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New passive income test for lower corporate tax rate

New rules ensure that companies with more than 80% passive income will not qualify for the reduced company tax rate.

Calculations of a business’s “passive income” would include:

distributions by corporate tax entities (other than non-portfolio dividends);
franking credits attached to such distributions;
non-share dividends;
interest;
royalties;
rent;
gain on qualifying securities;
net capital gains; and
amounts included in the assessable income of partners in a partnership or beneficiaries of a trust estate that are referable to another base rate entity passive income amount.

This will apply from the 2017–2018 income year.

The lower company tax rate of 27.5% is available in 2017–2018 for small businesses and corporate base rate entities with turnover of less than $25 million.

You must also “carry on a business” to be eligible for the lower corporate tax rate.

AcctWeb

Resources to help understand and implement Single Touch Payroll (STR)

STR is a significant change for business tax compliance, though for now those businesses that need to make this charge have 20 or more employees. Changes take effect on 1-7-2018, 12 months later for businesses with less than 20 employees.

In short, this change means that ‘you will report payments such as salaries and wages, pay as you go (PAYG) withholding and superannuation information from your payroll solution each time you pay your employees.’

The information and links listed below will help you quickly check or double check what you need to do to comply. If you are having trouble or want to discuss cash flow and tax implications then ask your accountant. But, above all, do not delay in getting ready for this change.

ATO resources and explanatory notes:

Source: Australian Taxation Office (ATO)

New rules capture SMSFs trading big with cryptocurrency

Sizeable cryptocurrency transactions will “come to the attention of the ATO” under new rules that came into effect this week, so a mid-tier firm has put together a checklist of key considerations to keep SMSF investors compliant.

As of today, all cryptocurrency exchanges must be signed up to a new Digital Currency Exchange Register. Transactions exceeding $10,000 must also be reported to AUSTRAC to meet existing rules for bank transfers and cash transactions.

“People will need to be ready to explain not only where the money came from, but also to show that they have followed the ATO’s rules,” said partner at HLB Mann Judd, Peter Bembrick.

“A critical aspect for an SMSF’s compliance is having the right documentation to establish that the investment has been made by the fund, as well as keeping track of the market value annually and recording disposals, gains and losses,” Mr Bembrick told SMSF Adviser.

Ignorance of the tax-related consequences of cryptocurrency exchanges is not adequate defence, particularly given the very public campaigning of the ATO about cryptocurrency in the lead up to tax time.

“There are a number of areas that may catch people by surprise, if they haven’t done their research. It’s never a good idea to fall foul of the ATO and, as always, ignorance of the rules is not considered an adequate defence for failing to pay the appropriate tax.”

Mr Bembrick prepared a checklist for professionals with clients who hold cryptocurrency, as follows:

The tax implications of mining cryptocurrency

Generally speaking, the ATO would treat activities to acquire cryptocurrency by mining additional units as a business, and the value of units acquired would be assessable income in the year of acquisition.

“On the assumption that the cryptocurrency units are treated as either trading stock or CGT assets, however, then any further unrealised increased in the value of units held will not be taxable until they are eventually realised on a later disposal,” Mr Bembrick said.

“In addition, if there are direct costs such as electricity or the depreciation of equipment dedicated to cryptocurrency mining activities, these should be tax deductible against the income received from the cryptocurrency mining business,” he said.

Claiming a personal use exemption

The ATO will accept that cryptocurrency is a personal use asset if it can be shown that it was acquired purely to hold and then exchange for other goods and services, and not with the intention of making a profit or in the course of carrying on a business, Mr Bembrick said.

A personal use asset — with examples including a car, boat or holiday home — is exempt from CGT if it costs less than $10,000.

“However, the question of intention can be quite subjective and is not always so easy to prove,” Mr Bembrick said.

Tax payable if someone is paid using cryptocurrency

Contrary to some client chatter, if someone is paid in cryptocurrency for goods or services they provide in the course of carrying on a business, this payment is still taxable.

“The ATO views this in just the same way as being paid with other goods or services, that is, as a form of barter arrangement. The taxable amount is the AUD value of the non-cash consideration for the goods or services at the time of the transaction,” Mr Bembrick said.

“Similarly, if cryptocurrency is used to pay for goods and services in the course of carrying on a business, the AUD value of the payment would be treated for tax purposes in the same way as if you had paid the equivalent amount in cash,” he said.

Capital gains tax

As the ATO indicated in its guidance note last year, there is a taxable capital gain when a cryptocurrency unit is sold for more than the purchase price, and a capital loss when it is sold for less than originally paid.

“The capital gain or loss needs to be recorded on the personal tax records, just as any other investment such as shares,” Mr Bembrick said.

