Regulatory Roundup – Sept 2016

Internal tax documents released — a peek into court interpretations

The ATO has released on its legal database a series of what until recently have been internal ATO documents.

The release of these documents in an initiative that the ATO has labelled “iNOW!” (a contraction of “interpretation now”) and is, according to assistant commissioner Gordon Brysland, “a reinvention initiative to drive awareness on what is happening on the statutory interpretation front”.

“iNOW! began as a way to address the need – recognised by top judges – for those working with legislation to get better at reading it,” Brysland says. “Yet, stand-alone interpretation courses are still not taught in universities and, of course, reading statutes is not just the playground of the legally trained.

“Instead, people pick up the skills by osmosis, by default, or not at all. iNOW! aims to fill this gap for both lawyers and non-lawyers,” he says. “We try to avoid focusing on niche issues and complication at the expense of practical guidance. Too easily this can lead to a mindset of ‘nothing is certain’ or ‘anything goes’. Both attitudes tend to distract the fundamental search for what parliament meant by the words it used.”

The documents (or “episodes” as the ATO calls them) are the brainchild of the ATO’s Tax Counsel Network, and have been released with an aim to raise awareness about what courts are saying about statutory interpretation.

The monthly series began more than a year ago, and the ATO says it has now made them public in response to growing external interest. Until now, they have been filed under “miscellaneous papers” in the ATO’s legal database.

Brysland says an additional aim is to draw attention to key principles, expressed in easily digestible chunks, “and to provide ‘iTips’ on how they may be applied”. The documents comment briefly on various cases (not necessarily tax cases) and indicate why they are important.

The documents are not public rulings or legal advice, and are not binding on the ATO. The episodes released already are listed below:

– Episode 1 (Hierarchy & harmony, Impractical obligations, Legislative intention, Statutory definitions)

– Episode 2 (Importance of the text, Act ‘always speaking’, Constructional choices, Use of dictionaries)

– Episode 3 (Singular & plural, Same word, same meaning?, Interpretation of DTAs, Black letter approaches)

– Episode 4 (Text context text, Changes in language, Use of regulations, Deeming provisions)

– Episode 5 (Composite expressions, Status of notes, Adding words, Refresher course)

– Episode 6 (Importance of policy, Preconceived policy, Generalised policy, Sources of policy)

– Episode 7 (Validity, Retrospectivity, Uncertainty, Inconvenience)

– Episode 8 (Re-enactment, Similar phrases, Fundamental rights, Exclusive codes)

– Episode 9 (Legislative scheme, Delegated legislation, Judgment words, Incurable defects)

– Episode 10 (Meaning of ‘person’, ‘as amended from time to time’, Meaning of ‘Australia’, ‘means X and includes Y’)

– Episode 11 (Statutory definitions, Taking advantage of own wrong, Beneficial legislation, Commanding the impossible)

– Episode 12 (Same word, same meaning?, Objects and long-title, Terms in another Act, When ‘may’ means ‘must’)

– Episode 13 (Back to basics, Principle of legality, Punctuation, Delegated legislation)

– Episode 14 (Status of tax laws, Tax retrospectivity, Context and ambiguity, General & special provisions)

To get further episodes in the future (they are released monthly), go to the ATO’s legal database page, search for “iNOW”, and bookmark that page.



Centrelink to data match details with ATO records

The Department of Human Services, which overseas Centrelink, has issued a notice of a data matching project that will enable it to compare income data it has on-hand with tax return data that has already been reported to the ATO.

Labelled by DHS the “Non employment income data matching project”, the initiative will “assist the department to identify social welfare recipients who may not have disclosed income and assets”.

DHS says the data it receives from the ATO will be electronically matched with certain internal departmental records to identify non-compliance with income or other reporting obligations.

The department expects to match each of the approximately seven million unique records held in its Centrelink database. Based on non-compliance criteria, the department anticipates it will examine approximately 20,000 records in the first phase of the project.

The department will use its “customer” information in the context of the income data project to:

– verify the information reported to it

– identify social welfare recipients who may not have disclosed income

– match and validate tax return and the pay-as-you-go data from the ATO

– identify discrepancies in the income declared to the department, and

– consider whether the department will initiate relevant compliance action (including debt recovery or a referral to the Director of Public Prosecutions).

The sorts of people who may be affected by this data matching project will include welfare recipients who have lodged a tax return with the ATO during the period 2011 to 2014. DHS stipulates in its notice that the standards for data matching activities avow to protect the privacy of individuals.



Deductibility of training course fees provided to employees

Running a successful small business sometimes requires an upskilled team. If you need your employees to grow their expertise in a particular area, spotting them for short-courses can be a worthwhile endeavour.

When providing staff these courses, the following questions can be considered by employers from a tax viewpoint.

Can I claim a deduction for course or education fees provided?
Yes. As general rule, a deduction is available for the full costs incurred in providing education to employees (such as course fees, travel costs and so on). What businesses tend to forget however is to consider possible FBT implications (see below).

