Deductions for vacant land, tax debt disclosure and SG integrity

By the time this article is published, this bill would have been enacted and have passed into law with some late amendments. 

So, what changes are being proposed? I will deal with each matter separately.

Vacant land

Changes for deductions pertaining to vacant land where first muted as part of 2019-20 budget under the heading “Tax Integrity – deny deductions for vacant land”. The policy intent was to target taxpayers that have been claiming deductions for costs associated with holding vacant land when it is not genuinely held for the purpose of gaining or producing assessable income. Understandably it is difficult to enter into the mind of the taxpayer to substantiate intent. The problematic nature of proving intent has resulted in the government introducing a new section (S26-102) to deny deductions for expenses incurred in relation to holding vacant land. There are two main exceptions to the denial of deductions as follows:

• Land used or held available for use in carrying on a business by the taxpayer or taxpayers affiliate;
• S26-102 does not apply to a corporate tax entity, MIT, a superannuation plan excluding SMSF.

The impact of new measure will be a denial of a deduction even though in some cases the vacant land is earning assessable income. The loss of deductions may go into cost base for CGT purposes as part of the third element of cost base but are not included as part of reduced cost base. In the event that the costs would create or increase a capital loss then they are permanently denied.

The definition of vacant land for the purposes of measure is as follows: there is no substantial and permanent structure in use or available for use on the land having a purpose that is independent of and not incidental to, the purpose of any other structure or proposed structure.

The original version of the bill meant that a loss of deduction apples even if the land is used by an unrelated third party on arm’s length commercial terms in carrying on a business. This went beyond the original policy intent when it was first announced. Amendments to the bill will ensure that a deduction will still be available for land used in these circumstances. 

Loss of deduction could potentially apply to newly constructed apartments impacted by structural defects. For the purposes of determining whether the land is vacant S26-102(4) treats a building as not being a substantial and permanent structure if it is residential premises constructed, or substantially renovated, unless the residential premises:

• Are lawfully able to be occupied; and
• Are leased/hired/licensed or available to be leased/hired/licensed.

Due to its potential application to investors who have purchased apartments with structural defects, the Senate flagged its intention to amend the proposed bill, which the government supported. The net effect will be that the loss of deduction will not apply if the land becomes or is treated as being vacant due to significant and unusual events or occurrences outside the reasonable control of the entity, such as fire, flood or substantial building defects. Investors impacted by apartments with substantial building defects will therefore not lose their ability to negatively gear their property through no fault of their own but the concession is only available for up to three years.

Tax debt reporting regime

Tax debt reporting regime first surfaced in February 2018 as part of Treasury Laws Amendment (Tax Transparency) Bill 2018. This initiative has re-surfaced after much consultation. The intent is to allow the ATO the ability to disclose the tax debt information of businesses who do not pay their debts on time that fall within the class of taxpayers (outlined in the legislative instrument), to credit reporting bureaus (CRBs) in certain circumstances. The major change from when it was firstly tabled, is lifting the tax debt threshold for reporting from $10,000 to $100,000. This significantly reduces the number of taxpayers that will be impacted by this new initiative and allows processes to be refined in case there are unexpected consequences that could lead to unfair outcomes on business taxpayers. The higher threshold will remove smaller business taxpayers from the reporting regime, allowing the new measures to apply to larger players who are better placed to deal with any potential unintended consequences. 

The IPA understands and supports the underlying motivation of the proposed legislation, but it would have liked to see more safeguards. 

The consequences for a taxpayer of having their tax debt information disclosed to CRBs can potentially be very serious. For example, such information could lead to difficulty accessing finance, which could have broader ramifications for the business. We are particularly pleased that the government has moved slowly and through the ATO, conducted extensive consultation to date on this measure. The legislative instrument contains certain conditions and safeguards that must be satisfied, which reflects the sensitivity of this measure and community expectations. 

