Tax Updates

Trust reimbursement agreements

The Full Federal Court’s judgment in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 has been released in respect of the Commissioner’s appeal from Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619.

In a unanimous decision, the Full Federal Court:

• Dismissed the Commissioner’s appeal in respect of the application of section 100A (s 100A) of the Income Tax Assessment Act 1936 (ITAA 1936) to distributions made in the 2013 income year;
• Dismissed the Commissioner’s appeal for the determination made under Part IVA of the ITAA 1936 in respect of the 2012 income year and assessed to Mr Springer; and
• Allowed the Commissioner’s appeal for the determination made under Part IVA of the ITAA 1936 in respect of the 2013 income year and assessed to Mr Springer.

The Commissioner did not appeal the single judge’s decision relating to the:

• 2012 income year that s 100A did not apply; or
• 2014 income year that s 100 did not apply, nor did Part IVA.

This case has confirmed the requirement that an agreement must exist prior or at the time a present entitlement is established for s 100A to apply. As their Honours found that there was no reimbursement agreement, it was unnecessary for the Court to consider the operation of ‘ordinary family or commercial dealing’ exception. Accordingly, the reasonings by Logan J in the first instance decision remain a leading authority as to the Court’s interpretation of ‘ordinary family or commercial dealing.

The outcome of the case, and the single judge decision will have implications for the ATO’s Ruling and Practical Compliance Guideline for trust reimbursement agreements.

Employee-independent contractors

Prior to the High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMEU) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek), the courts applied various methods to determine whether an individual was an employee or a contractor. However, since these cases, the contractual terms of a complete and valid written contract have taken a clearly paramount role in making this determination.

In CFMEU, the High Court ruled that the particular labour hire agreement for a ‘self-employed contractor’ constituted an employer-employee relationship. This was determined by considering the totality of the relationship arising from the legal rights and responsibilities contained in the contract, rather than following a multifactorial approach.

The High Court affirmed this approach in Jamsek, and the approach from both of these cases was applied in JMC Pty Ltd v Commissioner of Taxation [2022] FCA 750 (JMC). The High Court decisions, and that of Federal Court in JMC, emphasise that in the absence.

of a sham, or some other variation or displacement by conduct, the terms of the contract should be accepted over the traditional multifactorial test.

While the High Court in Jamsek declined to rule on the extended definition of employee for the purposes of section 12(3) of the Superannuation Guarantee (Administration) Act 1992, JMC provides some guidance on this issue.

From JMC, the following elements must be satisfied for a person to be characterised as an employee under the extended definition:

• There must be a contract;
• The contract must be wholly or principally for the labour of the person; and
• The person must work under that contract.

The second element is likely the most contentious and is to be approached from the perspective of the putative employer by reference to the terms of the contract. It will not be satisfied if the contract is for the provision of a result and the worker is paid for that result.

In JMC, the worker hired to lecture and mark exams was held to be an employee because, among other things, he was paid per hour rather than for completing tasks. The worker also lacked an unfettered discretion to delegate because all delegations had to first be approved by the employer.

The decisions in the High Court and the Federal Court demonstrate that where a written contract is complete and its validity unchallenged, determining whether a worker is an employee or a contractor turns on the interpretation of that contract. Therefore, businesses and practitioners should verify that their contracts detail relevant factors such as delegation, mode of remuneration, provision of equipment, control and independence. However, where a contract is not comprehensively committed to writing, the approach

is less clear and the analysis should be approached with the established common law principles in mind.

Following CFMEU and Jamsek, the ATO withdrew TR 2005/16 and released the following draft guidance:

• Draft Taxation Ruling TR 2022/D3 Income tax: pay as you go withholding – who is an employee? (draft Ruling); and
• Draft Practical Compliance Guideline PCG 2022/D5 Classifying workers as employees or independent contractors – ATO compliance approach (draft PCG).

The draft ruling and draft practical compliance guideline are covered in my February Tax tips, traps and updates.

Taxpayer Alert

On 8 February 2023, the ATO released Taxpayer Alert TA 2023/1 Interposition of a holding company to access company profits tax-free (Taxpayer Alert).

The ATO are actively reviewing arrangements where an individual accesses the profits of a private company in tax-free form (that is, without an additional tax liability for the individual) by arranging for the profits to be passed to the individual through an interposed holding company (interposed company).

This Taxpayer Alert applies to arrangements that, when viewed objectively, indicate that the dominant purpose of the arrangements is tax avoidance by enabling the individual to obtain a tax advantage or benefit.

Arrangements of concern include those with some or all of the following features:

•  A private company has retained profits that it may have paid tax on at the company tax rate.

• The shareholder of that private company disposes of their shares to an interposed company, receiving shares in the interposed company in return.

• The individual applies a capital gains tax (CGT) roll-over to disregard for tax purposes any capital gain on the disposal of those shares in the private company.

• The private company declares a franked dividend to the interposed company.

• The interposed company provides a loan to the individual, sourced from the dividend received, and the terms of which do not comply with section 109N ITAA 1936.

