THE HOME FRONT
USING YOUR HOME TO PRODUCE INCOME WHILE STILL LIVING IN IT
The full exemption from capital gains tax is lost if you:
- use any part of the residence to produce income during all or part of the period you owned it, and
- would be allowed a deduction for interest had you incurred it on money borrowed to acquire the dwelling.
This is referred to as the “Interest Deductibility Test”. This is a notional test, which means that it is applied irrespective of whether money has actually been borrowed to acquire the dwelling. In broad terms, the Interest Deductibility Test would result in the following conclusions:
- for taxpayers renting out all or part of their home as a rental property they would be entitled to claim a portion of their interest costs, thus the Interest Deductibility Test would be met, and the full main residence exemption would be lost. For example, renting out a room on Airbnb.
- for taxpayers running a business in part of their home, they would be entitled to claim a portion of their interest costs provided part of the dwelling was set aside exclusively as a place of business and clearly identified as such, and that part of the home is not readily adaptable for private use. An example is a photographer who has converted the lower level of his house into a studio containing backdrops, special lighting, dark rooms, and a waiting room. In this case, the full main residence exemption would be lost.
- for taxpayers using part of their home as a study or home office, they would not be entitled to claim a portion of their interest costs. Their claims would be limited to a portion of running costs such as electricity. In this case, the full main residence exemption would not be lost.
THE MYTH SURROUNDING NOT CLAIMING COSTS ON YOUR HOME
In the same vein as the myth surrounding the length of time one must live in their main dwelling to qualify for the main residence exemption, another common myth surrounds the loss of main residence exemption for income producing use. Many taxpayers and some tax practitioners take the view that if a taxpayer chooses not to claim deductions for a proportion of the holding costs of their home (e.g. rates, mortgage interest), then the main residence exemption is preserved. This is not the case. The loss of the main residence exemption is base on the tests discussed earlier. Whether you choose to claim or not claim your rightful share of deductible home running and holding costs is of no bearing. Therefore, you are disadvantaging yourself by not claiming these expenses.
ATO COMPLIANCE ACTION PENALTIES FOR SMSFs
This article looks at the actions and penalties that the ATO can impose on trustees of self-managed superannuation funds (SMSFs). In 2014 a new regime added the following compliance powers to the ATO’s arsenal:
- education directions;
- rectification directions; and
- administrative penalties.
In addition to the above, the ATO has the following compliance powers to deal with trustees of SMSFs which have not complied with superannuation laws:
- enforceable undertaking;
- disqualification of a trustee;
- civil and criminal penalties;
- allowing the SMSF to wind up:
- notice of non-compliance; and
- freezing an SMSFs assets.
In this article we will refer to trustees of the SMSFs in plural, but each reference equally applies to each trustee of an SMSF. It is helpful to remember here that the ATO do not distinguish between “active” and “passive” trustees when applying compliance action, but they can consider these matters when it comes to remitting penalties.
In practice, the ATO generally issues penalties where they detect contraventions of the Superannuation Industry (Supervision) Act 1933 (Cth) (SISA) or the Superannuation Industry (Supervision) Regulations 1994(Cth).
The ATO is generally made aware of contraventions via the fund’s auditor, who is obliged to report all contraventions that meet the reporting thresholds. In broad terms, the substantial or ongoing contraventions are required to be reported.
Where the contraventions come to the attention of the ATO, the ATO can impose the following penalties on trustees. We now explore each of the ATO’s compliances powers briefly below.
The ATO can direct trustees to undertake education. Education directions may be appropriate when the contravention appears to have occurred due to the trustee’s lack of understanding of the key obligations and concepts in the SISA, e.g. the sole purpose test.
Broadly, all trustees are treated as if they are aware of all the potential contraventions of the SISA, whether or not they actually have a good knowledge of the law. Thus, where trustees are not aware of the rules or have identified a contravention in their fund, it would be highly recommended that they take the initiative and consider undertaking an approved education course.
These courses are available for free online via the ATO’s website. These courses can be undertaken even if the ATO has not directed the trustees to take an education course and even where no contraventions have been identified in the fund.
