Funny Stuff GST Income Tax Rulings

Am I cool if I say Bitcoin?

I live in a town of less than 400,000 people and I just saw a Bitcoin ATM. I don’t know who to use it but how cool am I for living near a Bitcoin ATM…

The Commissioner also is cool as he has released his thoughts on the tax treatment of Bitcoin transaction.

In summary, he thinks Bitcoin is not money (not widely used or general accepted as money) so using Bitcoin is like any barter transaction… For example:

I want to buy a coffee. I could:

1. Go to the coffee shop and use cash or a card to buy the coffee; or

2. I could go to the fruit shop, buy $4 worth of bananas and go to the coffee shop and see if they will swap my $4 of bananas for a coffee (barter); or

3. I could go to a Bitcoin ATM or Bitcoin exchange and buy $4 of Bitcoin (yes I know Bitcoins are worth over $600 – it is just an example) and go to the coffee shop and swap my Bitcoin for a coffee (barter).

There is no difference between example 2 and example 3 – effectively no difference between Bitcoin and bananas. Yes, Bitcoin has a exchange so has a standard value at any time so if you would prefer replace bananas with BHP shares as they have an exchange, the ASX.

The problem with this outcome is a GST issue. In example one the only GST remitted is by the cafe (around 40c) and I don’t claim it back.

But in examples 2 and 3 the cafe still remits its 40c but the Bitcoin ATM owner also remits about 40c on the sale of the bit coin it make to me. As I am not registered for GST, and even if I was it is unlikely either acquiring the bit coin or the coffee are a part of my enterprise, I can’t claim either of the GST amounts back.

Now I am off to get a selfie of me and the Bitcoin ATM…

Tax Policy

Julia Gillard’s tax legacy

This is a policy rant so if you care about what the current tax law is, and don’t care what it could have been, then save yourself some time and don’t read this… 

This week we have both the release of former Prime Minister Julia Gillard’s biography telling us about her valuable legacy and her appearing before a Royal Commission where there have been specific allegations of fraud against her. The battle lines are drawn and both sides are going to be fighting all week about what history should say about her three years as prime minister…

But what about looking at the way the former prime minister handled taxation to get an idea of the legacy she should be afforded. For in my almost two decades of tax policy interest I have never seen anything quite like how Julia Gillard handled the mining tax.

Given this tax was repealed this week I thought we should remember her handling of this major tax reform… in the hope nothing like this ever happens again. I don’t mean a tax like this never happens again but rather a prime minister never stuffs up tax reform this badly again.

Yes I accept that Wayne Swan’s initial handling of the Mining Tax under the Kevin Rudd presidency (come on, he never thought he was just a Prime Minister) was poor. However, what happened under Julia Gillard was much worse.

The great policy developer, consensus maker and hard negotiator, Julia Gillard, had a problem. She had rolled a first term prime minister and her poll numbers did not look that solid. What’s more, she had promised to “fix the mining tax” – which was political speak for stopping some low budget, poorly made ads on TV by the miners.

So the new Prime Minister decided it was time for her negotiation skills to shine. She gathered her Treasurer Wayne Swan and her Resources Minister Martin Ferguson and the heads of Australia’s three big mining companies: BHP Billiton, Rio Tinto and Xstrata.

She decided that that was all they needed. The mining companies who had studied the mining tax proposal backward and forward, against three pollies not famous for their intelligence (check out their university records – very bright but not quite Rhode Scholars). 300 metres down the road sat the 200 staff in the Treasury who specifically work in tax policy and some of who wrote the actual tax – but none were allowed in… Craig Emerson who was in the Gillard Ministry had written academic papers (quite good ones actually) on the use of resource rent taxes but even he was not in the room. The prime minister decided that she did not need help from the experts – she could handle it all on her own… And what happened?

A tax that was to bring in tens of billions of dollars each year, enough to fund both the gonski reforms and the NDIS with cash to spare, was changed so that, when you take into account collection and marketing costs, collected pretty much nothing. A tax that raised no revenue. It almost does not fall within the dictionary definition of what is a tax.

The 1½ page agreement signed that night replaced the 40% resource super profits tax with a 22.5% tax only applying to coal and iron ore rather than all mining.

