ASF TAKEAWAYS: The Superannuation changes have been long flagged and welcomed, but expect more administration burden. We anticipate the payroll software to automatically capture this change from 1 July 2022.
The trust distribution rule changes under s100A has taken us by surprise, as it is a very narrow interpretation and virtually renders family trusts redundant. We will provide further commentary on this issue on the tax ruling is finalised.
Contractors vs employees has been an increasing focus area of case law, with the emergence of the gig economy in the last decade. It has been challenging to determine where the individual would sit, as the outcome was determined subjectively. The use of actual written agreements as the determining factor could reduce the risks.
SUPERANNUATION CHANGES
From 1 July 2022, the following legislation amendments will apply:
Abolishment of the work test for individuals between age 67 to 75 who make voluntary contributions i.e. non-concessional contributions and salary sacrificed contributions into super. Previously, the individual was required to have been gainfully employed for 40 hours in a 30 day period, but this change renders this requirement moot. Note individuals aged between 67 and 75 years must still meet the work test to make personal deductible contributions unless the work test exemption for recent retirees with less than $300,000 in total superannuation balance applies and superannuation balance cap limits still apply.
Individuals under 75 years of age at anytime in the financial year may trigger the bring forward non-concessional contributions rule in a particular financial year. Previously, the age limit of 66 applied, so this change would give individuals far greater time to boost their superannuation. Note that the total superannuation balance limits still applies.
Eligibility age for downsizer contributions will reduce from 65 to 60 with no change to other eligibility criteria. We aren't fans of this change, as the downsizers contribution does not affect the total superannuation balance and was a strategy to allow taxpayers to have more than $1.6m in superannuation. The loss of this is offset partially by the extra time to contribute non-concessional changes flagged above.
Removal of the $450 per month threshold before an employee’s salary or wages count towards the Superannuation Guarantee. Meaning people earning less than $450 per month will be eligible to receive employer SG. This, unfortunately, creates some administrative burden, and we recommend that you ensure that all active employees have superannuation details on file and details be updated with the superannuation clearing houses by 1 July 2022.
Increase the limit on the maximum amount of voluntary contributions made over multiple financial years that are eligible to be released under the First Home Super Saver Scheme from $30,000 to $50,000.
The Income Tax Act will be amended to allow SMSF trustees to choose their preferred method of calculating exempt current pension income (ECPI) when they have member interests in both the accumulation phase and retirement phase for part of the income year.
From 1 July 2021, the maximum number of members for self-managed superannuation funds (SMSF) and small Australian Prudential Regulation Authority (APRA) funds increased from four to six. This will allow larger families to keep superannuation assets in one vehicle.
TRUST DISTRIBUTIONS UNDER ATTACK
The ATO have recently released multiple draft tax rulings and guidance that will change the way trust distributions are used with family members. Whilst it has not technically gained ascent into law yet, it is imperative to understand how these changes will affect your tax affairs. It’s one of the most significant developments for the taxation of trusts in over two decades.
TR 2022/D1, PCG 2022/D1 and TA 2022/1 have been released as drafts and focus on decisions made by trustees which may ultimately attempt to reduce or eliminate the income of the primary controller.
Broadly, TR 2022/D1 states that the arrangement with regards to trust distributions will not come within anti-avoidance trust tax laws if they constitute ordinary family or commercial dealings.
The draft tax ruling and practical compliance guidelines go into depth about what is, and what is not, an ordinary family or commercial dealings. However, in short, if you are operating your business in a trust structure and you reinvest your earnings back into working capital of your business, the rules will not affect you.
The ATO has also released a Taxpayer Alert TA 2022/1, which discusses beneficiaries who are adult children of the controllers of a trust. Arrangements where an adult child receives a substantial distribution but does not receive an actual economic benefit may attract the ATO's attention. This is expanded to benefits paid to parents or siblings not working in the business - effectively drawing a line attempting to exclude using family beneficiaries at lower income tax brackets.
The ATO plans to invalidate trust distribution which could mean that the tax would be levied on the trustee of the trust at 47%, along with potential penalties.
The ATO have stated that they can go back as far as the 2015 tax year to review trust distributions. We believe this is very unfair and goes against the commonly held practice for many years. Submissions have been made by all the major professional taxation bodies to seek clarification of the Commissioners' intentions.
AM I A CONTRACTOR? HIGH COURT RULINGS PROVIDE CLARITY
One issue that our clients consistently have to grapple with is whether the contractor working for the business could be deemed to be an employee due to the multi-factorial tests approach that the courts have taken.
This basically means that a variety of questions are asked regarding the relationship, and a subjective view is formed based on the responses. Common questions asked include;
- Does the individual have the ability to delegate the work to another, or is that individual required to do the work only?
- What is the basis of payment - is it on an hourly basis or is it on the successful completion of the task?
- Who provides the equipment, tools and other assets?
- Does the individual work under direct supervision, and do they have discretion as to how the task is completed?
- Who takes the commercial risk i.e. who is liable for the costs of rectifying any defects?
Interestingly, in the two most recent cases around this subject matter, the High Court of Australia have relied on the written agreements between the parties. That is, if the two parties have a written agreement stating that the relationship is that of a business/contractor, prima facie, the Courts will rule the same.
We are awaiting the Australian Taxation Office views on this matter, but it could have the impact of simplifying this complex area of taxation.