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Tax stats

The 2013/14 Taxation Statistics are out…

My favourite part so far…

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So if you earn more than $80,000 you are in the top 19.5% of people who earn anything (excludes kids and other who don’t have to lodge tax returns like those just on a pension…). if you earn more than $180,000 you are in the top 2.9%. That means you are probably relatively richer than you thought you where…

And for those who want a more progressive tax system, those 19.5% of people pay 68.7% of all the individual income tax and the top 2.9% pay 29.8% of all the individual income tax. The top 20% pay 70% of the tax and the top 3% pay 30% of all the tax… Sounds like it is progressive enough…

PS: I keep being told we have a revenue problem and not a spending problem and if we just taxed the rich more we could fix out $35 billion a year structural deficit problem.

So what would we need to do to income taxes of the top 3%, or the top 20% to increase income taxes by $35 billion a year, based on these stats?

  • If you only want to go after the top 3% of taxpayers (probably because you have realised your are in the top 20%) to find an additional $35 billion, you need to increase the tax take from these guys by 70%. That means if you earn $180,000 we will need to take just under $100,000 in tax. If you are in the top 1% and earn $350,000 we will take $240,000 in tax.
  • Well lets just try to get the extra $35 billion a year from the top 20% who earn more than $80,000 a year. We only have to increase the tax on all these guys by 30%. So if you are earning $80,000, instead of $19k we will now take $25k in tax. And if you are earning $150k, instead of $45k in tax we will take a bit less than $60k

These are ridiculous outcomes and show there is no way we can plug the structural deficit by income tax increases.

We won’t touch the GST.

Every independent economist says increasing the company tax rate will decrease government revenues.

And there is not billions of dollars of tax concessions we can just reasonably turn off (unless you want to tax family homes or end the entire super system) or billions of dollars in unpaid taxes by evil multinationals as Fairfax keeps trying to claim.

What does that leave us to fix the 35 billion structural deficit? Whatever we can do with the tax system, and then we need to cut spending.

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The Commissioner gets a new discretion

The Commissioner has a series of discretions. For example the Commissioner can decide not to apply the non-commercial losses provisions (section 35-55) or not to apply excess contributions tax (section 292-465).

But while he can exercise these discretions he almost never does (and I pretty much only said “almost never” in this sentence as I have not seen every circumstance).

But now the Government has introduced a new Bill that will give the Commissioner a general discretion (see Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016) that applies to any part of the tax laws.

This Bill provides the Commissioner with a general discretion, described as his “Remedial Power”, to modify the operation of a taxation law where:

  1. The modification is not inconsistent with the intended purpose or object of the provision;
  2. The Commissioner considers the modification to be reasonable, having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object; and
  3. The Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible.

This means if the law does not achieve its stated purpose, and the costs will be minimal, he can ignore the words of the law and just implement the purpose of the law.

Most importantly, if the Commissioner does use this power to modify the operation of the law, a taxpayer can ignore the modification if it would produce a less favourable result for the taxpayer. This means, any change the Commissioner makes will only apply in the taxpayer’s favour.

So this sounds great… But we all know how often the Commissioner exercises his discretions in the taxpayer’s favour… almost never… and I expect the same will apply with this discretion. Lets remember to count how many times he uses this “Remedial Power” before it gets reviewed in three years time as is required in the Bill…

PS: This Bill also makes two other changes.

First, the Bill allows primary producers to access income tax averaging 10 income years after choosing to opt out, instead of that choice being permanent.

Second, the Bill provides relief from luxury car tax to certain public institutions that import or acquire luxury cars for the sole purpose of public display. These changes apply to public museums, galleries, and libraries that are registered for goods and services tax and that have been endorsed as deductible gift recipients.

 

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Collecting points in the Tax Act…

I have to start by telling you I am not making this up.

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Today the Government released the Bill for the “innovation” changes announced last year. in the Bill, called the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, and in this Bill are some amazing concessions for investors in certain companies.

These investors in the equity of these companies can receive a non-refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap amount of $200,000. In addition, investors may disregard capital gains realised on shares that have been held for between one and ten years (Investors must disregard any capital losses realised on these shares held for less than ten years).

