Increased administration and difficult deadlines will be a strong focus of employer and stakeholder concerns as consultation opens on Treasury’s broad design plans for Payday Super.
As part of the 2023-24 Budget, the Federal Government announced that from 1 July 2026, super must be paid on payday, a change that will contribute towards a ‘dignified retirement for all Australians’.
Treasury has released the Securing Australians’ Superannuation consultation paper (the Paper), which will remain open until November 3, 2023. The Paper provides a number of areas for consultation, including in relation to:
- defining payday super
- updating the superannuation guarantee (SG) charge
- compliance mechanisms
- choice of fund and employee onboarding
It is intended that stakeholder answers will help inform the design of payday super implementation and compliance frameworks.
SW fully supports the intended purpose of the payday super to address the drivers of unpaid SG. Material change is required to systems and processes in employers, clearing houses, superannuation funds and the ATO to deal with increased frequency of contributions (up to 13 times) and tighter deadlines.
Treasury’s openness to considering a broad spectrum of issues is commendable, with few topics being excluded. If not designed well, there are also numerous aspects of the proposed design which may unduly increase the administrative and regulatory burden on employers.
SW is preparing a submission to Treasury addressing practical issues for Australian businesses in designing and implementing the payday super frameworks. While there are many matters that deserve consideration, we highlight several key consultation topics below and welcome your insights and feedback:
- the transition from self-assessment system for SG obligations to ATO-driven recalculations and assessments.
Employers who have conducted recalculations of pay and super will know that recalculations are rife with false discrepancies. It is proposed that under Payday Super, the ATO will recalculate superannuation obligations based on STP and superannuation fund reporting data. The ATO calculated superannuation shortfalls will result in “nudges” for employers to comply followed by assessments, moving away from the self-assessment system we currently have.
Is it possible for the ATO to eliminate assessments resulting from false discrepancies, and if so, how might this be done?
- due date for the making of superannuation contributions or receipt by the superannuation fund.
Treasury has suggested either deadline based on when payment is made, or one based on receipt by the superannuation fund.
Superannuation is often a subsequent process to finalisation of a pay run, and can involve significant manual intervention (e.g. in successfully producing and submitting the SAFF file).
Is a same day due date for payment or a three day deadline for payment into the superannuation fund realistic? If not, how long would employers need to complete processing and comply with deadlines?
- grace periods for employers to deal with payroll/Payday Super issues that will occur on a more frequent basis (from quarterly to payroll cycle).
There are many circumstances that arise which can cause superannuation shortfalls, some of which outside the employers control. For example, incorrect superannuation fund details, or paid amounts being reclassified (e.g. an employee incorrectly claims overtime that is re-classified to ordinary pay).
While proposed improvements in onboarding and superannuation stapling may reduce these instances, the increased frequency and tighter deadlines may result in more SG shortfalls.
Currently, employers have the quarter and 28 days to correct issues that arise.
Should there be a grace period which allows employers to correct shortfalls of superannuation? If so, what should be included as a concession in the grace period (interest, admin fees, income tax deductibility, SG calculations)?
In addition, should the SGC calculation be made easier to assist with the administrative burden of compliance?
How SW can help
While this has not been made law as of yet, we see a trend of increased transparency and compliance activity from the ATO in respect of superannuation compliance. In anticipation of these trends, or the proposed Payday Super changes, all employers should review the configuration of STP phase two reporting to the ATO as well as end -to -end superannuation processing to reduce the risk of superannuation shortfalls and review activity from the ATO or FWO.
SW has designed an end to end offering which includes a review of time and attendance / payroll system configuration, and the use of advanced data analytics to test superannuation compliance and reporting to superannuation funds and the ATO.
If you have any concerns with the proposed reforms or are interested to contribute to SW’s submission, please contact Paul Hum.
Contributors
The Australian Taxation Office (ATO) has introduced five further legislative instruments aimed at reducing Fringe Benefit Tax (FBT) record-keeping obligations. This is in addition to the four draft legislative instruments that we discussed in our earlier alert from March 2023.
While the earlier legislative instruments focused on travel benefits, these new instruments broaden the scope to include other areas such as Living-Away-From-Home Allowances (LAFHA) and private use of vehicles other than cars.
The ATO is progressively making it easier to comply with FBT obligations by offering more flexible record-keeping options. Employers now have a wider array of records they can rely on, which can be particularly beneficial for those who already maintain such records for other operational or compliance purposes. This not only simplifies the administrative process but also reduces the risk of non-compliance due to incomplete or missing employee declarations.
Summary of key points from the five additional Legislative Instruments
- LI 2023/D18 Temporary Accommodation Relating to Relocation: Employers can use employment contracts and relocation agreements as alternative records. This would be useful for organisations with frequent employee transfers.
