November Practice Update
Tax cuts pass Parliament
The Government announced various tax measures in the 2020 Budget on 6 October 2020, and it was able to secure passage of legislation containing some of the important measures very shortly afterwards, as summarised below.
Tax relief for individuals
The Government brought forward ‘Stage two’ of their Personal Income Tax Plan by two years, so that, from 1 July 2020:
q the low income tax offset increased from $445 to $700;
q the top threshold of the 19% tax bracket increased from $37,000 to $45,000; and
q the top threshold of the 32.5% tax bracket increased from $90,000 to $120,000.
In addition, in 2020/21, low and middle-income earners will receive a one-off additional benefit of up to $1,080 from the low and middle income tax offset.
Tax relief for business
Businesses with a turnover of up to $5 billion are now able to immediately deduct the full cost of eligible depreciable assets as long as they are first used or installed by 30 June 2022.
To complement this, the Government will also temporarily allow companies with a turnover of up to $5 billion to offset tax losses against previous profits on which tax has been paid.
Also, businesses with an aggregated annual turnover between $10 million and $50 million will, for the first time, be able to access up to ten small business tax concessions.
Under the changes passed by the Parliament, the Government will also enhance previously announced reforms to invest an additional $2 billion through the Research and Development Tax Incentive.
Employers need to apply recent tax cuts as soon as possible
The ATO has now updated the tax withholding schedules to reflect the 2020/21 income year personal tax cuts — the updated schedules are available at ato.gov.au/taxtables.
The ATO has said that employers now need to make adjustments in their payroll processes and systems in order for the tax cuts to be reflected in employees’ take-home pay.
Employers must make sure they are withholding the correct amount from salary or wages paid to employees for any pay runs processed in their system from no later than 16 November onwards.
Employees should be aware that any withholding on the old scales will be taken into account in their tax return.
Deferrals of interest due to COVID-19
Many lenders have recently allowed borrowers with investment property loans to defer repayments for a period of time.
While repayments are being deferred, interest (and fees) will usually be added to the loan balance (i.e., the deferred interest will be ‘capitalised’).
However, it is important to recognise in such situations that, while repayments are not being made during the relevant period, borrowers continue to ‘incur’ the interest during that time.
Further, interest will continue to be calculated and will accrue on both the unpaid principal sum of the loan and the unpaid (i.e., capitalised) interest. The interest that accrues on the unpaid or capitalised interest is referred to as ‘compound interest’.
Importantly, the ATO has previously acknowledged that, if the underlying, or ordinary, interest is deductible, then the compound interest will also be deductible.
Accordingly, interest expenses (including any compound interest) will generally be deductible to the extent the borrowed monies are used for income producing purposes (such as where the borrowed funds are used to purchase a rental property).
However, interest on a loan will not be deductible to the extent to which the borrowed funds are used for private purposes (e.g., to purchase a home, a private boat, or to pay for a holiday).
Editor: Note that, despite the name, “penalty interest” is not always “in the nature of interest” and, in some cases, may not be deductible (e.g., due to the expense being capital in nature).
Simplified home office expense deduction claims due to COVID-19
Given that many Australians continue to work from home due to COVID-19, the ATO has updated its Practical Compliance Guideline which allows taxpayers working from home to claim a rate of 80 cents per hour, by keeping a record of the number of hours they have worked from home, rather than needing to calculate specific running expenses.
The application of the Guideline has been extended so that it now applies from 1 March 2020 until 31 December 2020.
Companies holding meetings and signing documents electronically
The Government has made another determination extending the timeframe within which companies can hold meetings electronically and enabling electronic signatures to be used, to relieve companies from problems they face due to the Coronavirus situation.
This determination is intended to be in effect until (and will be repealed from) 22 March 2021, unless the Government determines otherwise.
Editor: Note that the Government has also released exposure draft legislation to make these reforms (in respect of virtual meetings and electronic document execution) permanent.
COVID-19 and loss utilisation
The ATO understands the way some businesses operate has been impacted as a result of COVID-19.
Some of these impacts may have resulted in changes that affect whether they are able to utilise their carried-forward losses in the current or a future income year.
For companies to utilise their carried-forward losses in a particular year, they need to satisfy the continuity of ownership test or, if they fail that test, they need to satisfy the business continuity test (‘BCT’).
Whether a company can utilise carried-forward losses requires a consideration of its facts and circumstances.
Generally, a company that has completely closed its business with no intention to resume will fail the BCT. However, a company that has temporarily closed its business may still be able to satisfy the BCT.
Importantly, the mere receipt of JobKeeper payments will not cause a company to fail the BCT.
Employees on JobKeeper can satisfy the ‘work test’
The Australian Prudential Regulation Authority (‘APRA’) has confirmed that, where an employer is receiving the JobKeeper wage subsidy for an individual, superannuation funds should consider the individual to be ‘gainfully employed’ for the purpose of the ‘work test’, even if that individual has been fully stood down and is not actually performing work.
