The mood in the room (hot issues arising from tax discussion groups)
3 October, 2019 | Steve Burnham
The mood in the room (hot issues arising from tax discussion groups)
Steve Burnham: Welcome to Tax Wrap, the podcast of Tax & Super Australia. Each fortnight we present news and insights to tax and SMSF practitioners. If you’ve got any questions, comments, or even suggestions, get in touch at firstname.lastname@example.org. I’m your host, Steve Burnham. Now, today I’ve got a special guest, I think, Josh Goldsmith. Hello, Josh.
Josh Goldsmith: Hello, Steve.
Steve Burnham: Josh, you’re a tax lawyer and you host quite a few of our tax discussion groups for Tax & Super Australia. So Josh, you come across a lot of practitioners…
Josh Goldsmith: Absolutely.
Steve Burnham: …you hear their problems and their whinges and their concerns and what they’ve got to contribute to the conversation. I suppose what I’m keen to talk about is what you’ve found from these practitioners, in your many conversations with them. What’s the mood in the room, as you put it earlier? What are they talking about and what are they concerned about?
Josh Goldsmith: Yeah, thanks Steve. Thanks for having me. I guess in my role I’m very fortunate, in the sense that I host two of the discussion groups every month and I’ve been doing this now for a year. What I really enjoy doing is being able to share a room with a bunch of really clever people. Something that I said very early on in the discussion groups is that you don’t want my one idea. The idea is not for me to tell you the answer. Because there are a bunch of very clever people in the room and let’s see what everyone thinks…
Steve Burnham: …and every one of them deals with hundreds, potentially, of their clients and taxpayers who have their own problems.
Josh Goldsmith: That’s it, that’s it. Let’s collectively reach resolutions and let’s collectively share ideas.
Steve Burnham: That’s the way to do it.
Josh Goldsmith: So I guess I’m very lucky in that sense. This, generally, is a very interesting time in the tax landscape. Obviously, being an election year does change things. I mean, in general, we’re only just starting to see legislation come through parliament, which is, I guess, to be expected.
Steve Burnham: It took a while, didn’t it. There was a potential for a great groundswell of change, had the opposition got in, but they didn’t. The incumbent government still needs to deal with legislation, and it’s just starting to come through, isn’t it.
Josh Goldsmith: Yeah, very much just starting to come through now. The most fascinating part of this election was tax was a big player in this election. Tax policies were significant. Obviously the Labor Party weren’t successful, but what they were proposing were quite dramatic tax changes. Without sharing a political view, us as tax practitioners needed to be well and truly on guard. To give an almost an unrelated analogy, this sort of reminded me of Y2K, where people talk how they needed to fill their bath with fresh water in case the tap wasn’t working.
Josh Goldsmith: Us, as practitioners, we didn’t know what the change was going to be and we didn’t know what entirely this was going to look like. We had to be well-equipped, in case Labor was to be successful.
Steve Burnham: Yeah, because people get anxious. I mean, taxpayers have a lot at stake. They come to the accountant or tax practitioner, maybe wringing their hands and ‘what am I going to do’, and we need to have answers, I suppose.
Josh Goldsmith: Absolutely. From memory, I think the election was the 18th of May. We had to spend the first half of this year basically getting equipped in case Labor was to be successful. We had to know what the minimum tax rate on trust distributions was going to look like. The franking credit refund, we had to know what that was going to look like. I mean, there’s a novel of changes that were going to come through.
Josh Goldsmith: That very much controlled the conversation for the first half of this year. What would this look like and what were the clients saying, particularly with self-managed super funds and the denial of refunds, franking credits, in self-managed super funds.
Steve Burnham: It was a big change.
Josh Goldsmith: Yeah. It was a significant change. Things that we saw… I mean, this came out of the budget, but the low and middle-income tax offset, it was something that was really attractive. So this is that $1,080 tax offset that we now know is a non-refundable tax offset.
Steve Burnham: That’s right, yeah. I mean, my feeling was that that wasn’t actually explained all that well to taxpayers. What was your take on that?
Josh Goldsmith: Yeah, I think that’s definitely right, Steve. I think it’s a really attractive policy. I think, when you go to a budget, when you say that, if you vote for us, you will get $1,080 back in your tax return, you’ll be $1,080 better off than if you weren’t to vote for us. Now that’s not entirely true, but nonetheless, it’s very good marketing. It’s a very good policy, because it’s simple, it was clear. It was attractive for those earning between mid $40,000 and $90,000 and then it started to phase away once your income was $126,000.
