On 13 April 2013, the Deputy Prime Minister and Treasurer, the Honourable Wayne Swan MP issued a media release foreshadowing a $2000 per annum cap on deductions for “self-education expenses”.

On Friday 31 May 2013, the Assistant Treasurer showed his support for the proposal in a Media Release announcing the issue of a discussion paper for the proposal in which he described the measure as “a down-payment on the Gonski reforms underpinning our National Plan for School Improvement.” 

The Treasury website announcing the release of the discussion paper helpfully explains that the measure is a “reform to better target education expense deductions” and ensure that [the Gonski reforms ] are  sustainable.

To help deliver these reforms and ensure that they are sustainable, a $2,000 cap on work‑related education expense deductions will be introduced from 1 July 2014. When this measure was announced, the Government made it clear that it would consult.  Part of this consultation process is the release of a discussion paper.

 The discussion paper Reform to deductions for education expenses examines the current treatment of education expenses including what qualifies as an education expense, and works through a range of issues related to this cap, such as the effect of the cap on the depreciation of capital assets relating to education, the current $250 no‑claim threshold and personal services income. The proposed changes in the income tax legislation and fringe benefits tax legislation are also outlined.

The Government welcomes views on this discussion paper, and written submissions will be accepted until 12 July 2013.

In case you were wondering whether the proposals extended to continuing professional development costs such as attending conferences, the discussion paper includes a list of the types of costs that are targeted:

The following expenses are some examples of what will be included in calculating the cap:

•  tuition fees, including fees payable under FEE‑HELP and self‑education expenses paid with a OS‑HELP loan;
• registration fees for conferences, workshops or seminars;
• textbooks and professional or trade journals;
• stationery and photocopying;
• computer expenses, including decline in value (depreciation);
• student union fees and student services and amenities fees;
• accommodation and meals when participating in a course that requires a person to be away from home for one or more nights;
• running expenses if there is a room set aside for education purposes — such as the cost of heating, cooling and lighting that room while used for studying; and
• travel expenses for travel from home to a place of education and back, and from work to a place of education and back.

As you would expect, the list is not exhaustive.  “Deductions for a range of expenses are not affected by this measure.  For example, taxpayers will continue to claim deductions, provided they meet the necessary tests, for the following expenses:

•  professional membership fees;
•  overtime meal expenses;
• travel expenses;
• home office expenses;
• professional indemnity and income protection insurance; or
• protective clothing and uniform expenses.”

In case you were wondering about apportionment:

 Where an education expense is included in a payment for broader services, the component relating to education will need to be apportioned and will be included in the calculation of the cap. For example, if the membership fee of a professional association includes a certain number of hours of professional development or training programs that are included in the membership, the education element of the membership fee must be apportioned and included in the cap.

 In other words, if membership to an organisation contains an allowance for continuing professional development training, the organisation needs to itemise the value of this training component. 

While employers that meet employees’ costs of professional development or education will not have deductibility or the FBT “otherwise deductible” rule affected, the new measure will apply to salary sacrifice arrangements:

 As part of the proposed measure the Government will ensure no FBT liability arises in respect of employer‑provided education expense payments.

 However, the intent of the measure may be undermined if employees can salary package education expenses. If FBT was not payable, the employee would effectively be able to access the deduction in another form. Therefore, the FBT ‘otherwise deductible rule’ will not apply where the education is provided through a salary packaging arrangement.

Having identified the mischief in the operation of the current law that must be targeted, the discussion paper poses 15 questions for consultation:

1.         In your industry or field, are there studies or courses that are compulsory and must be completed in order to meet licence requirements?

a)             What is the average amount of the expense?

b)            What is the highest amount of the expense?

c)             What is the nature of these courses?

2.         Is training undertaken in your industry predominantly held in Australia or overseas?  Can you provide examples? 

3.         In employment relationships, are employees largely obliged to incur work‑related education expenses themselves or are they employer provided?  Do you anticipate this changing in response to this measure?

4.         Are you aware of examples where education expense deductions can be claimed under the current arrangements, even where significant private benefits are enjoyed?

5.         Are there any lessons for Australia in the experiences of other countries with restrictions on education expenses deductions?

6.         Should the $250 no‑claim threshold under section 82A of the ITAA 1936 be removed when the $2,000 cap is introduced?

7.         How should this be prioritised?

8.         What types of assets that relate to an education activity are placed into a low‑value pool or similar small business pool? 

9.         What are the advantages/disadvantages of the ‘reasonable estimation’ method proposed above?

10.      Is the use of low‑value pools under these circumstances appropriate?

11.      Are there any unintended consequences from the proposed reforms?

12.      What practical aspects of the proposed reforms need further consideration?

13.      Are there any interactions with other areas of the tax law that need to be addressed?

14.      Do you consider that further amendments will be required to the tax law outside of those already mentioned in the discussion paper?

15.      Are there alternative approaches that you would like to see considered?  How would they work in practice and are there any precedents in Australia or other jurisdictions?

Good luck!  You have until 12 July 2013.

PS – don’t mention GST input tax credits.