Generally, the ATO imposes this penalty in addition to other compliance protocols. For example, the trustees could be directed to undertake education, rectify the contravention via a rectification directive and pay an administrative penalty.
Rectification directions allow the ATO to direct trustees to rectify a contravention and put into place managerial or administrative arrangements to ensure there will be no repeat contraventions. These directions usually require the trustees to provide evidence of their rectification within the specified timeframe to the ATO, generally six months.
The ATO generally welcomes trustees that take the initiative, particularly trustees that provide the ATO with an enforceable undertaking. An enforceable undertaking may be more beneficial for trustees that wish to propose how they intend to rectify a contravention and don’t want to wait for the ATO to issue a rectification direction.
When considering whether to issue a rectification direction, the ATO takes into account the following:
- any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction;
- the nature and seriousness of the contravention; and
- any other relevant circumstances.
Where trustees wish to vary an ATO rectification direction, they can make a request in writing on or before the period specified in the direction. The request must be signed and dated and must contain the reasons for making the request. Further, trustees can also object to the ATO’s rectification direction or decision to refuse to vary a rectification direction.
Under s 166 SISA, the ATO can impose administrative penalties on the following provisions (and next to each item is the maximum penalty), including:
- lending to members: 60 penalty units;
- borrowing: 60 penalty units
- in-house asset rules: 60 penalty units;
- duty to keep minutes: 10 penalty units; and
- duty to keep records of change of trustee: 10 penalty units.
A penalty unit is currently $210 but increases with the consumer price index. For example, 60 penalty units are currently $12,600.
Where an administrative penalty is imposed, individual trustees or directors of corporate trustees are personally liable. Therefore, the penalty cannot be paid or reimbursed from assets of the fund (see s 168 of the SISA). Directors of corporate trustees are jointly and severally liable to the penalty, whereas individual trustees are each liable to a penalty. This means that a corporate trustee with two directors will get one penalty overall, but two individuals will get a penalty each. It is generally preferable, therefore, to have a corporate SMSF trustee. In regard to collecting the penalty from directors the ATO may collect the entire penalty from any one of the directors of the corporate trustee or from all directors in various amounts, until the penalty is paid in full.
The ATO has the discretion to remit penalties in part or in full under s 298-20 of sch 1 of the TAA 1953. The circumstances where the ATO will not remit administrative penalties include the more serious cases, for example, where the ATO see the following:
- indicators of ongoing non-compliance;
- the trustee’s unwillingness to recognise the issue and engage with the ATO; or
- where it has remitted a penalty previously.
Trustees may object to the ATO’s decision not to remit or not to remit in full the administrative penalty by seeking a review of the ATO’s decision. Broadly, a review of the ATO’s decision usually means that the matter is then referred to, and adjudicated by, the tribunals or the courts.
GST ON LOW VALUE IMPORTED GOODS
From 1 July 2018, amendments to the GST legislation in Australia will require sellers, online platforms and redeliverers to remit GST on sales of low value imported goods (LVIGs) to Australian consumers. An “Australian consumer” is defined as an Australian resident that is not registered for GST in Australia.
The context of these amendments is that when GST was first introduced, there was little or no online shopping. In the present day, statistics indicate that Australians now spend over $21 billion on online shopping each year. Under the current legislation, overseas businesses selling LVIGs into Australia are not required to charge an additional 10% GST on the same goods that Australian retailers are required to charge GST on.
This has led to a perception that there is preferential treatment of online shopping and the Australian retail sector has lobbied in recent years for this disparity to be rectified. The explanatory memorandum (EM) to the legislation reflects this sentiment as it states that “the fact that neither the supply nor the importation of such low value goods is subject to GST represents a significant risk to the integrity of the GST system. It also places Australian based suppliers at a growing competitive disadvantage”.
The amendments will require overseas businesses selling goods into Australia to consider a two-tier system whereby LVIGs will be taxed at sale and goods or consignments over AU$1,000 will be taxed at the Australian border.