- LI 2023/D19 Otherwise Deductible Benefits: This instrument provides guidelines for using alternative records for benefits that would otherwise be deductible to the employee. Employers can now use corporate credit card statements or expense management software as alternative records, reducing administrative overhead.
- LI 2023/D20 Maintaining an Australian Home: This instrument focuses on the alternative records that can be used for benefits related to maintaining an Australian home while an employee is living away for work. Payroll records and housing lease agreements can now be used as alternative records.
- LI 2023/D21 Fly-In Fly-Out and Drive-In Drive-Out Employees: This instrument allows employers to use employment contracts that specify an employee’s normal residence and employment details as alternative records. This is especially beneficial for industries like mining and construction, where such work arrangements are common.
- LI 2023/D22 Private Use of Vehicles Other Than Cars: This instrument specifies that employers can use alternative records like mobile apps that record travel distances via GPS and email correspondences to substantiate the usage of vehicles other than cars. This is a significant shift from traditional methods that often required manual logbooks, making the process more efficient and accurate.
These legislative changes will take effect from 1 April 2024, and employers should prepare in advance to simplify their record-keeping.
These new record-keeping options offer more flexibility and convenience for employers who already maintain such records for other operational or compliance purposes. They also reduce the risk of non-compliance due to incomplete or missing employee declarations.
To simplify record-keeping in accordance with the new FBT legislative instruments, employers should undertake an assessment of their existing corporate records. This may involve:
- reviewing the requirements outlined in the legislative instruments,
- conducting an inventory of all current records,
- cross-reference this inventory of current records with the types of records now considered adequate,
- update internal record-keeping policies and employee training for any gaps identified,
- run a test audit to validate compliance and maintain documentation of the assessment process for future reference.
How SW can help
If you need any assistance in understanding how you can simplify your record-keeping in light of these draft legislative instruments, please contact your SW advisor Stephen O’Flynn or Rahul Sanghani.
Contributor
The ATO has issued a new draft ruling which outlines and provides examples for when tax deductions for self-education expenses are available to individuals.
While the draft Ruling does not introduce significant changes, it provides greater clarity by detailing factors and examples that can be considered. Each taxpayer’s situation will determine the deductibility of their self-education expenses.
The draft ruling present numerous examples, the facts and circumstances of each taxpayer will determine if the expense:
- is incurred in gaining or producing assessable income,
- enables you to maintain or improve a skill or specific knowledge, or
- objectively leads to, or is likely to lead to, an increase in your income.
The full draft Ruling can be viewed here.
For employers who subsidise or reimburse self-education expenses for their employees, it’s crucial to understand the implications of the “otherwise deductible” rule in the context of Fringe Benefits Tax (FBT). Under this rule, if an employee could have claimed a deduction for the self-education expenses had they incurred them personally, the taxable value of the fringe benefit provided by the employer can be reduced. This aligns with the principles laid out in TR 2023/D1, making it essential for employers to review the new guidelines to ensure that any benefits provided are compliant with both income tax and FBT laws.
Details
On 27 September, the Commissioner released draft Taxation Ruling TR 2023/D1, addressing the deductibility of self-education expenses incurred by an individual and replaces TR 98/9 which has been withdrawn from 27 September 2023.
The draft Ruling reflects the current rules following the changes in 2022 that removed the $250 non-deductible threshold for self-education expenses. Therefore, self-education expenditure is deductible from the first $1 spent.
The Commissioner reinforces that self-education expenses will be deductible under section 8-1 to the extent that they:
- are incurred in gaining or producing your assessable income, and
- Are not:
- capital, private or domestic in natureincurred in gaining or producing exempt or non-assessable non-exempt (NANE) income
- prevented from being deducted by a specific provision.
A key focus of the draft Ruling is that self-education expenses will be incurred in gaining or producing assessable income if either or both of the following principles apply:
- income-earning activities based on skill or specific knowledge (Principle 1)
- leads to, or is likely to lead to, an increase in your income (Principle 2).
Principle 1
Where income-earning activities are based on the exercise of a skill or specific knowledge, expenses undertaken to maintain that knowledge or skill will be deductible.
The Commissioner notes following factors that the courts have determined when considering if expenses are incurred to maintain or improve knowledge or skills:
- if the knowledge or skills obtained are too general, there will not be a sufficient connection between the expense and the income-earning activity
- the self-education has a necessary connection to your income-earning activities at the time.
Principle 2
Where self-education will objectively lead to, or likely to lead to, an increase in income from your current income-earning activities, the expenses will be deductible.
