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The end of the FBT year is upon us once again. Employers that have provided their employees with fringe benefits any time during the 2024 FBT year – 1 April 2023 to 31 March 2024 – will need to lodge an FBT return and pay any liability by 28 May 2024. With the landscape of FBT evolving every year due to legislative amendments and administrative updates, employers need to be mindful of the changes applying for the current FBT year. While the electric vehicle exemption came into effect on 1 July 2022, many employers have only recently started ramping up the purchase or leasing of electric vehicles due to a combination of waiting for previous leases to expire and a temporary shortage of electric vehicles. As a refresher, employers are now exempt from paying FBT on benefits related to eligible electric vehicles under the condition that the vehicles are zero or low emissions, first held and used after 1 July 2022, never subjected to luxury car tax, and utilised by current employees or their associates. It should be noted that car expenses associated with providing eligible electric vehicles are also exempt, which includes registration, insurance, repairs and maintenance and fuel (including the cost of electricity to charge electric cars). Other expenses that are not exempt may be reduced by the otherwise deductible rule if the expenditure would have been deductible to the employee had they incurred it themselves. To provide certainty for employers, the ATO recently issued Practical Compliance Guideline PCG 2024/2, offering guidance on calculating electricity costs for charging electric vehicles at an employee’s home. This guideline provides a methodology for employers and individuals to calculate electricity costs, either by using the outlined approach or by determining the actual cost, facilitating the inclusion of these costs in FBT and income tax calculations. In addition, employers that provide cars to their employees should also be aware of the recent updates to the car parking fringe benefits to reflect the latest Taxation Ruling, TR 2021/2, offering clarity on modern car parking arrangements and compliance requirements. In another change for the 2024 FBT year, the ATO has simplified employee declarations in relation to some fringe benefits to ease the administrative burden for both employees and employers. The new declarations remove the requirement for employees to declare the make and model of cars for specific transport-related benefits, including remote area holiday transport and overseas employment holiday transport, among others. Similar to previous FBT years, employers that lodge FBT returns electronically through tax practitioners will have access to a deferred due and payment date of 25 June. This only applies to electronic lodgments and any paper returns lodged through tax practitioners will still have 25 May as the due and payment date. For employers that have registered for FBT but do not need to lodge a return for the 2024 FBT year, a notice of non-lodgment should be submitted to the ATO by the time the FBT return would normally be due (ie by either 25 May or 25 June) to prevent the ATO from seeking a return at a later date. The regulatory environment surrounding FBT continues to evolve; for example, recently the ATO registered instruments to allow employers the option to utilise existing records instead of statutory evidentiary documents for certain benefits from 1 April 2024 (ie the 2025 FBT year). Therefore it is crucial to stay up-to-date and well-informed to navigate the complexities of FBT compliance.
Recently, the ATO updated its small business benchmarks to encompass the 2021-22 income year. While the ATO promotes these benchmarks as an aid for small businesses to enable them to compare expenses and turnover with other similar small businesses in the same industry, it is important to note that these benchmarks are also used by the ATO to identify businesses that may be avoiding their tax obligations. According to the ATO, it uses small business benchmarks along with other risk indicators to select businesses for further compliance activities. The first step consists of comparing information reported in business tax returns lodged with the key performance benchmarks for the industry. The industry that your business is in depends on the industry codes selected, as well as the description of the main business activity on the tax return and the business trading name. The benchmarks themselves are divided into 9 broad categories of accommodation and food; building and construction trade services; education, training, recreation and support services; health care and personal services; manufacturing; professional, scientific and technical services; retail trade; transport, postal and warehousing; and other services. These categories split into additional subcategories; for example, bakeries, chicken shops, coffee shops, kebab shops and pubs all have their own separate subcategory under accommodation and food. There are 5 tax return benchmark ratios calculated by the ATO and all are expressed as a percentage of turnover (excluding GST). These consist of total expense/turnover, cost of sales/turnover, labour/turnover, rent expenses/turnover, and motor vehicle