S0 you invest $200,000 in one of these companies, get a $40,000 tax offset straight away and can ignore paying any CGT on the gain for the next ten years… Awesome.

PS… the investor does not need to be an Aussie resident, any entity can invest, non-sophisticated investors are limited to investing amounts of $50,000 not $200,000, the shares must be newly issued shares not under an ESAS, the shares cannot be preference shares, the investor and the company cannot be affiliates, the investor and their affiliates cannot own more than 30% after the acquisition… yes it is already a dog’s breakfast but trust me it get worse…

“So let me at it” you say. “What type of companies can I invest in and get all these goodies?” There are two tests that a company must pass to be the type of company I can buy new shares in and get these goodies.

The first is the “early stage test”. This requires the company to be either incorporated in the last three years, or registered on the ABR in the last three years, or been incorporated in the last 6 years and have spent less than $1,000,000 total (as shown on company tax returns). In addition, any company that meets these conditions must also have total expenses of $1 million or less in the previous year, assessable income of $200,000 in the previous year and not listed on the stock exchange. All objective tests.

But when you hit the second test, the “innovation test”, it becomes obvious that the people who wrote this law had absolutely no idea on how to objectively define innovation. The innovation test is “principle based” and the principles to assess if you pass the test are

Genuinely focused on developing its new or significantly improved innovation for the purpose of commercialisation and show that the business relating to that innovation has the potential for high growth, has scalability, can address a broader than local market and has competitive advantages.

Could they be any more vague?!? According to the EM every single part of this definition is a separate “principle based” test that needs to be passed.

And the Government seems to have missed the point that a company can do more than one activity and one activity might pass this test (if we can work out what it means) and one cannot. What do we do then?

But they know they understand that no one will really be able to assess if they meet such a vague and uncommercial test so they offer an alternate test with an objective standard.

I am not making this up…

As an alternative to satisfying the “principle-based so vague you could never assess it innovation” test (my new name for it), companies can collect points and if they collect 100 points then they will be treated as passing the innovation test. Yes, the tax law now lets you collect “points”.

How do I get these points:

1.  A company will be awarded 75 points if it has at least 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R&D activities provided under Division 355.

2.  A company will be awarded 50 points if it has at least 15 and less than 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R&D activities provided under Division 355

3.  A company will be awarded 75 points if, at any time, it has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth’s Entrepreneurs’ programme.

4.  A company will be awarded 50 points if it is undertaking or has completed an eligible accelerator programme (whatever that is…).

5.  A company will be awarded 50 points if it has previously (at least one day before) issued shares to a third party, provided that the third party paid at least $50,000 for those shares and was not an associate.

6.  A company will be awarded 50 points if it has one or more enforceable rights on an innovation through a standard patent or plant breeder’s right that has been granted in Australia or an equivalent intellectual property right granted in another country.

7.  A company will be awarded 25 points if it has one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country.

8.  A company will be awarded 25 points if it has a written agreement to co-develop and commercialise an innovation with specific research organisations or universities

 

Yes, it is true. Go out and start collecting points and if you have enough, you can give special benefits to your investors (the easiest way is to do $1 of R&D in a year with no other expenses and get 75 points and then get a design right in Uzbekistan and get 25 points).

There are two other options if you can’t find enough points.

First you can just “wing it” and hope that your company is innovative. But when the investors claim their concession, the Commissioner will be visiting very quickly and you will need to prove you meet the unbelievably vague innovation test.

Second, you can seek a ruling from the Commissioner about whether their circumstances satisfy the innovation test. In providing a ruling, the EM states that the ATO may need to consult with the Department of Industry, Innovation and Science. This does mean you will have two Government agencies considering if you are:

genuinely focused on developing its new or significantly improved innovation for the purpose of commercialisation and show that the business relating to that innovation has the potential for high growth, has scalability, can address a broader than local market and has competitive advantages.

That sounds like a fun experience for a company. And remember, this is to allow the company to get more investors, it does not give you any direct benefit. Lets hope the fee consultants charge for doing this process of proving to two Government entities you meet this vague test is less than the actual investment the company gets (I doubt it!).