The responsibility to remit GST to the Australian Taxation Office will be with the supplier of the LVIGs and not the Australian consumer. As a result, the ATO has been engaging with impacted suppliers to ensure they comply with the new rules.
Under the current law, GST is collected on most imported goods valued over $1,000 at the time they are imported into Australia. GST is also charged on the subsequent supply of these goods that are made to consumers in Australia. For imported goods with a customs value of $1,000 or less, there is no GST charged on importation. In addition to this, there is no GST cost to the Australian customer at all which means that these supplies are currently outside the Australian GST system.
LAW FROM 1 JULY 2018
Sales of LVIGs to Australian consumers which have a customs value of AU$1,000 or less at the time of sale will be subject to GST from 1 July 2018. As discussed this does not affect the current rules in relation to collecting GST on imports above AU$1,000.
It is worth reiterating that GST is only applicable to sales to Australian consumers that are not registered for GST (business to consumer sales). Where supplies of goods are made to Australian business consumers that are registered for GST, no GST will apply. To confirm that an Australian business is registered for GST, overseas suppliers will need to collect the Australian business’s Australian business number (ABN) and a declaration confirming that they are registered for GST.
Where multiple LVIGs are shipped in a single consignment with a combined value over AU$1,000, GST will be payable on the importation of the consignment by the importer and not on the sale of the individual LVIGs. This means that overseas businesses will need to be certain that LVIGs shipped in a consignment with a value over AU$1,000 do not require GST to be charged on them. If GST does apply, the consignment will be taxed at the border by Australian customs (Department of Immigration and Border Protection).
WHO IS AFFECTED?
The amendments will affect entities that make supplies of goods into Australia where:
- the supply is an offshore supply of low value goods; and
- the recipient acquires the supply as a consumer.
Specifically, the following types of entities that make or facilitate sales or delivery of LVIGs to Australian consumers will be affected by the new laws:
- operators of online marketplaces; and
The current registration turnover threshold of $75,000 ($150,000 for non-profits) will also apply to supplies covered by the new legislation.
GST REGISTRATION REQUIREMENT
A simplified GST registration process is available to entities that are “limited registration entities”, which is where they are non-resident businesses making LVIGs supplies to Australian consumers. A limited registration entity will have the following rules applying to it:
- reduced requirements to apply for registration;
- GST required to be remitted on its supplies;
- returns will be lodged on a quarterly basis; and
- the entity is unable to claim GST on its acquisitions.
A limited registration entity will not be issued an ABN, but rather will be issued with an ATO registration number. Alternatively, a full GST registration is possible, which means that full GST returns will be lodged with the benefit that GST credits can be claimed by the overseas business.
An overseas business supplying LVIGs will not be able to issue tax invoices. This is logical as a supplier of LVIGs will only be making these supplies to unregistered Australian consumers who are not entitled to claim GST credits on the purchase of goods.
If GST has already been paid on the sale of LVIGs, there are safeguards to prevent the consignment being taxed again at the Australian border. Double taxation will be avoided if an appropriate declaration is provided to Australian customs. Overseas businesses need to ensure that their import documentation is completed correctly to avoid any double taxation issues.
If an appropriate declaration is not provided to customs and the LVIGs are taxed twice, there is also provision for the overseas business in certain circumstances to seek a refund of the GST paid.
As discussed previously, under a simplified registration, tax invoices are not required to be issued. However, an overseas business is required to issue a notice of GST paid in the approved form which has certain information that must be disclosed. For full registration entities, the normal GST Tax invoice rules apply.
Overseas businesses which do not provide the consumer with a notice of the amount of GST but receive a request from them to provide a notice will be required to provide this within five business days of the request. Suppliers will be liable for an administrative penalty if they do not include certain tax information in customs documents.
The amendments in relation to the supply of LVIGs are a relatively major change to the Australian GST system, not only for the Australian customer, but also for overseas businesses making supplies of LVIGs to Australia. Therefore, overseas businesses making supplies to Australia need to consider whether their business is captured under the new rules and, if so, what changes to its commercial practices, reporting requirements and internal systems need to be made.