Josh Goldsmith: This was a really attractive policy and I think we’re seeing that. I think lodgements generally are way up on this time last year because people are keen to get the benefit of that offset.
Steve Burnham: Yeah. Were they earlier? I don’t know what the figures were, but I’ve heard anecdotally that returns were lodged earlier than in past years.
Josh Goldsmith: Yeah, definitely, and this is on the back of that $1,080. This wasn’t something for us to necessarily control, but this was something that… For individual taxpayers, this was attractive. Now, as we now sort of know, that’s a salary and wage earner.
Steve Burnham: That’s right.
Josh Goldsmith: This is a salary and wage earner benefit because it is a non-refundable offset. It’s attractive, it worked, but I guess the more significant changes were what was going to come out of Labor. These changes didn’t come through, but that didn’t mean that we didn’t have to spend a considerable amount of time bracing in case they did come through.
Steve Burnham: Yeah, no, exactly. So that was a concern up until the election came and went. Now we know where we are. But in discussions with people, with tax discussion groups, et cetera, what else came out of the conversations that you had?
Josh Goldsmith: Yeah, so something that’s been coming up quite a lot at the moment is… And we’re seeing this in cases near on every month over the last couple of months-
Steve Burnham: Really? Okay.
Josh Goldsmith: We’re seeing treatment of compensation payments really being a relevant thing now. If my memory serves me correctly, I think this is outlined in tax ruling 95/35.
Steve Burnham: 95/35, okay.
Josh Goldsmith: Yeah. 95/35 goes for about a hundred pages and it’s quite comprehensive, but if we were to sort of strip it all back… and this is the essence of every case… you work out, first and foremost, whether the sum is dissectable or undissectable. So this is an amount received in compensation.
Steve Burnham: Sorry, compensation for accidents, for losing your job, anything?
Josh Goldsmith: Anything, yeah. They’re basically lump sum payments. So if they’re dissectable, the approach generally taken by the ATO, and this is… whether it’s right or not right by law, but it is the approach taken by the ATO, it’s been the approach which has been informed by the jurisprudence… is that you use the underlying asset approach. So the compensation, you ask yourself, to what does this relate? If this relates to income, then this is basically treated on revenue account, and if this relates to a capital receipt or a capital payment, then it basically relates to capital.
Josh Goldsmith: But I guess the more interesting part of compensation payments, which comes up time and time again, is what do you do in the instance of where the lump sum is undissectable? So when you’ve got a compensation payment and it’s a lump sum, you don’t know what it relates to, but it relates to a bunch of different things. The deed of release, the terms in which the agreement was entered into, doesn’t specify what amounts relate to what components, so what do you do? Now, the treatment here is quite favorable for taxpayers, which is really nice, this is treated on capital account.
Josh Goldsmith: The benefit of this, Steve, of course, is that when it’s on capital account you can get the CGT discounts, which is really significant. So it is potentially discountable. There’s another benefit, too. And I guess, if we were to be more technical about this, what does it relate to? It relates to foregoing the right, and the ending of the right. So the right to seek compensation is CGT event C2. Then when that comes to an end, so you’ve got an intangible asset coming to an end by surrender or extinguishment, release, etcetera, I use CGT event C2, which is a discountable event. You go back to the time which the breach occurred, and if the time in which the breach occurred has been more than 12 months from the time of receipt…
Steve Burnham: Hey presto, 50%…
Josh Goldsmith: …50%, so that’s incredibly favorable. That’s even if some of the component may… If being able to be dissected… There may be an income component to it, but we can’t articulate or we can’t detail what that number actually is, so it’s all on capital, which is nice. There’s another component here which is even better. If this amount relates to personal wrong injury, illness, et cetera, that capital receipt is exempt from capital gains tax. So it’s a tax-free kick, which is really nice.
Josh Goldsmith: We’ve seen a case recently, where the taxpayer was arguing that it was undissectable, turns out that it was dissectable. The taxpayer argued that, all right, if it is dissectable, some of this amount relates to personal wrong injury illness, therefore the capital component should be tax-free. And that was right. I mean, as it happened, that that split, 88% of it related to the income of the taxpayer, treated on revenue account. 12% of it was capital tax-free. Now, I mean, I can’t remember the name of the case off the top of my head, but it came out a couple of months ago. I think we’re seeing time and time again… These may not be the most high profile cases, but this treatment of compensation payments is something that just seems to be incredibly relevant most months.
