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 (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 (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 (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.


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…

Income Tax Tax Policy

The end of tax depreciation schedules

I don’t know if the Quantity Surveyors have worked it out yet, but they have the most to lose from the changes to negative gearing that are currently being discussed.

Screen Shot 2014-05-21 at 8.37.30 pm

Labor is promising to remove negative gearing from all purchased buildings that are not new buildings from 1 July 2017.

And the Government is considering a cap on deductions, which will include deductions on rental properties.

So either way, it looks like you and I won’t be able to claim all the current deductions on most rental properties soon.

If Labor win, after 1 July 2017, the only people who will want a tax depreciation schedule will be:

  • The buyers of new properties – but it is pretty easy to ask for the information from the seller, especially the construction costs and even the depreciable assets are easy to value as they are new.
  • Buyers who are not negatively geared.

Under the Labor model, if the interest costs, rates, management fees on the rental property washes out most or all the rent, I won’t want a tax depreciation schedule as my deductions cannot go above my rent (It cannot be negatively geared).

If the Coalition win and they cap deductions (The plan is to cap work related deductions and rental property deductions to a percentage of the taxpayer’s income), then there will also be a reduction in the need for tax depreciation schedules.

All my deductions other than those on tax depreciation schedules, like work related deductions, or interest, or rates, or management fees, or… are easy to work out what they are by just looking at bank accounts or invoices. So if I am going to go near or above the cap, the deductions I won’t claim are the ones that are hardest, and most costly, to assess – being the deductions in a tax depreciation schedule.

It looks like that either way the election go, the need for tax depreciation schedules is going to reduce.

Tax Policy

Tax “expenditures”

The yearly “tax expenditure statement” has been released ( What is a tax expenditure? Its a negative tax. Effectively it is a tax concession so that certain income is taxed less than the “norm”.

For example, super is taxed at 15% generally, which is less than most marginal tax rates.

So what are the big tax expenditures?

Capital gains tax main residence exemption cost $54 billion in revenue each year.

Concessional taxation of  superannuation contributions and superannuation entity earnings cost $30 billion in revenue each year.

GST discounts and exemptions cost $21 billion in revenue each year.

Capital gains tax discount for individuals and trusts  costs $6 billion in revenue each year.

Concessional taxation of non-superannuation termination benefits costs $2 billion each year.

My favourite three are growing with the car fringe benefit statutory method aproaching $1 billion, Division 43 capital deductions costing $1 billion and the R&D tax incentive $850 million each year.

But remember we need to find $40 billion in savings to balance the budget. We are not going to find this by playing with tax concessions alone…

Tax Policy

Arrr, the Greens

The Greens have done it again. When you put out a press release titled “Axing just 4 unfair tax breaks would plug Budget revenue hole” you are going to get me excited. With a yearly budget deficit of $35-40 billion I was desperate to see what 4 tax breaks can raise this amount each year.

But it is a Greens press release so according to the Greens the “Budget revenue hole” is the additional amounts that will be added to these already massive yearly deficits when the MYEFO is released this week. So they are not fixing the $35-40 billion problem, just the growth in the $35-40 billion problem!!!

But in case you are interested in what they are proposing here are their 4 ideas.

  1. Progressive superannuation taxation to replace the 15 per cent flat tax rate on pre-tax superannuation contributions from 1 July 2016. Earn less than $18,200 and your fund pays no tax, earn over $150,000 and your fund pays 30% tax (with a 4%, 15% and 22% rate in between)
  2. The removal of the capital gains tax discount for all capital gains realised on or after 14 December 2015 (but go back to indexation)
  3. Remove negative gearing for assets purchased from 14 December 2015
  4. Remove fuel tax credits (FTCs) for all industries except agriculture and other mining and coal related stuff

Lets be honest, these are massive changes… BUT THEY STILL ONLY KEEP US LOSING $35-40 billion a year!


Income Tax Legislation Planning Stuff Tax Policy

Innovation Tax Changes

Why does “innovation” have anything to do with tax changes? In the Government’s Innovation Statement most of the expenditure is making tax changes.

Tax is a revenue raising device… Not a method to change people’s actions. When you use tax policy to do anything other than raise revenue you get bad policy.

But here are the changes announced.

The “same business test” becomes the “predominantly similar business test”. This means you can still get to the losses if the business uses similar assets and generates income from similar sources. Let the loss trading begin!

Taxpayers will now be able to self-assess the tax effective life of acquired intangible assets that are currently fixed by statute. So instead of having to depreciate a patent over 20 years or in house software over 5, a taxpayer can now self assess its life.

Are you excited yet???

Early Stage Venture Capital Limited Partnerships (stay away as these are messy) will be able to get a10% non-refundable tax offset on capital invested. These partnerships can also get bigger than the current law allows before having to wind up.

Wake me up…

Lastly, certain investors will get a 20% non-refundable tax offset on investments (capped at $200,000 per investor per year) and a 10 year exemption on capital gains tax, provided investments are held for three years. Now this sounds more exciting. So what can I invest in to get these benefits?

The Government has not decided yet…. ARRRRAAAAHHHH. All we know is that these company must have been incorporated during the last three income years, not listed on any stock exchange and have expenditure and income of less than $1 million and $200,000. But in addition to this the company must be undertaking eligible activities – and no one knows what these are. This is just a perfect example of the marking coming before the policy!

Lets talk in 2016 about this

Legislation Tax Policy

What are we waiting for…

Each December I try to wrap up the year with the tax promises that have not quite made it into law. While the list has VERY, VERY SLOWLY, getting shorter, there are still a number of measures that are yet to get in to the tax laws.

And remember, after the last election, this Government promised it would be different to the previous Government (heard that before) and not leave announced measures unenacted.