Is the provision of education also subject to FBT?
Yes. Paying for your employee’s work-related course fees would generally constitute a fringe benefit and be subject to FBT. However the rules within the FBT legislation allows for a full or partial reduction of FBT payable on the benefit provided that the “otherwise deductible” rule is met.

Simply put, the otherwise deductible rule assumes that if the employee had hypothetically incurred the expense, they would have been able to claim a deduction for the expense themselves.

It follows that if the otherwise deductible rule could apply, the employer can reduce their FBT liability to the extent that the hypothetical deduction would have been allowed to the employee.

Certain membership fees and subscriptions paid by an employer are specifically exempt from FBT (such as a subscription to a trade or professional journal). Any FBT expense, however, can be deductible to the business.

When is an education expense considered to be hypothetically deductible to the employee?
This will depend on the type of course or education undertaken by the employee.

The ATO has provided guidance in working out whether course or education fees incurred is deductible to an employee (see here for more).

Generally, the course must have a sufficient connection to an employee’s current employment and:

– maintain or improve the specific skills or knowledge the employee requires in current employment, or

– result in, or possibly result in an increase to, income from current employment.

Employees generally cannot claim a deduction for an education expense if it doesn’t have a sufficient connection to their employment, even if:

– it might be generally related to it, or

– it enables the employee to get new employment.

In most cases, employers will provide for education costs that are beneficial to their business, and so the otherwise deductible rule should apply such that no FBT is payable.



What is Australia’s “tax gap”, and how is it measured?

Every year, the ATO measures its revenue and compares that total against the amount of revenue it expected to make. Often, the two numbers are different. The ATO has labelled that discrepancy the “tax gap”.

The ATO’s projected revenue total is based on the amount of tax “theoretically payable” in a given year, assuming every taxpayer complies fully. The actual amount of tax collected is always much less, and the ATO says this is mostly due to a host of innocuous factors like administration expenses and employer obligations. Sometimes, though, less-than-efficient practices increase the gap.

Tax gaps also help the ATO to locate its administrative revenue leaks, and work on fixing them. According to the regulator, all estimates have multiple goals, including:

– measuring the types and levels of tax revenue losses from non-compliance, providing a view of the overall effectiveness of the tax system over time;

– supporting efficiency in the allocation of resources; and

– supporting perceptions of fairness and transparency in the tax administration’s efforts.

How is the tax gap actually created?
The ATO says tax gaps are made, at least in part, by “unintentional, careless or deliberate taxpayer actions that result in under-reporting of their tax obligations”. It says that as a result, it collects less revenue that would otherwise have been the case. But some taxpayers overpay – and the gap estimates “net off” overpayments and underpayments.

What are some recent gaps found?
In the 2014-15 financial year (the 2015-16 year isn’t fully accounted for yet), the ATO measured a series of tax areas and found sizeable gaps.

For example, it measured gaps for GST, luxury car tax and wine equalisation tax. In its measurements, it included a “voluntary compliance ratio” (VCR), which complements the gap number by measuring the proportion of taxpayers fully compliant with “all four pillars of compliance”.

These four pillars include:

– being correctly registered,

– reporting on time,

– paying on time, and

– reporting the correct amount.

  Net gap $ Net gap % of revenue Gross gap % VCR (equivalent to % of theoretical revenue)
GST 2.7 billion 4.9 10.6 84
Luxury car tax (LCT)* 15 million 3.3 4.8 92
Wine equalisation tax (WET)* 35 million 3.3 3.9 N/A

*estimate, not taking into account LCT refunds or WET producer rebates

How reliable are the gap measurements?
The ATO says tax gap estimates are best viewed as a trend over time, taking into account a considerable error margin. The “absolute dollar gap,” for instance, “should only ever be seen as a guide”.

“Given this imprecision in measurement, the International Monetary Fund recognises that tax gap estimates generally should not be used mechanically as performance indicators,” it says.

The ATO also concedes tax gap measurements will never help it achieve full tax law compliance, which means it will be virtually impossible to close all gaps. Tax gap estimates are part of a host of assessment processes designed to encourage compliance and build confidence in the system.

Ultimately, the data is there for you to use.



Capital gains tax record keeping tool

The ATO’s capital gains tax (CGT) record keeping tool allows you to record and save your asset and CGT event details, and helps us calculate your capital gains or losses.

For assets with a CGT event date, the tool works out your net capital gain or loss amount for the year by applying the CGT calculation method that gives you the best result (in other words, the smallest net capital gain).

You can print a copy of the calculation results for your records and to give us access, and the ATO says anyone using the tool can choose to remain anonymous.

Information you may need:

– asset purchase/acquisition costs

– expense records (such as legal fees, stamp duty, advertising, brokerage)

– borrowing expenses (such as loan application and mortgage discharge fees)

– records of any repairs, maintenance and improvement costs.

If you change or add any details relating to an income year for which you’ve already lodged a tax return, you may need us to amend that return for you. You can access the CGT tool direct here.



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