“For Australian residents who have held the cryptocurrency for at least 12 months, a 50 per cent CGT discount can be claimed, meaning they only pay CGT on half of the actual gain,” he added.

Further, it’s important clients are aware of the difference between investor and trader for tax purposes.

“Just like other investments, be aware that the ATO may treat some investors as a trader or speculator. This means that, if the purpose of buying and selling cryptocurrency was for short-term profit rather than long-term capital growth, then any gains would simply be taxed as personal income, without any access to the CGT discount and without the ability to offset any capital losses from other investments against the cryptocurrency gains,” Mr Bembrick said.

“The only good news is that trading losses can be offset against other types of income,” he added.

Not a currency

Cryptocurrency, such as bitcoin, is not a currency, but rather is treated as an asset for tax purposes.

Consequently, the price in Australian dollars will change over time, which is important because it means that there are tax consequences from the purchase or sale of a unit of cryptocurrency.

“As with other investments, the exact nature of the tax implications will depend on the taxpayer’s related activities as well as their intention when they acquired the cryptocurrency,” Mr Bembrick said.

By: Katarina Taurian
03 APRIL 2018
www.smsfadviser.com

Accountants spy elder abuse spike as mortgage stress sets in

Housing affordability is tempting some adult children into elder abuse territory, as they look to their parents' retirement savings to alleviate their mortgage stress.

Protecting Seniors Wealth chief executive Anne McGowan said she is regularly contacted by professionals who are concerned their clients may be subject to financial abuse by either family members or other individuals.

One of many recent cases came from an accountant reporting his stepfather was suffering financial abuse from another member of the family.

“What was happening was another member of the family had begun to take the older gentleman in around to all their banks, and this family member was closing all the bank accounts and putting the money into his own companies,” Ms McGowan explained at an SMSF Association event in Sydney this week.

This family member had enlisted the help of a lawyer to set up a number of these companies, she said.

The accountant, through his firm, did a number of searches on these companies, and they started to trace what was happening with the companies and then chase the funds.

“It ended up going to court, it took him a while and he was the one that had to drive it all,” Ms McGowan said.

“The outcome of that court case was that the funds had to be paid back to the older gentleman, and the lawyer’s professional indemnity had to pay all the court costs.”

While the older gentleman hadn’t necessarily lost capacity, the perpetrator had somehow convinced him that it was a good idea, she said.

Verante Financial Planning director Liam Shorte said he has likewise seen adult children of clients come into the firm and state that because their mother or father are only receiving a small return on their term deposit, that perhaps the money in the account should instead be put towards their own mortgage.

“We see situations where someone comes in and says ‘dad or mum are only getting 2.5 per cent on the term deposit, so what we've agreed with dad or mum is that we'll put the money towards our mortgage where it saves us interest but we'll pay mum or dad 3 per cent,” explained Mr Shorte.

“It starts off being all legal, and then six months later some expense comes in and they can't afford to pay mum or dad the money, and they say ‘they don't need the money anyway’. Then we have to raise the point: ‘Well you may not think it, but your siblings probably do’. I've seen that a few times with clients in the past few years. It's disturbing.”

These patterns correlate with increasing levels of mortgage stress on a national scale. Accountants Daily has previously reported clients are increasingly looking to risky tax strategies to boost their repayment capacity.

Research house Digital Finance Analytics (DFA) late last year showed about 29.7 per cent of households — 921,000 — are under “mortgage stress.”

About 24,000 households are under “severe mortgage stress”, up by 3,000 from November 2017.

DFA principal Martin North believes the risk of default for Australians has increased for 2018, with an estimated 54,000 households currently at risk of 30-day debt defaults in the next 12 months.

By: Miranda Brownlee
21 MARCH 2018
www.accountantsdaily.com.au

Tax office releases fresh guidance on SMSFs

The ATO has released a new piece of guidance which outlines its concerns and compliance activity with reserves in SMSFs.

****Update***The ATO used the new vehicle of an SMSF Regulator’s Bulletin to issue this guidance. This is now live on the ATO's website and available here.)

The ATO is set to “closely scrutinise” arrangements where amounts within an SMSF are held in a reserve, as opposed to being allocated directly to a member’s superannuation interest.

Compliance resources will not be applied to arrangements entered into by an SMSF before 1 July 2017, with exceptions to arrangements such as those that were not originally lawfully entered into.

In particular, the ATO is concerned that the advent of the transfer balance cap may entice some SMSF members to use reserves as a means to circumventing the new balance restrictions. In these instances there can be serious consequences, as the Part IVA provisions may apply.

Effectively, the ATO will be on the lookout for unexplained increases in the creation of new reserves, in the balances of existing reserves, or allocation of amounts from a reserve directly into the retirement phase.