expenses/turnover. To calculate the turnover, the ATO generally uses the amount reported at the “Other sales of goods and services” label on the tax return or if that figure is not present, the figure from the “total business income” label. Small businesses can use the Business performance check tool on the ATO app to work out their own personal ratios and then compare them to the benchmarks, or manually calculate the various ratios and compare to the benchmarks. For businesses with ratios inside the benchmark ranges for their industry, the ATO notes that nothing else needs to be done. However, businesses with ratios outside of benchmarks are encouraged to look to see if there are any factors that can be improved. Generally, businesses reporting ratios above the benchmarks indicate that expenses are high relative to sales which may point to a range of factors ranging from the benign (eg higher wastage, lower volume of sales, or lower mark-up), to concerning (eg sales not recorded properly, failure of internal cash controls, etc). Businesses reporting ratios below the benchmarks commonly have fewer issues of concern as they have lower expenses relative to sales which may indicate some expenses not being recorded, having a higher mark-up or just being more efficient. Not all benchmark ratios will apply to every business. It is up to the individuals in control to work out which benchmarks are applicable and check that the business is within the appropriate range, as well as investigate instances where it is not. The ATO reminds small businesses that benchmarks are never used in isolation in instances where further action of investigations are initiated, instead a wide range of other supporting factors are also considered.
Investment property owners beware! The ATO has signalled that its rental bond data matching program will continue to the 2025-26 income year. This program first commenced in 2005 and collected data dating back to 1985, the year that CGT was first introduced. It has continued since then. Rental bond data will be collected from the following State and Territory bond regulators twice a year for the 2023-24 to 2025-26 years: New South Wales Fair Trading – Professional Standards and Bonds; Department of Justice and Community Safety – Consumer Affairs, Victoria; Residential Tenancies Bond Authority – Consumer and Business Services, South Australia; Bond Administrator – Department of Mines, Industry Regulation and Safety, Western Australia; ACT Office of Rental Bonds – Access Canberra; Department of Justice – Office of the Residential Tenancy Commission, Tasmania; and Residential Tenancies Authority, Queensland. Specific data items collected will include: Individual client details (names, addresses, email addresses, phone numbers, unique identifier for the landlord). Landlord and Managing agent identification details (business names, addresses, contact names, email addresses, phone numbers, unique identifier of the managing agent). Rental bond transaction details (rental property address, period of lease, commencement of lease, expiration of lease, amount of rental bond held, number of weeks the rental bond is for, amount of rent payable for each period, period of rental payments, type of dwelling, number of bedrooms, and unique identifier of the rental property). According to ATO estimates, records relating to around 900,000 properties will be obtained each financial year. This data will be used to identify under-reporting or non-reporting of income in tax returns, the misapplication of CGT provisions leading to under or non-reporting in relation to sale of properties, and non-compliance with foreign investment laws. In combination with other data matching and compliance strategies, the ATO notes that the rental bond data matching program identified approximately 5,600 taxpayers where real property dealings had not been treated correctly in the 2022-23 financial year alone. This led to an additional$23m in revenue being raised. The identity matching process within any ATO data matching program employs over 60 sophisticated identity-matching techniques to ensure the correct taxpayer is linked to the data and uses multiple identifiers to obtain a match. An additional manual process may be undertaken in instances where a high confidence identity match does not occur and involves an ATO officer reviewing and comparing third-party data identity elements against ATO information on a one-on-one basis. Once an identity match is obtained, data analysts within the ATO then use various models and techniques to detect potential under-reported income or over-reported deductions. Higher risk discrepancy matches are then loaded into ATO’s case management system and allocated to compliance staff for actioning. Lower risk discrepancy match will be further analysed to discern whether further action is required. The compliance team will then contact the taxpayer usually by phone, letter or email to clarify or verify the discrepancy. Taxpayers will have up to 28 days to verify the accuracy of the information from the data matching and respond prior to the initiation of any administrative action. Taxpayers that disagree with any ATO decision regarding the information obtained from data matching programs can request a review by lodging an objection.
