Robert Goodman Accountants Blog

If you have a business in addition to your main employment, the non-commercial loss rules could apply to you, which may prevent you from deducting your business losses against your other income. Depending on your business activity, as long as you satisfy certain conditions, your business will not be subject to the non-commercial loss rules. If your business does not satisfy these conditions, don't fret, you can also apply to the Commissioner for an exemption under certain circumstances.

Do you run a side business in addition to your main employment? This could be in primary production (ie a farm or winery), retail or any other profession, trade, vocation or calling, provided it is not in a role of an employee. If you do, you may be subject to non-commercial loss rules, which are designed to restrict losses from "non-commercial" business activities from being offset against income from other sources, say your employment income.

A "non-commercial" business activity in this context is any business where the deductions exceed the assessable income in any particular year. However, the non-commercial loss rules will not apply (ie you are able to offset losses from the business activity against other income) under the following circumstances:

  • the assessable income from the business for the year is at least $20,000;
  • the business made a profit (for tax purposes) in at least 3 of the past 5 income years including the current year;
  • the total value of real property (or interests in real property) used on a continuing basis to carry out the business is at least $500,000; or
  • the total value of other assets (excluding cars, motorcycles or similar vehicles) used on a continuing basis in carrying on the business is at least $100,000.

The above conditions only apply to those with an adjusted taxable income of less than $250,000.

Those with an adjusted taxable income of $250,000 or more are considered to be "high-income earners" and will have their deductions from the business quarantined to the business activity.

As such, they will only be allowed to deduct the loss when the business makes a profit. However, high-income earners and those that who do not satisfy the above conditions can still make a request to the Commissioner of Taxation to exercise his or her discretion not to apply the rules.

The Commissioner may exercise his or her discretion to not apply the non-commercial loss rules if:

  • the business was or will be affected by special circumstances outside of your control (eg natural disasters, unforeseen major accidents, government restrictions, illnesses affecting key personnel);
  • if you are not a high-income earner, and the nature of the business means you will not satisfy the conditions, however, the business is objectively expected to make a profit or pass one of the conditions within a commercially viable period for the industry; or
  • if you are a high-income earner, and the nature of the business is such that it has not and will not produce a tax profit for the year in question and there is an objective expectation that it will make a tax profit within a commercially viable period for the industry.

The exercise of discretion is based on an assessment of the facts in each case, as such, any application should be accompanied by supporting evidence of special circumstances, and/or evidence from independent sources including industry bodies, professional associations, and government agencies as to what a "commercially viable period" for the industry is.

If you're a primary producer or a professional artist (eg authors, playwrights, artists, sculptors, composers, performing artists and production associates) and your income from other sources that do not relate to the business is less than $40,000 (excluding net capital gains), you can ignore all of the above, as the non-commercial loss rules will not apply to you. You will be able to deduct any losses from the business against your other income, but you should beware of the $40,000 threshold which may change from year to year based on your personal circumstances.

Still not sure?

If you get the bulk of your income from being an employee and run a business on the side, we can help you figure out if you're subject to the non-commercial loss rules. Alternatively, we can help you apply for the Commissioner to exercise his or her discretion in relation to any business activity you may run so you can start deducting the losses while building your business.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

The rules around Div 7A deemed dividends are complex and may have become more so with the release of a draft taxation determination from the ATO in relation to debts forgiven. Contrary to previous guidance, the draft determination now indicates only natural persons can forgive debts by reasons of natural love and affection. Therefore, private companies will no longer be able to use this exemption on debts forgiven. If your private company has previously used this exemption, beware as the Tax Office has indicated that it will apply this new view in any litigation matters.

Private companies that pay amounts of money, make loans, or forgives debts of shareholders or associates of shareholders, may be subject to Div 7A rules which are designed to ensure that income is not inappropriately sheltered at the corporate tax rate. Generally, these rules deem certain moneys and/or benefits (eg loans and forgiven debts) obtained from the private company by shareholders or their associates to be dividends.

There are exceptions where a private company is not taken to have paid a deemed dividend, for example, where a loan is on commercial terms or is fully repaid within a required timeframe. However, by and large, where a shareholder or their associate has obtained a benefit, then the benefit will be a deemed dividend and needs to be included in the assessable income of the shareholder or their associate.