Steve Burnham: Yeah, really. It’s a lot of money I would imagine. I mean, potentially.
Josh Goldsmith: Really significant. The one thing too is that, as tax practitioners, being involved in the negotiations is really important. We often are engaged after the fact. When we’re after the fact… I mean, we’ve got this data that we need to analyze and work out to what extent does it relate to income or capital and what is the underlying asset, whereas when we’re engaged earlier, perhaps we can start to be of greater use to the client.
Steve Burnham: Okay, yeah. Does case law have a big influence in this sort of-
Josh Goldsmith: Oh, yeah, very big influence, very big influence. Tax ruling 95/35 is informed by case law and we continue to see case law. So when you get it, have a look at that tax ruling. When you do see a compensation payment and you wonder what to do with it, start with the tax ruling, certainly. Then have a look at some of those cases there, and then have a look at some of the more recent cases that may be more analogous. But it is something that there’s plenty of guidance around. I mean, in my very humble view, I think it’s a concessionary area of the law for taxpayers, because I think being able to treat amounts on capital, if they’re undissectable, is really favorable.
Steve Burnham: Yeah, yeah. If it works out that way. Especially, as you said, for personal injury, etcetera.
Josh Goldsmith: Yeah. Personal injury, wrong or illness, it can be exempt from CGT.
Steve Burnham: Right, right. Okay. That’s interesting, Josh. Is there anything else been keeping you busy?
Josh Goldsmith: Yeah. I mean, in terms of what else is coming out of these discussion groups… and this is coming out more in the questions… People are very interested in, from a Division 7A perspective, the application of what’s known as the 109RB application, which is the application for the commissioner’s discretion regarding Division 7A and deemed dividends. Now, when this arises… People fail to meet their minimum yearly repayments for a range of reasons. This is seeking this the commissioner’s discretion to not deem a dividend.
Josh Goldsmith: When this occurs, I guess the thing that sort of comes out… It’s almost on a jukebox, everyone keeps saying this. When you’re seeking the commissioner’s discretion generally, the biggest piece of advice that I’ve got… and this is certainly relayed by the other tax practitioners in the room… remedy the mistake.
Steve Burnham: Remedy the mistake.
Josh Goldsmith: Remedy the mistake. Do right.
Steve Burnham: Oh, yeah. Okay.
Josh Goldsmith: Fix it before you ask for the discretion. So then you can come in and ask for clean hands. So it’s like when you’re asking the commissioner’s discretion to remit certain charges or certain interest charges or penalties and whatnot. If you fail to lodge for six years but you’ve still got one outstanding and you’re seeking to waive the penalties for those six year periods, my advice is, fix that seventh year before you start to ask for the revision.
Steve Burnham: Oh, I see. Okay. Now I get it. Okay.
Josh Goldsmith: When you’re seeking commissioner’s discretion regards to minimum yearly repayments, have that payment made. So you might be late, but have that payment made and then seek the commissioner’s discretion to waive the date-
Steve Burnham: To go back and… yeah, yeah.
Josh Goldsmith: Yeah. So your problem is not that you haven’t made the minimum yearly payment, the problem is now that you were late on the minimum yearly repayment. It becomes a much easier argument to run and, certainly from my experience, the success of these is largely contingent on what have you done since. You can ask for the commissioner to take an educative approach and use this as a we’ll-be-better-next-time. If you’re going to do that, illustrate that you’re not going to be a recidivist. Illustrate that you have remedied it now and that you won’t be in this situation in the future, and you can detail why this is the case. But remedying your mistake or remedying the failure to meet the minimum yearly repayment is, I think, critical or successful application seeking the commissioner’s discretion.
Steve Burnham: Okay. Does it happen a lot, like do people do seek that discretion?
Josh Goldsmith: Yeah, it does. I mean, it’s obviously not the idea.
Steve Burnham: Isn’t there further… Isn’t a change to Div 7A coming? Is that on the books to be… I don’t know when, I forget when. Do you remember?
Josh Goldsmith: Yeah, so there are changes to Division 7A. We heard that these are going to be coming next year, June next year. It’s one of those that… I’ve got more confidence now that that will be the date, but I think we’ve been promised these Division 7A changes for a long time.
Josh Goldsmith: With these changes to Division 7A, there are quite dramatic changes proposed in the consultation paper. A lot of practitioners not happy about the consultation paper. There’s been a lot of noise from the profession. One of those things we have to be aware of, what these changes may look like. I suspect that when we get this draft legislation, it’s going to look different.
