Capital Gains Tax
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    Deceased Estates – Full capital gains tax exemption if dispose of the pre-CGT property within 2 years from date of death

    Did you know of the capital gains tax exemption available for the disposal of pre-CGT properties (originally acquired by the deceased before 20 Sep 1985) within 2 years from the deceased date of death?

    Does the pre-CGT property have to have been the main residence at any time?

    No it is not necessary for the pre-CGT property to have been the main residence of the deceased just before they died.

    The deceased could have used the pre-CGT property to earn income so this capital gains tax exemption can also apply to investment properties.

    What do you mean by dispose of?

    The Estate will need to have transferred out the property, either by selling to a 3rd party or transfers to the beneficiary (so they inherit as according to the will).

    Further to this, if the beneficiary who inherits the property decides to sell the inherited pre-CGT property within 2 years, the capital gains tax on the disposal is also still fully exempt.

    What do you mean by “settled”?

    For this particular legislation for the capital gains exemption, the relevant date is the date the contract is fully settled and completed, which is the date the property transfer has been finalised and performed.

    This is in contrast to the date of exchange of contracts which is normally relevant for the capital gains on the disposal of Real Estate assets, which is the date the contract is signed by the relevant parties.

    If you have questions on any of the above issues raised, please do not hesitate to contact us. Read more Personal Tax articles.

    Judy She
    Senior Accountant
    T: 02 9984 7774
    E: judys@northadvisory.com.au

     

    Martin van der Saag
    Partner
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Mr Scott Morrison, the Federal Treasurer, handed down his third Budget at 7.30 pm (AEST) on 8 May 2018. Mr Morrison said the Budget is focused on further strengthening the economy to “guarantee the essentials Australians rely on” and “responsibly repair the budget”. With a deficit of $18.2b in 2017/18 and $14.5b in 2018/19, the Budget is forecast to return to a balance of $2.2b in 2019/20 and a projected surplus of $11b in 2020/21.

    The government is proposing a three-step, seven-year plan to make personal income tax “lower, fairer and simpler”. The Budget also contains additional measures to counter the black economy, particularly in response to the final report from the Black Economy Taskforce, including expanding the taxable payments reporting system. Additionally, the Budget contains a range of measures intended to ensure the integrity of the tax and superannuation system.

    The tax and superannuation highlights are set out below.

    Individuals

    • A seven-year Personal Income Tax Plan will be implemented in three steps, to introduce a low and middle income tax offset, to provide relief from bracket creep and to remove the 37% personal income tax bracket.
    • The Medicare levy low-income thresholds for singles, families, seniors and pensioners will be increased from the 2017/18 income year.
    • The 2017/18 Federal Budget measure to increase the Medicare levy from 2% to 2.5% of taxable income from 1 July 2019 will not proceed.
    • Supplementary amounts (such as pension supplement, rent assistance and remote area allowance) paid to a veteran, and full payments (including the supplementary component) made to the spouse or partner of a veteran who dies, are exempt from income tax from 1 May 2018.
    • Schemes to license a person’s fame or image to another entity such as a related company or trust to avoid income tax will be curtailed.
    • The ATO will be provided with $130.8m from 1 July 2018 to increase compliance activities targeting individual taxpayers and their tax agents.

     

    Income tax

    • Significant changes to the calculation of the R&D tax incentive will commence for income years beginning on or after 1 July 2018. Additionally, a maximum cash refund will also apply for some entities.
    • The $20,000 instant asset write-off will be extended for small businesses by another year to 30 June 2019.
    • Amendments to Div 7A will strengthen the unpaid present entitlements (UPE) rules from 1 July 2019.
    • The start date of targeted amendments to Div 7A will be deferred from 1 July 2018 to 1 July 2019.
    • Deductions for expenses associated with holding vacant land not genuinely used to earn assessable income will be denied.
    • The small business capital gains tax (CGT) concessions will not apply to partners alienating rights to future partnership income.
    • Payments to employees and contractors are no longer deductible where any amounts that are required to be withheld are not paid, from 1 July 2019.
    • The definition of a “significant global entity” (SGE) will be broadened to include more large multinational groups, from 1 July 2018.
    • The thin capitalisation rules will be amended, effective 1 July 2019, to require entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.
    • The thin capitalisation rules will be amended, effective 1 July 2019, to treat certain consolidated groups and multiple entry consolidated groups as both outward and inward investment vehicles for thin capitalisation purposes.
    • Tax exempt entities that become taxable after 8 May 2018 will not be able to claim tax deductions that arise on the repayment of the principal of a concessional loan.
    • The 50% capital gains discount for managed investment trusts (MITs) and attribution MITs (AMITs) will be removed at the trust level.
    • A specific anti-avoidance rule that applies to closely held trusts engaging in circular trust distributions will be extended to family trusts.
    • The concessional tax rates for the income of minors from testamentary trusts will not be available for trust assets unrelated to the deceased estate.
    • A five year income tax exemption will be provided to a subsidiary of the International Cricket Council (ICC) for the ICC World Twenty20 to be held in Australia in 2020.
    • The list of countries whose residents are eligible to access a reduced withholding tax rate of 15% on certain distributions from Australian managed investment trusts (MITs) will be updated.
    • Six more organisations have been approved as specifically-listed deductible gift recipients.

