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How much does negative gearing really cost?

25th Mar, 2024

Since the government’s announced changes to the Stage 3 tax cuts to give lower income earners more benefits, the chorus of voices advocating for changes to other aspects of the tax system, such as negative gearing, has grown steadily stronger. So how much does negative gearing actually cost the nation each year? The answer to this can be gleaned from the 2023–24 Tax Expenditures and Insights Statement (TEIS) which, somewhat confusingly, contains figures relating to the 2020–2021 financial year.

Put simply, a tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment or the tax benchmark. These expenditures include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability.

The TEIS contains detailed breakdown of various categories, including rental property deductions. The ATO estimates that some 2.4 million rental property investors claimed deductions for expenses associated with maintaining and financing property interests, including interest, capital works and other deductions. Collectively for the 2020–2021 financial year, $48.1 billion worth of rental deductions were claimed, resulting in a total tax reduction of $17.1 billion.

Only around half, or 1.1 million, of these rental property investors had a rental loss (negative gearing), which added up to total rental losses of $7.8 billion and provided a tax benefit of around $2.7 billion for the 2020–2021 income year. The other rental deductions category (eg property maintenance, council rates etc) accounted for more than 50% of the amount claimed, with the next largest deduction being interest expenses, coming in at 39%.

Further analysis of the $2.7 billion negative gearing tax benefit (or tax reduction) reveals that 80% went to individuals with above median income (those earning above $41,500) and 37% went to individuals in the top income decile (those earning over $128,000).

Although the TEIS doesn’t provide data on the status of those claiming rental deductions, this can be somewhat inferred by the ages of those claiming the deduction. According to the ATO, more than half of the total negative gearing tax reduction went to individuals between the ages of 40 and 59 years old. Presumably a majority of individuals in this cohort have families, and a good proportion may be either the sole income earner or the primary income earner in their family.
This means the bulk of the commentary regarding negative gearing benefiting the rich may be on shaky ground.

However, these contentions aside, with the tax reduction on rental deductions expected to blow out to
$28.2 billion by the 2026–2027 income year (from $17.1 billion in the 2020–2021 income year) and it being the second largest tax expenditure (second only to concessional taxation of employer super contributions), it’s likely the calls for changes to negative gearing will only grow stronger in time.

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FBT electric vehicle home charging rate

25th Mar, 2024

With the rise in businesses purchasing electric vehicles (EVs) for the use of their employees, the ATO has finalised its guidelines setting out the methodology for calculating the cost of electricity for FBT purposes when an eligible EV is charged at an employee’s or an individual’s home. The rate of 4.20 cents per kilometre now applies (from 1 April 2022 and for later FBT years). To use this rate, employers will need to keep a record of the distance travelled by the car, and a valid logbook must be maintained if the operating cost method is used.

In terms of FBT, the employer now has the choice of either using the methodology outlined in the guidelines or determining the cost of the electricity by determining the actual cost incurred. Once made, this choice applies to each vehicle for the entire year, although the choice can be changed from one FBT year to another.

TIP: These ATO guidelines only apply to zero emission EVs and not to plug-in hybrid vehicles which have an internal combustion engine, or to electric motorcycles or electric scooters.

A transitional approach applies for the 2022–2023 and 2023–2024 FBT years, whereby if odometer records have not been maintained, a reasonable estimate may be used based on service records, logbooks or other available information. After the transitional period ends, employers will need to keep a record of the distance travelled by each car and a valid logbook must be maintained if the operating cost method is used.

Employers are reminded that even if an EV is eligible for an FBT exemption, the benefit must still be included in an employee’s reportable fringe benefits amount. Therefore, the taxable value must be determined, and where the employee home-charged the EV throughout the year and paid their electricity bills and provided the employer with the necessary declaration for electricity costs, the home charging electricity cost will form a part of the recipient contribution amount.

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Australia’s love affair with SMSFs continues

25th Mar, 2024

Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, so it is perhaps no surprise that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of the control and flexibility offered.

In the five years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876 billion in assets, which accounts for around 25% of all super assets.

It’s important to be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF: trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances.

The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees’ lack of experience or knowledge can lead to poor investment choices. SMSFs also need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members.

There is also a time commitment required to research investments, monitor fund performance and stay updated on regulatory changes. Taxpayers thinking about starting an SMSF should consult qualified advisers for further advice.

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ATO areas of focus on businesses for the coming year

25th Feb, 2024

As we move into 2024, the ATO has highlighted three areas of focus for businesses: taking steps to address cyber security and increased protection of personal data, addressing the growth in the collectable debt book – particularly for small businesses – and improving overall tax performance.

With increased cyber-crimes, scams and hacks occurring in Australia in recent times, like any other large organisation the ATO has taken additional steps to address cyber security and increase protection of personal data to deal with an unprecedented rise in identity-related fraud attempts. For all businesses, the ATO has introduced “client-to-agent linking”, which requires all entities with ABNs (excluding sole traders) to digitally nominate their agent through ATO’s secure online services before the agent can access any data. This will cover approximately 4.7 million businesses.