Steve Burnham: From what we’ve already seen?
Josh Goldsmith: Yeah, from what was indicated in the consultation paper. One of those things… Watch out, be mindful of it. Things like a distributable surplus are going to be foregone. It’s pretty dramatic changes, particularly with these pre-’97 Division 7A loans now being brought back on foot… is something that people are going to be mindful of. We’re almost going to have a uniform period of 10 years to meet your Division 7A loans, pre-’97 loans. People have sort of had it on their balance sheet and parked, where they’re now going to be asked to repay them. Again, in my humble view, I don’t think a pre-’97 loan is ever meant to sit there forever and a day. I think taxpayers ought to have been mindful of it, that they would have to repay them. Now, there are some pretty significant pre-’97 Division 7A loans sitting there. It’s one of those things that… Have a look, be mindful. Changes are coming.
Steve Burnham: Yeah, yeah. So be prepared as much as you can, basically.
Josh Goldsmith: Be prepared. Have a look at that consultation paper and be across it, because this will affect most of the clients in the private tax space. Division 7A is obviously a very important area of law and it’s about to change in a big way. June 2020’s when we expect these changes to come in so…
Steve Burnham: Which isn’t that far away, really, June 2020.
Josh Goldsmith: No that far away, yeah.
Steve Burnham: It’s not that far away…
Josh Goldsmith: This is going to be a really moving space, Division 7A.
Steve Burnham: Yeah, exactly. A lot of those sort of finer-detailed sort of topics… You probably heard the Harding case, on residency. That’s changed a lot of things. You mentioned distributions, and that’s another area where there’s just change about dealing with income, I suppose.
Josh Goldsmith: Yeah. I guess the world, Steve, as you could attest to, the world’s just getting smaller…
Steve Burnham: It is, yeah.
Josh Goldsmith: … and smaller, so international tax is becoming an area that, certainly from my perspective, I need to just continue to get sharper and sharper at. The Harding case is a really interesting one in terms of residency. You may have noted that the high court denied special leave, so it wasn’t heard by the high court. So that’s an interesting one. But that was an individual residency case.
Josh Goldsmith: In terms of what’s coming out of trusts, this is also a moving space. This Division 99B is an interesting one. There there’ve been a few cases regarding this. Probably the most typical application to watch out for is you have a foreign trust that makes a distribution to a resident beneficiary, so an Australian beneficiary. You’ve got to work out whether that amount assessable for the Australian taxpayer.
Josh Goldsmith: The golden rule essentially is… As a result of 99B, it starts to be quite a egregiously unfair. And then 99B, subsection two… Again, I don’t have a legislation in front of me, so don’t directly quote me on this, but the golden rule is basically treat that distribution as if it was received from a resident trust. So you’ve got to make a determination as to whether that amount is corpus or whether that amount reflects income. So a distribution of corpus of the trust won’t be assessable for the taxpayer, but a distribution of income will be assessable for the taxpayer.
Josh Goldsmith: What is corpus and what is income is a question that is not that easy to ask. There’s a case that came out last month, where we had a New Zealand trust. The taxpayer was arguing that it was corpus, the commissioner was arguing that it was income and naturally, you can see where this goes… It came down to an evidentiary question of whether there was sufficient documentation to argue that it was corpus. The fact that the taxpayer had two sets of accounts, both of which were different, both of which were deemed to be not factually correct, didn’t help.
Steve Burnham: Oh, really?
Josh Goldsmith: When you get a distribution of corpus, generally, from a non-resident trust, it won’t be taxable in Australia. When you get a distribution of income, it will be taxable in Australia. So yes, 99B is an inherently complex provision, particularly relevant where you’ve got non-resident trusts and distributions for non-resident trusts. It’s something that we do need to be mindful of.
Josh Goldsmith: But I guess the broader international tax space… Clients of all sizes now are starting to have international tax matters. It’s not just the big corporations that are dealing with-
Steve Burnham: I was going to say, does it just apply to individuals and other entities, or across the board?
Josh Goldsmith: Across the board, international tax is becoming more and more of an issue. Well, more and more of a consideration anyway. Just because there is just so much more travel, there is so much exchange of funds overseas. And it’s just so easy, it’s so accessible now.
Steve Burnham: Yeah, yeah, exactly. Before, you mentioned Div 7A, and I think you had some people talk to you about the benchmark interest rates that are applied there, even though locally… I mean, you know, RBA is pushing everything down, but that’s not the case?