The rules around Div 7A are complex and may have become a little more so with the release a draft taxation determination from the Tax Office in relation debts forgiven. Importantly, it changes the circumstances in which the exclusion for debts forgiven for reasons of natural love and affection can apply.

The term "natural love and affection" encompasses both its legal meaning (goodwill towards or emotional attachment to another person, particularly that of a parent to their children) and its ordinary meaning (strong emotions of caring, fondness and attachment that arise in consequence of ordinary human interaction).

Whether or not natural love and affection is present in a relationship can only be determined on a case by case basis, although relevant factors may include past dealings, existing relationships, and future intentions.

Previously, when a debt to a shareholder or associate was forgiven by a private company, it was not taken to have been "forgiven" if it was done so for the reasons of "natural love and affection". Therefore, the effect is that, if a private company had lent money to a shareholder/associate but then forgives that debt due to "natural love and affection", then the debt would not have been captured under Div 7A rules and any amount forgiven would not have been a deemed dividend.

With the release of the draft taxation determination, the Tax Office has taken a new stance and noted that the "natural love and affection" exclusion in relation to debts forgiven can only be used if the creditor is a natural person. In this new interpretation, a private company cannot forgive any debts due to natural love and affection as it is not a natural person but rather an entity. It then follows that more private company debt forgiveness would be captured under Div 7A after this change. Whilst this view is not final, it is highly likely that the final determination will express a similar if not the same view as the draft.

In the draft taxation determination, the Tax Office notes it will not devote compliance resources to debts forgiven prior to the withdrawal of previous guidance that expressed the view that companies can forgive debts for reasons of natural love and affection (ie 6 February 2019). However, if your private company has previously applied this exemption, you may need to be aware as the Tax Office is likely to apply this new view in private rulings or litigation matters.

Review your private company arrangements.

Now is the time to review your private company arrangements, including loans and benefits to shareholders and/or associates to ensure it does not fall afoul of the new Tax Office stance. If you're unsure about any arrangements, we can help, contact us today.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

The building defects saga that's happening all around Australia has understandably caused public uproar and forced state governments to act. It is unsurprising then that this issue was at the forefront of the Federal government's attention when it decided to enact an exception to disallowing deductions for holding vacant land. Having the exception available provides peace of mind to investors that if things do go wrong in a major way, they will not lose the ability to negatively gear their property.

As a testament to the far-reaching consequences of recent residential building defects crisis, the government has recently decided to change the legislation on vacant land deductions to exclude structures affected by natural disasters or other exceptional circumstances such as substantial building defects.

Previously, the government had sought to crack down on "land banking" by disallowing expenses, such as interest costs incurred in holding vacant land from 1 July 2019. Basically, any land that did not have a substantial permanent structure on it would be captured. The term substantial permanent structure does not include any premises that is being constructed or substantially renovated unless the premises are able to be lawfully occupied.

Therefore, under the legislation as it was originally written, investors who held defective units in buildings all around Australia would've had their expenses disallowed. These expenses could not be carried forward for use in later income years, with only some expenses allowed to be included in the cost base of the land for CGT purposes.

After the scale of the building defects debacle became known, the government decided to provide an exception to disallowing deductions for holding vacant land for those affected. For the exception to apply, there must've been a substantial and permanent structure on the land prior to the time the exceptional circumstance occurs, and the circumstance must be exceptional and beyond the reasonable control of the taxpayer.

Under the exception, investors holding structures affected by natural disasters or other exceptional circumstances (ie substantial building defects) are allowed deductions for three years from the date the event occurred.

The Commissioner may also extend the three-year period if the failure to replace the structure is beyond the control of the taxpayer or due to the size of the structure, it is unable to be realistically completed on time.

The exceptional circumstances exception can apply to any unusual events or occurrences (ie major building fires, floods and discovery of asbestos) not just substantial building defects. However, the exceptional circumstance must not be caused by the investor/investors and there must've been nothing a reasonable person in that position should have reasonably done to prevent the circumstance (ie outside the reasonable control of the investor/investors).

Therefore, this exception would not apply to investors suffering financial hardship due to renovations that do not affect the structure, and those investors may not be able to deduct any costs associated with holding what is considered to be "vacant land". If you're unlucky enough to have to use this exception, you must keep written records of the exceptional circumstance (and their effect on the structure) until the fifth anniversary of the end of the income year in in which you first deducted the loss.

Not sure whether this applies to you?