     

    Superannuation

    • The maximum number of allowable members in SMSFs and small APRA funds will be increased to six from 1 July 2019.
    • The annual audit requirement for self managed superannuation funds will be changed to a three-yearly requirement for funds with a history of good record keeping and compliance.
    • Individuals whose income exceeds $263,157, and have multiple employers, will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018.
    • Individuals will be required to confirm in their income tax returns that they have complied with “notice of intent” requirements in relation to their personal superannuation contributions, effective from 1 July 2018.
    • An exemption from the work test for voluntary contributions to superannuation will be introduced from 1 July 2019 for people aged 65–74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements.
    • Insurance arrangements for certain superannuation members will be changed from being a default framework to being offered on an opt-in basis.
    • A 3% annual cap will be introduced on passive fees charged by superannuation funds on accounts with balances below $6,000, and exit fees on all superannuation accounts will be banned.
    • The financial institutions supervisory levies will be increased to raise additional revenue of $31.9m over four years, from 2018/19.

     

    Black economy measures

    • A package to reform the corporations and tax laws to deter and disrupt illegal phoenix activity and the black economy will be introduced.
    • The taxable payments reporting system for payments to contractors will be expanded to include security services, road freight transport and computer system design industries, effective from 1 July 2019.
    • Business seeking to tender for Australian government contracts above $4m (including GST) will need to provide a statement of compliance with their tax obligations, from 1 July 2019.
    • Businesses can no longer receive cash payments above $10,000 for goods and services, from 1 July 2019.

     

    Indirect taxes

    • Offshore sellers of hotel accommodation in Australia will be required to calculate their GST turnover in the same way as local sellers from 1 July 2019.
    • The luxury car tax on cars re-imported into Australia, following a refurbishment overseas, will be removed from 1 January 2019.
    • Alcohol excise refund scheme cap increased from $30,000 to $100,000 per financial year from 1 July 2019, and lower excise rates will apply for smaller beer kegs.
    • Measures to combat illicit tobacco in Australia, including collecting tobacco duties and taxes upon importation and creating a multi-agency task force, will be introduced.
    • Customs tariffs from placebos and clinical trial kits that are imported into Australia will be removed from 1 July 2018.
    • Access to refunds of indirect tax, including GST, fuel and alcohol taxes under the Indirect Tax Concession Scheme has been extended.

     

    How can we help?

    If you have any questions or would like further clarification in regards to any of the above measures outlined in the 2018-19 Federal Budget, please feel free to contact Martin van der Saag or Norman Ruan on (02) 9984 7774. Read more Financial Industry articles.

    Who this applies to

    In the healthcare services industry, it is now common for some practitioners to operate from healthcare centres run by third parties. This frequently occurs without any stated partnership or employment relationship between the third party and the practitioner.

    The third parties that run these centres generally encourage practitioners to start work or continue to work from their centres. They may offer lump sum payments for this purpose and there is nothing wrong with that.

    ATO’s concerns and types of arrangements

    The ATO’s concerns relate to the tax treatment of the lump sum payments by the practitioner for arrangements which has most or all of the following features:

    • A healthcare centre operator provides you with fully equipped consulting rooms, administrative services, clerical staff and facilities as necessary for you to provide healthcare services. The agreements entered into typically state that there is no employment relationship between you and the operator.
    • In return for these facilities and services, you are required to pay the operator an agreed percentage of the receipts for the healthcare services you provide.
    • You are required to provide healthcare services from the healthcare centre for an agreed minimum period of time, minimum weekly working hours and working patterns.
    • You are required to use your best endeavours to grow and promote the interests of the healthcare centre.
    • The operator pays you a lump sum
      • it is described as being consideration for a restraint imposed, for goodwill, for other terms or conditions, or for a combination of the three
      • the payment is ordinarily made when you enter into the agreement or start to provide healthcare services to patients from the healthcare centre (whichever is the later) or whenever the agreements relating to the provision of healthcare services are renewed.