• Neither company has a sufficient distributable surplus for loan to be treated as a deemed dividend for Division 7A.

More specifically, aspects of this kind of arrangement that concern the ATO include whether:

• there is any intention for the purported ‘loan’ to the individual to be repaid or whether the amount may be taken to be an assessable dividend paid to the individual pursuant to section 109C of Division 7A;

• the arrangements comprise a ‘dividend stripping’ scheme or operation, such that;

• section 177E applies to include the amount of the purported loan in the taxpayer’s assessable income, and section 207-145 of the ITAA 1997 applies to cancel the franking credit on the dividend paid to the interposed company, or

• this is a scheme under section 177D to which the general anti-avoidance provisions in Part IVA apply.

Taxpayers that have entered into, or are contemplating entering into, an arrangement of this type should contact the ATO, apply for a private ruling, seek independent professional advice, or make a voluntary disclosure to reduce penalties that may apply.

Cyber Scams

The ATO has released updated information that cybercriminals are targeting small businesses with business email compromise scams.

Businesses can protect themselves, and the reputation of their business, by taking a few simple steps:

• Verify payment details — if businesses hold sensitive financial records, ensure they confirm the identity of anyone who requests changes to their information.
• Alert staff — train employees to identify suspicious requests or emails that may link to fake websites built to capture passwords.
• Secure email accounts — use multi-factor authentication or, if this is not possible, a strong unique passphrase that would be difficult to hack.

Payroll Tax

The Queensland Treasury has issued Public Ruling PTAQ000.6.1 Relevant contracts (the Ruling).

The purpose of the Ruling is to explain the application of the relevant contract provisions in the Payroll Tax Act 1971 (Qld) to an entity that conducts a medical centre business (referred to as a ‘medical centre’). This term includes the following medical centres:

•   dental clinics;

•   physiotherapy practices;

•   radiology centres; and

•       similar healthcare providers who engage medical, dental and other health practitioners or their entities (‘practitioners’) to provide patients with access to the services of practitioners.

INDIVIDUALS AND EMPLOYEE’S TAX

WFH Expenses

On 16 February 2023, the ATO released Practical Compliance Guideline PCG 2023/1 Claiming a deduction for additional running expenses incurred while working from home – ATO compliance approach (PCG 2023/1).

PCG 2023/1 revises the fixed rate method for calculating work-related additional running expenses incurred as a result of working from home (WFH). PCG 2023/1 should be read in conjunction with Taxation Ruling TR 93/30 Income tax: deductions for home office expenses, which explains when WFH expenses are deductible.

The revised fixed rate method apportions the following additional running expenses incurred on a fair and reasonable basis by using a fixed rate of 67 cents per hour for each hour they worked from home during the income year:

•  energy expenses (electricity and/or gas) for lighting, heating/cooling and electronic items used while WFH

•   internet expenses

•   mobile and/or home phone expenses

•   stationery and computer consumables.

From 1 July 2022, taxpayers may choose between either the actual cost method or the revised fixed rate method to calculate their deductions for expenses incurred while WFH. Under the revised fixed rate method, taxpayers may also separately claim the decline in value of any depreciating assets they used to WFH, and any other running expenses incurred as a result of WFH that are not included in the revised fixed rate method.

The fixed-rate method (52c per hour) outlined under ‘Special rules for home office running expenses’ in Law Administration Practice Statement PS LA 2001/6 Verification approaches for home office running expenses and electronic device expenses (PS LA 2001/6) will no longer be available for taxpayers to calculate deductions for their deduction for working from home expenses from 1 July 2022.

INTERNATIONAL TAX

Global minimum tax

On 2 February 2023, the Organisation for Economic Co-operation and Development (OECD) released technical guidance to assist governments with the implementation of the landmark reform to the international tax system, that will ensure multinational enterprises will be subject to a 15% effective minimum tax rate.

The Agreed Administrative Guidance for the Pillar Two GloBE rules will ensure co-ordinated outcomes and greater certainty for businesses as they move to apply the global minimum corporate tax rules from the beginning of 2024. Together with the December 2022 publication of the Safe Harbours and Penalty Relief document and public consultations on the GloBE Information Return and Tax Certainty, the release finalises the Implementation Framework as set out in the October 2021 Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.

Central management and control

The ATO has updated Practical Compliance Guideline PCG 2018/9 Central management and control test of residency: identifying where a company’s central management and control is located.

The transitional compliance approach enables eligible foreign incorporated companies to change their governance arrangements so that their central management and control is exercised outside Australia by the end of the period. The update further extends the transitional compliance approach period from the previously extended date of 31 December 2022 to 30 June 2023.

TAX AGENTS

Client-agent linking

Due to concerns about the security of online services and increasingly bolder attempts by cybercriminals to impersonate legitimate users of online services for fraudulent purposes, the ATO is adding an extra step to the process of linking a tax agent, BAS agent or payroll service provider (agent) to a client.

