It has been a while but the Government is back with some new law. Yes I know we had the changes to the personal tax rates, but that was boring (changes to rates and thresholds). Now we have some real meaty changes to digest!
The beautiful named “Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019” has some very interesting changes.
One of my favourites in the SG Act will be changes so that an individual’s salary sacrifice super contributions cannot be used to reduce an employer’s minimum SG contributions. It does this stating an employer must contribute at least 9.5% of an employee’s ordinary time earnings and any amounts sacrificed into superannuation that would have been ordinary time earning if there was no packaging. Interestingly, if an employer has a shortfall, the amount of the shortfall will be calculated by reference to their employee’s salary or wages base, and now any amounts sacrificed into superannuation that would have been salary or wages, but for the salary sacrifice arrangement. These changes start on 1 July 2020.
But you want something meatier? How about the fact that the Bill denies deductions that relate to holding vacant land. Before you scream, this does not apply to where the land is used or held available for use in the course of carrying on a business in order to earn assessable income. It also does not apply to corporate tax entities, superannuation funds (but it does apply to SMSFs, managed investment trusts, public unit trusts or unit trusts or partnerships of which all the members are entities of the these types.
Land is vacant if there is no substantial and permanent building or other structure that is in use or available for use on the land, with an independent purpose that is not incidental to the purpose of another structure or proposed structure on the land. Have a look at these examples:
Example 3.1: Vacant land
Chelsy owns a block of land. She intends to eventually build a rental property on the land. However, while the block of land is fenced and has a retaining wall, it currently does not contain any substantial and permanent building or other structure with an independent purpose that is not incidental to the purpose of another building or structure. As the block of land does not have a substantial and permanent structure on it, it is vacant land and Chelsy cannot deduct any holding costs she may incur in relation to the land.
Example 3.2: Expenditure for mixed use land
Howard owns one hectare of land in Queensland. He uses one third of the land for carrying on his firewood sales business. He stores all his firewood in the open and there are no structures on the land. Howard has set aside the remainder of the land to construct a rental property. The remaining part of the land is separately fenced off and has been subject to site work including earthworks to clear the land ready for construction.
Howard is eligible to claim losses and outgoings relating to holding the part of the land that he uses for carrying on his firewood business, to the extent that the loss or outgoing is necessarily incurred for the purpose of gaining or producing the assessable income.
The remainder of his land is not used or held available for use in carrying on his firewood business. Further, as there are no structures on Howard’s land, it cannot contain a building or other structure that meets the requirements of these amendments. As a result, Howard is not entitled to claim any deductions relating to the costs of holding this part of the land even though he intended to derive income from it in the future as a rental property.
And now comes the kicker… There is a special rule applies when determining if land that contains residential premises is vacant. The land is treated as remaining vacant for the purposes of these amendments until the residential premises are able to be occupied under the law and leased, hired or licensed or available for lease, hire or licence. IF YOU DON’T HAVE AN OCCUPANCY PERMIT AND HAVE NOT ADVERTISED THE LAND IS VACANT??? Magic, you just made a building disappear and miraculously reappear as soon as you advertised for a buyer! This applies from the start of the first quarterly period commencing after the day of Royal Assent of the Bill.
Not meaty enough… What about the change to prevent the small business CGT concessions from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.
When capital gains arise from a CGT event that involves the creation, transfer, variation or cessation of a right or interest that entitles an entity to either an amount of the income or capital of a partnership or an amount calculated by reference to the partner’s entitlement to an amount of income or capital of a partnership then we have a new test in the small business CGT concessions. This new test states that these concessions can only be used if the CGT event make the entity holding the right or interest a partner (including for example, the transfer of all or part of a partner’s share in a partnership to another entity, making that other entity a partner or increasing their existing share in the partnership). So you can transfer the whole interest and not be a partner any more, but you just can’t transfer the income rights.
Laura, a partner in a partnership, makes an equitable assignment of half her partnership interest to Dominic, her spouse. This entitles Dominic to half of any amounts Laura receives as a partner, but does not make Dominic a partner.
The assignment results in Laura having a CGT event. The CGT event involves both the variation of Laura’s partnership interest and the creation of a right in the hands of Dominic. The partnership interest held by Laura and the equitable interest held by Dominic must be membership interests for the new additional basic condition to be satisfied in relation to the CGT event.
The partnership interest held by Laura is a membership interest of Laura’s in the partnership and satisfies the condition. The equitable interest held by Dominic is not a membership interest of Dominic’s and cannot satisfy the condition.
As Dominic’s interest does not satisfy the new additional basic condition, the small business CGT concessions are not available to Laura in relation to the CGT event.
This applies from May 2018.
I feel like a salad now…