The Commissioner notes following factors to assist in this determination:
- the increase in income is clearly linked to the self-education undertaken
- a real opportunity for promotion results from the self-education
- the self-education leads to or is likely to lead to a higher pay grade in your current income-earning activities
- the self-education leads to or is likely to lead to a bonus or higher pay grade once completed
- advancement of employment and salary must be a substantial part of you motives for undertaking he self-education.
The draft Ruling also highlights that if you were to cease your income-earning activity whilst you were completing a course, only expenses incurred up to the point when the activity ceases are deductible.
Exclusions
Another key focus of the draft Ruling is the following exclusions that will not be incurred in gaining or producing assessable income:
| Exclusion 1 | |
|---|---|
| Self-education expenses cannot be deducted if that are undertaken or designed to: Get employment, obtain new employment, or to open up a new income-earning activity. |
| Exclusion 2 | |
|---|---|
| Expenses incurred whilst you are not undertaking income-earning activities to produce assessable income. |
In addition to examples relation to each principle and exclusion, the Commissioner provides examples of self-education expenses relating to the following:
- course fees (including work-related conferences, HECS-HELP loan, VET Student loan etc.). Employers should remember that Higher Education Loan Program (HELP) charges are not otherwise deductible and the full value is subject to FBT if paid by the employer
- interest
- books, digital subscriptions and stationery
- airfares, Accommodation and meals (including course and holiday). This has been an area hotly contested over the years. Unfortunately, the examples provided merely replicate the existing examples in TR 98/9 and are quite simplistic and have an obvious outcome
- transportation costs
Apportionment
The Commissioner says that if an expense is not entirely incurred in gaining or producing your assessable income, it may be apportioned in certain circumstances.
Expenses can be apportioned in the following ways:
- according to its particular purpose where some parts are for an income-producing purpose, and some are not (where the expense has district parts), or
- on a fair and reasonable basis based on your facts and circumstances where the expense is singular.
FBT
From an FBT perspective understanding the “otherwise deductible” rule is of paramount importance. This rule stipulates that if an employee would have been eligible to claim a deduction for self-education expenses had they paid for them out-of-pocket, the taxable value of the fringe benefit that the employer provides can be reduced accordingly. However, to ensure that the otherwise deductible reduction is obtained, an employer should:
- obtain Employee declarations
- ensure that the benefit is covered by a Recurring fringe benefit declaration provided by the employee, or
- ensure that the benefit is covered by a No-private-use declaration prepared by the employer.
This is particularly relevant in light of the newly released draft Taxation Ruling TR 2023/D1, which provides updated guidelines on what qualifies as a deductible self-education expense.
Employers should closely review these new guidelines to ensure that the benefits they offer align with the ruling’s principles. By doing so, they can optimise their FBT liability while also ensuring compliance with income tax laws. This dual compliance not only mitigates the risk of potential penalties but also enhances the employer’s ability to provide meaningful benefits that support employees’ professional development.
How SW can help
The ATO is currently seeking comments on the new draft legislation, with the comments period closing on 27 October 2023.
Once TR 2023/D1 is finalised by the ATO, it is important to note that the ruling will apply both prospectively and retrospectively.
Please reach out to your usual SW advisor or one of our experts for more information about deductibility of self-education expenses or what the draft Tax Ruling might mean for you.
Contributors
As part of the State Taxes Acts and Other Acts Amendment Bill that has been introduced to Parliament, the Allan government is set to expand the Vacant Residential Land Tax (VRLT) from 1 January 2025 to apply statewide. Currently, the VRLT applies to only inner and middle suburbs of Melbourne.
VRLT will continue to be payable at 1% of capital improved value of residential property that has been vacant for at least 6 months in a calendar year. The change will take effect from 1 January 2025, effectively capturing land which is vacant for more than 6 months during 2024. VRLT will also expand to apply to residential land that remains undeveloped for five years or more from 1 January 2026.
The existing exemptions for holiday homes and properties being renovated will remain in place. Developers that currently hold vacant land will receive a two-year extension, if they have received a building permit in the initial five-year period in which the land is vacant.
The State Revenue Office (SRO) will have the power to extend the five-year period in certain circumstances that are beyond the control of the developer. The SRO will also have considerable discretion to determine exemptions.
Underlying reasons for the changes
These changes come as part of the government’s push to meet its target to build 80,000 extra homes per year.
The changes look to put pressure on Victorian owners of vacant homes and land to make the homes available for rent or sale and develop vacant land. This much was confirmed in Treasurer Tim Pallas’ speech to the Property Council in which he stated that the “clear message to landowners is to either develop land or sell it to someone who will”.