A media release from the Treasurer, Wayne Swan, today announces the Government’s intention to limit tax deductibility for education expenses to $2,000 per person per annum.

The limit is to apply for outgoings incurred from 1 July 2014.

The Treasuer explians the mischief as follows:

Without a cap on the amount that can be claimed under this deduction, it’s possible to make large claims for expenses such as first class airfares, five star accommodation and expensive courses.

The Treasurer’s  “education expenses” include:

formal qualifications and associated tuition fees, textbooks, stationery and travel expenses and also conferences, seminars and self-organised study tours.

While this statement implies that the cap is directed at “formal qualifications”, as opposed to training and professional development, the Treasurer’s position is murky because the Media release indicates that the measure may be intended to extend to training:

This is a targeted reform and the majority of those with self-education expenses will not be affected by this change.

According to the most recent ATO data, the typical claim for formal qualifications is less than half the proposed cap at $905. For other expenses, such as conferences, seminars and workshops, including those held locally, the typical claim is only a few hundred dollars, remaining well below the cap.

Currently employers are not liable for fringe benefits tax for education and training they provide to their employees – this treatment will be retained, unless an employee salary sacrifices to obtain these benefits. This is in recognition of the need to encourage employers to continue to invest in the skills of their workers.

The Government will consult closely with employees and employers to better target this concession while still supporting essential training.

One hopes consultation will be broader than employee and employer associations.  Continuing professional education is a requirement for many occupations.

The proposal seems to have, at its core, a notion that outgoings incurred to acquire or maintain knowledge for use in income producing activities is a private benefit.  But this notion has been rejected by the High Court … most recently in Commissioner of Taxation v Anstis [2010] HCA 40.  What an unfortunate choice of language Minister.

In response to the Anstis decision, the Government amended the law to disallow deductions incurred in relation to government assistance payments.    This measure was enacted with effect for assessments for the 2011-12 income year and later income years.

As I am now more than 60 years of age, I often get a sense of déjà vu about amendments to the tax law.  So, could someone put my tortured brain at rest and tell me whether we have seen a proposal to limit overseas travel expenses for conferences before.

On 26 February 2013, the Assistant Treasurer released exposure draft legislation to address some of the issues raised in relation to the first ED legislation to replace section 105-65 of Schedule 1 of the Taxation Administration Act 1953.  The first ED proposed a new Division 36 into the GST Act.

The amendments in relation to this revised ED will apply at the originally announced date – i.e., in relation to working out net amounts for tax periods commencing on or after 17 August 2012.

The AT said of the revised ED:

The draft legislation clarifies the circumstances in which the restriction on GST refunds applies to overpayments of GST and allows taxpayers to self-assess their entitlement to a GST refund by reference to ascertainable criteria. It also addresses a gap in the existing law relating to refunds associated with miscalculations of GST payable on a supply.  …

That first consultation highlighted a number of concerns with the draft legislation. The main issues raised in the first consultation round included the following:

• the perceived inability to obtain a refund of overpaid GST would encourage taxpayers to shy away from adopting a conservative approach to their GST obligations;
• a concern that rights to object to an assessment of GST would be removed as the relevant assessment would not be excessive as section 36-5 would deem the GST to have always been payable;
• the restriction on refunds would override the operation of the adjustment provisions resulting in businesses not being able to get a refund in their dealings with other businesses;
• the concept of passing-on was introduced without being adequately defined creating considerable uncertainty;
• recipients that have excess GST passed on to them may not have an entitlement to an input tax credit on the excess GST as it may not be consideration for a taxable supply and therefore would not be a creditable acquisition for the purposes of Division 11; and
• the Commissioner should be able to retain his discretion to pay refunds where appropriate e.g. where a taxpayer does not satisfy the requirements of Division 36 but there is no windfall gain to the taxpayer.

A link to the Treasury website, ED Bill and explanatory Memorandum is here

It may be of interest to some you that at TEN’s 1^st GST Conference at the Gold Coast last year, Jeremy Geale (KPMG) was scheduled to talk about proposed self assessment amendments – they were introduced a day before his session was to be presented.  Further amendments dealing with the Multiflex case were introduced on the morning of his session.

The 2^nd TEN GST conference commences on 28/2/13 at Palazzo Versace in the Gold Coast.

Gina Lazanas and Robyn Thomas (Balazs Lazanas & Welch LPP, Sydney) are scheduled to present a session on the topic of these latest refund EDs on the afternoon of 28/2/13.

It suggests that the program for the TEN conference is a prompt for amendments and EDs to be released.

The final ruling on financial assistance payments was issued by the ATO yesterday, 30 May 2012 – GSTR 2012/2.

As an initial observation, it refers to the existing (but about to be amended) provisions of the GST law dealing with:

• non-profit bodies (a term which is to be replaced by not-for-profit entity if the ED for Tax Laws Amendment (2012 Measures No. 4) Bill 2012: tax exempt body “in Australia” requirements finds its way into law); and
• appropriations (which is to be amended under the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012)

Apart from that, the ruling undertakes an identification of supplies for which financial assistance payments might be consideration and continues the mantra that any connection with anything is good enough.

