Things you need to know about taxes on Nov. 17

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The government has canceled its plans to change the company tax rates on a retrospective basis with the new 80% passive income test. Practitioners may now finalise their 2017 tax returns for companies and confirm dividend franking rates, which has a flow-on impact on shareholders.

The Minister for Revenue and Financial Services has introduced the Treasury Laws Amendment Bill 2017 to Parliament. The Bill will prevent passive investment companies from accessing the lower corporate tax rate if more than 80% of their total income is passive in nature.

The 80% passive income test will replace the need to determine whether the company is carrying on a business to figure out the tax rate that applies. The ATO will not select companies for audit based on their determination of whether they were carrying on a business in the 2016-17 income year, unless their decision is plainly unreasonable.

The ATO has clarified that a company will be treated as carrying on a business if activities are carried on by a company than by an individual or trust and aims to make a profit. It includes a company that owns a single commercial property, which is rented at market rates on normal commercial terms and it produces a profit from these activities.

It also includes a company that holds a portfolio of listed shares for the purpose of earning dividend income and a company that receives distributions of income from a related trust, with the distributions lent back to the trust in return for a commercial rate of interest secured against the assets of the trust. However, the ruling is yet to be finalised.

If a company receives income from trusts or partnerships, the nature of the income has to be determined and may have to be done on multiple levels. The changes all mean companies that only hold rental properties will not qualify for the lower tax rate but a company that receives distributions from a related trust could still qualify if 20% or more of its total income is attributable to trading profits.

The maximum franking percentage rules may also be changed in that you have to look at the tax rate to determine a company’s maximum franking rate if the company’s aggregated turnover in the current year is the same as in the previous year, its assessable income is the same as in the previous year and its passive income is the same as in the previous year as well.

The taxable payment reporting system, which currently applies to businesses in the construction industry will include courier and cleaning services. Entities with an ABN that supply courier or cleaning services will have to report to the ATO the details of payments made to other entities that relate wholly or partly to courier or cleaning services and capture the payments made to contractors. Payments to sole traders, companies, partnerships and trusts fall under these rules.

ATO also clarified rules on property flipping. Many clients assume that any gain made from a renovation will be exempt from tax as long as the property is their main residence but this is only applicable where the property is held on capital account. ATO clarifies that those who renovate a property to sell it could be taxed on revenue account.

This includes personal property investors who buy a property for long-term rental or private residency. If the property is sold earlier than originally planned, they can still argue that the sale is dealt with on capital account and the main residence exemption or CGT discount could apply. It also includes isolated profit making undertaking where a property is sold upon renovation and the business of renovating properties where property flipping activities are done on a regular repetitive basis.

Meanwhile, the ATO is considering updating its approach and adopting an interpretation that includes ride-sourcing vehicles or other vehicles. It will seek comments from interested parties before reaching a final decision.

According to the ATO, two approaches can be used to recognise income and deductions for long-term contracts, namely: 1. the basic approach, which includes all final payments received in assessable income and deductions allowed for all expenses incurred, and 2. the estimate profits basis, which can use accounting methods to allocate the ultimate profit or loss across the relevant income years.

ATO also ensures that dividends paid by a foreign company to an Australian resident company are non-assessable non-exempt income as long as the Australian company holds participation interests in the foreign company of at least 10%. The exemption applies where the 10% interest is held directly or indirectly through at least one interposed trusts or partnerships. It does not apply when dividends are received by a discretionary trust, even if they are subsequently distributed to a corporate beneficiary.

The Bill also seeks to limit the deductions that can be claimed by rental property owners for travel expenses and depreciation on certain assets. The good news is that the first home super saver scheme will allow first home savers to make voluntary super contributions, which can be withdrawn for the purpose of buying a first home. People over 65 years may also use the proceeds from the sale of their home to make super contributions. The Bill seeks to ensure that supplies of digital currency will not be subject to GST.

What can you do?

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