Impacts
The impacts of the current and new measures are outlined as follows:
| Current | New | |
|---|---|---|
| Homes captured | Approximately 900 homes captured under the VLRT. | An additional 700 homes to be captured in the state-wide expansion. |
| Undeveloped properties | Approximately 3000 to be captured in the expansion |
In focus
Statewide expansion from 1 January 2024
- references to a ‘specified geographic area’ will be removed from the Land Tax Act 2005, allowing the VRLT to be expanded to include all vacant residential property statewide
- the current exemptions will still apply
- the tax rate will remain at 1 per cent.
Undeveloped land from 1 January 2025
The VRLT will apply to vacant residential land that has been vacant for 5 years or more if the land is:
- within a municipal district of a Council listed in the new Schedule 2B (essentially all Melbourne Metropolitan local government areas), and
- within a zone other than a ‘non-residential zone’ (these are based on AVPCC numbers specified in the Bill), and
- not solely or primarily used for or under development for a non-residential use.
This 5-year period will apply in instances where the land has had the same ownership during the 5 year period.
Land is under development for a non-residential use if:
(a) an application is made for a permit 10 under the Planning and Environment Act 1987 in relation to the use or development of the land for a non-residential use; or
(b) a request is made under the Planning and Environment Act 1987 for an amendment to a planning scheme that would authorise a non-residential use of the land; or
(c) an application is made for a permit or 20 approval under the Building Act 1993 in relation to the use or development of the land for a non-residential use.
Exemptions from the VRLT is available for:
- land contiguous to land used as a principal place of residence where it has the same owner
- land that cannot be developed for residential purposes due to its physical attributes, or where a matter prohibits lawful use or development, such as a restrictive covenant or environmental orders.
Commissioner discretion
- The Commissioner of State Revenue will be granted significant discretion to grant exemptions from VRLT if:
- Land is intended to be solely or primarily used or developed for non-residential use; and
- There is an acceptable reason for the land not yet being used or developed in that way.
- The Commissioner has the power to determine that land is ‘not vacant’ if a residence is to be constructed and there is an acceptable reason that this has not commenced.
- The Commissioner may impose the VRLT under its discretion if the land is deemed to have been transferred with the intention of receiving a reduction or exemption.
Full details are outlined in the Bill which is currently before parliament and the accompanying Explanatory Memorandum. Debate on the Bill will resume later this month, with it being likely that the Bill moves to the Legislative Council in November.
How SW can help
Reach out to our state taxes experts if you would like to discuss the potential impact of these changes on your current or future property or land holdings. The SW team can also assist with applying to the Commissioner for exemptions, where applicable.
Contributors
The New South Wales (NSW) Chief Commissioner’s guidelines on stamp duty and property leasing provide essential guidance for calculating the dutiable value of complex lease agreements.
Understanding these rules is vital for developers, landholders, and businesses involved in leasing property, especially with conditions that require the lessee to undertake construction or improvements. This article aims to explain the guidelines, discuss their impact, and offer actionable insights for clients.
Introduction
Stamp duty is a tax levied on particular transactions, such as sales and leases of real estate. While it’s a straightforward affair in most circumstances, complex leases involving non-monetary considerations, like property improvements or long-term conditions, can be complicated. The NSW Chief Commissioner’s guidelines offer examples and conditions under which dutiable value is calculated differently than one might expect.
The Impact
Understanding the guidelines has immediate implications for businesses and developers. Depending on the length and conditions of the lease, dutiable values can differ significantly:
Long-Term Leases:
Leases exceeding 50 years may have a dutiable value of nil, thereby avoiding stamp duty.
Conditional Leases:
Conditional leases often involve stipulations where the lessee (tenant) must undertake certain actions like construction or significant property improvements either as a condition to the grant of the lease or as a condition of the lease itself.
If a lease is granted for non-monetary consideration comprising improvements to the property, the full cost of the construction (including builder margins) undertaken or to be undertaken by the developer is taken to be the value of the improvements. This value is determined on entry into the agreement for lease or a lease.
In the absence of evidence of the valuation of the undertaking, the Chief Commissioner has stated in Circular Practice Note (CPN027) that he is prepared to use the following methodology to calculate the proportion of the value attributable to the improvements:
| Term of Lease | % of cost of improvements |
|---|---|
| 10 years or less | 100 |
| Greater than 10 but not more than 20 years | 75 |
| Greater than 20 but not more than 30 years | 50 |
| Greater than 30 but not more than 50 years | 25 |
| Greater than 50 years | nil |
| Periodic lease or lease for a term that cannot be ascertained when the lease is made | 100 |
For instance, in a 15-year lease where the lessee is obligated to make improvements worth $20 million, the dutiable value for calculating stamp duty would be 75% of the improvement costs, which amounts to $15 million.