As such, superannuation funds can assume that all members in receipt of the JobKeeper subsidy satisfy the ‘work test’ when determining whether they can make voluntary superannuation contributions.
– Special Benefit; or
– Farm Household Allowance;
❑ On or after 1 January 2020 either;
– they were made redundant;
– their working hours were reduced by 20% or more (including to zero); or
– they were a sole trader and their business was suspended or there was a reduction in turnover of 20% or more (partners in a partnership are not eligible unless the partner satisfies any other eligibility criteria).
Editor: Please contact our office for assistance if your financial circumstances have taken a turn for the worse due to COVID-19 and you wish to see if you are eligible to access your superannuation.
Tax treatment of JobKeeper Payments
Broadly, JobKeeper Payments received by an employer are assessable income to the employer.
Likewise, the payments an employer subsequently makes to an employee that are funded (in whole or in part by the JobKeeper Payment) are generally allowable deductions to the employer.
The ATO has recently issued some guidance for employers in receipt of JobKeeper Payments.
For sole traders, they will need to include the payments as business income in their individual tax return.
For partnerships or trusts, JobKeeper payments should be reported as business income in the relevant partnership or trust tax return.
For a company, report JobKeeper payments as income in the company tax return.
For a taxpayer that has repaid (or is in the process of repaying) any of their JobKeeper payments to the ATO, these amounts do not need to be included in their tax return.
Editor: Note a business would be refunding JobKeeper payments to the ATO if it had been discovered that the business had incorrectly claimed JobKeeper payments, and had either voluntarily disclosed this to the ATO, or the ATO made this determination as a result of audit activity.
The normal rules for deductibility apply in respect of the amounts a taxpayer pays to their employees, even where those amounts are subsidised by the JobKeeper payment.
That is, if the underlying salary is deductible, then it is still deductible to the employer where it has been subsidised by a JobKeeper payment.
For employees who have received JobKeeper payments, these will be included as salary and wages (or an allowance) in their income statement (or payment summary) as provided by their employer.
Editor: If you have any queries about the JobKeeper Payment scheme, please contact our office.
Deduction for work-related vehicle expenses disallowed
In a decision of the Administrative Appeals Tribunal, a taxpayer, Mr Bell, was a denied a deduction for $21,565.73 of work-related vehicle expenses for the 2016 income year.
Mr Bell, was a construction worker who predominantly worked on a construction site in an eastern suburb of Melbourne and lived approximately 100 kilometres away from that worksite.
Mr Bell owned a ute that had a load carrying capacity of more than one tonne – so it fell outside the definition of a ‘car’ for the purposes of the ITAA 1997.
Mr Bell claimed a total deduction for $24,865.73 for motor vehicle expenses and received an allowance under his Enterprise Bargaining Agreement.
This allowance did not vary with the amount of travel undertaken and totalled $15,221 for the year.
Mr Bell contended that he was required to use his vehicle to transport heavy/bulky goods (tools) between his home and his workplace and to collect supplies and equipment from hardware stores while travelling between his workplace and his home.
Ordinarily, travel from home-to-work (and back again) is considered non-deductible. However, if an employee is required to carry heavy/bulky equipment for which there are no secure storage facilities at work, the travel between home and work with the heavy/bulky equipment can be considered deductible.
Unfortunately for Mr Bell, evidence before the Tribunal indicated that there were safe and secure storage facilities for his tools (the bulky/heavy equipment) at the worksite.
Accordingly, Mr Bell was unable to rely upon the ‘bulky goods’ exception to recharacterise home-to-work travel as being a deductible work expense.
Instead, it retained its ordinary private and non-deductible status.
Mr Bell was unsuccessful in advancing the argument that he was entitled to a deduction in relation to the motor vehicle expenses because he was in receipt of an allowance.
However, Mr Bell was able to convince the ATO that he had undertaken at least some work-related travel using his vehicle. The ATO allowed Mr Bell a deduction under the ‘cents per kilometre method’ up to the maximum dollar amount for 5,000 kilometres for the 2016 income year of $3,300.
Editor: This decision provides a timely reminder that simply carrying bulky equipment between home and work will not make these trips deductible, where there is a secure place for the equipment to be stored at the employee’s worksite. The decision also highlights the fallacy of assuming that being in receipt of an allowance somehow entitles the taxpayer to an offsetting deduction.
The taxpayer was technically ‘lucky’ that he was allowed the ‘cents per kilometre method’ deduction for work-related travel, given that his motor vehicle fell outside the definition of a ‘car’.
This is because the cents per kilometre method only applies to ‘cars’, so it could be said that the ATO was generous to the taxpayer in these circumstances.
Please contact our office if you have any queries as to the deductibility of work-related travel.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.