Property depreciation tax changes passed

As part of the 9th of May 2017 federal budget, the Australian Government proposed amendments to legislation relating to plant and equipment (division 40) deductions.
The proposed changes, outlined in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 , have now been legislated after being passed by the Senate on the 15th of November 2017.
This has resulted in a change to the Income Tax Assessment Act 1997 and denies property investors from claiming income tax deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) within residential investment properties.
The government’s intention in making this legislation amendment was to deliver an integrity measure which addressed concerns that some plant and equipment assets were being depreciated by successive property investors in excess of their actual value.
These changes affect investors who purchase second-hand residential properties after 7:30pm on the 9th of May 2017 by limiting the depreciation they can claim on existing plant and equipment assets.
The following video has been prepared by BMT Quantity Surveyors to explain the changes.

ATO debts to be reported to credit agencies

The Federal Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) included an announcement that from 1 July 2017 the Australian Taxation Office (ATO) can disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage those debts. This will be a new and unprecedented power for the ATO.

This measure is part of the Government’s strategy to reign in overdue tax and improve transparency of taxation debts, and will initially only apply to businesses with an Australian Business Number and tax debt of more than $10,000 that is at least 90 days overdue.

The policy should not come as a surprise given it has been on the Government’s agenda for a number of years, having been touted at least as far back as 2014.

The MYEFO confirms the ATO is owed $19b in overdue tax, approximately two thirds of which is owed by small businesses with a turnover under $2m. The rising level of debt, particularly in small business, presents a growing challenge for the ATO as they are faced with managing the delicate balance of collecting tax arrears without (where possible) suffocating the cash flow of the business.

Compounding this challenge, the current consequences for failing to pay the ATO have no real tangible impact on the day-to-day operations of a business. Failure to lodge and general interest charge penalties, and in some instances imposing personal liability on directors, do not typically influence a business continuing to trade. This means that ATO debt is often pushed to the back of the queue, and will be allowed to accumulate—often until the ATO pursue legal proceedings.

That landscape is about to change, as defaults being recorded on a taxpayer’s commercial credit file will have immediate and lasting consequences for a defaulting taxpayer. A credit default is a black mark that lasts for five years, and creates an environment where support from financiers may be withdrawn and supplier credit stopped.

SMSF pension fund tax exemption ceases on death

A self managed superannuation fund that is paying an income stream (pension) is exempt from tax including capital gains) on the earnings from assests used to pay the pension.
The ATO has issued a draft ruling TD2001/D3 discussing its views on when a pension commences and ceases.

The draft ruling confirms that the ATO believes that a:

superannuation income stream ceases as soon as the member in receipt of the superannuation income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the superannuation income stream, to receive an income stream on the death of the member.

THe consequences of this is that any fund investment sold at at profit to fund the payment of death benefits to the member’s benficiaries with be taxable capital gains for the fund.

This ruling will not comes as a surprise as many commentators have reached the same interpretation of the law.

One way to avoid or mininise this additional tax sting on death is for the trustees to try to avoid building up large unrealised capital gains. Where the fund invests in listed investments such as shares, the trustees could regularly sell growing shares and repurchase them at the same price. This would realise the capital gain while the fund is still tax exempt.