ATO compliance on “schemes”

The ATO has released its practical administrative approach to businesses claiming the JobKeeper payment. Generally, it notes that it would only apply compliance resources to what would amount to a "scheme" in terms of the entity and its external operating environment. For example, if an entity's business has not been significantly affected by external environmental factors beyond its control and/or the payments are in excess of those that would maintain pre-existing employment relationships. The integrity measure contained in the JobKeeper payment legislation ensures entities that enter into contrived schemes do not obtain a payment they would otherwise not be entitled to. It is aimed at contrived and artificial arrangements that technically satisfy the eligibility requirements but have been implemented for the sole or dominant purpose of accessing the JobKeeper payment. Where that is the case, the ATO has the power to determine these entities were never entitled to the payment. In addition, it will also be able to recover any overpayments and has the power to impose significant penalties and interest. To determine whether or not a certain arrangement is a "scheme", the ATO will largely consider the substance of the outcome achieved rather than the type of arrangement entered into. According to the ATO, some examples of schemes to obtain the JobKeeper payment which may pique its interest include: company deferring the making of supplies/payments of cash/issuing of invoices to third parties to lower the projected GST turnover in order to meet the decline in turnover threshold; company bringing forward the making of supplies to artificially lower the GST turnover in a particular quarter to obtain the JobKeeper payment; company transferring assets that are leased to third parties to a related party to reduce GST turnover; a group of entities in which the service company reduces the service fee charged to the operating company to meet the decline in turnover test (depending on the circumstances of the reduction); a group of entities in which the service company stands down employees/reduces their work hours to the operating company resulting in reduced service fees to meet the decline in turnover test; parent company of a corporate group that reduces management fees or manipulates the timing of the management fee. Whilst it is not an exhaustive list, it does provide a useful guide in what the ATO considers to be a scheme. In particular, there are two examples which points out that a reduced service fee within a group of companies does not necessarily mean that there has been a scheme. From the ATO's point of view where an entity has been significantly affected by the external operating environment that is beyond their control and applies for the JobKeeper payment in response to the impact (satisfying the criteria), it is unlikely to devote compliance resources to those cases.

Residency implications of COVID-19

COVID-19 pandemic has wrought havoc on a global scale, causing almost every country around the world to lockdown their population and close their borders. This has drastically affected international travel and movement across borders, which is causing unintended consequences for individuals that are not Australian residents for tax purposes. One of the most common scenarios is an individual who is not an Australian resident staying in Australia longer than expected due to not being able to return to their home country. According to the ATO, if you're in Australia temporarily for some weeks or months, you will not become an Australian resident for tax purposes as long as you usually live overseas permanently and intend to return there as soon as you are able to. In those cases, the individual would only be assessable on income from Australian sources subject to the application of double tax agreements (DTAs) between Australia and their home country. A tax return would only need to be lodged if the individual earns salary or wage income that is assessable in Australia. However, a temporary resident could become an Australian resident for tax purposes if they end up staying for a lengthy period and/or do not plan to return to their country of residency when they are able to do so. In those situations, the individual could be assessed on all Australian-sourced and foreign-sourced income including salary, wages, and investments. The ATO notes that the issue of residency depends on the unique individual circumstances of each case with a range of potential tax outcomes. Another likely scenario is a temporary resident who usually works overseas continuing to earn salary and wages through their foreign employer by working remotely. Whether or not this income is assessable depends on the source of income and DTAs. The ATO notes that usually the place where the employment is exercised is very significant when deciding the source of employment income. However, it accepts that COVID-19 has created a special set of circumstances and short-term working arrangements of three-months of less where a non-resident usually works overseas but instead performs the same employment in Australia will not have an Australian source. For working arrangements lasting longer than three-months, the ATO will consider the facts and circumstances in deciding whether the employment is connected to Australia. In all scenarios, DTAs may determine that in certain circumstances, employment income derived from performing employment duties for a short period in Australia by an individual who is a resident of a foreign country (after applying DTA tie-breaker rules) will not be taxed in Australia. Each DTA is different, therefore, depending on your home country, the taxation outcome may be different.
SMSFs entering into arrangements which involve the purchase and development of real property for subsequent disposal or leasing should beware, the ATO is keeping a close eye on these types of agreements, irrespective of whether they are with related or unrelated parties. As outlined in a recent regulator bulletin, the ATO is concerned with an increasing number of arrangements which the investment activity in developing real property is undertaken utilising joint venture arrangements, partnerships, or investments through ungeared related unit trusts or companies.