With the year-on-year growth in the number of SMSFs in Australia, the ATO is finally rolling out a extra security feature for SMSFs that use the Small Business Superannuation Clearing House (SBSCH) in terms of bank account validation. Briefly, the SBSCH is a free, online superannuation payments service that small businesses can use to pay their super contributions in one transaction. It is designed to simplify the process of making superannuation contributions on behalf of employees. The service is available to small businesses with 19 or fewer employees or businesses with an annual aggregated turnover of less than $10 million. The SBSCH is part of ATO online services and allows employers to meet their superannuation guarantee obligations easily. By using the clearing house, employers can make a single electronic payment to the SBSCH, which then distributes the funds to each employee's super fund or SMSF. This service helps reduce the time and paperwork associated with superannuation contributions for multiple employees across different super funds. The rollout of the new security feature, expected around 15 March 2024, will check whether an employee’s SMSF bank account details match their SMSF records. Where there is a mismatch, or where an employee has not listed their bank account details, the employer will receive an “invalid super fund bank details” error on the SBSCH payment instruction. According to the ATO, where this error occurs, the SBSCH cannot accept payments to an employee’s SMSF until it is resolved. To resolve this error, the ATO recommends employers check with employees that their SMSF’s bank account details exactly match those listed on the SMSF records. If those details are incorrect, or if there are no details listed, the employee should approach the trustee of the fund or a tax professional associated with the fund to update the information through ATO online services. Employees with SMSFs are encouraged to ensure that fund details are correct ahead of the change to avoid any delays in their super. Where the discrepancy is resolved, employers will be able to update the employee’s SMSF bank details in SBSCH and submit payment instructions. To avoid delays for other employees, the ATO notes that SBSCH payment instructions can still be submitted for employees with valid super fund details ahead of resolution of any discrepancy. This security feature is just one of many that the ATO has been rolling out late last year and early this year to safeguard retirement savings held in SMSFs from fraud and misconduct. For example, the ATO commenced sending rollover alerts to members of SMSFs when a super fund uses the SMSF verification service to verify a fund’s details with the intent to roll super benefits into an SMSF. This alerts members of SMSFs to an unauthorised rollover and potentially stop it in its tracks. Other alerts for SMSF changes have also been implemented by the ATO to tackle fraudulent use of taxpayer details to register new SMSFs. These are often then used to commit further offences, such as illegal early release. Taxpayers that have been alerted by the ATO in relation to a change made to an existing SMSF should either contact the trustees or the tax professional associated with the fund to verify the change in the first instance. Where it is subsequently determined that the change was incorrect or unauthorised, taxpayers are encouraged to contact the ATO immediately.
Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, chief among them being the unparalleled control and flexibility this type of fund can afford its members over their retirement savings. This control extends to the ability to tailor investment strategies to personal financial goals, risk tolerance and preferences, with access to a broader array of investment options than those typically available in retail or industry super funds. Such options include not just traditional stocks and bonds but also direct property, precious metals and even cryptocurrencies, allowing for a highly diversified investment portfolio. Beyond investment choices, SMSFs provide significant tax advantages. Members can employ strategic tax planning to minimise liabilities and enhance their retirement nest egg, benefiting from the ability to manage the timing of tax events and utilise imputation credits. In addition, SMSFs can offer enhanced estate planning flexibility, enabling members to specify how their assets are distributed upon their death, which can be particularly beneficial in complex family situations. The pooling of resources in an SMSF, which can include up to six members, allows for increased buying power, making it easier to invest in assets like real estate that might otherwise be out of reach for a single individual. Additionally, the direct ownership of investment assets through an SMSF can provide a sense of security and personal involvement not found in other superannuation arrangements. It is perhaps no surprise then that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of all the benefits offered. In the 5 years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876bn in assets, which accounts for around 25% of all super assets. However, taxpayers seeking to establish SMSFs should also be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF, as trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances. The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees' lack of experience or knowledge can lead to poor investment choices. It should also be noted that not all investments are created equal. SMSFs need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members. The sole purpose test may be contravened if a related party to the fund obtains a financial benefit (directly or indirectly) when making investment decisions. The SMSF will also fail the sole purpose test if it provides a pre-retirement benefit to an individual, for example, if one of the members engages in personal use of a fund asset. In addition to these potential drawbacks, there is the time commitment required to research investments, monitor fund performance and stay updated on regulatory changes; liquidity challenges for funds investing in real estate or other illiquid assets; and in most cases, more expensive or complex insurance (ie life, total and permanent disability [TPD], income protection) access to consider when starting an SMSF. Taxpayers thinking about starting an SMSF should carefully weigh these potential drawbacks against the benefits, and consult relevant qualified advisers for further advice where required.