The types of arrangements that will be of particular interest to the ATO include the use of a reserve to reduce a member’s total superannuation balance, allowing them to make non-concessional contributions without breaching their cap.

Using a reserve to reduce a member’s total superannuation balance below $500,000 in order to allow the member to access the catch-up concessional contributions arrangements will also capture the ATO’s attention.

The ATO will be looking for signs of intentional use of a reserve to reduce the balance of a member’s transfer balance account below the member’s transfer balance cap, allowing the member to allocate a greater amount to retirement phase, thereby having more earnings in the SMSF being exempt current pension income (ECPI).

Similarly, intentional use of a reserve to reduce a member’s total superannuation balance below $1.6 million in order to allow the SMSF to use the segregated method to calculate its ECPI will also raise red flags.

The number of SMSFs using reserves is in the low thousands, and the ATO has not seen a spike in problematic arrangements. Rather, the regulator is taking a “prevention is better than detection” approach, Deputy Commissioner James O’Halloran told SMSF Adviser.

Outgoing Assistant Commissioner for SMSFs, Kasey Macfarlane, stressed the ATO understands there are legitimate cases for the use of reserves, but they mostly exist for historic reasons.

“That’s why the decision to create a reserve, or any growth in reserves, would attract our attention,” Ms Macfarlane told SMSF Adviser.

“We believe there are limited circumstances for use from 1 July 2017,” she said.

By: Katarina Taurian
15 MARCH 2018
www.accountantsdaily.com.au

Labor’s tax plans could favour the rich, analysis shows

Labor's plans for excess dividend imputation credits will favour the rich despite claims it is targeting wealthy Australians, according to specialist analysis.

If elected, Labor plans to end cash refunds for excess dividend imputation credits, with exemptions for pensioners and SMSFs with at least one pensioner or allowance recipient before 28 March this year.

Shadow treasurer Chris Bowen has framed the policy as one that targets the wealthy, but general manager for technical services and education at SuperConcepts, Peter Burgess, has found flaws in this assertion.

“It seems to me that this measure could actually allow the rich to accumulate more in super,” Mr Burgess told SMSF Adviser.

“Transferring some of their pension balance to the accumulation phase may allow them to use all of their franking credits. The effect will be more retained in super for longer, as they can draw down super from accumulation phase when they need it rather than being forced to take the minimum pension each year,” he said.

Further, ongoing associations with SMSFs and the wealthy is a “fallacy,” Mr Burgess said.

For one, ATO statistics show that the SMSF median member balance is about $350,000 and the average member balance reported by funds established in 2016 was $204,000.

“So this revised measure will still eventually end up impacting many thousands of members with moderate superannuation savings,” Mr Burgess said.

“The growth of the SMSF sector has been a huge success story in terms of increasing member engagement and allowing individuals to take control of their own retirement savings. It’s unclear, at least to me, why we would want to penalise future generations who want to do the same,” he said.

Broadly, in professional communities, the policy has been knocked back as one that is not fit for purpose or fair to retirees.

On grounds of equity for SMSF members, The SMSF Association argued the sector has already had its concessions adjusted, and this policy would represent another blow to those who have structured their arrangements under current law and in good faith.

“The transfer balance cap is limiting excess franking credits that would have been paid to SMSF members with large balances. Under the new transfer balance cap rules, SMSF members with more than $1.6 million will be paying tax on some of their earnings that will offset the value of their franking credits, limiting their refunds,” said chief executive John Maroney yesterday.

By: Katarina Taurian
29 MARCH 2018
www.accountantsdaily.com.au

Property investors on notice after ATO spots false claims

As usual some ridiculous claims ruin it for genuine investors.

(One case reported by the ATO, one man owned a property on Victoria's Mornington Peninsula and claimed $760,000 in deductions for a property used by either himself or family and friends for 87 per cent of the year.)

Clients with holiday homes will be subject to further ATO surveillance this tax time, after the ATO found a large number of “mistakes, errors and false claims” made by owners who use their property for personal holidays.

ATO assistant commissioner Kath Anderson has called on tax agents to double-check claims made by their property investor clients after finding a large number of incorrect deduction claims being made.

“As Australians enjoy the Easter break, they should be aware that the ATO is focusing on taxpayers who claim deductions for holiday homes that are not actually available for rent or only available to friends and family,” said Ms Anderson.

“While private use by family and friends of a holiday home is entirely legitimate, it does reduce your ability to earn income from the property. This in turn impacts the deductions you can claim.

“You can only claim deductions for your holiday home if your property is genuinely available for rent. You cannot claim for times when you were using it for your own personal holidays or letting friends and family stay rent-free,” she added.

“Holiday home owners also need to remember that if their property is rented to friends and family at mates rates, they can only claim deductions for expenses up to the amount of the income received.”

