Small Scale Subdivision Projects
The guidance has been released by the ATO to determine the tax treatment of property subdivision activities, both from a GST perspective and an income tax perspective. The guides make a helpful and practical addition to some of the current and more technical guidance of the ATO. It is important to determine how the sale of the subdivided lots will be taxed when a taxpayer subdivides land into smaller lots. The 3 main possibilities are written below:
- The sale is taxed under the GST rules and treated as the simple realisation of a capital asset;
- The sale occurs in the simple course of a property development business, in which the land is kept as trading stock; or
- The sale occurs in relation to an isolated profit-making undertaking, with the net profit or loss being identified on the revenue account.
The ATO guide considers looking at each category, with detailed guidance on the key aspects that must be taken into account in determining the tax treatment of the project such as:
- The entity type undertaking the subdivision
- Activities types, the taxpayer is involved in
- The costs obtained before the sale
- The steps undertaken
- The phases and parties involved in the project
- The relationship of a taxpayer with other parties that are involved in the subdivision project
- The purpose of a taxpayer in purchasing land, and
- The steps and timing undertaken for the sale.
One of the most important things for advisors to keep in mind is that a taxpayer’s purpose may change over the course of the ownership of the land. For instance, land that was initially purchased and held on the revenue account may begin to be held on the revenue account if it is used to support a profitable enterprise that goes beyond the simple realisation of a capital asset. An example of how to conduct tax computations in circumstances like this is provided in the ATO guidance.
The ATO notes that although the guidance on the GST position is limited, there will likely be some GST implications when a property project is taxed on a revenue account, however, this will always be based on the circumstance.
Clarifying Deductions for Digital Product Expenses
The ATO has provided some clarification on how expenses spent by business taxpayers in connection with digital items are typically treated.
First, the ATO affirms that a tax deduction can often be made for operational costs incurred within the course of a business’s regular operations during the year in which they are incurred. This generally covers charges like Internet service provider (ISP) fees, software subscription fees, ongoing website operation costs, file-sharing services, cloud storage, and asset lease payments.
When it comes to capital expenses, it is important to determine whether they are related to a particular depreciating asset. If so, deductions would typically be made over a number of years, though there are some circumstances where immediate deductions may be possible (such as under the temporary full expensing rules or the small business instant asset write-off rules). Examples include the price of computers and computer accessories, cell phones and tablets, point-of-sale systems, internal software, and the price of purchasing or constructing a website.
Regarding costs, the ATO indicates that fees of software subscription and commercial off-the-shelf software costs with a life span of one year or less can be claimed, although the deduction must be reduced to consider any private usage.
Irrespective of whether the expenses are normal operating costs or concerned with a depreciating asset, it is necessary to recognise whether there is an opportunity to get benefits of the small business technology investment boost. The boost offers a 20% bonus deduction for eligible expenses incurred by small businesses with a total annual turnover of less than $50m between 29 March 2022 and June 30, 2023.
GST and Digital Currency
The ATO has given some guidance on the GST treatment of digital currency. The GST system has specific rules managing the treatment of digital currency. In exchange for money or digital currency, when someone disposes of digital currency, they are treated as making an input-taxed supply, although GST-free treatment can be applied if the supply is made to a non-resident.
For GST purposes, digital currency refers to a digital unit of value that:
- can be given as payment
- can be fully interchangeable with the same digital currency
- doesn’t have a value that is acquired from or is based on anything else
- doesn’t give entitlement to get something else unless it is incidental to using it or holding it as payment
- If the provided supply does not fall under the category of input-taxed financial supply due to reasons other than being a supply of digital money, then it would not be applicable.
According to the ATO, receiving or utilising digital currency to pay for goods and services in GST-registered organisations is similar to using money for GST purposes. When utilising digital currency, the GST component of an invoice must be converted into Australian dollars to check the GST liability or the GST credit that can be claimed.
In situations where the transaction has a digital currency exchange and where the other parties can’t be identified, the taxpayer can use a digital currency exchange location to treat a supply as GST-free if the exchange is not situated in Australia.
While it is not possible to claim GST credits for those expenses incurred in making input-taxed supplies, there are some limited exceptions to this. Firstly, the entity can claim GST credits that are related to financial supplies if it doesn’t exceed the financial acquisition threshold (FAT). The entity can claim reduced GST credits on particular expenses relating to financial supplies if it exceeds the FAT. When it is the matter of dealing with cryptocurrency, then it may be possible to claim reduced GST credits on the following things:
- Brokerage cost, commission, or arranging services given by entities that facilitate purchasing and selling of digital curencies,
- Costs relating to transaction processing, report generation and account maintenance services.
Filing Out of Time Objections
Taxpayers can raise objections to the assessment of tax and other ATO decisions within a time limit that may be between 60 days to 4 years. The taxpayer can request an extension if the time limit expires, by including a written request and explaining why the objection is late.
Some of the important factors that the ATO will take into account in deciding whether to allow a late objection include:
- Whether the objection was lodged as soon as the situation permitted.
- The explanation of the taxpayer for not lodging the objection within the time limit.
- The delay duration.
- Whether the taxpayer has an arguable case and objection should be allowed in full or part.
The ATO indicates to its officers that late objection may be granted if:
- The taxpayer thought that lodging an objection was pointless until a court decision, change in legislation, or public ruling was made shortly after the time limit expired which made the objection reasonable.
- The taxpayer thought that lodging an objection was pointless but then discovered they may have been mistaken.
- The taxpayer was not well to file an objection.
- The taxpayer was overseas and did not come back until the time limit had expired.
- The issue involves vital questions of law or practice.
- Failing to file an objection within time was because of the ATO’s conduct.
- The adviser of a taxpayer, besides receiving prompt instructions, failed to execute those instructions.
2023 Changes to Deduction Rules
The ATO has published a reminder of important points to consider when completing 2023 tax returns for clients, including:
- In the 2023 tax year, the rate of cents per kilometre for people deducting automotive expenditures increased from 72 to 78 cents per kilometre.
- For the 2023 tax year, the automobile cap for depreciation purposes was raised to $64,741. The car limit only applies to motor vehicles that are classified as cars and are designed primarily to carry passengers.
- The fixed-rate method for home office expenses increased from 52 cents to 67 cents per hour worked from home and no longer requires the taxpayer to have a dedicated home office space. However, it is vital to keep more thorough documents proving the number of hours spent working from home. Electricity, gas, stationery, computer consumables, internet access and phone usage are all covered by the fixed rate scheme. Separate deductions can be claimed for expenditures not included in the fixed rate.
ATO Flags CGT Problem Areas
When it comes to CGT concerns for privately held and wealthy groups, the ATO has issued a warning on the main areas of worry. These are essentially divided into three categories, with the key problems grabbing ATO’s attention highlighted below:
- Disposal of assets
- The reported capital gains fall short of their estimates (based on third-party data sources)
- Companies claiming the CGT discount
- Beneficiaries failing to gross up the discounted share of capital gains distributed by a trust
- Entities selling high-value assets but reporting low capital gains or claiming inflated capital losses
- Taxpayers incorrectly interpret the CGT rollover provisions.
- Capital Losses
- Losses that seem disproportionate, inaccurate, or improperly labelled.
- A year after the loss, the company underwent changes that could have indicated that the business continuity test or continuity of ownership test failed.
- Capital losses that are fraudulently produced to offset capital gains (such as wash sales), when the market value substitution rules are not taken into account or enforced.
- Recognising revenue losses instead of capital losses to reduce taxable income.
- Small Business CGT Concessions
- Entities that don’t pass the small business entity tests ($2 million turnover tests or $6 million maximum net asset value tests)
- When the asset sold doesn’t fit the definition of an active asset
- When the CGT asset is a share or trust interest, entities that don’t meet the additional requirements
- Entities that restructure primarily so that they can claim small business CGT concessions that might not otherwise be available
- When entities fail to purchase a replacement asset during the replacement asset period while claiming the small business rollover, they fail to declare CGT event J5.
Digital Games Tax Offset
With effect starting on July 1, 2022, the recently enacted digital games tax offset (Division 378 of the ITAA 1997) offers eligible game producers a 30% refundable tax offset for qualifying Australian production expenses. Subject to fulfilling the necessary eligibility requirements, which include certification by the Arts Minister and the corporation spending at least $500,000 of qualifying expenditure, the offset is applicable to the completion, ongoing implementation, or porting of digital games.
The offset is limited to $20 million per company (or associated or affiliated group of companies) every income year. It would take about $66.7 million in eligible spending to reach this cap. The offset is available for non-resident companies with a permanent establishment in Australia and an ABN and for Australian resident companies with an ABN.
Working Holidays Makers Taxed as Australian Residents
If they are from a country that has a double tax agreement that contains a non-discrimination article (NDA) and they are an Australian resident for tax purposes, working holiday makers (individuals holding a subclass 417 or 462) may be taxed on the same basis as a resident Australian national after the High Court decision in the Addy case back in November 2021.
Taxpayers from Chile, Finland, Germany (starting in 2017–18), Israel (starting in 2020–21), Japan, Norway, Turkey, and the United Kingdom may fall under this category.
The majority of people on working holiday visas will be considered non-residents for tax purposes, therefore the applicability of this treatment will often be restricted. However, planned changes to the residence requirements may have an impact on this area.
The ATO also clarified that working holiday makers from an NDA country will have tax withheld by their employer at the 15% rate, who are treated as Australian residents for tax purposes, but it is possible to file a PAYG variation. The tax amount that must be paid in Australia will be based on whether an individual only has Australian-sourced income or has foreign and Australian-sourced income.