November 2023: Business & SMSF Compliance Activity

The ATO has ramped up compliance activity in the self managed super fund (SMSF) space in response to an increasing number of funds that have been identified as not complying with superannuation obligations. For the 2023 year, the ATO says it has issued double the amount of tax and penalties when compared with the 2022 income year, and the number of disqualifications has tripled.

SMSF Compliance Activity Escalation

In the fiscal year 2023, the ATO undertook compliance measures resulting in the imposition of an additional $29 million in income tax liabilities, administrative penalties, tax shortfall penalties, and interest charges upon SMSF trustees and/or members. This amount represents a twofold increase compared to the tax and penalty figures assessed by the ATO in 2022.

Furthermore, the ATO reported the disqualification of a total of 753 trustees during the 2023 fiscal year, marking a threefold surge in trustee disqualifications compared to the previous fiscal year of 2022.

The ATO has identified the primary reason for imposing penalties as the unauthorised early withdrawal of superannuation benefits by fund members. It serves as a reminder to SMSF trustees of their obligation to ensure that fund members meet the requisite conditions for benefit release before authorising any fund disbursements. Additionally, trustees should be mindful that certain conditions of release may entail limitations on the form of benefit (e.g., lump sum or pension) or the amount of benefit that can be disbursed.

Common conditions of release include the fund member having reached preservation age and retired, or commenced a transition-to-retirement income stream; ceasing an employment arrangement on or after the age of 60; being 65 years old even though they haven’t retired; or having died. If the common conditions of release aren’t met, where a member meets eligibility requirements under certain special circumstances, they are able to have at least part of their super benefits released before reaching preservation age.

These special circumstances include that the fund member:

  • has terminated gainful employment;
  • is temporarily or permanently incapacitated;
  • is suffering severe financial hardship;
  • meets conditions for compassionate grounds;
  • has a terminal medical condition; or
  • is taking part in the first home super saver scheme.

Besides targeting illegal early release, the ATO has reminded trustees of SMSFs that their fund must be audited every year by a suitably qualified auditor and an annual return must be lodged by the due date.


Small business litigation funding

A recent report from the Inspector-General of Taxation and Taxation Ombudsman (IGTO) has proposed enhancements to the small business litigation funding program. These improvements aim to provide small businesses with better access to justice and fairness.

The original purpose of this funding program was to address the inherent disadvantages that small business taxpayers often encounter when dealing with the Australian Taxation Office (ATO). The ATO possesses substantial resources and legal expertise, making proceedings against them complex and costly.

Under this program, small business taxpayers who represent themselves in disputes with the Commissioner of Taxation at the Administrative Appeals Tribunal Small Business Taxation Division can qualify for litigation funding. This funding becomes available when the ATO engages external legal representation. Eligible small business taxpayers would have their reasonable legal representation costs covered.

The IGTO’s report was primarily based on two completed dispute investigations. In these cases, taxpayers raised concerns that the ATO had attempted to limit the funding to levels insufficient to cover their legal expenses adequately. Additionally, questions were raised regarding the ATO’s methodology for calculating reimbursements, which taxpayers were not informed about when they entered into these agreements. Furthermore, the ATO’s frequent emails to the legal representatives of taxpayers, questioning their bills, were found to be disruptive to the preparation of their cases.


Small Business – Lodgment Penalty Amnesty Program

On 9 May 2023, as part of the 2023-24 Budget announcement, the government introduced a Lodgment Penalty Amnesty Program tailored for small businesses. The primary objective is to encourage these businesses to re-engage with the tax system and bring their financial obligations up to date.

This amnesty initiative covers overdue income tax returns, business activity statements, and fringe benefits tax returns that had originally been due between 1 December 2019, and 28 February 2022.

Small businesses that meet the eligibility criteria have the opportunity to benefit from this program by submitting their overdue forms between 1 June 2023, and 31 December 2023. The key advantage is that any penalties related to late lodgment will be automatically waived during this period, without the need for a separate request for remission.

To qualify for this amnesty, small businesses must have had an annual turnover of less than $10 million at the time when the initial lodgment was due. However, it’s important to note that privately owned groups or individuals with a net wealth exceeding $5 million are not eligible for this program.


Business losses vs non-commercial losses

It is important for taxpayers in business to know the difference between business losses and non-commercial losses.