The ATO’s increased focus came after it found similar claims being made last year, including red flags when clients attempt to make claims for property that has not been genuinely rented out.

Ms Anderson said records were key to substantiating claims, including records of income received from the rental property, evidence of the property being rented out, and records of people who have stayed at the holiday home.

“We see things like unreasonable conditions placed on prospective renters, rental rates set above market rates, or failing to advertise a holiday home in a way that targets people who would be interested in it,” Ms Anderson said.

“Incorrect rental property claims will not go unnoticed. Whether it is a genuine mistake or a deliberate attempt to over-claim, new technology, data matching and other systems allow the ATO to identify unusual claims.

“Where something raises a red flag, it will be investigated. Property owners whose claims are disproportionate to the income received can expect scrutiny from the ATO.”

By: Jotham Lian
29 MARCH 2018
www.accountantsdaily.com.au

ATO issues update on cryptocurrency compliance traps

The ATO has provided further details on some of the regulatory considerations with cryptocurrency for SMSFs, including valuations, in specie contributions and ownership of assets.

Following some of its earlier comments around cryptocurrencies and SMSFs, the ATO has discussed some of the specific regulatory considerations for SMSF trustees and professionals with cryptocurrency in an online update.

The ATO explained that where an SMSF transacts in cryptocurrencies, SMSF trustees and members need to be aware of the tax consequences in each case, which will depend on the nature of the circumstances of the SMSF.

“SMSFs involved in acquiring or disposing of cryptocurrency must keep records in relation to their cryptocurrency transactions. There are also super regulatory considerations for SMSF trustees, members and SMSF auditors,” the ATO said.

Investment strategy and trust deed

While SMSFs are not prohibited from investing in cryptocurrencies, it said, the investment must be allowed under the fund’s trust deed, be in accordance with the fund’s investment strategy and comply with SISA and SISR regulatory requirements concerning investment restrictions.

Before investing in cryptocurrency, the ATO said SMSF trustees and members should consider the level of risk of the investment and review their fund’s investment strategy to ensure the investment being considered is permitted.

“Trustees and members also need to ensure that investments in cryptocurrency are allowed under the SMSF’s deed,” the update said.

Ownership and separation of assets

SMSF cryptocurrency investments must also be held and managed separately from the personal or business investments of trustees and members, the ATO added.

“This includes ensuring the SMSF has clear ownership of the cryptocurrency. This means the fund must maintain and be able to provide evidence of a separate cryptocurrency wallet for the SMSF from that used by trustees and members personally,” said the ATO.

Valuation

In terms of valuation, the ATO said SMSFs must ensure their investments in cryptocurrency are valued in accordance with ATO valuation guidelines.

“The value in Australian dollars will be the fair market value which can be obtained from a reputable digital currency exchange or website that publishes its rates publicly,” it said.

“The value of cryptocurrency can change constantly. For the purpose of calculating member balances at 30 June, the ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.”

Related-party transactions

The ATO also noted that cryptocurrencies such as bitcoin are not listed securities and therefore cannot be acquired from a related party.

“It follows that SMSF trustees and members – being related parties of the fund – cannot make in specie contributions or other transfers of cryptocurrency to the fund,” it said.

Sole-purpose test

The ATO also reminded SMSF professionals that an SMSF is unlikely to meet the sole-purpose test if trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements.

“For example, it may be a breach of the sole-purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally,” it explained.

Pension or benefit payments

The ATO also confirmed that where a trustee or member satisfies a condition of release, the SMSF can make an in specie lump sum payment by way of transfer of cryptocurrency. However, pension payments must be made in cash.

“Trustees and members will need to consider the fund’s trust deed and any CGT implications associated with the transfer of assets such as cryptocurrency,” it said.

The ATO added that any SMSF trustees who think they may have breached the super laws “should work with their professional advisers to rectify the breach as soon as possible”.

By: Miranda Brownlee
19 MARCH 2018
www.smsfadviser.com

Single Touch Payroll – 1 April 2018 Action

Single touch payroll will be a compulsory reporting requirement for employers.

It means employers will report payments such as salaries and wages, pay as you go withholding (PAYGW) and super information from their payroll solutions at the same time they pay their employees, directly to the Australian Taxation Office (ATO).

For employers with 20 or more employees, Single Touch Payroll reporting starts from 1 July 2018.

While the system starts 1 July 2018, the obligation is triggered on 1 April 2018.

The 20 or more Headcount is done on April Fools Day!

The following employees need to be included within the Headcount:

Full-time employees
Part-time employees
Casual employees who are on your payroll on 1 April 2018 and worked any time during March
Employees based overseas
Any employee absent or on leave (paid or unpaid)
Seasonal employees engaged regularly.

When performing the headcount, the following are not included: