

We expected the reason the Government has been sitting on the report since November 2014 was the Government were preparing to implement the Boards recommendations to fix this mess…

But you have just kicked these recommendations into another review. This is not appropriate. It is five and a half years of the industry saying the Commissioner’s position on unpaid present entitlements to corporate beneficiaries is inappropriate and after a through review concluding the same (Recommendation 9 in the Boards review would fix all the problems) you just kick the problem further down the road.

This is the classic government “review” leading to reconsideration in another “review”.

Kevin Rudd would be very proud of you Josh!