In summary, this is pretty much a dog’s breakfast. The principle base test is too vague to be of any use. The cost of proving the principle based test will be too high. And the objective test pretty much only gives you points if you have already registered with other government type entities for other benefits (R&D Tax Incentive with innovation Australia, Patents or other IP with IP Australia, Commercialisation grants with the Department of Industry, some research organisation agreements have their funding from the government who can vet third party agreements…) so the test is a cop out as it requires other Government entities to do the review of the company.

This was a policy that sounded great but does not work in practice. But lets wait and see how many people claimed the tax offset in their 2016/17 tax return. And when it is less than 2,000 can we repeal this law please.

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What changes are coming in tax and super?

Now that the Prime Minister has stated that the Budget “will be, for all practical purposes, the White Paper” in a radio interview, we can put the idea of a radical rethink of the tax system in the too hard basket.

So in May we get to compare the less than comprehensive tax policies of the ALP (increasing the excise on tobacco, making a minor change to thin capitalisation safe harbours, reduce a threshhold from $300k to $250k (Division 293 tax), only allow $75k a year to come out of super tax free each year, changing a rate of a concession from 50% to 25% (CGT discount) and limiting debt deductions that salary and wage earners can use (negative gearing)… boring) to the ideas of the Government that sound less and less comprehensive as the Budget gets closer (changes to super and the marginal tax rates???).

I would hate to be sitting in the Revenue Group of the Treasury looking for exciting changes to tax and super policy to get my teeth into. This does not look like much more than fiddling with rates and thresholds.

The only tax and super policy that we know is being worked on at the moment in the Revenue group is the following…

Draft law in the public for consultation

  1. Commissioner’s power to modify the law

And the stuff that is announced but nothing has been done other than an announcement

  1. Innovation statement stuff
  2. No low value GST threshold – GST changes are always is slow as each State and Territory has to have a go at it
  3. Amendments the tax hedging rules
  4. Functional currency rules — extending the range of entities that can use a functional currency
  5. Debt/equity tax rules — limiting scope of integrity rule
  6. Taxation of financial arrangements — foreign currency regulations — technical and compliance cost savings amendments

Remember we were told by the current Government in 2014 that…

The tax system is holding Australia back

There is evidence that the economic costs of Australia’s tax system are higher than they need to be. Australia’s tax system was designed in a different era, when the economy was very different. It was not designed to deal with multinational trade, increasing global competition for investment, the internet and the digital economy. The implications of an ageing population requires a fresh approach to tax.

Therefore we were going to have a comprehensive review of the tax system. YEAH RIGHT!!!

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Fairfax just can’t get tax…

Here they go again

Labor drew up a comprehensive suite of tax measures, including increasing taxes on cigarettes, multinational firms, superannuation and investment housing.

So according to a “senior economics writer for Fairfax Media”, a “comprehensive suite” of tax measures is:

Increaing the excise on one product;

Make a change to thin capitalisation safe harbours;

Reduce a threshhold from $300k to $250k (Division 293 tax);

Only allow $75k a year to come out of super tax free each year;

Changing a rate of a concession from 50% to 25% (CGT discount); and

Limiting debt deductions that salary and wage earners can use (negative gearing).

Go have a read of the Henry Review and compare a “comprehensive suite” of tax changes to this list. 

I have to stop reading Fairfax on tax…

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Negative Gearing, the 50% discount and the ALP

Just a quick note on the ALP’s policy on removing negative gearing… The Opposition has announced they will limit negative gearing to new housing from 1 July 2017.

From the announcement it appears the losses from negative geared properties that are not new properties will not be able to be offset against any salary and wage income.

However, these losses can still be used to offset income from investments, or can be carried forward to offset the final capital gain on the investment.

Interestingly, the policy document put out by the Opposition states that this limitation on negative gear losses also applies to “new investments in shares”. Therefore, it does appear that from 1 July 2017 you may not be able to offset negative gearing losses on any newly acquired asset, including shares, against your salary and wage income unless the asset is new residential property.