Here are some other key points to note for a conditional lease:
- Valuation Reports: In certain cases, you can provide a professional valuation report to show that the future value of the improvements you have made will be less than the original cost of those improvements. This can help in lowering the stamp duty payable
- Compliance and Documentation: It’s essential to maintain complete documentation of the improvements carried out, including permits, invoices, and reports, to substantiate the dutiable value calculated based on improvement costs
- Implications for Tenants and Landlords: Tenants must be aware that the costs of improvements could impact the dutiable value, while landlords need to consider how these conditions might affect the lessee’s ability to carry out the lease terms.
Premium and Prepaid Rent:
Leases may involve upfront payments, which are often categorised as premiums or prepaid rent. These payments can significantly influence the dutiable value of the lease, and consequently, the amount of stamp duty that may be payable.
In many instances, upfront payments serve as the total consideration for the lease. As a result, these payments could either inflate the dutiable value or, in some situations, completely negate the requirement for stamp duty, depending on the lease terms and other conditions.
For example, consider a scenario where XYZ Pty Ltd enters into a 15-year lease for an industrial building with a prepaid rent of $15 million. The lessee has the option to satisfy this prepaid rent either through a cash payment or by undertaking construction improvements with an agreed value of $20 million. In the event of an early termination of the lease for reasons other than the lessee’s default, the lessee would be entitled to a proportionate refund of the prepaid rent. No stamp duty is payable on this lease arrangement, regardless of whether the lessee opts for a cash payment or construction improvements, as both options are considered to be forms of prepaid rent
Failure to grasp these nuances could result in incorrect stamp duty payments, leading to financial and legal repercussions.
Other Transactions Triggering Duty
In addition to standard leases, there are various other transactions that could also attract stamp duty, according to guidelines set out in CPN027. These include:
- Early Termination by Lessor: When a lessor terminates a lease early for specific reasons, such as granting a new lease to another lessee or selling the premises, duty may be payable on any consideration for these arrangements
- Legal Fees over $1,000: If a lessee pays or agrees to pay the lessor’s legal fees, which are non-refundable and greater than $1,000, then duty may be applicable. However, this does not apply to the extension or renewal of a lease where legal fees are paid as rent
- Option to Lease for a Premium: An option to lease land in NSW for a premium may be dutiable
- Assignment of Lease: The transfer or assignment of an existing lease can also attract stamp duty
- Novation of Agreement: Modifying the parties in an agreement for a lease could trigger stamp duty
- Attornment of Leases: In cases of attornment on the sale of a property, stamp duty may also be applicable.
Actions Clients Need to Take
Property leasing can be complicated. We recommend the following steps:
- Consult a Tax Advisor: Given the complexities, consulting a tax advisor is paramount for ensuring compliance and financial optimisation
- Conduct Valuation: If property improvements are involved, get a valuation to establish a dutiable value
- Document Thoroughly: Keep thorough records of lease terms, conditions, and any upfront payments or improvements made
- Stay Updated: The Chief Commissioner’s guidelines may evolve. Regularly review any updates to remain in compliance
- Liaise with Legal Teams: Ensure that all legal aspects are squared away, especially in leases involving intricate conditions or non-monetary considerations.
How SW can help
Understanding the NSW Chief Commissioner’s guidelines is essential for any party involved in complex property leasing situations. SW experts can provide professional advice to help you keep abreast of these rules, helping to avoid surprises in the future.
Contributor
The Australian Taxation Office (ATO) has finalised Taxation Ruling TR 2023/3, an update to the draft ruling TR 2021/D5. This ruling, effective from 1 July 2019, focuses on the deductibility of expenses related to holding so called “vacant” land. Taxpayers considering holding or investing in land need to understand the implications of this ruling.
Summary
Section 26-102 of the Income Tax Assessment Act 1997 denies land holding cost deductions where there is no substantial and permanent structure in use or available for use on the land. Various exceptions apply, including where the land is in use for carrying on a business, or the taxpayer is a company. Ruling TR 2023/3 clarifies the ATO’s view on Section 26-102 and provides examples to illustrate its application.
The main points of this ruling are:
- deductions are permissible only when the land is actively used in income-generating business activities or meets specific criteria, such as having a substantial and permanent structure.
- the structure must be in use or available for use. Residential premises constructed or substantially renovated must be lawfully able to be occupied and this would occur when the certificate of occupancy is received
- various exceptions are provided, including for corporate entities and certain trusts
- property developers would typically be carrying on a business – however not always where the land is owned in a Special Purpose Vehicle (SPV)
- the relevant area of land for the purposes of section 26-102 is determined by the area that the relevant loss or outgoing relates
- the timing of expenses and income-earning activities is important in determining the deductibility of interest expenses.
