Circular trust distributions
From 1 July 2019 specific anti-avoidance rules will apply to family trusts which engage in ‘circular trust distributions’.
Whilst the detail of the measure has not been released, it is expected to apply to situations where fully franked dividends are distributed between family trusts and corporate beneficiaries in ‘round robin’ type arrangements that mean that no further tax is being paid on such amounts.
Under the proposed measure tax will be imposed at the top personal tax rate (45%) plus the Medicare Levy.
Division 7A (UPEs)
Division 7A is an integrity regime that treats payments and loans by a private company to associates as unfranked dividends.
An unpaid present entitlement (“UPE”) arises where a beneficiary becomes entitled to a share of income from a trust, but the amount remains unpaid. Prior to 2009, UPEs to corporate beneficiaries were outside the ambit of Division 7A. From December 2009, a controversial change in the interpretation of the Division 7A provision by the ATO started treating UPEs as a type of loan.
The Government is intending to amend Division 7A to remove any ambiguity associated with the ATO’s interpretation and treat UPEs to companies as subject to Division 7A from 1 July 2019.
Start date of other Division 7A measures deferred
In the 2016-2017 Budget various amendments to Division 7A were identified as commencing from 1 July 2018.
Those measures included:
- a self-correction mechanism providing taxpayers with the opportunity to voluntarily correct their arrangements without penalty;
- new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers;
- amended rules, with appropriate transitional arrangements, regarding complying Division 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions.
Subject to the legislation being drafted and passed, these measures will apply from 1 July 2019.
Deductions for vacant land to be denied
The Government proposes to deny tax deductions for expenses associated with holding vacant land, from 1 July 2019.
This is to address concerns that deductions are being improperly claimed for expenses, such as interest costs related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income.
The measure will also reduce any tax incentives for land banking, which denies the use of land for housing or other development.
However, land held for commercial development will generally be excluded due to the “carrying on a business” test.
Denied deductions will not be able to be carried forward for use in later income years, although they may be able to be added to the Capital Gains Tax (CGT) cost base of the asset, subject to meeting the existing requirements for inclusion in the cost base of a CGT asset.
It is proposed that the measure will not apply to expenses associated with holding land that are incurred after:
- a property has been constructed on the land, it has received approval to be occupied and is available for rent, or
- the land is being used by the owner to carry on a business, including a business of primary production.
From 1 July 2019, concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.
This measure clarifies that minors will be taxed at adult marginal tax rates (rather than higher tax rates that generally apply to minors) only in respect of the income a testamentary trust has generated from assets of the deceased estate or the proceeds of the disposal or investment of these assets.
This ensures that taxpayers are not able to inappropriately obtain the benefit of the lower tax rate by ‘injecting’ assets unrelated to the deceased estate into the testamentary trust.
Extension of Taxable Payments Reporting System to further industries
From 1 July 2019, the taxable payments reporting system (TPRS) will extend to security providers and investigation services; road freight transport; and computer system design and related services.
Under TPRS, businesses are required to report contractor payments to the ATO. This measure will bring payments to contractors in these industries into line with wages paid to employees, which are reported to the ATO.
Businesses in these industries will be required to collect information regarding payments made to contractors from 1 July 2019. The first annual report is required in August 2020 and a new online form will assist in making the reporting process simpler.
The TPRS already applies to the construction, cleaning and courier industries.
Reforms to target the black economy
The Government is proposing to introduce a raft of new measures to tackle Australia’s black economy. Additional funding will be provided to the ATO over four years to implement new strategies to combat the black economy. The key measures introduced in the 2018/19 budget are set out below.
Tax deductibility of salary/wage and contractor payments
Businesses will no longer be able to claim tax deductions for payments of salary and wage to their employees where they are obligated to withhold Pay As You Go (PAYG) on such payments and have not met these obligations.
Also, businesses will be denied tax deductions for payments made to contractors in instances where:
- The contractor has not provided their Australian Business Number (ABN); and
- The business has not withheld any amount of PAYG in respect to a payment when obligated to do so.
Currently businesses are usually required to withhold and remit amounts to the ATO from contractor payments where the contractor does not provide their ABN to the business.
Both measures are to be effective from 1 July 2019.
Cash receipt limit of $10,000
A limit of $10,000 for cash payments made to businesses for goods and services from 1 July 2019 has been proposed by the Government. The measure will require transactions over the proposed $10,000 threshold to be made through an electronic payment or cheque. Transactions with financial institutions or consumer to consumer, non-business transactions will not be affected.
Reforms in combatting illegal phoenixing
The Government proposes changes to corporations and various tax laws and provide regulators with additional tools to assist in deterring illegal phoenix activity. Some of the key reforms include:
- Introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
- Prevent directors improperly backdating resignations to avoid liability or prosecution;
- Limit the ability of directors to resign when this would leave the company with no directors;
- Restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator;
- Extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts; and
- Expand the ATO’s power to retain refunds where there are outstanding tax lodgements.