The opposition has announced it will halve the capital gains discount for all assets purchased after 1 July 2017 to 25%. All investments made before this date will still be able to access the 50% rate. In addition there will be no change to the rate of the discount in superannuation.

Most interestingly, the policy document states that the CGT discount will not change for small business assets. So it appears that if you are a small business entity selling an active asset, you still will get the 50% rate. But until we see the final legislation it is difficult to state how the new rules will apply.

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Rulings

Are ATOIDs over?

On the 28th of November the Commissioner released two ATO Interpretative Decisions on non arms length income and limited recourse borrowing arrangements…

And since that date, no more ATOIDs. Strange.

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ATOIDs arose to fill in a gap between public rulings and private rulings.

What if a complex tax issue is not covered in a public ruling, but the Commissioner has a position in the various private rulings he gives? Then he releases an ATOID so we all can know these positions and act in accordance with them.

And initially the Commissioner gave us lots of these to consider (in 2013 there was over 1,200 released) helping us understand how the Commissioner approach various tax issues.

But the Commissioner has never been comfortable with these “non binding” opinions, and much of the text of an ATOID is taken up with caveats about how the ATOID should, and according to tne Commissioner, and should not be used. When arguing with the Commissioner in an audit, objection or the AAT, I have sern ATO staff hate the fact that I can show through an ATOID how the Commussioner has acted in previous factual situations.

So my guess is the Commissioner has just decided to stop issuing ATOIDs. He has decided to stop looking for issues covered in private rulings that would be helpful to be more widely known.

He can do this if he wants but at least he should tell us he is doing this and why he is doing it.

I may be wrong and next Friday (they are generally released on a Friday – good weekend reading) we will see an ATOID or two.

But with no ATOIDs for almost two and a half months, I think it is about time the Commissioner let us know about the future of ATOIDs.

And the picture is the Solomon Island flag made into a tax officer’s uniform… Love it.

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Income Tax Legislation Planning Idea Planning Stuff

Small Business Restructure Rollover and Stamp Duties

I have discussed this rollover before so if you have no idea what I am talking about have a look at these links first.

The rollover is very broad, applying to CGT assets, revenue assets, trading stock and depreciable assets. But it does not cover all the taxes that may be rolled over under these restructures.

Clearly this does not cover State and Territory taxes, like stamp duty.

So does this mean that any restructure that we do is still going to cost us a whole lot of tax.

Remember, that stamp duty can be large. In NSW the current rate is $8,990 plus $4.50 for every $100, that the value exceeds $300,000. So restructure an inexpensive business premise of say $600,000 to a better entity (say out of a company and into a discretionary trust) then you end up with stamp duty of $22,490.

Ouch. But can we avoid this tax?

In NSW, as duty on the transfer of business assets or a declaration of trust over ‘business assets’ (other than land) will be abolished from 1 July 2016 you could consider keeping the land and buildings in the current structure and moving the “business” out of the current structure to another entity. Of course this would mean the land and buildings still sit in the old structure, which if it is a company may mean no access to the CGT concession and no income splitting on the earnings from the land and buildings….

At this point we need to ask ourselves is the future access to possibly the CGT concessions on the land and buildings and income splitting from the income of the land and buildings worth paying $22,490 of stamp duty today (using the $600,000 example above)? Get a spreadsheet out and do the maths!

But perhaps there is another way to avoid the stamp duty all together.

In most jurisdictions there are “corporate restructure” relief rules in the respective Duties Act. And if we were happen to forgo the income splitting benefits that we get from rolling assets into a discretionary trust, then we might be able to avoid the stamp duty on the sale of the property from the Company to a trust.

If the trust that we roll the land and building to was a unit trust, not a discretionary trust, then all the units in the unit trust have to be owned by the same underlying economic owners. This would be the case if the company from which we intend to roll the assets out of owns all of the units in the unit trust.