 Whilst property development can be a legitimate investment for SMSFs, provided it complies with Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulations 1994; the ATO's concern centres around inappropriate use of these investments to divert income into the superannuation environment, ventures that could be detrimental to retirement purposes, or arrangements used to manipulate a members' transfer balance accounts. The regulatory issues that can arise in development of real property that is causing particular uneasiness for the ATO include: 

Sole purpose test – does the arrangement mean the SMSF is maintained for a purpose outside those permitted. operating standards – meeting record-keeping requirements and ensuring assets are appropriately valued and recorded at market value and keeping SMSF assets separate from members' assets; loan/financial assistance – whether direct or indirect support is provided a member or their relative; 

LRBAs – if there is a borrowing, does it meet the requirements to be exempt from the prohibition on borrowing for limited recourse borrowing arrangements; potential contravention of in-house asset rules; issues with acquiring assets from a related party; 

Payments out of the SMSF – does the payment constitute an illegal early release of superannuation; and whether investments are maintained on an arm's length basis and if not whether the terms and conditions of the transaction are not more favourable to the other party than would be expected in an arm's length dealing. In addition to the above, trustees of SMSFs should also be familiar with other income tax matters which may arise in these arrangements including non-arm's length income (NALI) provisions, and the general anti-avoidance rules. The ATO notes that particular care should be taken where an arrangement involves related parties. To complicate things further, purchase and development of real property would also most likely involve GST matters such as registration, correct reporting and in some cases the application of the margin scheme. The ATO notes that it will be monitoring development arrangements involving SMSFs, particularly those that include LRBAs and related party transactions to ensure that there are no contraventions to superannuation law. It warns trustees and members of SMSFs that there may be significant adverse consequences including the forced sale of assets or the winding up of an SMSF should contraventions occur.

Directors’ duties: coronavirus safe harbour

As a part of the government's coronavirus economic response package, a provision was inserted into the Corporations Act 2001 to provide temporary relief (safe habour) for directors of financially distressed business from potential personal liability for insolvent trading. This was designed to counter the pressure on boards and directors to make quick decisions to enter into an insolvency process to mitigate the risks of insolvent trading during this economic downturn. If you're seeking to rely on this particular safe habour measure to protect yourself, any debt must be incurred: in the ordinary course of the company's business (ie it is necessary to facilitate the continuation of the business); during the 6-month period commencing from 25 March 2020 (or a longer period as prescribed by the regulations); and before any appointment of an administrator or liquidator during the temporary safe harbour application period. For holding companies, depending on whether certain conditions have been met, temporary relief may also extend to debts incurred by a subsidiary. Importantly, this temporary safe habour measure does not replace the existing safe habour provisions in the Corporations Act, and directors can still use those if they so wish. If you do choose to use the temporary relief regarding insolvency, remember you will bear the evidential burden to prove that the safe habour requirements have been met. It should also be noted that even though relief is provided from insolvent trading, this does not extend to relief from statutory and common law directors' duties. These duties include acting in the best interests of the company as a whole (ie interests of shareholders, creditors and employees), duty to act with care, diligence and good faith, and not to use a directors' position or information obtained as a director to gain an advantage or cause detriment to the company. Even if you're not a named director/officer of a company, these statutory and common law directors' duties may still apply to you if you have the capacity to significantly affect the financial standing of the company. While ASIC has recalibrated its regulatory priorities to focus on challenges posed by COVID-19 by suspending a number of near-term activities which are not time-critical, it will maintain enforcement activities and continue to investigate and take action where public interest warrants. According to ASIC, whether or not action is taken depends on the assessment of all relevant circumstances, including what a director or officer could reasonably have foreseen at the time of making relevant decisions or incurring debts. Therefore, if you plan on using these safe habour provisions to get your business through the next 6 months, it may be prudent to seek the advice of an appropriately qualified adviser.

