For accountants and advisers, a summary of the April month’s most essential details.
The Assistant Treasurer has issued a press release in response to the ATO’s draught guidance on section 100A. The Assistant Treasurer suggests that the government consider making legislative changes in this area. The government will keep an eye on the ATO’s draught guidance consultation process and consider any necessary changes to the law if any negative retrospective effects emerge.
The government will assess the consequences of the recent High Court judgement in the Carter case if any inequitable outcomes may be addressed through legislative change, according to the media release. The issue concerns the tax implications of a beneficiary’s request to reject a trust distribution.
From the ATO
FUEL TAX CREDIT RATE CHANGES
- From March 30, 2022, until September 28, 2022, the government has temporarily halved the excise and excise equivalent customs duty rates on gasoline, diesel, and all other petroleum-based products for a six-month period. Fuel tax credit rates have been reduced as a result of this.
- Businesses that use fuel in heavy vehicles to travel on public roads will be unable to claim fuel tax credits during this six-month period. Because the road user charge is greater than the excise duty due, the fuel tax credit rate is zero.
- The current rates have been applied to the ATO’s fuel tax credit calculator.
DEDUCTIONS FOR COVID-19 TESTS
- Employees can claim a deduction for COVID-19 tests purchased for work purposes beginning July 1, 2021, according to the ATO.
- This also means that employers who provide COVID-19 tests to their employees for work purposes can use the otherwise deductible rule to reduce the taxable value of the relevant fringe benefit.
DEBTS PLACED ON HOLD BY THE ATO
- The Australian Taxation Office (ATO) has issued some revised guidelines on the management of tax debts that have been placed on hold. It also explains how to view these debts using online facilities for both taxpayers and registered tax professionals.
- In most cases, no collection action will be taken against these debts because it is not considered cost-effective. If the taxpayer becomes entitled to credits, which will be applied to reduce the balance, or if their circumstances change, a debt deemed uneconomical for collection action will be re-raised.
- When a debt is re-raised to offset a credit, the ATO will notify the taxpayer.
Rulings, Determinations, & Guidance
DEFERRED TAXATION OF ESS AND GENUINE DISPOSAL RESTRICTIONS
- The ATO has issued final tax judgments on whether shares issued under an Employee Share Scheme (ESS) are subject to genuine disposal restrictions.
- It is necessary to determine when the deferred taxing point is triggered when shares are provided to employees under an ESS and they qualify for deferred taxation. In some cases, the deferred taxing point will be activated when there is no longer a risk of the shares being forfeited and when the worker is no longer genuinely restricted from instant disposing of the shares.
- Disposal restrictions must be sufficiently identifiable (real and objectively demonstrable), certain, and legally enforceable in order to be considered “genuine” (not spurious or hypothetical). In order for shares to be subject to a genuine disposal restriction, there must be serious and enforced consequences when a scheme’s disposal restrictions are broken.
- It may be essential to check with the offer document relating to the ESS arrangement or any other governing documents of the taxpayer’s employment contract, scheme, and documented company policies when determining whether shares are subject to genuine disposal restrictions.
DEDUCTIBILITY OF COSTS INCURRED IN ESTABLISHING AND MAINTAINING AN ESS
- This determination explains when an employer’s expenses for setting up and administering an ESS can be subtracted.
- Because the expenses incurred in establishing or amending the terms of an ESS are capital in nature, the determination confirms that they are not generally deductible to the employer under section 8-1. Under the blackhole expenditure rules in section 40-880, if the employer company is in business, these expenses should be deductible to the employer company over a five-year period.
- The ATO, on the other hand, claims that ongoing expenses related to the administration of an ESS can be deducted under section 8-1. Brokerage fees, bank charges, audit fees, making new offers to employees in an existing ESS, and other ongoing administrative expenses are examples of ongoing expenses.
DISCLAIMING AN ENTITLEMENT TO A TRUST DISTRIBUTION
- This case looked at whether beneficiaries can disclaim their right to trust distributions after the end of an income year, making them non-assessable. The relevant time, according to the High Court, is the end of the income year, and actions taken after that time cannot change the operation of section 97 ITAA 1936.
- The trustee of a discretionary trust had been unsuccessful to make any decisions about the trust’s income distribution for the 2014 tax year. The trust deed included a default distribution clause that ensured that any income not allocated to beneficiaries by the end of a given income year would be distributed to specifically named beneficiaries (i.e., default beneficiaries). The trust deed was presumably written in this way to ensure that no part of the trust’s net income was taxed at the top marginal rate in the trustee’s hands.
- The Commissioner issued amended assessments to the relevant people in October 2015, including one-fifth of the trust’s net income for the 2014 income year in the assessable income of each of the five default beneficiaries, based on their current entitlement to that proportion of the trust’s income under section 97.
- Three of the individuals signed deeds of disclaimer in respect of the default distributions on November 3 and 4, 2015, but these disclaimers were ineffective. In September 2016, these people executed additional disclaimers. The question in this case was whether the third attempt to claim the distributions was valid for tax purposes.