So here is the list:

Announcements sitting in Bills before the Parliament

Draft law in the public for consultation

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

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

That is not a very long list. But there is an election coming so lets see what tax policies come up.

Income Tax Tax Policy

What a waste of time

It is stupid tax policy made worse…

From 1 July 2016 there will be a 10% non-final withholding tax on payments made to foreign residents that dispose of certain  property. The effect of this will be that where a foreign resident disposes of Australian property, the purchaser will be required to withhold and pay to the Australian Taxation Office 10% of the proceeds from the sale.

The reason they are implementing this is to stop non residents from just not paying any CGT on these sales. To do this we force the purchaser, not the non resident seller, to undertake the withholding.

There are a number of exclusions. But the most important is that the new withholding regime will not apply to real property transactions valued under $2 million.

Because we all said that “if a non resident is happy to not pay tax, they will also be happy to pretend they are residents to avoid this withholding” the Government has now come up with another solution… Clearance Certificates.

These certificates confirm that the withholding tax is not to be withheld from the transaction and the Government has decided that, for real property transactions valued above $2 million, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO.

So now everyone, including residents, will have to get one of these certificates if they want to sell property greater than $2 million.

So let me get this right…

Because naughty non residents were not paying their CGT on the sale of properties… Resident sellers now have to get a clearance certificate (non- residents won’t get one because they cannot)… and resident buyers have to keep watch to see if they have to withhold 10% – and if they don’t they will still owe 10%.

To stop non residents doing naughty things, residents are given substantial extra administration.

Good policy!


Tax Policy

Please Fairfax, think…

Once again Fairfax journalists are showing how little they know about tax.

Recently, the master of the tax mistake, Michael West, wrote about some recent tax amendments that have been blocked in the Parliament…

The second is an amendment to compel multinational companies to file, as do their Australian-listed peers, proper financial statements, and not the niggardly “Special Purpose” reports with which they disguise vital information about their tax affairs.

Michael, the Commissioner does not need or want General Purpose Accounts. He has access powers that means he can request taxpayers to send him details of every single transaction. So, if the Commissioner can see everything taxpayers do without having to look at General Purpose Accounts, why would taxpayer’s not want to produce General Purpose Account, which you claim “disguise vital information about their tax affairs”? These General Purpose Accounts are not “vital to the Commissioner in reviewing the tax affairs of these taxpayers so who is this tax information “vital” to.

Michael and his tax novices at Fairfax think this is vital, not to ensure the correct amount of tax is collected, as the Commissioner already has all the information to make this happen. It is only “vital” to Michael, as, up until now, almost everything he has claimed in his reporting of corporate taxation is wrong, and he hopes with this information he might get a bit closer to the truth.

If you think that is hard, Michael was the head reporter of the “Tax Justice Network” report that claimed there was $8 billion a year of unpaid corporate tax. When the head of tax policy at the Treasury was asked about this report and its repotting in the media, his words were measured. But if you watch it on YouTube you can see he is struggling not to laugh at the start and struggling not to show what a waste of time this is at the end. When this is the response of the most senior policy wonk in the Government in the area you know you are way off the mark.

On radio Michael has gone further. He states that not only should these companies provide ASIC with more information, but rather than having to pay ASIC to access these account,  anyone (especially lazy journalists who won’t invest time into understanding the area they are writing on) should be able to download these account for free. THERE IS NO WAY THIS WILL INCREASE THE TAX COLLECTED BY THESE COMPANIES SO WHY DOES MICHAEL WANT THESE CHANGES?

The tax law does not exist to help journalists Michael…

Income Tax Planning Idea Planning Stuff Tax Policy

And so there is another scheme to avoid Division 7A

A few weeks after 4 December 1997 I was told about my first Division 7A avoidance idea. And by mid 2008 the first amendment to Division 7A came about to undo this idea (the old section 109UB to stop trusts loaning corporate UPEs to owners).

Since then I have been asked lots of times to advise on new ways to avoid Division 7A so that shareholders can get access to income at a 30% tax rate.

And the Commissioner has just raised concerns about another idea to get the 30% tax rate.

In Taxpayer Alert TA 2015/4 the Commissioner states that setting up a partnership where a substantial amount of the partnership interests are held by companies, and the partnership loans these amounts to the owners, will not be effective at getting the 30% tax rate for the high income owners.

The Commissioner states that if you drop in one of these partnerships between the business in a company and the shareholders, this still might be a financial accomodation and Division 7A will still apply. If the income comes from the trust to these new partnerships the commissioner states it could be a reimbursement agreement under section 100A. And of course, the Commissioner threatens the general anti avoidance rule in Part IVA. And when the current Commissioner makes this threat he means it.

Have a look at the diagram in the Taxpayer Alert if you want a good summary of the arrangement the Commissioner is concerned about.

My general comments on Division 7A avoidance ideas that give a 30% tax rate to income for high income individuals… A 19% tax saving is big – big enough to easily justify getting a private ruling from the Commissioner. So why IN EVERY CASE I HAVE BEEN ASKED TO LOOK AT has the person who developed the idea not want my client to get a private ruling from the Commissioner? Some have wanted confidentiality agreement so that my client cannot disclose the idea to the Commissioner. I wonder why???

But the battle continues until the highest marginal tax rate gets closer to the company tax rate…

Budget Income Tax Planning Idea Planning Stuff Tax Policy

More Wow!

I was thinking about yesterday’s post and I have a strange thought.

If I have a CGT asset owned by a company I am not going to get the CGT discount. But if I use the rollover from yesterday’s post to move the CGT asset to a trust and sell it the next day I get the discount on the whole gain (the 12 month rule includes the time the company owned the asset under the new rollover).

Now I need to decide if a potential second stamp duty is more than half the tax on the capital gain…