Worse still, the agreement allowed “all state and territory royalties” to be deducted from the tax. So Western Australia promptly lifted its iron ore royalty from 5.6% to 7.5% effectively just taking money from the Federal Government – smart move by WA, pure stupidity by Julia Gillard and Wayne Swan.

Also, (its hard to believe it could get worse) they increased the profits the miners could earn before paying any tax (long term bond rate plus 7% so need to be making upwards of 10% profits before any tax is paid) and allowed profits to be calculated after revaluing assets to market value… Crazy.

Mining taxes have seen some countries change themselves dramatically. Spend some time looking at what the Norwegians have done with their petroleum sovereign wealth fund and you will start to cry when you think what might have been…

Fortunately in countries like Norway who have a resource rent tax (aka a mining tax) their leaders do not do either of the following:

  1. Put their politics before their people (assuming Gillard and Swan knew what they where doing and gave up the revenue from the tax to stop a bad advertising campaign against them so they could win – just – an election); or
  1. Think they are some amazing policy developer, consensus maker and hard negotiator who does not need anyone’s help when they are really just an average industrial lawyer (and industrial lawyers rank not much above workers compensation lawyers in the intelligence stakes).

For just a few million dollars in advertising, the big three miners saved themselves billions of dollars every year as they totally and utterly out negotiated our then prime minister.

The chance to have a resource rent tax funding my children’s future, like our Norwegian brothers, is gone, not thanks to Tony Abbott, but thanks to Julia Gillard. It is impossible to defend the mining tax that raised not revenue and was supposed to fund billions of dollars of concessions. Once that agreement was signed there was nothing that was going to save a tax. Once a prime minister’s politics or pride had ripped the heart out of the tax it was never going to survive

And thanks to this debacle no one will have the political courage to take this on again.

But saving that… Remember in 1985 Paul Keating went to his prime minister at the time with his preferred tax reform – not just a capital gains tax, a fringe benefits tax and dividend imputation – a goods and services tax. He argued long and hard for it but Bob Hawke would not have it.

Then in 1993, John Hewson agreed with Keating and ran a campaign on a major GST led tax reform. Keating, knowing it was the best option, and having argued for it for years, ripped it to shreds. When political advantage can be made who cares about the policy (or people).

After Hewson’s loss it seemed like no one would ever touch the GST again – even though it was the best option. Whatever you think of Howard and Costello, you must give them credit for bring the GST to their first attempt at re-election. As someone who has worked in a Labor minister’s office it pains me to say, lets hope there is another John Howard or Peter Costello ion the future who will see that a resource rent tax is very good policy.

End of rant for today… lets go back to reading boring explanatory memoranda.

Cases Income Tax

35-55 and non commercial losses discretion

Given it happens so infrequently, I thought I should mention a case where the AAT has required the Commissioner to exercise his discretion to not apply the non commercial losses rule in Division 35 of the ITAA97.

In AAT Case [2014] AATA 620, Re Bentivoglio v FCT a medical doctor earning over $250,000 (so could not use the four exemptions) wanted to apply losses from his olive business against his other income.

The non commercial losses rules would not let him do this, so he asked the Commissioner to exercise his discretion to not apply these rules (the discretion is in section 35-55) and, like almost always, the Commissioner refused.

The taxpayer went to the AAT and stated the losses were due to the olive lace bug, drought, fire, an olive glut worldwide and the illness of a key worker. The taxpayer said these were special circumstances so the Commissioner should exercise his discretion. And at AAT agreed.

So tick off these issues and it might be worth asking for the 35-55 discretion next time you get stuck with unusable losses due to the rest of Division 35.

Income Tax Planning Stuff Rulings

Divorce and Dividends #2

The Commissioner has released a fact sheet on when a payment or in specie transfer from private company to an individual under matrimonial proceedings can be a dividend or a deemed divided.

I have discussed this before but there are some interesting examples in this fact sheet:

First the simple case…

Tim, Helene and a private company are parties to matrimonial property proceedings before the Family Court. Tim and Helene are both shareholders of the private company. The Family Court makes an order requiring the private company to transfer a rental property with market value of $1,000,000 to Tim.