Etched into the collective consciousness of Sydney-siders is the building defects saga of Opal and Mascot towers. The investors in these buildings, along with many others all around Australia may benefit from this measure. If you have a residential investment that may have defects but are not sure whether this can apply to you, we can help, contact us today.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants.

Trusts avoiding CGT alert

An alert has been issued over arrangements where trustees of unit trusts disposes CGT assets to an arm's length purchaser with no CGT consequences by exploiting restructure rollovers. Whilst there may be many variations of such arrangements, the overall effect is that rather than selling the relevant asset and incurring a large capital gain on which tax needs to be paid, the transferring trust is able avoid tax. The ATO notes it is actively reviewing such arrangements and that the anti-avoidance provisions may apply.

The Tax Office has recently issued an alert on its concerns over trusts avoiding CGT by exploiting restructure rollovers. Specifically, it is actively reviewing arrangements that supposedly allow a unit trust to dispose a CGT asset to an arm's length purchaser with no CGT consequences.

As a result, both taxpayers and advisors who enter into these arrangements will be subject to increased scrutiny.

The arrangement consists of a trustee of a unit trust (transferring trust) selling a CGT asset with a large unrealised capital gain to an arm's length purchaser for an agreed price in the following way:

  1. transferring the asset to a trustee of a new trust (receiving trust) for the purchase price, which gives rise to a debt owing to the transferring trust;
  2. choosing rollover under Subdivision 126-G in relation to the transfer;
  3. the purchaser then subscribes to new units in the receiving trust equal in value to the purchase price; and
  4. the receiving trust subsequently repays the debt to the transferring trust with the funds received from the issue of the new units.

According to the ATO, the steps may be implemented in close succession or structured in stages as a part of a broad scheme. Whilst there may be many variations of such arrangements, the overall effect is that rather than selling the relevant asset and incurring a large capital gain on which tax needs to be paid, the transferring trust is able to transfer the underlying ownership to the purchaser and avoid the capital gain using the rollover provisions.

The specific aspects of the arrangements that concern the ATO include:

  • whether conditions for Subdivision 126-G rollover relief are met in respect of the arrangement;
  • the arrangement appears to be designed primarily to allow the transferring trust to exploit Subdivision 126-G rollover to disregards a capital gain that would otherwise be assessable to the trustee or beneficiaries of the trust;
  • the arrangement results in a change in the underlying ownership of the relevant asset without triggering a CGT taxing point, which is contrary to the intention of the Subdivision 126-G rollover;
  • the parties have entered into this arrangement in circumstances where a direct sale of the relevant asset by the transferring trust to the purchaser would have been simple, viable and commercially expected;
  • the commercial substance of the arrangement is a sale of the asset by a transferring trust to the purchaser, and the complex arrangement can only be explained by the tax advantage obtained by the transferring trust; and
  • the transferring trust receives (and the purchaser pays) the same total sum under the arrangement as if the asset were sold directly.

In light of the concerns, the ATO considers that Pt IVA anti-avoidance provisions may apply to these arrangements where they would otherwise qualify for rollover relief under Subdivision 126-G. While only a small number of cases have been detected so far, the ATO noted at least one case involved the sale of real property of several hundred million dollars.

Do you know your trust?

Trusts, whether they be unit, discretionary or family trusts, can consist of complex arrangements with each specific trust subject to particular rules. If you're a part of a trust, whether it be in the role of trustee or beneficiary, we can help you understand and implement strategies which won't catch the ATO's attention. Contact us today.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

ATO debts to affect your credit rating

Businesses with tax debts beware, the ATO will now be able to disclose the details of your tax debts to credit ratings agencies, which could potentially affect the ability of the business to obtain finance or refinance existing debt. Generally, only those businesses with an ABN and debts over $100,000 and are not "effectively engaged" with the ATO will be affected. Practically, the ATO is planning a phased implementation which will consist of education before targeting companies followed by partnerships, trusts, and sole traders.

The ATO now has another "stick" in its arsenal to get businesses to engage with it and manage outstanding tax debts. Laws have recently been passed that allow the Tax Office to disclose tax debt information of businesses to registered credit reporting bureaus (CRBs).

The aim of the laws, according to the government, is to encourage more informed decision making within the business community by making large overdue tax debts more visible, and reduce the unfair advantage obtained by businesses that do not pay their tax on time.