Steps to claim the JobKeeper for businesses

If your business is one of the tens of thousands of businesses to register for the JobKeeper payment early, there's good news, claims for the payment is now open. There are a few steps involved in claiming, so make sure you have all the relevant documents and supporting information before you start. Firstly, you will need to check whether your business and nominated employees (ie those who you're claiming the payment on behalf of) meet the eligibility requirements. To recap, an eligible employer is broadly one that has: carried on a business in Australia on 1 March 2020; employed at least one eligible employee on 1 March 2020; eligible employees are currently employed by the business for the fortnights the claims are for (including those who are stood down or rehired); the business has faced a fall in turnover of 30% for those businesses with an aggregated turnover of $1bn or less (note that businesses with an aggregated turnover of more than $1bn will need to demonstrate a 50% fall in turnover, while ACNC registered charities will only need to demonstrate a 15% fall in turnover). Note that the turnover calculation is based on GST turnover and applies even if your business is not registered for GST. If you're running your business as a sole trader, you'll also be eligible if your business has experienced a downturn according to the eligibility criteria. Remember the JobKeeper payment also applies to business owners that are actively engaged in the business or a director that is actively engaged in the business (including in the form of a company, trust or partnership). However, the payment is limited to one entitlement for each entity even if there are multiple business owners or participants. Secondly, you'll need to notify eligible employees that you intend to participate in the JobKeeper scheme. You'll also be required to send eligible employees an "Employee Nomination Notice" to complete and return to you to confirm that they agree to you being nominated as the employer to receive JobKeeper payments from. Thirdly, it is important to note that you will need to pay the minimum $1,500 to each JobKeeper eligible employee per fortnight starting from 30 March 2020 (ending 12 April 2020). Alternatively, you can make one combined payment of $3,000 for the first two fortnights paid by the end of April 2020. This means that you'll need to pay your employees first before the ATO pay your business in the first week of May 2020. Finally, when you've done all of the above, you will need to enrol for the JobKeeper using the Business portal and authenticate with myGovID.