When it comes to business losses, taxpayers generally make a business tax loss when the total deductions they can claim for an income year exceed the total of their assessable and net exempt income for the year.

If a taxpayer’s business makes a tax loss, they may be able to carry forward the loss and claim a deduction for their business in a future year.

The structure of the business can affect whether the loss is offset and claimed in the current year, or rather carried forward and claimed as a deduction in a later year.

Sole traders or individual partners in a partnership may be able to offset their business losses against other types of assessable income for the same income year.  Alternatively, they may be able to defer the loss or carry it forward and offset it when they next make a profit. Taxpayers who are operating a company may (if they satisfy certain criteria) be able to carry forward a tax loss for as long as they want and choose the year in which they claim the deduction (and trusts can also potentially carry forward business losses).

non-commercial business loss is a loss incurred from a business activity that is not related to the taxpayer’s primary source of income, either as a sole trader or as a partner in a partnership.  The activity may be one that is likely to be largely unprofitable and be lacking a significant, business-like purpose or character.

Generally, individual taxpayers cannot offset non-commercial losses, and need to defer them until they make a profit from the business activity.  However, taxpayers who have been affected by flood, bushfire, or COVID-19 over the past few years may be able to offset their current year’s non-commercial loss (but not their previous year’s deferred losses) without applying for a private ruling.


ASIC calls on lenders to support customers

Amidst the current challenges posed by the escalating cost of living and the concurrent rise in interest rates affecting Australian households, it is evident that an increasing number of individuals are experiencing financial distress. In response to this backdrop, the Australian Securities and Investments Commission (ASIC) has issued an open letter directed at various financial institutions, including banks, credit providers, and lenders. This letter serves as a call to action, urging these entities to ensure that their customers receive appropriate levels of support.

ASIC has drawn attention to Section 72 of the National Credit Code, emphasizing that credit providers must consider modifying a customer’s credit contract if they receive notification of the customer’s inability to meet their credit obligations. Additionally, credit providers are reminded of their obligation to conduct their credit-related activities efficiently, honestly, and fairly, as mandated by their licenses.

To fulfill these obligations, lenders must proactively communicate with their customers, explaining the circumstances in which customers can request hardship assistance and outlining the available options. Furthermore, if a request for hardship assistance is denied, lenders must provide written reasons for the denial and inform customers about alternative recourse options, including the possibility of submitting a complaint to the Australian Financial Complaints Authority (AFCA) regarding the decision.

Through these measures, ASIC aims to promote transparency, accountability, and consumer protection within the financial sector during these economically challenging times.


The “Airbnb” Tax

Property investors that choose to utilise their property for short-term stays (or leave it vacant) are firmly in the sights of the regulators. 

The Victorian Government’s recent Housing Statement announced Australia’s first short-stay property tax. The additional tax, which is scheduled to come into effect from 1 January 2025, is expected to generate $70 million plus annually. The Short Stay Levy will be set at 7.5% of the short stay accommodation platforms’ revenue – so, a few days in Melbourne at $850 will cost an extra $63.75 taking the stay to $913.75.

According to the statement, there are more than 36,000 short-stay accommodation places – with almost half of these in regional Victoria. More than 29,000 of those places are entire homes.

Airbnb’s ANZ Country Manager Susan Wheeldon however says that “short-term rentals in Victoria make up less than one percent of total housing stock. Acute housing issues existed long before the founding of Airbnb, and targeting these properties is not a long-term solution.”

What happens overseas?

Bed taxes in some form are not uncommon internationally but it is unusual to isolate one form of tourist accommodation from another as the Victorian Government has chosen to do. Also unusual is the 7.5% rate – many local taxes on short-stay accommodation are in the 5% range (despite California’s Transient Occupancy Tax of up to 15% depending on the region you are staying).

Do restrictions on Airbnb create rental stock?

In a 2017 study, Professor Gurran and Professor Peter Phibbs found that Airbnb absorbed 7% of stock in one Sydney municipality.

So, where is all this going? Governments are unlikely not to take advantage of the opportunity to share in what has become a lucrative short-term rental market. What that looks like will really depend on the States and Territories. Beyond revenue, further regulation is likely to ensure that private gain from short-term rentals is not at the expense of the supply of long-term accommodation.

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