The disclosure of these debts have the potential to affect the credit ratings of businesses and their ability to refinance existing debt, so only those businesses that meet certain criteria will be subject to this new disclosure rule. These criteria are:

  • have an ABN and is not an excluded entity (ie a DGR, registered charities, government entities, and complying superannuation entities);
  • has one or more tax debts of which at least $100,000 is overdue by more than 90 days;
  • is not effectively engaging with ATO to manage its tax debt; and
  • the Inspector-General of Taxation is not considering an ongoing complaint about the proposed reporting of the entity's tax debt information.

When a business meets the above criteria, the ATO is required to notify the business in writing and give them 28 days to engage and take action before any debt is disclosed. In addition, tax debt information will only be provided to CRBs where they are registered with the ATO and have entered into an agreement detailing the terms of reporting.

According to the ATO, an entity's tax debts for the purposes of the disclosure rule includes income tax debts, activity statement debts (eg GST, PAYGW), superannuation debts, FBT debts and penalties and interest charges. An entity is considered to be effectively engaged with the ATO in respect of a tax debt if it:

  • has a payment plan in place and is meeting the terms of the payment plan;
  • has an active Pt IVC objection against a taxation decision to which its tax debt relates;
  • has an active review with the AAT or an active appeal to the Court against a decision to which its tax debt relates;
  • has an active reconsideration of a reviewable decision which may affect the quantum of a non-complying super fund's tax debt with the relevant regulator;
  • has an active review with the AAT of a reviewable decision which may affect the quantum of a non-complying super fund's tax debt; or
  • has an active compliant lodged with the Inspector-General of Taxation in relation to the tax debt that is, or could be, the subject of an investigation.

The practical approach to disclosure of tax debts were outlined by the ATO previously. It consists of a phased implementation approach, with the initial phase focusing on raising community awareness of the measure through newsletters, articles, forums and speeches. After the initial phase, it will begin firstly with companies that meet the disclosure requirements before moving onto other entities such as partnerships, trusts, and sole traders with ABNs.

Need help?

Unsure if you have a tax debt to the ATO and want to avoid having your credit rating affected? Or perhaps you need help with working out a payment plan with the ATO for your existing debt? We can help with all this and more, contact us today.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 


From Accountant's Daily 8/1/20. 

SMSF trustees hoping to make donations to charitable causes associated with bushfire relief out of their super may run into problems unless they have triggered a condition of release, according to SMSF Alliance.

 

The SMSF administrator's principal, David Busoli, said in an email update that the issue of funding large-scale donations to bushfire relief charities was likely to come up among clients in the coming days as damage from Australia's bushfire disaster escalated.


"SMSF members, as trustees, are more vulnerable to breaching early access provisions as they directly control access to their member accounts," Mr Busoli said.


"They need to be aware that SMSFs are prohibited from making donations as there is a clear breach of the sole purpose test. Alternatively, any member may draw on unrestricted non-preserved monies, then one they hold the withdrawal personally, do with it as they wish."


Mr Busoli said members could only draw from funds in their SMSF to make a donation if they had met a condition of release, which could involve either fully retiring or finishing a job after the age of 60.


"Apart from actual retirement after preservation age, a useful trigger of release between the ages of 60 and 65 is the cessation of a situation of employment as retirement is not required," he said.


"It may be triggered if a member loses their job or ceases it voluntarily. It may even be invoked if the member is working at both a full-time and part-time job and ceases either of them."


Members under the age of 60 would not be able to access their super for donation purposes, but may be able to do so under financial hardship provisions if they had been personally affected by the fires, Mr Busoli said.


"For an SMSF member, the ATO, not the trustee, decides on whether a trigger of release due to compassionate grounds is allowable," he said.


"Qualification is difficult. Compassionate grounds generally involve medical expenses and related issues but also include making a payment on a loan, or council rates, to prevent the loss of the member's principal place of residence, but only if the member is legally responsible for making the mortgage payments."


If the member qualified for release on compassionate grounds, they could only access a maximum amount up to three months' worth of loan repayments plus 12 months' interest on the outstanding loan balance. However, this amount would be less if the full amount was not required to stop the foreclosure, Mr Busoli said.

Need more information?

If you're confused about the prohibition for an SMSF making donations unless the member has triggered a condition of release or other aspects of SMSFs we can explain it to you in simple to understand terms, contact us today.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Accountant's Daily. All rights reserved. Brought to you by Robert Goodman Accountants.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances  

Bushfire Assistance