Since the introduction of EV incentives by various state governments to encourage the uptake of EVs and other zero emissions vehicles, the market share of EVs has significantly increased from around 0.78% in 2022 to 7.2% in 2023. According to the Federal Chamber of Automotive Industries, while EV sales only account for a small proportion of overall vehicle sales, the sales have increased 185% since 2022 (80,446 sales 2023 vs 33,410 in 2022). Due to the increasing number of EVs being used for business purposes, the ATO released a draft compliance guideline last year setting out the methodology for calculating the cost of electricity when an eligible electric vehicle is charged at an employee’s or an individual’s home. This draft guideline has now been finalised and applies from 1 April 2022. According to the guideline, in terms of FBT, the employer has the choice of using either the methodology outlined in the guideline or determining the cost of the electricity by determining the actual cost incurred. However, this choice applies to each vehicle for the entire year, although this choice can be changed from one FBT year to another. It should be noted that the guideline only applies to zero emission electric vehicles and not to plug-in hybrid vehicles which have an internal combustion engine. It also does not apply to electric motorcycles or electric scooters. For FBT purposes, the guideline may only be relied on to calculate electricity costs of charging an electric vehicle at an employee’s home if an employer: provides the electric vehicle to an employee or their associate for private use resulting in the provision of either car fringe benefit, a residual fringe benefit, or an expense payment benefit; provides the electric vehicle to an employee or their associate who charges the electric vehicle using electricity at a residential premises, where the electricity cost directly attributable to charging the electric vehicle cannot be practically segregated from the cost of running other electrical appliances in the home; and is required to calculate the taxable value as a part of FBT obligations (ie car fringe benefit, residual fringe benefit, car expense payment benefit, or reportable fringe benefits amount). The rate that the Commissioner will accept for calculating electricity costs of charging an electric vehicle at a residential premises for FBT purposes for the FBT year commencing 1 April 2022 and later FBT years is 4.20 cents per km. A transitional approach applies for the 2022-23 and 2023-24 fringe benefits years, whereby if odometer records have not been maintained, a reasonable estimate may be used based on service records, logbooks or other available information. After the transitional period ends, employers will need to keep a record of the distance travelled by the car and a valid logbook must be maintained if the operating cost method is used. Employers are reminded that even if an electric vehicle is eligible for a fringe benefits tax exemption, the benefit is still required to be included in an employee’s reportable fringe benefits amount. Therefore, the taxable value must be determined and where the employee home-charged the electric vehicle throughout the year and paid their electricity bills and provided the employer with the necessary declaration for electricity costs, the home charging electricity cost will form a part of the recipient contribution amount.