Josh Goldsmith: Yeah, this is a bit anomalous. The Division 7A rates are still in the sort of mid-five percents, so it’s not consistent with what the RBA is doing. I mean, we’ve had two RBA cuts this year. We’re now bracing for another one in the next month or so and potentially two more before the end of the year-
Steve Burnham: Amazing, yeah.
Josh Goldsmith: So the RBA is going down, reducing the cash rate by 25 basis points every time they meet, pretty much. This is not reflected in Division 7A and the benchmark interest rate. I think we had a small increase this year, which is-
Steve Burnham: Really?
Josh Goldsmith: … anomalous. It certainly hasn’t moved dramatically. Tax practitioners are generally surprised by this. The mood of the room generally suggests that it’s perhaps not indicative with the market. I think it’s more of a statement. I don’t even see anything we can do about it. It’s just something to be mindful of, that perhaps you’d expect a cut when there are no cuts forthcoming in the benchmark interest rate.
Steve Burnham: I suppose, you know, it’s annoying. Not annoying, but practitioners have to deal with government and what they tell us to do and what they need to deal with them in the TPB. I mean that’s another… Well, it’s a body that the people have to deal with? What’s your feeling on how practitioners are interacting with the regulator?
Josh Goldsmith: Yeah. I mean there are a lot of authorities to really consider. I mean, certainly when we get changes, they can really come from two places. I mean, you can get a change from treasury, which is a change in the law and the black letter, and then you can get a change in the ATO, which would come out as a practice statement or a tax ruling or law companion guide or all sorts of different changes. There’s everything’s sort of forthcoming.
Josh Goldsmith: Then you’re sort of getting messages now from the Tax Practitioners Board, which is… I think there’s a little bit of confusion around the role of the Tax Practitioners Board. Again, I’m just the messenger here, but people are sort of querying the role of the Tax Practitioners Board and the messages that are coming out of it. There’s no doubt that the Tax Practitioners Board is really active at the moment, and I think that’s good. I think an active practitioners board is good.
Josh Goldsmith: The Tax Practitioners Board had been chasing down non-lodgement from tax agents. I mean, put simply, if a tax agent’s not lodging their own tax return, it’s like the son or daughter of the hairdresser having scruffy hair. We’re very good at looking after other people’s backyards, but we don’t know our own lawn. It’s one of those things that they’ve really clamped down on, tax agents who are not lodging. They’ve seen a dramatic increase in that.
Josh Goldsmith: They had a release last month, which I thought was really valuable, about an engagement letters and what should be in your engagement letters. I think it’s brilliant. I mean, this is the sort of stuff that tax agents want to see, certainly from the rumor. I certainly pointed this out, I think this is great [crosstalk 00:00:21:33]`
Steve Burnham: It’s interesting, because the TPB didn’t, they haven’t issued a pro forma, like a template, which is… It’s a bit hard to do that. We’ve actually had members asking us, well, do you have a template for an engagement letter, when we don’t. The TPB has guidance on what should be included, et cetera, in an engagement letter, which is something, I suppose.
Josh Goldsmith: Yeah, it is something. It’s nice to inform the existing practice of the members and of practitioners broadly. I think the Tax Practitioners Board is in the spotlight. I think the Tax Practitioners Board does a lot of good work. I think the Tax Practitioners Board has areas for improvement, so do you and I, Steve.
Steve Burnham: We all do, yeah.
Josh Goldsmith: Yeah, I just think that this is an area of focus right now. The Tax Practitioners Board are very active. They’re also under review and where they sort of sit is being considered. A lot of very clever people sit on that board and they do a lot of very good things. So yeah, it’s just an interesting space.
Steve Burnham: And so Josh, what else is coming out of the room when you’re talking to people, what are they talking about?
Josh Goldsmith: Yeah. Well, Personal Services Income is something that the ATO has even mentioned.
Steve Burnham: Oh, PSI.
Josh Goldsmith: Yeah, the old PSI.
Steve Burnham: The perennial.
Josh Goldsmith: The ATO have recognized that there’s been a lot of case law around this recently. The AAT’s heard a few cases about this. Certainly in our discussion groups, we discussed two of them last month and we’re about to discuss another one this month.
Steve Burnham: A case? Sorry.