- The AAT initially found the disclaimers ineffective because they were issued after the individuals (with knowledge) had been unsuccessful to disclaim and accepted the gits. The Full Court of the Federal Court, however, overturned this decision on appeal. The Full Court found that nothing in section 97 indicated that a beneficiary’s liability should be determined once and for all at the end of the income year based on the legal relationships that existed at the time. The Commissioner filed an appeal with the High Court.
- The Full Federal Court decision was overturned by the High Court, which confirmed that whether a beneficiary is currently entitled to a trust’s income must be determined at the end of the income year. That is, attempting to disclaim a trust distribution after the end of the tax year will not be successful under the law.
- That is the question of a beneficiary’s “present entitlement” to trust income must be tested and examined at the end of the income year, not some reasonable period of time afterward.
- This decision poses a serious practical problem for trust beneficiaries who may be unaware that they are now entitled to trust income. The decision also appears to be at odds with ATO material relating to the disclaimer of trust income entitlements, particularly the comments in ATO ID 2010/85 and Trustee resolutions (QC 25912). Hopefully, the ATO will issue a decision impact statement on this case soon, explaining how the ATO will handle this area in the future.
DEDUCTIONS FOR GYM MEMBERSHIPS
- The AAT has permitted a prison dog handler to claim gym membership costs as a deduction, but practitioners should review the decision carefully before advising customers to claim fitness-related expenses.
- The taxpayer worked for the South Australian Department of Correctional Services as a dog handler. He was in charge of training and maintaining two dogs during the relevant income year. The taxpayer was required to be available to help in the event of an emergency. While these emergencies didn’t happen very often, taxpayers needed to be prepared for the possibility of one at any time.
The AAT noted the following in reaching its decision:
- The taxpayer had to maintain a high level of anaerobic fitness (muscle strength sufficient to control a large German shepherd on a leash in a potentially dangerous situation)
- The taxpayer was necessary to continue a high level of aerobic fitness (i.e., enough speed and agility to effectively move with, control, and direct his dog in the situation of an emergency)
- The taxpayer must also be willing to physically restrain inmates.
The AAT was satisfied that the taxpayer purchased gym memberships in the tax year in question in order to maintain the high level of fitness required for his job. While his employer did not specify a specific level of fitness, his role implied that a high level of fitness was required.
There are exceptions to the rule that it is difficult to claim the costs of gym memberships, even for taxpayers with physically demanding jobs. There are a few key takeaways from this case.
According to the AAT, there is no reason why this approach should not be applied to correctional officers who are the Emergency Response Groups’ members and train and control dogs.
Although the AAT allowed the taxpayer to claim a deduction for gym membership expenses, the Tribunal denied the taxpayer a deduction for gym supplements, clothing, or travel between the taxpayer’s home and the gym. The AAT determined that these expenses were personal in nature and had insufficient ties to the taxpayer’s income-generating activities.
While all legislation before Parliament has now expired as a result of the Federal election, some legislative instruments have been released in the last month that clean up the details of some recent tax measures.
TAX-FREE STATUS OF COVID-19 GRANTS
The Treasurer has issued a new legislative instrument in response to the 2022-23 Federal Budget, which expands the list of COVID-19-related payments and grants from Territory and State governments that can qualify as Non-Assessable Non-Exempt (NANE) income.
It is essential to note that NANE income treatment is only available if the grant recipient runs a business, has an annual turnover of less than $50 million, and receives the grant in the 2021 or 2022 tax year.
FLOOD DISASTER RECOVERY
This legislative instrument establishes the qualification criteria for determining whether a person was harmed by the Queensland floods in February 2022 and may be eligible for the disaster recovery payment.
The instrument states that a person is considered to be harmed by a major disaster if any of the following conditions apply:
- The person is seriously injured as a result of the disaster
- The person is a close relative of an Australian who is killed as a result of the disaster
- As a direct result of the disaster, the person’s primary residence has been destroyed or has suffered significant damage
- The person’s major asset or assets have been destroyed or have suffered major damage as a direct result of the disaster
- The person is the primary caregiver of a child who falls under paragraphs (a), (b), (c), or (d).
DEFINED BENEFIT INCOME STREAMS AND COMMUTATION
- A legislative instrument has been enacted that permits certain income streams to be commutated in order to meet the superannuation transfer balance cap.
- When a taxpayer receives a lump sum as a result of a capped defined benefit income stream being commuted, the lump sum is transferred directly to the purchase of a superannuation income stream of a type specified by the instrument, the instrument allows a debit in the transfer balance cap account (reducing the balance). This cancels out the credit that would otherwise result from the receipt.
EXTENDING THE REDUCTION IN MINIMUM PENSION DRAWDOWNS
- For the income years 2020, 2021, and 2022, the government temporarily cut the minimum needed rates for withdrawals from pension accounts by 50%.
- These regulations also extend the measure to the fiscal year 2023.
A taxpayer aged 67 with an account-based pension, for example, would normally be required to withdraw at least 5% of their account balance in the income year. This has been cut in half for the 2020-2023 period (i.e., to 2.5 percent).