On 30 April 2014, the private company makes the transfer of the rental property to Tim.

The market value of the rental property ($1,000,000) is an ordinary dividend to Tim for the 2014 tax year.

Now the Division 7A case…

Max, Denise and a private company are parties to matrimonial property proceedings before the Family Court. Denise is the sole shareholder of private company.

The Family Court makes an order for the private company to transfer a rental property with market value of $500,000 to Max. On 30 June 2014, the private company makes the transfer of the rental property to Max.

The market value of the rental property ($500,000) is a deemed dividend to Max for the 2014 tax year.

There are also examples where there is a limited distributable surplus (therefore there is a dividend limited to the distributable surplus), and an example showing these dividends can be franked (remember a Division 7A deemed dividend is franked at the benchmark franking rate or 100% if no other dividends have been paid in the year).

It is worth noting that the fact sheet state where the Family Court requires the private company to pay money to a spouse who is not a shareholder, these rules only apply where the obligation to pay the money was imposed by the Family Court on or after 30 July 2014.

So lets get it right from now on…

Funny Stuff

Policy all at sea…

Have you heard about the Seafarers Tax Offset… Probably not…

This is a 30% refundable tax offset paid to companies that employ seafarers on the salary they pay their seafaring employees. It is effectively a promise to pay 30% of the salaries of these seafaring employees.

Some bright spark thought this would “stimulate opportunities for Australian seafarers to be employed on overseas voyages and to gain maritime skills.”

From 1 July 2012 when it was introduced until 1 July 2014, a whole 20 employers, covering only 250 employees, claimed the offset. That is not the increase in employees in the sector (as this was supposed to help), but the total employees covered by claim for the offset. I would call that a massive fail (kind of like the revenue estimates of the Mining Tax).

Fortunately the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 will repeal Subdivision 61-K of the ITAA97 from 1 July 2015 and so end this quite silly offset.

Is there anyway if we can find out if any of these 20 employers made a contribution to the previous Government?

Income Tax Legislation

Instant Asset Write Off Clarity – Successful negotiation with a PUP

I know I should wait until the Bill goes back to the House of Reps this evening to confirm the Senate amendments before writing this post but…

From 1 January 2014 (installed ready for use from this date) the instant asset write off for small businesses is $1,000 (down from $6,500). Also, there is no $5,000 immediate write off for cars from 1 January 2014.

The Palmer United Party senators has agreed to pass the Mining Tax Repeal Bill (now called Minerals Resource Rent Tax Repeal and Other Measures Bill 2014) and this Bill reduces the instant asset write off for small business. It also repeals carry back losses from 1 July 2013 (if anyone cared…).

So what did the Palmer United Party get for agreeing to these repeals:

  • The school kids bonus stays in place to December 2016, but would now only be available to families earning $100,000 a year or less (adjusted taxable income).
  • The low income super contributions (a co-contribution for those earning less than $37,000) stays until June 2017.
  • The low income bonus stays until December 2016.

What did the Government get to cover the costs of these changes:

  • The SG rate will stay at 9.5% until 30 June 2021, only making it to 12% by 2025 rather than 2019. This means poor public servants don’t get their free SG pay rises for some time. For the private sector, as Bill Shorten admitted in government, an SG rate rise is just a reduction in take home pay as your pay rise is reduced by the raise in the SG rate. I am sure he he wishes he did not say that now, even if it is true.
Income Tax Part IVA Planning Idea Planning Stuff

Partnerships of Discretionary Trusts on the nose…

Late last year the Commissioner released a Taxpayer Alert on the use of partnerships of discretionary trust by professional practices to avoid tax.

In the Taxpayer Alert late last year the Commissioner stated that he was concerned that the dominant purpose for setting up a partnership of discretionary trusts for a professional practice was to gain a tax benefit. Therefore, Part IVA could apply.

In this Taxpayer Alert the Commissioner did state that he would not be considering the use of partnerships of discretionary trust for years before 1 July 2013.

The Commissioner has taken this a step further by releasing a document to assist taxpayers to assess the risk that the Commissioner will apply Part IVA to the allocation of profits within professional firms.