In NSW, section 273B of the Duties Act 1997 states:

Duty under this Act is not chargeable on a transaction if the Chief Commissioner is satisfied, on application by a party to the transaction, that:

(a) the transaction is a corporate reconstruction transaction, and

(b) the transaction, or the series of transactions of which the transaction is a part, is undertaken for the purpose of either or both of the following:

(i) changing the structure of a corporate group,

(ii) changing the holding of assets within a corporate group, and

(c) the transaction, or the series of transactions of which the transaction is a part:

(i) is not undertaken for a purpose of avoiding or reducing duty under this Act on another transaction, and

(ii) is not undertaken for the sole or dominant purpose of avoiding or reducing a liability for tax, other than duty under this Act, under a law of an Australian jurisdiction.

Note, that to get this you need to apply first to the Commissioner in each state or territory and there are different processes and timeframes for this approval in different jurisdictions.

Also note that while the term “corporate” is used in the definition about, a unit trust that is wholly owned by a company can be a part of a “corporate group” in the NSW Duties Act.

So would the Commissioner of Taxation in NSW agreed that rolling the land and buildings from a company to a unit trust where the units are all owned by the company is an exempt “corporate reconstruction” under Part 1 of Chapter 11 of the Duties Act 1997 (NSW)?

There is only one way to find out. Ask him. And if he says yes you can now use the small business restructure rollover without paying any taxes at all and get the land and building that are in a company into a trust that can access the 50% discount (as long as the trust holds the land and buildings for 12 months).

Choice (as my New Zealand friends say)!

Categories
Income Tax Legislation Tax Policy

Property transactions and clearance certificates

The Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015 is now law (just awaiting Royal Assent).

I don’t like it at all…

But we now need to understand that from 1 July 2016 a purchaser of certain CGT assets, being asset valued at $2 million or more that are taxable Australian real property or an indirect interest in Australian real property, will need to withhold 10% of the purchase price and remit it to the Commissioner if the seller does not provide a “clearance certificate” from the Commissioner.

I should also acknowledge this withholding does not apply to transactions listed on an approved stock exchange or whether the foreign resident vendor is under external administration or in bankruptcy.

This will be a process nightmare so lets step through how this SHOULD work in practice

A resident vendor…

A vendor goes to http://www.ato.gov.au/FRCGW (should be up and running before 30 June 2016) and submits an online application called the clearance certificate application.

Once the application for a clearance certificate is lodged there will be an automated process for the issue, or rejection, of a clearance certificate. Where the Commissioner has all the required information to assess if the vendor is a resident, it is expected that clearance certificates will be provided within days of being submitted.

However, where there are data irregularities or exceptions, the clearance certificates will be provided within 14 to 28 days. In addition, the Commissioner states that higher risk and unusual cases may take longer than 28 days.

This clearance certificate can be applied for before the property is listed for sale and the clearance certificate will be valid for 12 months.

A non resident vendor making a small or no capital gain (exempt asset) or making a capital loss

This is where the second form at www.ato.gov.au/FRCGW (should be up and running before 30 June 2016), called the variation application, comes into play.

Where the vendor is not entitled to a clearance certificate because they are a non-resident, but they believe a withholding of 10% is inappropriate, the vendor can apply for a variation.

The vendor completes this on-line form requesting a lesser withholding rate be determined by the Commissioner. The Commissioner may then issue a notice of variation and this should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.

Every seller of assets greater than $2 million

If you are provided with a clearance certificate by settlement – nothing changes.

If you are not – withhold 10% of the amount and only pay the vendor 90%. Where an amount is withheld, the purchaser is required to complete an online form, called the Purchaser payment notification, to provide details of the vendor, purchaser and the asset being acquired. Again this can be found at at www.ato.gov.au/FRCGW (should be up and running before 30 June 2016). The purchaser will then receive a payment reference number, with various methods to make the payment of the withheld amount.

AND NOW THE BAD NEWS – WHAT IF A SELLER FORGETS TO GET A CLEARANCE CERTIFICATE AND FORGETS TO WITHHOLD 10%?

The penalty for failing to withhold is equal to the amount that was required to be withheld and paid. So make sure the contracts require the vendor to provide a clearance certificate or agree that the amount to be paid to them is only 90% of the contract price.

Not a final withholding…

Remember, this withholding is not a final withholding tax, so the seller will still need to include any capital gain in their tax return and claim a credit for the amount withheld.

I don’t like it at all…