Josh Goldsmith: Yeah, a case. I mean, three cases in a short space of time with PSI. It’s a difficult area generally, whether you a personal services business or not, and the implications of being a personal services business. I think the interesting space, for me, is… When you look at what’s happening with the corporate tax rates and there… They will be reduced in 2024, by 2024 certainly, and so will the individual tax rates. So the individual tax rates, it’s going to be this reduction, for most taxpayers, down to 30%. The corporate tax rate is going to be reduced down to 5%. So whether people seek to operate through a corporate entity and make Personal Services Income rules a consideration, it probably becomes less and less attractive to operate through an interim entity.
Josh Goldsmith: The other part, too, is that… You’ve also got other on-costs, WorkCover [crosstalk 00:23:49], that sort of come with it, the employment on costs. If I had a crystal ball in front of me, I would say in five years’ time, Personal Services Income is going to be less of an issue than what it is now.
Steve Burnham: Do you think that’s the aim of the developments?
Josh Goldsmith: Possibly, yeah. I mean, I’m not sure Personal Services Income informs it. It might be an ancillary objective or it might even be incidental or coincidental maybe, but it’s certainly something that, when you closer align the corporate tax rate with the individual tax rate, the attraction of operating through a business, through a separate entity becomes less and less attractive.
Steve Burnham: Especially when, as you said, you add those on-costs of things that you have to set up.
Josh Goldsmith: It just adds a layer of complexity where the effective tax benefit perhaps is reduced. I just think that’s a moving landscape. It’s certainly an active landscape right now. I guess what we were discussing in both the discussion groups that I do, the breakfast one in the evening one… It’s certainly an important part of people’s practices, there’s no doubt. My general gauge was that this is a part of the staple diet, that you just have to know about the Personal Services Income rules.
Steve Burnham: Yeah, because it’s going to come up. It must be interesting. I mean, for you and for me too. Test discussion groups, people are very keen on it. You get every practitioner turning up who’s going to have you-don’t-know-how-many clients behind them as it were, relying on them for advice. So they’re going to bring all that to the table. It’s a really good litmus test, really, of what’s out there and being discussed, so it’s good to hear that.
Josh Goldsmith: Yeah. I consider myself very fortunate to be doing what I’m doing because I get to share a room with a bunch of very clever people. You take my client experiences and you times them by 20 every time we get in a room. When you fill a room with 20, 25 people, you’re going to be getting 25 different ideas. When you fill a room with five people or 50 people, it’s just a multiplier of the client base.
Josh Goldsmith: We’re seeing some fascinating client examples come up. Probably the favorite part of the discussion group for me is we have almost conversation hour. If people have client queries that they wish to address, it’s… and without selling it too much… If someone has a client query that they just want to run by the group or they’ve got an idea, they present their client’s circumstance and you get the benefit of the whole room’s view.
Steve Burnham: So everyone chips in if they have an opinion or-
Josh Goldsmith: Everyone chips in.
Steve Burnham: … perhaps an experience from the past, which is a good thing.
Josh Goldsmith: You take your most complex client and you get the benefit of everyone in the room. You get the benefit of people with legal backgrounds, with accounting backgrounds, with big-client backgrounds, small-client backgrounds, international, self-managed super fund, GST. Everyone has their own little sweet spot and you’re now tapping into people’s sweet spots. I think that’s the real benefit and that’s the fortunate position that I’m in. I’ve been able to learn a lot from the attendees. This is why, as I was saying earlier in the interview, Steve, that I really push that. My view is just one view. Let’s hear everyone else’s view.
Steve Burnham: It’s funny, I’m in a discussion with… There’s a called Nathan [Yi 00:00:26:43], who does some of our presentations. Things I don’t think about usually, say estate planning, comes into the discussion if you’re looking at, say, SMSFs or trust distributions, all this sort of thing and, oh, there’s another aspect to that talk, estate planning. Half the time I didn’t think of it, but it’s there and it’s real and it makes a big difference, these sort of elements that, as you said, people bring to the table from their experience.
Josh Goldsmith: Yeah, definitely. I think that’s the great part of it. You have people who are better versed in dispute resolution, in controversy, in dealing with the respective revenue authorities. You have people who are really strong in estate planning, people who are really strong in the space of GST and payroll tax and SBT. They all talk about their lodgement programs and what’s on the radar and what they’re finding and what their software’s doing. I mean, software is a really interesting one. Sorry, I’m a bit tangential…
Steve Burnham: No, that’s good, yeah.