Key Concepts
Structure in use or available for use
Section 26-102 specifies that deductions are permissible only when the land is actively used in income-generating business activities or meets specific criteria, such as having a substantial and permanent structure. A substantial and permanent structure is one that is fixed to the land and has a degree of durability and permanence. Examples of such structures include buildings, sheds, silos, windmills, and solar panels.
Carrying on a business and property developers
Section 26-102 does not apply where the taxpayer is using the land in carrying on a business. The Ruling states that whether activities on the land amount to ‘carrying on a business’ is a question of fact’. Property developers will generally not be affected by Section 26-102 provided they are carrying on a business. Land held by a developer for future development would be considered ‘available for use’.
However, where land is held in an SPV (with no other activities), special consideration should be given to whether the SPV is carrying on a business.
Relevant Area and multiple titles
The Ruling provides some practical guidance where holding costs relate to:
- Only a portion of the land under a single title, or
- Across multiple titles
Where the holding costs relate to only part of the land under a property title then for the purposes of determining if there is a substantial and permanent structure on the land, it is sufficient that such a structure exists somewhere on that part of the land. The structure does not need to take up all of that part of the land or all the land under the property title.
Where the holding costs relate to land held under multiple titles, the Ruling states that it will be sufficient where a substantial and permanent structure exists somewhere on the area of land to which the loss or outgoing relates.
Implications
The deductibility of holding costs becomes more complex for non corporate taxpayers.
Individuals may find their ability to claim deductions for holding costs like property taxes and loan interest limited, depending on the land’s usage. The ruling narrows the scope for claiming these deductions, making the land’s actual usage a pivotal factor.
Companies have a distinct advantage when it comes to deductions for holding vacant land. Corporate tax entities are generally exempt from limitations on claiming deductions for holding costs of vacant land during the income year in which the loss or outgoing is incurred. This exemption provides these companies with greater flexibility in their tax planning strategies, allowing them to optimise their tax position while holding vacant land for business purposes.
When vacant land is held in a SPV the situation becomes complex. If the SPV is not a company (or owned by companies), the SPV must meet specific criteria to be eligible for deductions, such as actively using the land or making it available for use in a business. Failure to meet these criteria could result in the SPV being ineligible to claim deductions for holding costs, which could have significant tax implications.
Example: Holding Land in a Company vs. a Discretionary Trust
The following table compares the situations of holding land in a company versus a discretionary trust:
| Entity | Criteria | Deductibility |
|---|---|---|
| Company | Exempt from limitations on claiming deductions for holding costs of vacant land during the income year in which the loss or outgoing is incurred | Yes |
| Discretionary Trust | Must meet specific criteria to claim deductions, such as actively using the land or making it available for use in a business | Depends |
Actions required
- Review Current Holdings: Examine your vacant land holdings to assess how the ruling impacts your ability to claim deductions
- Analyse Business Activities of land owners (particularly SPVs): Determine whether you are entitled to rely on the carrying on a business exemption and whether SPVs would qualify
- Documentation: Ensure proper documentation is in place to substantiate any claims for deductions
- Strategic Planning: Re-evaluate your long-term investment or business strategies in light of this ruling and make necessary adjustments.
How SW can help
Understanding the application of TR 2023/3 is essential for anyone holding or planning to hold vacant land. Keeping abreast of these rules and seeking professional advice can save both time and money, helping to avoid potential pitfalls down the line. Our expert team is here to support you every step of the way.
Contributor
The NSW Budget delivers a $3.1 billion housing and planning investment package to address the state’s housing crisis. However, the property sector will also face increased taxes as the Government announced some significant tax changes in the Budget. SW experts has summarised all these changes below.
1. Corporate reconstruction and consolidation exemption concession amended to a 90% concession
The 100% duty exemption currently in place for eligible corporate reconstruction and consolidation transactions will be replaced with a concession requiring only 10% of the duty that would otherwise be payable to be paid.
Under the proposed transitional rules, the rules currently in force (i.e. a 100% exemption) are still expected to apply to:
- transactions occurring before 1 February 2024, or
- a transaction occurring on or after 1 February 2024 if an application for the exemption is made on or before 1 April 2024 and the transaction arose from an agreement or arrangement entered into before 19 September 2023.
2. Landholder amendments
a. Landholder acquisition thresholds for private unit trust schemes
The threshold for the acquisition of a significant interest in a private unit trust that is a landholder will be reduced from 50% to 20% for acquisitions in private unit trusts after 1 February 2024 (unless it relates to an acquisition from an agreement or arrangement entered into before 19 September 2023).