Now in this new document, titled “Assessing the risk: allocation of profits within professional firms”, the Commissioner states what type of arrangements he will be reviewing.

In summary he states he will not review a partnership of discretionary trust structure for professional firms where any of the following three tests are met.

The first test is where the individual working in the practice receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm. In determining an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm. If there are no such employees in the firm, comparable firms or relevant industry.

The second test is where 50% or more of the income to which the individual and their associated entities are collectively entitled in the relevant year is assessable in the hands of the individual.

The third test is that the individual working in the practice, and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.

So if a taxpayer passes any of these three tests the structure will not be reviewed.

But lets be honest… almost no structure will fit within any of these three rules. So the Commissioner is saying “I am coming” to almost every professional practice!

You now have a choice… Stay at what the Commissioner calls “high risk” or decide to comply with one of these three test. If you are going to comply with these rules it is probably easiest to ensure the individual working in the practice receives the same as the highest paid staff member, or 50% of the trust distributions, whichever is the lowest.

Or you can just take the risk… The Commissioner says he will be looking at running cases in this area.

UPDATE: .In the media release launching this document the Commissioner refers to these as “draft guidelines”. He also states that these will only be applied to the 2014/15 year and later years. So it looks like we can lodge the 2014 year returns without having to comply with these tests. But once the guidelines are no longer draft, we will need to talk to clients about the risks that may exist if the structure is used to reduce tax substantially.

UPDATE 2: I keep getting asked about incorporated practices that use discretionary trusts as shareholders. Well the guideline states it applies to any structure. You will still need to ensure 50% of the dividends to the trust shareholder (or the amount the company pays to the top employee of the company) are distributed to the individual professional.

And just a couple of examples…

Example 1

A professional firm subject to these guidelines has three equal trustee partners (with representative IPPs) and 10 employees. It generates a profit of $1.5 million for the year. The three highest paid professional employees of the firm earned between $240,000 and $250,000 during the year. The IPPs at the firm bring in new clients, personally endorse the work of the employees, provide supervisory services, and represent clients in high-risk and high-value matters.

Trust Partner 1 distributes the $500,000 as follows:
$300,000 to IPP 1
$200,000 to a company owned and controlled by IPP 1.

Trust Partner 2 distributes the $500,000 as follows:
$230,000 to IPP 2
$20,000 to the spouse of IPP 2
$250,000 to a company owned and controlled by IPP 2.

Trust Partner 3 distributes the $500,000 as follows:
$60,000 to IPP 3
$80,000 to the spouse of IPP 3
$260,000 to a trust with losses
$100,000 to a company owned and controlled by IPP 3.

Based on the guidelines above, IPP 1 will be considered low risk because they meet all three of the guidelines. IPP 1 is unlikely to be specifically reviewed for their allocation of profits.

IPP 2 does not meet two of the guidelines, because the amount returned by IPP 2 is less than that paid to the band of the highest paid professional employees of the firm, and IPP 2 does not receive 50% or higher of the profits in their own hands. However, IPP 2 satisfies the effective tax rate measure, and on the basis that IPP 2 demonstrates no aggravating factors, they will be considered low risk.

IPP 3 is considered high risk – they do not meet any of the guidelines. IPP 3 is likely to face additional enquiry from the ATO.

Example 2

A small professional firm has two equal trustee partners (with representative IPPs) and generates profits of $400,000 for the year. The three highest paid professional employees at the firm earned $90,000 each for the year. The IPPs at the firm bring in new clients, personally endorse the work of the employees, provide supervisory services, and represent clients in high-risk and high-value matters.

The Alphabet Trust distributes its $200,000 as follows:
$130,000 to Sam Letters (the IPP)
$70,000 to Letters Pty Ltd, a company owned and controlled by Sam.

The Numeral Trust distributes its $200,000 as follows:
$75,000 to Jo Numbers (the IPP)
$75,000 to Alex Numbers (the IPP’s spouse)
$25,000 to Jamie Numbers (the IPP’s adult child)
$25,000 to Numbers Pty Ltd, a company owned and controlled by Jo.

Sam would be considered low risk – he satisfies both the comparable remuneration and 50% or greater distribution guidelines, even though he does not meet the 30% effective tax rate test.