Early release of super: coronavirus condition

As a part of the second round of COVID-19 stimulus, the government allowed individuals in financial distress to access a tax-free payment of up to $20,000 from their superannuation. While it may be a lifeline for many in these harsh economic times, before you take up this early release offer, it is best to consult a qualified professional about eligibility and the potential future impacts this may have on your retirement as well as other options available. If you're thinking of consulting a qualified professional, but don't have an existing relationship with a financial adviser, you may now be able to go and see your registered tax agent to get the advice that you need. ASIC has provided a temporary AFS licensing exemption to allow registered tax agents to provide certain financial product advice to their existing clients about the early release of super under the Coronavirus condition. To qualify for the exemption, other conditions include unsolicited contact, maximum advice fee of $300, Record of Advice requirements, and disclosure of potential conflicts of interest, commissions and remuneration. The exemption only applies to registered tax agents who are neither an AFS licensee nor a representative of an AFS licensee. If your tax agent is already authorised under an AFS licence to provide this type of financial product advice, then they are required to comply with the providing entity relief requirements in the Instrument. The ATO will be accepting applications for early release of super by individuals impacted by COVID-19 from 20 April 2020. An individual can make one application to access up to $10,000 (tax-free) in the 2019-20 financial year (ie by 30 June 2020). A second application for up to $10,000 can be made in the 2020-21 year (ie from 1 July 2020) until 24 September 2020. Applications can either be made online through the myGov website or over the phone with the ATO for those unable to access online services. The application itself requires the person to certify that they are eligible and includes information about the consequences of making false applications. The ATO has recently run a social media campaign asking people to observe the spirit of the legislation and only apply to release their super to deal with the adverse economic effects of COVID-19. It notes that taxpayers should not withdraw their super early and recontribute it to gain a personal tax deduction. Other methods of taking advantage of early release that have been floating around in mass media including salary sacrifice schemes would also presumably not be acceptable.
As a part of the second round of economic stimulus in response to the COVID-19 pandemic, the government legislated a measure to boost cash flow for employers. To recap, the measure ensures that an eligible employer receives an amount equal to 3 times the amount of tax withheld from ordinary salary and wages as disclosed in the March monthly BAS, or equal to the amount of tax withheld from ordinary salary and wages for the quarter – both subject to minimum of $10,000 and a maximum of $50,000. The payment is due on 28 April 2020 and other payments will follow later this year. The cash flow boost payments are only available to entities that qualified as small or medium entities for the income year for which they have been most recently been assessed. In other words, entities that have turnover less than $50m. Put conversely, there will be no cash flow boost payments for entities that have turnover greater than $50m. Note, there is also a withholding requirement (ie the payment will only be made to entities that first notified the Commissioner that it has a withholding obligation through the lodgement of a BAS or IAS for the period). Therefore, the key to the system is the BAS that entities lodge for March, either monthly or quarterly. Pretty much everything will be automatically generated from that. That BAS determines how much is paid, and when it is paid. A word of caution, however. The headline numbers (and dates) can be a tad misleading. It is not a minimum $10,000 payment that will be received, it is a minimum gross credit of $10,000 that taxpayers will be entitled to (in respect of the March BAS). This credit will be offset against of the liabilities that appear on the BAS and any debits in a taxpayer's RBA. This may result in refund, but more likely for most taxpayers will result in a reduction in the amount they owe to the ATO. Even assuming that the ATO owes the taxpayer money (ie a refund), it will not be paid on 28 April, but rather within 14 days of lodging the BAS. So, any hopes that a taxpayer holds that an amount of $10,000 is to be deposited into its bank account on 28 April will not be met. The ATO has already stated that lodging a BAS early will not give rise to an early payment of the first cash flow boost payment. Another important feature to note in the legislation is that eligibility is subject to a specific integrity rule to overcome artificial or contrived arrangements or schemes. The Tax Office has stated a "scheme" for these purposes includes restructuring a business or the way an entity usually pays its workers to fall within the eligibility criteria, as well as increasing wages paid in a particular month to maximise the cash flow boost payment amount.
In line with various concessions provided to businesses to soften the blow of the COVID-19 pandemic, the ATO has now released the following details of concessions for self-managed super funds (SMSFs) as well as advice: SMSFs temporarily reducing rent - due to COVID-19, many landlords are voluntarily giving their tenants a reduction in rent or a waiver of rent to help them survive the economic downturn. As a consequence, the ATO has said it will not take compliance action for the 2019-20 and 2020-21 financial years where an SMSF gives a tenant, who is also a related party, a temporary rent reduction during this period. In-house asset restrictions - according to the ATO, if at the end of the financial year, the level of in-house assets of a SMSF exceeds 5% of a fund's total assets, the trustees must prepare a written plan to reduce the market ratio of in-house assets to 5% or below. It notes that this plan must be prepared before the end of the next following year of income. For example, if your SMSF exceeds the 5% in-house asset threshold at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021. Although due to the uncertainly in global recovery, the ATO has stated that it will not undertake compliance action if the rectification plan was unable to be executed because the market has not recovered, or it was unnecessary to implement the plan as the market had recovered. Investment strategies - the ATO notes that investment strategies should be reviewed regularly (at least annually) and any decisions arising from the review documented. It says certain significant events such as a downturn in the market should also prompt a review and update of investment strategies if required. If during this uncertain time, you make short-term variations in your SMSF investment strategy (including specified asset allocations whilst adjusting investments), the ATO will not consider that a variation from the articulated investment approach. Super balance losses - the ATO advises that while realised losses arising in an SMSF may be available to the fund to deduct against realised gains in future years, these losses are not available to individual trustee or beneficiary to deduct in their personal tax returns. Just as you don't return any profit made in your SMSF as assessable income in your personal tax return, you cannot claim a deduction for the loss in your super balance, the ATO says.