However, the 50% threshold will remain for acquisitions in:
- private companies
- unit trust schemes which are registered with Revenue NSW as a wholesale unit trust or imminent wholesale unit trust. These are a new category of unit trust (see below).
The 90% acquisition threshold for ‘public landholders’ (i.e., certain listed companies, certain listed unit trusts and widely held unit trust schemes) remains unchanged.
b. Landholder acquisition thresholds for wholesale unit trust scheme and proposed wholesale unit trust scheme registration
A separate regime is intended to be introduced for wholesale unit trusts. Under the proposed amendments, the Chief Commissioner may register wholesale unit trust schemes, which is expected to have the effect of preserving the 50% acquisition threshold for these entities.
The Chief Commissioner may register a private unit trust scheme as a wholesale unit trust scheme if satisfied that:
- it was not established for a particular investor
- at least 80% of its units are held by ‘qualified investors’ (including listed companies and trusts, public superannuation funds and other wholesale unit trust schemes)
- no qualified investor (alone or in aggregate with associated persons) holds 50% or more of its units
- any other requirements specified by the Chief Commissioner to be published in a gazette (not yet published). Note, the Victorian registration requirements are not similarly open ended.
The Chief Commissioner may register the private unit trust scheme as an “imminent wholesale unit trust scheme” if satisfied it will meet the abovementioned criteria within 12 months of the first issue of units to a “qualified investor”.
The Chief Commissioner may also cancel the registration if satisfied of any disqualifying circumstances, such as a failure to comply with a condition of registration. This may result in any historical acquisitions in the unit trust scheme as being assessable.
Acquisitions in a trust are taken to be acquisitions in a registered wholesale unit trust scheme or an imminent wholesale unit trust scheme if:
- the acquisition occurs on or after 1 February 2024, and
- an application is made to register the scheme before 1 May 2024, and is subsequently approved.
c. Changes to tracing / linked entity rules
The threshold for tracing property through linked entities of a landholder will also be reduced from 50% to 20%, similar to Victoria and Northern Territory.
The changes to the above landholder duty provisions will apply to acquisitions that are completed on or after 1 February 2024 unless they arose from an agreement or arrangement entered before 19 September 2023.
This change is significant as many more entities will be treated as landholders e.g. a company holding a 25% interest in a landholding company or trust. Transactions involving upstream entities will need to be carefully managed.
3. Increase in fixed and nominal duty amounts
The fixed and nominal duty amounts for various transactions under the Duties Act 1997 (NSW) will be increased. For example, this includes increases in the nominal duty:
- on a declaration of trust over unidentified property signed in NSW (or electronically by a trustee based in NSW) from $500 to $750
- on transfers occurring in conformity with an agreement upon which duty has been paid, from $10 to $20
- on certain concessions, including change of trustee concession from $50 to $100, or certain managed investment scheme concessions from $50 to $500.
These changes will apply to most transactions occurring on or after 1 February 2024, regardless of whether they arise under an arrangement entered into before this date. The exception being that nominal duty for transfers of land under agreements entered into before 1 February 2024 will remain at $10.
4. End to the duty exemption for certain zero and low emission vehicles
The exemption from motor vehicle registration duty ceases to be available to zero and low emission vehicles from 1 January 2024. The transitional provisions allow battery electric vehicles and hydrogen fuel cell electric vehicles purchased (or for which a deposit was paid) before 1 January 2024 but that had not yet been registered by that date to continue to access the exemption.
5. Other minor amendments
- revise the land tax indexation formula to ensure that the NSW Valuer General can determine the correct land tax threshold for the 2024 land tax year
- require that a person occupying a property as their principal place of residence must own at least a 25 per cent interest in the property to be eligible for the land tax exemption. The transitional provision provides that those who already claim the principal place of residence exemption but own less than 25% may continue to claim the exemption for the 2024 and 2025 land tax years. The minimum ownership requirement will then apply to those owners from the 2026 land tax year
- re-enact a power of the Chief Commissioner to remit interest and include a new power for the Chief Commissioner to issue guidelines about how interest must be remitted.
How SW can help?
Reach out to our state taxes experts if you would like to discuss further.
Contributors
Changing the definition of ‘employee’ in the Fair Work Act will reverse landmark High Court decisions establishing that ‘contract is king’, increasing uncertainty and risk for businesses of all sizes.
On 4 September, the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 (Bill) was introduced into Parliament. Among the sweeping reforms proposed in the Bill, arguably, the change to the definition of ‘employee’ in the Fair Work Act 2009 (FW Act) may most warrant further consideration.
