Individuals Claiming Deductions for Financial Advice Fees
TD 2023/D4 has been released by the ATO, which looks at when deductions can be claimed for payments paid for financial advice. The primary focus of draft determination is on individuals who don’t run a business. Firstly, the ATO checks out how the general deduction provisions in section 8-1 ITAA 1997 apply to financial advice fees.
Consistent with the ATO’s original view, ongoing fees for financial advice regarding existing or ongoing income-generating investments should be deductible under the general deduction provisions. This would include continuing advice on the performance of an individual’s income-generating investments that they already own.
On the other hand, deductions typically won’t be available for financial advice fees under the general deduction provisions in the following conditions:
• Fees of the financial advice on new proposed investments that have yet to be bought, including advice on whether those types of investments are appropriate for the individual. These fees are referred either to be capital in nature or preliminary to the actual earning of assessable income.
• Fees for once-off financial advice that is expected to offer an enduring benefit, such as suggestion on estate planning or suggestion on starting an SMSF. The problem is that these fees are considered capital in nature.
• Financial advice fees that are considered private in nature, such as suggestions related to household budgeting.
This allows someone to claim deductions for fees paid for a suggestion on a Commonwealth taxation law to the extent the suggestion relates to managing their tax matters. However, various issues need to be considered. First, the advice must be given by a recognised tax adviser such as a tax adviser registered with ASIC or a tax or BAS agent registered with the Tax Practitioners Board. Second, the advice must be related to managing an individual’s tax matters.
While the ATO considers that tax matters include tax advice from a financial adviser under the Tax Agent Services Act 2009, the warning is that not all advice given by a financial adviser will qualify. The ATO observes the following conditions when claiming deductions for financial advice fees:
• Where only part of the financial advice fee is deductible either under section 8-1 or section 25-5, a suitable apportionment of the fee is needed; and
• The individual should have required evidence of the expenses before claiming a deduction. For example, an invoice with the financial adviser’s name, the amount, an explanation of the advice, the date when the expense was incurred and the date when the invoice was generated should suffice as written evidence.
The ATO’s Updated Guidance on Employee/Contractor Distinction
The ruling TR 2023/4 has been finalised by the ATO which explains how to check whether a worker must be classified as an employee for PAYG withholding purposes. The ATO continues to focus that whether an individual is an employee is a question of fact to be considered depending on an assessment of the entire relationship between the parties.
In line with more recent High Court decisions in this area, if the worker and involved entity have committed the terms of the relationship into a written agreement, then the analysis needs to be performed in relation to the legal rights and obligations in that written agreement. The key focus is on the terms of the contract.
The ATO indicates that the key difference between an employee and an independent contractor is that:
• An employee serves in the business of an employer, performing their duties as part of that business;
• An independent contractor provides services to a principal’s business, but the contractor does so in furthering their own business enterprise, they work as the principal of their own business, not as part of another.
Apart from these two factors, various other factors can help in classifying the worker, including:
• The ability to assign tasks
• Whether the agreement/contract is on a results basis
• Which party offers the tools and equipment
• Risk
• Generation of goodwill
The ATO has also finalised PCG 2023/2 which explains how the ATO will assign compliance resources when classifying a worker as an employee or a contractor. The PCG highlights the risk pattern that the ATO will use for worker classification issues depending on the actions taken by the parties when entering into the arrangement and their conduct. The PCG sets four risk categories that depend on whether certain conditions are satisfied. There are some updates:
• Changes to the conditions that check whether an arrangement lies within a medium-risk zone.
• A new condition that has been included for an arrangement to be taken into account is a very low or low risk that needs the parties to enter into a written contract that governs their entire relationship.
• One of the original conditions for an arrangement to be considered very low or low risk is that the business has acquired specific advice confirming that the classification is right. This condition remains, but will only be met if the ATO consider the advice given is at least reasonably arguable.
Software and Intellectual Property Royalties
According to the draft ruling TR 2021/D4 issued by the ATO, when an amount paid under a software arrangement is considered a royalty under domestic tax law and standard international tax treaties. If the payments are categorised as royalties under domestic tax law or a tax treaty, it can trigger non-resident withholding tax obligations for the payer. With the focus on software distributors, a key message from the ATO is that many contemporary distribution agreements involving the electronic distribution of software are intended to include royalties. This is because they commonly now engage a software distributor paying for the use of rights that are exclusive to the copyright owner. This ruling is complex and needs to be reviewed for clients engaged in the software industry.
Single or Multiple Depreciating Assets
ATO’s final ruling TR 2024/1 is on determining whether an item is a single depreciating asset or whether its parts are separate depreciating assets in their own right. This issue can arise in concern with whether the cost of multiple items needs to be grouped when checking if the cost of the asset is less than a specific instant asset write-off threshold.
The ATO explains that the following main principles are considered to check whether an item has a single asset or multiple depreciating assets:
• The depreciating asset will be the item that performs separately identifiable functions in the business.
• An item may have a discrete function without being used on a stand-alone basis.
• The more functional integration of an item with other components, the more likely the depreciating asset will be the composite larger item.
• When the effect of connecting an item to another item varies the functional performance of that other item, the attachment will be a separate depreciating asset.
• When several components are bought to work together as a system and are connected in their operation, the depreciating asset is usually the system.
Offshore Intangibles Arrangements with Related Parties
Practical compliance guideline PCG 2024/1 has been finalised by the ATO which sets out its approach to some arrangements between international related parties engaging intangible assets, for instance, intellectual property. The two primary areas of concern for the ATO are:
• Migration arrangements where there has been a restructure, which affects the flow of the benefits from the exploitation of the intangible assets (for example, the transfer of intellectual property to an offshore related party); and
• Situations where Australian activities associated with the development, improvement, maintenance, protection and exploitation of intangible assets are being mischaracterised or not identified.
The primary focus of the guideline is on the application of the transfer pricing provisions and anti-avoidance rules and offers a way for classifying an arrangement as lower, lower-medium risk, and medium-high risk.
Arrangements that Exploit the R&D Tax Offset
The ATO has issued two taxpayer alerts which identify concerns regarding certain arrangements that are aimed at exploiting the R&D tax offset. The ATO is worried that these arrangements are being used to either access an R&D tax offset in situations where it would otherwise not be accessible or artificially increase the amount of R&D tax offset claimed.
First, TA 2023/4 targets arrangements involving an existing entity that has conducted the group’s research and trading activities in the past. The existing entity would either not have been liable to an R&D tax offset or would have been liable to a lower R&D tax offset.
The second taxpayer alert TA 2023/5 focuses on the arrangements that broadly involve a foreign entity involving a new Australian company to access R&D offsets. These arrangements allow limited ability for the new Australian company itself to commercially exploit the intellectual property being developed.
Income Tax Exempt Entities Receiving Refunds of Franking Credits
TA 2023/3 has been issued by the ATO which focuses on certain arrangements that engage income tax-exempt entities receiving refunds of franking credits when they receive franked distributions that are satisfied with property other than cash.
The focus is on situations where terms and conditions are imposed as part of seeking the franked distributions which limit the sale or disposal of the property by the income tax-exempt entity. The ATO’s concern is that the income tax-exempt entity has not received immediate control of the property, which then means that it is not subject to a refund of franking credits attached to the distribution.
Legislation
30% Tax on Super Earnings on Balances Over $3 Million
Following the release of a discussion paper and draft legislation for consultation, the Government has now introduced a law to impose an overall 30% tax on future superannuation fund earnings on member balances above $3 million. This is proposed to start from 1 July 2025. Currently, superannuation fund income is generally taxed at either 15% or 10% on gains on capital assets that have been held by the fund for over 12 months. In broad terms, the legislation introduces an additional tax of 15% on superannuation earnings, but only for those individuals with a total superannuation balance (TSB) above $3 million at the end of a financial year. Individuals can pay this additional tax personally or from their superannuation fund.