    Whilst these are common features, any other arrangements that relate to a lump sum payment for your ongoing provision of healthcare services from a medical centre may still be of concern to the ATO.

    The ATO’s concerns are:

    • The lump sum will typically be ordinary income of the practitioner for providing services to their patients from the healthcare centre.
    • Practitioners are required to include the full amount of the lump sum payment in their assessable income.
    • These lump sums payments cannot be treated as a capital gain, and cannot apply the small business CGT concessions to reduce the capital gain.

    The ATO has formed this view due to:

    • the lump sum payment is an inducement for the practitioner to enter into the agreements to provide healthcare services from the healthcare centre
    • the lump sum is fundamentally connected to the practitioner’s provision of those services in the alternative, the lump sum payment represents a profit or gain from an isolated transaction in the course of the practitioner providing healthcare service
    • the mere fact the payment is a one-off lump sum, or expressed to be principally consideration for the restraint imposed, for the goodwill or for the other terms or conditions, does not define it as having the character of a capital receipt there is no transfer of goodwill as
      the third party operating the healthcare centre does not acquire the right to provide healthcare services from the practitioner
    • the practitioner does not cease to provide healthcare services.

    Where these features applies to the arrangement, the whole of the lump sum payment is assessable as ordinary income in the hands of the practitioner.

    What you need to do

    If you are considering any arrangements that relate to a lump sum payment for commencing or providing ongoing healthcare services, you should note that the ATO:

    • Has concerns with those payments being mistakenly treated as capital gains
    • Are looking closely at these arrangements to determine if they are compliant with income tax laws and whether the anti-avoidance provisions may apply.
    • From 2013, the ATO has consistently issued private rulings on these or similar arrangements treating the whole of the lump sum payment as assessable ordinary income.

    What is happening now 

    If you have already treated these lump sum payments as something other than ordinary income, the ATO is offering to help you ensure you are in, or that that you get into, the correct tax position.

    The ATO has started targeted activities and examinations of healthcare practitioners who may have incorrectly treated these lump sum payments as capital gains.

    The ATO is working to provide further advice and guidance to health practitioners to help them either self-identify these and emerging arrangements that concerns the ATO , or as early warning for those who may be considering them.

    The ATO is encouraging practitioners to seek professional advice from their accountants which may include:

    • applying for a private ruling with the ATO about your specific circumstances
    • make a voluntary disclosure if you believe the ATO’s concerns apply to you, which may reduce any penalties.

    The ATO will continue to identify, examine and understand the types of payment arrangements being used in the industry by further engaging with healthcare centre operators.  This may include obtaining details of which practitioners have received payment from the healthcare centre operators.

    Example: A new doctor joins the practice

    Dr Lee has recently been approached by Medical Centre Z, a medical centre operator, with an offer to join a well-established healthcare centre.

    Medical Centre Z’s offer includes the payment of a lump sum connected to an agreement where Dr Lee is required to work 40 hours a week, Monday to Friday, providing healthcare services to patients attending the medical centre.

    The medical centre provides Dr Lee with the use of their facilities and all the support services needed to run the practice so she can focus solely on what she loves best, working with patients. For the use of these facilities and services, the medical centre takes a percentage of her billable receipts.

    Dr Lee is unsure how this payment will be treated for tax purposes. A friend suggests that the payment is a capital gain and she would be able to apply for CGT concessions. This doesn’t seem quite right to her so she decides to talk to her accountant about the payment.

    Her accountant confirms her thoughts; the payment is not a capital gain as it is essentially made for her agreeing to provide her healthcare services at the medical centre. Dr Lee needs to treat the payment as ordinary income and report it and pay tax on it accordingly. Her accountant advises her that had she tried to include the payment as a capital gain she would have underpaid her tax and been exposed to tax adjustments and potential penalties.

    Where to go for help

    If you have entered, or are planning to enter, into an arrangement of this type or if you have questions about the tax consequences of these arrangements, please do not hesitate to contact us. Read more Personal Tax articles.

    Judy She
    Accountant
    T: 02 9984 7774

    judys@northadvisory.com.au