The new definition will reverse recent High Court cases (CFMMEU v Personnel Contract Pty Ltd; ZG Operations Australia Pty Ltd v Jamsek) establishing that in circumstances where there is a comprehensive written contract, the question of whether an individual is an employee of a person is to be determined solely with reference to the rights and obligations in the terms of that contract. This provided businesses with practical certainties as the classification of individuals as employees/contractors that was clear at the beginning of working relationships would remain consistent throughout the working relationship.
Instead, the definition of ‘employee’ and ‘employer’ under the FW Act will revert to be determined by reference to the real substance, practical reality, and true nature of the relationship between the parties. Effectively, the conduct of the parties after a contract is entered into will be considered under the ‘multi-factorial assessment’ in determining if there is an employment relationship. This means that businesses may engage an individual with the understanding that they are hired as an independent contractor, but later could be deemed an employee.
Navigating employer obligations – a new challenge
A significant issue that does warrant further consideration is that the new definition of ‘employee’ will only apply to the FW Act, while the definition of ‘employee’ in other Federal and State legislation is proposed to remain unchanged. Given businesses will have multiple overlapping obligations and responsibilities for each ‘employee’ (depending on which Act you’re referring to), the selective application of this new definition can lead to further complexity and fragmentation in complying with employer obligations.
As shown in the graphic below, businesses may be required to provide ‘employee entitlements’ to individuals taking into account post-contractual conduct under the FW Act, but not necessarily under other legislation. For example, this could lead to a worker being entitled to only those minimum pay and work entitlements provided by the FW Act, but not entitled to superannuation, workers’ compensation or long service leave. The increased complexity means there is a higher risk that businesses get it wrong. Practically, even where a business understands its various obligations and has the in-house capability to get it right, it is likely to increase the complexity of their internal processes and may require significant changes to their internal HR/payroll systems.
An alignment of the definition of employee across the various obligations which would involve co-operation between the State/Territory Governments and the Federal Government would go a long way to providing clarity and certainty for businesses. At the very least, a consistent definition across Federal Legislation should be considered.
In recognition of the complexity, the Australia Taxation Office (ATO) has historically had softer penalties for the inadvertent misclassification of employees and has recently been consulting on practical guidance that employers can rely upon to reduce ATO scrutiny.
ATO’s compliance approach
The Draft Practical Compliance Guideline 2022/D5 provides the factors the ATO takes into consideration in applying compliance resources to review worker classification (note that this has yet to be updated for the recent High Court cases mentioned previously). These factors include:
- whether there is evidence that both parties agreed to the arrangement to have a given worker classification
- whether both parties understand the tax and superannuation consequences of the classification
- whether specific advice confirming the worker classification was sought from an appropriately qualified third party, such as a solicitor or tax professional
- whether the performance of the arrangement has deviated significantly from the contractual rights and obligations agreed by the parties, and
- whether the correct tax, superannuation, and reporting obligations are being met.
While this guidance only applies to obligations administered by the ATO and is still in draft, it contains practical steps which if followed reduce the risk of misclassification across various obligations significantly. Therefore, it is prudent for businesses to consider the level of risk their current arrangements face and take proactive steps to ensure they have ‘low-risk arrangements’. By ensuring internal processes consider the factors above, this may reduce the likelihood of the ATO applying compliance resources to review the business’ worker arrangements and increase the likelihood of correctly classifying workers.
How SW can help?
The SW Team has expertise in assisting businesses and employers in complying with their employment obligations. By analysing contract language, payment schedules, delivery timelines and termination clauses, we provide businesses with the confidence that they are complying with the correct worker classification.
Considering the complexity of navigating employer obligations, our dedicated team designed a process that is considered low risk by the ATO.
Understanding and Setup – understanding the processes and controls that are in place to classify worker arrangements followed by designing a compliance program based on factors in the ATO practical compliance guideline to reduce risk.
Outsourced or co-sourced assistance – assistance with the classification of workers for various obligations, documentation as well as ongoing compliance activities.
In addition, SW can assist with more comprehensive, once-off review or advisory needs:
- conduct a comprehensive review of your assisting agreements and structure
- provide tailored advice on compliance and potential exclusions
- assist with private rulings for prospective arrangements with the relevant tax authority
- assist with voluntary disclosure if needed
- data analytics services to focus attention on higher risk arrangements across all suppliers paid.
Contact the SW Team today to schedule a consult and ensure that your business is prepared. Our expert team is here to support you every step of the way.
Contributors
SW experts have prepared a video series to tell you some important matters you need to know about taxation and wealth management in Australia. 信永中和專家為您講解有關澳洲稅務架構及資產管理既重要事項。