Further to yesterday's post, the Australian Taxation Office ('ATO') has now announced a temporary simplified short cut method to make it easier for individual taxpayers to claim deductions for additional running expenses incurred (e.g., additional heating, cooling and lighting costs), as a result of working from home due to the Coronavirus pandemic. 

Based on the announcement, the ATO will allow individuals to claim a deduction for all running expenses incurred during the period 1 March 2020 to 30 June 2020, based on a rate of 80 cents for each hour an individual carries out genuine work duties from home. This is an alternative method to claiming home running expenses under existing arrangements, which we had previously discussed.

The 80 cents per hour method is designed to cover all deductible running expenses associated with working from home and incurred from 1 March 2020 to 30 June 2020, including the following:

  •       Electricity expenses associated with heating, cooling and lighting the area at home which is being used for work.
  •       Cleaning costs for a dedicated work area.
  •       Phone and internet expenses.
  •       Computer consumables (e.g., printer paper and ink) and stationery.
  •       Depreciation of home office furniture and furnishings (e.g., an office desk and a chair).
  •       Depreciation of home office equipment (e.g., a computer and a printer).

This means that, under the 80 cents per hour method, separate claims cannot be made for any of the above running expenses (including depreciation of work-related furniture and equipment). As a result, using the 80 cents per hour method could result in a claim for running expenses being lower than a claim under existing arrangements (including the existing 52 cents per hour method for certain running expenses).

Furthermore, according to the ATO's announcement, under the 80 cents per hour method:

(a)     there is no requirement to have a separate or dedicated area at home set aside for working (e.g., a private study);

(b)     multiple people living in the same house could claim under this method (e.g., a couple living together could each individually claim running expenses they have incurred while genuinely working from home, based on the 80 cents per hour method); and

(c)     an individual will only be required to keep a record of the number of hours worked from home as a result of the Coronavirus, during the above period. This record can include time sheets, diary entries/notes or even rosters.

 As always if you need further clarification in relation to your personal situation please contact us.

Working from home: what can I deduct?

With the majority of Australia now under lockdown to slow the COVID-19 pandemic, many employers are either encouraging their employees to work from home or have now instituted mandatory work from home policies. While working from home has its benefits, there may be extra expenses too, ranging from printing costs, the need for more internet data and perhaps even additional equipment. Depending on your circumstances, you may be able to claim a deduction for the additional running costs you incur, including expenses associated with heating, cooling and lighting in the area you are working from, work-related phone and internet, decline in value of a computer (work-related portion only), and decline in value of office equipment. To work out your expenses for heating, cooling, lighting, cleaning and the decline in value of furniture, you can either the fixed rate method or the actual value method. Under the fixed rate method, you keep records of your actual hours spent working at home for the year or keep a diary for a representative 4-week period to show your usual pattern of working from home. You can then claim a deduction at a rate of 52c for each hour that your work from home. The actual value method not only requires the keeping of a diary, you'll also need receipts to show the actual amount spent and will be required to work out the cost based on floor area as well as other factors. For phone and internet expenses, you can claim up to $50 without having to analyse your bills in detail. The rates you can use to work out the cost of your work calls are 25c for calls made from your landline, 75c for calls made from your mobile or 10c for text messages sent from your mobile. If you would like to claim more than $50, you will need to work out the percentage of work use over a 4-week period using a reasonable basis (ie the number of work calls made as a percentage of total calls). If you have a work issued computer or laptop, you cannot claim any decline in value for the computer, this also applies to any work issued office equipment such as additional screens, a keyboard or a mouse. However, if you have purchased your own equipment such as a telephone, a printer or a computer chair, you can claim the full cost of items up to $300 or decline in value (depreciation) for items over $300. This is provided the purchased equipment is used purely for work purposes. The depreciation that can be claimed depends on the effective life of the asset purchased and for any equipment that's used both for work and personal purposes, an apportionment may have to be undertaken. Work-related portion of other running expenses including computer consumables such a printer paper, ink and various stationery can generally be deducted outright.

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