Josh Goldsmith: … but software is one… particularly around election time. It’s one thing to have these dramatic changes in policy, that’s where the election plays out and that’s what people hear, then there’s mechanically, what are we going to do about it?
Josh Goldsmith: So the question of… When you talk about the minimum tax on trust distributions, people querying mechanically, how’s this going to work? How’s the law going to work was question number one, and question number two is how’s the software going to work?
Steve Burnham: That’s true. That’s a big thing. Well, look at STP. That was a big change. People had to adopt something to get passed. It’s not actually 100% adopted yet, of course, and people still having trouble. But software, of course, has got to catch up to all the talk that happens in the lead up to those changes.
Josh Goldsmith: Yeah, definitely. So I guess where I sit, I probably act in more of a legal capacity. It’s all well and good that I have a grasp of what the law actually is, but then there’s another grasp of, mechanically, how does this work?
Josh Goldsmith: So when we assist a lot of our accountants around the office and they talk about… Non-commercial loss rules was one that, for example, came up, and they said, Josh, are you sure you’ve got the right position because the software doesn’t agree. So then we came back-
Steve Burnham: Computer says no.
Josh Goldsmith: That’s exactly what it was. So then we double, triple, quadruple checked ourselves and we ended up… Our position was right, we’re pretty sure of. We spoke to the person at the tax office and they said, no, apologies about the software, here’s what it should be and we’ll rectify on our end.
Josh Goldsmith: But it’s one thing to have the right position at law, which is probably where I spend most of my time working, but then there’s another position, mechanically, how does this work? And getting the software to match up with the position at law is not always as obvious as it sounds. I have a bit of sympathy for the software developers, basically. I mean, they need to be a step ahead of the curve.
Steve Burnham: I’m sure they earn their money, but as changes happen, you sort of got to feel for them trying to keep up, of course.
Josh Goldsmith: Yeah. I mean, we need to know how it works, they need to know how it works and then have the infrastructure to keep up with it. Then, if the infrastructure can’t keep up with it or the infrastructure’s slightly delayed on the change, then you have the accounts people on the ground who are really suffering the effects of software that can’t keep up with the change in the law. So it’s all well and good that we discuss proposed changes and consultation papers and drafts and whatnot, but if I was in the software development of all this, I’d be having a fit.
Steve Burnham: Yeah, gosh. Now, Josh, we’re sort of coming to the end of the tax time, 2019. What’s sort of issues and concerns and questions have practitioners had about individual lodgement this tax time? What are the watch-outs? What are the concerns?
Josh Goldsmith: Yeah. So, I mean, this is obviously a focus area when we’ve got individual lodgements. I mean, individual lodgements tend to carry on all year round, because you’ve got your middle of May lodgement dates and you’ve got those without tax agents who are lodging approximately now.
Josh Goldsmith: The one area that was a focus was how does this $1,080 work and when does that hit my account? That was a concern for a while, that the law wasn’t passed by 30 June, so that was a concern. But what we’re hearing a lot from the tax office now is work-related expenditure, which is a repeat of what the ATO was putting in the spotlight last year.
Josh Goldsmith: There was a release by the tax office called Dodgy Car Expense Claims. The word “dodgy” was their word, which was interesting. Making sure that you go through the proper process of recording your car expenditure, noting that the 5,000 kilometer… where you don’t need to show substantiating evidence… that doesn’t necessarily mean it’s a 5,000 kilometer free kick for everyone. You can put in that $3,300 deduction, that’s not how it applies. It needs to be reasonable, it needs to be accurate, you just don’t need to have a logbook on hand. I mean, that’s in the spotlight again. Also, laundry expenses, that $150 laundry expense.
Steve Burnham: Weren’t they finding that people were climbing up to the threshold and then, you know… There were many, many.
Josh Goldsmith: Often. Often, yeah. The ATO has been releasing proper guidance on what the entitlement to claim a laundry expense is. This is just because there are a lot of clients with laundry expenditure that perhaps shouldn’t be climbed. Again, it’s just something to focus on, work-related expenditures coming up time and time again.
Josh Goldsmith: The other one, too, this year certainly is… Rental properties are being targeted. Again, just be mindful. I think there’s a lot of misunderstanding around the allowable deductions in the space of rental properties. When you talk about allowable interest deductions, they’re often misunderstood, particularly when you’ve got instances of refinancing properties and whether they’re for investment purposes or private purposes. You go back to what is the actual purpose of the borrowing. A lot of that is misunderstood, particularly people are being told by their mortgage brokers or from the banks that the interest on certain debt will be deductible. Of course, mortgage brokers are not tax agents-
Steve Burnham: I was going to say, is it a bit of misinformation?