Offshore tax evasion was once the domain of the very wealthy, but as the world becomes more globalised, many ordinary professional individuals both with and without accounting experience are increasing turning to establishing offshore companies to decrease the amount of tax paid in Australia. In response, the ATO is using the many tools in its arsenal to tackle the problem before it becomes established. As shown by recently offshore tax evasion case studies, one of the most effective tools employed by the ATO is advanced data analytics to identify patterns and anomalies indicative of tax evasion. By cross-referencing information from various sources, including those obtained through international agreements as well as domestically through share market trading data and payments made to domestic bank accounts, the ATO is able to detect unreported offshore income. The ATO also actively participates in international agreements for the exchange of tax information. The list of countries that the ATO has Tax Information Exchange Agreements (TIEAs) with include many famed tax havens as well as other countries: Andorra; Anguilla; Antigua and Barbuda; Aruba; The Bahamas; Bahrain; Belize; Bermuda; British Virgin Islands; Brunei; The Cayman Islands; Cook Islands; Costa Rica; Dominica; Gibraltar; Grenda; Guatemala; Guernsey; Isle of Man; Jersey; Liberia; Liechtenstein; Macao, Marshall Islands, Mauritius; Monaco, Montserrat; Netherlands Antilles; Samoa; San Marino; St Kitts and Nevis; St Lucia; St Vincent and the Grenadines; Turks and Caicos Islands; Uruguay; and Vanuatu. TIEAs allow the automatic exchange of financial account information between countries and allows the ATO to receive detailed information about Australians with financial accounts in other countries. In addition to these two very effective tools, the ATO also gathers information of tax evasion through the multi-agency Serious Financial Crime Taskforce (SFCT) which started operating on 1 July 2015, and combines the expertise and resources of the ATO, AFP, AUSTRAC, ASIC and ACIC, to name a few. The composition of the taskforce changes depending on the financial crime being investigated. As at 31 December 2023, the taskforce had investigated cases that resulted in the completion of 1,994 audits and reviews and the conviction and sentencing of 33 people, raising liabilities of over $2bn and collecting around $800m. In terms of international presence, the ATO is also a part of the J5 (Joint Chiefs of Global Tax Enforcement) along with Canada, UK, US, and Netherlands, which share intelligence and carry out operational activities. The most recent focus of the J5 include optimising the usage of data acquired from a variety of open and investigative sources available to each country to detect threats from crypto-assets. While these active approaches occupy most of ATO’s focus under normal operating conditions, where there is a substantial data leak from whistleblowers or investigative journalists such as the Panama Papers, the ATO will scrutinise the data and conduct investigations and audits of individuals and businesses with suspected links to offshore tax evasion. For individuals who inadvertently or mistakenly find themselves as part of possible offshore tax evasion structures, the ATO encourages making a voluntary disclosure before the commencement of potential audits to reduce the penalties and interest which may apply. However, those that deliberately flout the system may find themselves mired in legal action which can result in significant penalties or even criminal charges.
The talk about the stage 3 tax cuts has reached fever pitch in recent days. The changes were originally legislated by the previous government in 2019 with support of the then Labor opposition. During the election campaign and since coming o government, the Prime Minister had reassured voters on multiple occasions that the stage 3 tax cuts would remain. However, with the recent inflationary stressors, the government has been under increasing pressure to scrap the already legislated tax cuts in favour of cost-of-living relief for low to middle income earners, which would require the introduction of amending legislation. As a refresher, stage 3 tax cuts are due to come in place from 1 July 2024, and will benefit individuals that earn above $45,000 of taxable income. Under the current rates, individuals that earn between: $0 and $18,200 pay no tax; $18,201 and $45,000 are taxed at 19% of excess over $18,200. $45,001 and $120,000 are taxed at $5,092 plus 32.5% of excess over $45,000; $120,001 and $180,000 are taxed at $29,467 plus 37% of excess over $120,000; and $180,001 and more are taxed at $51,667 plus 45% of excess over $180,000. From 1 July 2024 however, those earning taxable income between $45,000 and $200,000 will be taxed at $5,092 plus 30% of excess over $45,000. In addition, individuals that earn $200,001 and more are taxed at $51,592 plus 45% of excess over $200,000. According to the latest ABS data, the median earnings of full-time Australian workers are around $1,600 per week equating to $83,200 per year. Under the current rates this worker would be paying $17,507 in tax; however, when stage 3 tax cuts come into play for the 2024-25 income year, this same worker would only be paying $16,552, a saving of $955. Of course, as the critics of the tax cuts have pointed out, those earning more will be saving more. For example, the same ABS data indicates that individuals earning $2,820 per week are in