For all individuals interacting with the tax system, the ATO encourages the use of myGovID. This coincides with the government announcing a tightening of the way in which individuals access their myGov account. Individuals who use their myGovID to access the ATO’s services will need to use that myGovID for future logins from now on. In other words, it will not be possible to access an ATO account without it.

In 2024, the ATO will also be seeking to address the growth in the collectable debt book. Currently, the collectable component of debt sits at about $50 billion and consists of mostly self-assessed debt, with small businesses owing 67% of this. According to the ATO, its more lenient approach during the height of the pandemic, under which it chased fewer lodgments and recovered less debt, has now led to a concerning behavioural pattern from some businesses where they deprioritise paying tax and super and increasingly rely on unpaid tax and super to prop up cashflow.

One of the ways the ATO is seeking to level the playing field on uncooperative businesses is the reporting of debt information to credit reporting bureaus. Since 1 July 2023, it has disclosed the debts of more than 10,500 businesses that have significantly overdue undisputed tax debts of at least $100,000.

The takeaway message for businesses, especially small businesses, for this year is to be proactive and engaged with the ATO in terms of any unpaid tax or super debts and keeping data secure.

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Employees versus contractors: new rules

25th Feb, 2024

Following two prominent High Court decisions which dealt with the distinction between employees and independent contractors, the ATO has sought to provide guidance to businesses in the form of a taxation ruling. The most significant departure from its previous position is that the ATO now considers that various indicators of employment identified in case law, while relevant, should only be considered in respect of the legal rights and obligations between the parties, with the most important factor the holistic consideration of the contract between the parties.

In brief, the High Court’s decisions deal with the distinction between employees and independent contractors in the context of a labour-hire company and two truck drivers operating through partnerships to provide delivery services to their former employer. In the first case, the High Court ruled that a labourer engaged by a labour-hire company to work on construction sites under the supervision and control of a builder was an employee of the labour-hire company.

The High Court noted that this right of control, and the ability to supply a compliant workforce, was the key asset of the business as a labour-hire agency and constituted an employment relationship. That the parties chose the label “contractor” to describe the labourer did not change the character of that relationship, the High Court said. This decision also overruled a earlier Full Federal Court decision which held, after applying a “multifactorial approach”, that the labourer was an independent contractor.

In the second case, the High Court held that two truck drivers were not employees of a company for the purposes of the Fair Work Act 2009 and Superannuation Guarantee (Administration) Act 1992. The Court also observed that the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors (and not of employees).

The ATO’s Taxation Ruling 2023/4 now states that whether an individual worker is an employee of an entity under the term’s ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

In addition, where the worker and the engaging entity have comprehensively committed the terms of their relationship to a valid written contract, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of an engaging entity.

The ruling notes that evidence of how the contract was performed, including subsequent conduct and work practices, cannot be considered for the purpose of determining the nature of the legal relationship between the parties. However, this evidence can be considered to establish the contractual terms or to challenge the validity of a written contract with general contract law principles.

In conjunction with the ruling, the ATO has also released a practical compliance guideline which sets out its compliance approach for businesses that engage workers and classify them as employees or independent contractors.

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ATO’s continued focus on illegal early release of super

25th Feb, 2024

As a new calendar year commences, the ATO’s priorities in the self managed super fund (SMSF) sector remain consistent. As in previous years, the greatest area of concern for the ATO continues to be taxpayers illegally accessing their super before meeting a condition of release. While it notes that the vast majority of SMSFs follow the rules, those that do not are having a significant impact on the system.

According to the ATO, early withdrawal of super seriously impacts a member’s retirement savings, which can lead to an increased reliance on taxpayer- funded pensions (such as the Age Pension) in the future. This is in addition to significant financial and regulatory impacts for individuals, because illegally accessed benefits are assessable as income, and the ATO may apply and seek penalties, interest charges and disqualifications.

In order to weed out the few bad apples, the ATO implemented a program late in 2023 called “illegal early access estimate” which allows it to estimate the amount of retirement money leaving the system before it should. The information from the program informs the ATO of the size, scale and trajectory of the illegal early access risk and gathers intelligence to assist in addressing the issue.

This program will be used in conjunction with preventative approaches such as providing support and guidance products and education courses for new trustees. For example, the ATO continuously improves publications available on its website to support trustees in meeting their obligations at different stages of the SMSF lifecycle. It has also developed several online learning modules focused on the lifecycle of SMSFs, which will go live very soon.

Another preventative strategy employed by the ATO is an initial review of new registrants, which involves a risk assessment of all SMSF registrations to ensure trustees are entitled to set up a fund, and acts as a safeguard against identity fraud.

For new entrants into the SMSF system, the ATO has also tailored the first-time non-lodgers program, which identifies and takes actions against funds that have received a rollover from a member but have not yet lodged their first annual return.

On the topic of compliance action, the ATO has warned that it uses increasingly sophisticated risk detection models which resulted in a significant number of sanctions being applied last year. In 2023, it disqualified 753 trustees – triple the number from 2022 – and raised around $29 million in additional tax, penalties and interest. The use of this detection model is set to continue in 2024.

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