The key points are:

• Existing client links are not affected — client-agent linking must be undertaken only where a client appoints an agent for the first time or changes agents.

• A successful pilot for this new process was run in mid-2022 for public and multinational businesses who are part of the Top 100 and Top 1,000.

• The rollout continued in mid-December 2022 for most public and multinational businesses, and  businesses  in  the  Top  500  privately- owned wealthy groups, where that group has a significant level of ownership of the business.

• Smaller businesses and Individuals are the subject of current consultation on design and implementation.

The professions are aware of members’ concerns regarding the project and the additional burden this will place on agents and their clients. They are continuing to work with the ATO in reaching a practical resolution to the concerns raised.

SUPERANNUATION

Non-arm’s length expenses

The Government has released for consultation a paper considering options to amend the non‑arm’s length income (NALI) provisions which apply to superannuation funds. The paper proposes to amend the NALI provisions such that:

• self‑managed superannuation funds (SMSFs) and small Australian Prudential Regulation Authority (APRA) regulated funds would be subject to a factor‑based approach that would set an upper limit on the amount of fund income taxable as NALI due to a general expenses breach; and

 •   large   APRA‑regulated   funds   would   be exempted from the NALI provisions for general expenses.

Transfer Balance Cap Indexation

On 8 February 2023, the ATO released information on the indexation of the general transfer balance cap (TBC) that is due to increase on 1 July 2023 by an increment of $200,000.

Individuals who start their first retirement phase income stream from this date will have a TBC of $1.9 million.

The ATO will use the highest ever balance in the individual’s transfer balance account as at close of business on 30 June 2023 to calculate the proportional increase in the taxpayer’s TBC and apply that new personal TBC to their account going forward.

Individuals with an existing transfer balance account in the financial year before indexation and, at any time, met or exceeded their personal TBC will not be entitled to indexation. Their personal TBC will remain the same.

After indexation ATO online services and Online Services for Agents (OSfA) will be the only place an individual who had a transfer balance account prior to indexation will be able to see their personal TBC.

Superannuation death benefits

On 10 February 2023, the ATO released information on the payment of superannuation death benefits to a dependant or other beneficiary of the deceased.

This includes an introductory video on what happens when a member of a self-managed superannuation fund (SMSF) dies.

When a SMSF member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased. This should be done as soon as possible after the member’s death.

If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream. The income stream can be new or a continuation of an existing income stream.

If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum.

The ATO has released updated guidance on downsizer contributions into superannuation. Taxpayers that have reached the eligible age, may be able to contribute up to $300,000 from the proceeds of the sale (or part sale) of their home into their superannuation fund.

The eligible age is:

• 55 years old or older — from 1 January 2023
• 60 years old or older — from 1 July 2022
• 65 years old or older — from 1 July 2018.

There is no maximum age limit.

Some of the eligibility criteria taxpayers must satisfy are as follows:

• The home must be in Australia, have been owned by the taxpayer or their spouse for at least 10 years and the disposal must be exempt or partially exempt from capital gains tax (CGT).
• The taxpayer has not previously made a downsizer contribution to their superannuation fund from the sale of another home or from the part sale of their home.
• Prior to (or at the same time) as making the contribution, the taxpayer must provide their superannuation fund with the ‘Downsizer contribution into superannuation form’.

The Government has released for consultation a discussion paper that proposes that victims and survivors of child sexual abuse will be able to access the superannuation of their offender for unpaid compensation orders.

The discussion paper also includes proposals aimed at improving transparency and reducing the costs of pursuing compensation by providing visibility of superannuation accounts to ascertain the value of the ‘additional’ contributions made by an offender.

OTHER

Federal Budget submissions

The Tax Institute has recently made submissions for the 2023-24 Federal Budget.

The submissions include:

• the need for Government action on the long announced but unenacted reforms for a number of measures including Division 7A of

Part III of theITAA 1936;

• action on the proposed changes to the corporate residency rules;
• addressing the disproportionate impacts of inadvertent non-compliance with superannuation guarantee;
• reviewing the rules relating to the taxation of trusts; and 
•  the simplification of complex and inefficient taxation rules, such as fringe benefits tax

Deductible gift recipients

The Treasury has released for consultation exposure draft legislation and explanatory materials on the transfer of the administration of the four unique Deductible Gift Recipient (DGR) categories from portfolio agencies to the ATO. There are currently 52 categories of DGR set out in the gift provisions (Division 30) of the Income Tax Assessment Act 1997. Of these categories, four are currently administered by portfolio agencies. They are:

• Register of Cultural Organisations, administered by the Department of Infrastructure, Transport, Regional Development, Communications and the Arts 
• Register of Environmental Organisations, administered by the Department of Climate Change, Energy, the Environment and Water 
• Register of Harm Prevention Charities, administered by the Department of Social Services
• Overseas Aid Gift Deductibility Scheme, administered by the Department of Foreign Affairs and Trade. 

The ATO would gain responsibility for assessing eligibility for the four remaining DGR categories, consistent with the 48 other DGR general categories.