Josh Goldsmith: Yeah, I mean, it’s a misunderstanding. To be fair, it’s complicated. I mean, there is an area of complexity here. The other part too is that you just need proper advice. You need to make sure that you’re doing this right, because “My friend told me,” “My mortgage broker told me,” just doesn’t fly. It doesn’t fly.
Steve Burnham: The guy on the taxi just reckoned that I can claim this, yeah.
Josh Goldsmith: Yeah. I mean, the amount of times that myself and other practitioners would have been told that, “My friend did this,” or, “This person told me that I could do that. Can I do this,” that just doesn’t fly. By the same token, “My mortgage broker told me that I can claim a deduction,” is just not substantiation.
Steve Burnham: No. First of all, it’s not on paper. Any concerns about this whole vacant properties, the fees and things, in your experience?
Josh Goldsmith: Yeah, I mean the vacant properties one is controversial, isn’t it. It’s something that the industry is talking about a lot.
Steve Burnham: I think there’s some state-based schemes starting up. I know Victoria is looking at doing that.
Josh Goldsmith: Yeah. It’s an absentee surcharge. The one in the spotlight at the moment is an income tax one. This is a denial of deductions for vacant land and whether there’s a premises and what actually accounts for a premises and what is vacant land. There’s all sorts of complications with it.
Josh Goldsmith: Basically, the people that this is going to affect is people that buy land with the intention to develop on the land. They will generate assessable income, but they are yet to generate assessable income.
Steve Burnham: The point too soon kind of thing.
Josh Goldsmith: Yeah. It’s not an occupiable property at the moment or they’re about to demolish or all sorts of things, and they’re denied deductions along the way. Given that the intention is to derive assessable income, the efficacy of it is subject to dispute, but that’s just sort of what we’re facing. I mean, it is important to note that we can capitalize it.
Josh Goldsmith: It’s an interesting space, but in terms of the law of fairness and equity… This is a point that, Steve, we were talking about off fair that, particularly in a lot of cases that are coming out at the moment, the judiciary are making a distinction between their role and the role of the legislature. The judiciary is saying, it’s not for us to determine whether it’s fair or not, it’s for us to interpret and apply the law, which is the key distinction isn’t it, where you’ve got what is the role of the executive, the legislature and judiciary.
Steve Burnham: That’s true, yeah.
Josh Goldsmith: The AAT, the federal court, they’re not to determine whether it’s fair or not. There’s a case which came out last month or the month before, I forget, where someone was paid in arrears for their wages. Part of the payment related to a period in which they were a non-resident. They were assessed on the Medicare levy, even on that period in which they were a non-resident. The law of fairness would tell you that that’s not right. The tax law will tell you that salary is brought to account when it’s received, and this is just black letter.
Josh Goldsmith: So it’s one of those unfortunate instances where the taxpayer will be subject to the Medicare levy on that payment in arrears. Whether it’s fair or not, it’s not a question for the judges to determine. The question for the judges to determine is, what is the law, what are the facts, and how does it apply?
Steve Burnham: The letter of the law, but…
Josh Goldsmith: Yeah. I mean, there is an area of complexity and when there’s a strong reliance on judicial interpretation or when there’s a strong reliance on the existing jurisprudence and case law, that’s when the judges can start to analogize and distinguish and make determinations depending on the binding nature of the precedent. But when you’re determining whether the legislation is correct or incorrect, that’s not a role for the judiciary. The judiciary is to determine what is the law, what are the facts, and how does it apply.
Steve Burnham: Yep. Hence the arguable case, you could argue from some point.
Josh Goldsmith: That’s it.
Steve Burnham: From some point.
Josh Goldsmith: Agreed.
Steve Burnham: It’s a very rich reservoir of information you’ve got dealing there, Josh, with the discussion groups and your clients, of course. I hope you come back and tell us some more gems in a month or two, and fill us in about what the mood in the room is once again.
Josh Goldsmith: Thank you, Steve. Thanks for having me.
Steve Burnham: Thanks, listeners. Please tune in again next time.
Tax Wrap 201: Tax Wrap’s special guest is tax lawyer Josh Goldsmith, who hosts many of TSA’s tax discussion groups. Josh talks about the topics and issues that are generating a lot of interest from tax practitioners.