The IPA acknowledges that the tax debt disclosure proposed is aimed at ensuring that those failing to pay their tax debts on time are deprived of any advantages they might have over those complying with their tax obligations on a timely basis. The transparency amendments reduce the incentive for a taxpayer to prioritise the payment of their non-tax debts over their tax debts given both types of debt may affect the taxpayer’s credit worthiness. This increases the incentive for taxpayers to pay their tax debts in a timely manner and will reduce the unfair competitive advantage obtained by taxpayers that do not pay their tax debts on time over taxpayers who comply with their tax obligations. It also allows CRBs to provide their customers with more complete information to improve their ability to make informed decisions about the risk of extending credit or terms of trade to a business with unpaid debts. Some credit providers already request tax debt information directly from the client as part of their normal processes, but other providers may be unaware of existing overdue tax debts.

It is also appropriate, however, that the legislative framework maintains a degree of protection for the taxpayer given the potential consequences. Tax debt amounts that are subject to dispute will not be disclosed. This would ensure a degree of procedural fairness in the system that becomes critical when information related to debts is made available to those purchasing credit reports. The proposals also allow the Tax Office to defer disclosing business tax debts where there is a genuine difficulty for a taxpayer to pay the debt. Such circumstances include natural disasters inter alia, which are general safeguards supported by the IPA.

The oversight of the credit reporting agencies has been left to the ATO to administer. The ATO has now published its administrative approach to the disclosure of tax debt information to CRBs. Included in this document will be the strict protocols contained in the terms and conditions that CRBs must comply with in order to be allowed to participate in the reporting arrangements. Any non-adherence by CRBs can lead to termination of the information sharing arrangement. 

As stated earlier, the ATO is responsible for adherence to stated policies by the CRBs. If CRBs do not adhere to the reporting standards, the ATO can terminate their registration, which should act as a strong deterrent for any nonperformance on their part. Notwithstanding, given the dire consequences on a business taxpayer, we believe that the legislative framework is the appropriate place to enshrine some of the important safeguards the ATO will try and enforce. In addition, penalties and compensation should also have been part of the legislative framework in the event that a taxpayer is unduly impacted.

The ATO administrative approach states that if an entity no longer meets the criteria for reporting, CRBs will be instructed to remove tax debt information within two business days of ATO notification, and to cease showing or using the data in an entity’s credit report or credit history. While this addresses a key concern, no detail is given on the ATO’s reporting terms or the penalties which will be imposed in the event of non-compliance. Ideally, we would have preferred a legally enforceable obligation to remove tax debt information by CRBs. Compensation should also be made available to any affected taxpayer in the case of misuse of information.

The ATO intends to implement the measure gradually, which is commendable. As part of the gradual implementation, the initial phase will focus on raising community awareness of the measure and its implications. During this time, the ATO will build awareness of the measure through communication activities such as newsletters, articles, and forums. Under the ATO’s phased implementation approach, only companies that meet certain criteria will initially be reported. This will provide additional time for other entities to become aware of the new measure, recognising the impact of reporting on business activities and personal affairs. Gradually, implementation will be expanded to other entity types such as partnerships, trusts and sole traders. 

Salary sacrifice integrity

The anomaly allowing employers to use employee salary sacrificed super contributions to satisfy their super guarantee (SG) obligations first surfaced in December 2016 when the government established the Superannuation Guarantee Cross-Agency Working Group. On 14 July 2017, the Minister for Revenue and Financial Services announced that the government would amend the Super Guarantee (Administration) Act 1992 (SGAA) to implement recommendations made by the Cross-Agency Working Group to close loopholes that could be used by employers to short change employees who choose to make salary sacrifice contributions into their superannuation accounts.

The amendment was included in Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.2) Bill 2017, which unfortunately lapsed prior to the election. The integrity measure has now resurfaced in the current bill.

As it currently stands, salary sacrificed amounts can count towards employer contributions that reduce an employer’s mandated SG contributions. In addition, employers can calculate SG obligations on a (lower) post salary sacrifice earnings base. 

Whilst we fully support the proposed amendment, we recommended that the loophole be closed effective from the start of this financial year namely 1 July 2019 instead of applying from 1 July 2020. Given the delay experienced to date in getting this loophole rectified, it warrants a retrospective start date to stop the legalised theft of superannuation from employees who are salary sacrificing super contributions. Some of the other changes in this bill, have a 1 July 2019 start date.

It’s ironic that while we are discussing an SG increase to 12 per cent, some employees may not have been receiving the current 9.5 per cent until the loophole is closed. 

Tony Greco FIPA, general manager of technical policy, IPA