the 90th percentile of workers in Australia. This figure equates to annual earnings of $146,640 and under the current tax rates this worker would be paying around $39,323. When the stage 3 tax cuts come into place, this worker will only be paying $35,584, a tax saving of around $3,739. This effect becomes even more pronounced at the edge of the stage 3 threshold of $200,000. These individuals would experience a tax saving of a whopping $9,075 ($60,667 in tax under the current rates vs $51,592 under the stage 3 tax cuts). Under the government’s proposed changes, those earning between $18,201 and $45,000 will see their tax rate reduced from 19% to 16%. In addition, those that earn between $45,001 and $135,000 will be taxed at the new marginal tax rate of 30%, and the existing 37% marginal rate will be retained but will apply to individuals earning between $135,001 and $190,000. The top marginal rate of 45% will also remain for those that earn $190,001 and above. An average worker earning $83,200 per year will be better off under the government’s proposed changes, paying around $15,748 in tax versus $16,552 under stage 3 and $17,507 under the current rates. While those in the 90th percentile of workers will be slightly worse off under the proposed changes ($35,594 in tax) compared to stage 3 ($35,584 in tax), they will still be better off than under the current system ($39,323 in tax). The government will now be working to get these proposed changes passed before 1 July 2024. It is widely speculated that the Coalition will largely vote against the change. It is likely that the proposed changes will still go through given the previous verbal support for scrapping the stage 3 tax cuts from the Greens and some independent senators.
Following on from two prominent High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the ATO has issued a Ruling clarifying the issue of whether certain individuals are employees or independent contractors. In brief, the High Court’s decisions deal with the distinction between employees and independent contractors in the context of a labour hire company and two truck drivers operating through partnerships to provide delivery services to their former employer. In the first case, the High Court ruled that a labourer engaged by a labour hire company to work on construction sites under the supervision and control of a builder was an employee of the labour hire company. The High Court noted that this right of control, and the ability to supply a compliant workforce, was the key asset of the business as a labour-hire agency and constituted an employment relationship. That the parties chose the label "contractor" to describe the labourer did not change the character of that relationship, the High Court said. This decision also overruled a earlier Full Federal Court decision which held that the labourer was an independent contractor after applying a ”multifactorial approach”. In the second case, the High Court held that two truck drivers were not employees of a company for the purposes of the Fair Work Act 2009 and Superannuation Guarantee (Administration) Act 1992. The Court also observed that the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors (and not employees). In the present case, the High Court said there was no reason to reach a different conclusion. Due to these landmark High Court decisions, the ATO has now released Taxation Ruling TR 2023/4 which states that whether an individual (ie worker) is an employee of an entity (“engaging entity”) under the term's ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship. In addition, where the worker and the engaging entity have comprehensively committed the terms of their relationship to a written contract and the validity of that contract has not been challenged as a sham, nor have the terms of the contract otherwise been varied, waived, discharged or the subject of an estoppel or any equitable, legal or statutory right or remedy, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of an engaging entity. The Ruling notes that evidence of how the contract was performed including subsequent conduct and work practices cannot be considered for the purpose of determining the nature of the legal relationship between the parties. However, this evidence can be considered to establish the contractual terms or to challenge the validity of a written contract with general contract law principles. It should be noted that the Ruling now states that the various indicia of employment that have been identified in case law (ie control and right to control, ability to delegate subcontract or assign work, achieve a specified result, bearer of risk, or generation of goodwill) remain relevant, but are only to be considered in respect of the legal rights and obligations between the parties. Therefore, according to the Ruling, the most important factor is the holistic consideration of the contract between the parties to determine whether, on balance, the worker is an employee or independent contractor. This requires an approach which involves standing back and viewing the contract from a distance such that an informed, considered, qualitative appreciation of the whole can be undertaken. In conjunction with the Ruling, the ATO has also released a Practical Compliance Guideline (PCG 2023/2) which sets out its compliance approach for businesses that engage workers and classify them as employees or independent contractors.
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