Jo would be considered high risk – she does not meet any of the guidelines provided, because she does not receive comparable remuneration, or 50% or greater of the distribution, and does not have an effective tax rate of 30% or greater. Jo is likely to face additional enquiry from the ATO.

Funny Stuff Tax Policy

Economists advising us on tax again…

Peter Martin, the economics editor at the Age writes… “The finance minister is two-thirds right. He says if the government can’t balance its books by cutting spending, “the only alternative to balance the books is to increase taxes. There’s only one other option. It’s neither an increase in tax nor a cut in spending. It’s an attack on tax expenditures.”

Let me get this straight… an economist states that raising the super contribution rate (the tax expenditure he is suggesting we attack first) from 15% to marginal rates as high as 49% IS NOT AN INCREASE IN TAX. He states that removing the 50% CGT discount, thereby doubling the Capital Gains Tax paid, IS NOT AN INCREASE IN TAX…. Huh

Don’t get me wrong. I think the contributions and earnings tax on super needs to be increased but I am not mislead/dishonest/… enough to claim it is anything other than an increase it tax.

Peter, I suggest we don’t decrease government spending but rather we just give every government program and department less money… What is the difference I hear you say… About as much difference as increasing the individual tax rates (a increase in tax according to Martin) and increasing the super contributions tax (not a tax increase according to Martin).

If you don’t want to fix the budget by cutting spending Peter, then be honest and admit you have to increase taxes… And these are the tax increases I would do.

Income Tax Legislation Rulings

Divorce and Division 7A

In Taxation Ruling TR 2014/5 the Commissioner confirms one of the most overlooked tax issues in marriage breakdowns.

For example, if money or property is paid or transferred to a shareholder, if these payments are paid out of the private company profits, it will generally be an assessable dividend.

In addition, money or property transferred to an associate of a shareholder will be a deemed dividend under Division 7A. As the obligation to ensure the payment is made is on the divorced person and not the company, the exemption in section 109J of the 1936 Act will not apply.

While both these dividends are frankable, it is worth remembering that in many matrimonial proceedings one party gives up their interest and control of the company. As such, if there was not an agreement to frank these dividends before the proceedings are finalised, the remaining directors may not want to frank the dividend later.

Now why do I say it is one of the most overlooked tax issues??? Once it is released accountants “claim” it is a change of position….

But since 2004 the ATO has had a clear position that is exactly as is the Ruling – And this is much more “authoritative” than the unnamed “private rulings” that the accountants are claiming exists (I was too lazy to over the register of private rulings and start searching…)

So please don’t blame the Commissioner for not considering all the tax issues that arise from a transactions – rather thank him he has not been auditing the clients you have been ignoring Division 7A for since 2004…

Tax Policy

Tax changes still outstanding… Not much left

According to my count there are only 23 changes to the tax and super system left for the government to do to have completed all of the outstanding announcements.

And most of these 23 are BORING…

Number one is to get the mining tax, and the associated tax concessions, through at attempt two.

There are four things in the budget (repealing the Seafarers Offset???, Reducing the R&D Tax Incentive by 1.5%, locking in the private health insurance thresholds and allowing people to be refunded excess non-concessional contributions).

And then there is the promised reduction in the company tax rate to 28.5% from 1 July 2015.

The remaining 17 are previous government announcements.

My favourite is fixing earn-out arrangements and the Small Business Concessions – The Treasury has be “working” on this since 2007… and we are still waiting…

The next interesting thing is to replace the GST-free going concern with a reverse charge arrangement.

And after this, if you don’t care about Managed Investment Trusts, International Tax, Taxation of Financial Arrangements, loss recoupment rule, functional currency, the debt equity rules or Offshore Banking Unit rules (that make up 8 technical changes) there are only 7 changes.

These are automatic information from businesses to the ATO, Super fund mergers, four minor changes to CGT, and a change to GST and connected with Australia rules.

With a tax white paper coming up it is unlikely there will be many more tax changes announced in the next couple of years. lets see if the Treasury can clear all these issues soon (come on CGT gurus, you are making up more than 20% of the outstanding issues and one of these in seven years old…).

Outstanding tax changes