Worse, it fails to acknowledge that, even  if the payee does get some rights for the payment, the amount paid might not be solely for those rights – apportionment (dare I say proportionality) is, in many of the examples, necessary.  The commercial advantages are simply not commensurate with the payment.

A simple example from the ruling is as follows:

Example 3 – sufficient nexus – payment for entry into an obligation

1. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art in South Australia. It enters into an arrangement with Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts. Under that arrangement, in return for a financial assistance payment from the Foundation, the troupe enters into a binding agreement under which it is obligated to expand its activities – by presenting three performances outside South Australia during the following year.
2. By entering into this obligation to present three performances outside South Australia, the troupe has made a supply to the Foundation. The payment by the Foundation has been made in connection with, in response to, or for the inducement of this supply. Therefore, there is a sufficient nexus between the entry into the obligation and the financial assistance payment such that the financial assistance payment is consideration for that supply.
3. Snake Glass Jugglers is liable for GST on the supply of the entry into the obligation. The Gooseville Arts Foundation is entitled to an input tax credit on their acquisition of the right to require Snake Glass jugglers to present the performances.

Let’s take this on in order:

• One presumes that Gooseville is a charitable institution.  The payment to Snake Glass is either a gift (if it is for Gooseville’s general purposes) or it is a gift for purposes (and therefore subject to the enforcement of equity).  Either way, it is not consideration for a supply made by Gooseville.
• Gooseville takes on an obligation to perform outside of SA?  What advantage does this give to the Foundation for which one would allocate the payment as consideration.  It is not enough, one would have thought, that Gooseville complies with a condition of the grant unless it is the subject matter of the grant.  How much does the extra-SA tour cost as compared to the grant?  Is this a “grandma’s flowers” case – is it a supply to Grandmas at large?

Sooner or later, the Commissioner and Treasury are going to have to conclude that gifts are gifts are gifts are gifts.

The consequence of this ruling, the amendment to the government to government appropriations provisions and the removal of certainty about government fees and charges in Div 81 leaves the entities that are non-commercial but in the GST system in the most difficult circumstances of all GST taxpayers.

It looks like a detailed review of all receipts and payments is necessary to work out that compliance obligations.  If you conclude that you should tax everything just in case,

• The payer claiming credits is at risk of having them taken away if it turns out that GST wasn’t payable;
• The question of how to manage the cash flow looms large; and
• This is all a churn because the Government doesn’t want it to give rise to any sticky tax.

Principles?  I don’t think so!

Congratulations to (now) DP Stephen Frost, DP Fiona Alpins, DP Professor Bob Deutsch and SM Gina Lazanas on their appointments as part-time members of the AAT as Deputy Presidents and Senior Member, respectively, with taxation expertise.

The Attorney General, Nicola Roxon, made the appointments on Thursday 19 April 2012.  Her media release can be accessed here.

“I offer my congratulations to all those who have been appointed today and look forward to the contribution each will make to administrative justice in their new roles,” Ms Roxon said.

Those tortured souls that find it necessary to navigate our incomprehensible taxation laws will heartily welcome the chance to access the sensible guidance for which Stephen, Fiona, Bob and Gina are renowned.  I foresee a veritable stampede to the doors of the AAT.

Administrative justice?  I am still confused by ATO IDs 2012/ 21 and ATO ID 22 that suggest hearing fees for access to similar Tribunals may be subject to GST after 1 July 2012 on the basis that the Tribunal in question is NOT a non-commercial government activity – see more here.

There have been two important developments over the last week for the GST treatment of real property:

• The Commissioner has released two determinations concerning the sale of real property subject to a lease.

1. The first – GSTD 2012/1 – relates to the sale of residential premises that are subject to an input taxed lease.  The determination rules that:
   1. Following a sale of residential premises that are subject to a lease, there is a continued supply of the premises by way of lease which remains an input taxed supply under section 40-35
   2. The purchaser of residential premises is not entitled to an input tax credit under section 11-20 in respect of the purchase of the premises if and to the extent that it is intended that the lease will continue following the completion of the sale.
   3. The purchaser is not entitled to input tax credits for acquisitions relating to the ongoing lease of the residential premises.
   4. The purchaser has an increasing adjustment under Division 135, where residential premises subject to a lease are acquired through a supply of a going concern under section 38-325, or a GST-free supply of farm land under section 38-480, and the purchaser intends that the lease will continue
2. The second – GSTD 2012/2 – relates to commercial  premises that are sold subject to a taxable lease.  The determination rules that:
   1. Following a sale of commercial premises that are subject to a lease, the purchaser of the reversion is liable for GST relating to the lease where the elements of section 9-5 are satisfied
   2. The purchaser’s GST liability is attributed in accordance with the rules in Divisions 29 and 156
   3. The purchaser is entitled to an input tax credit for the acquisition of the premises where the requirements of section 11-5 are satisfied and subsection 75-5(1) (the margin scheme) was not applied to work out the amount of GST payable on the sale of the premises. Further, the purchaser is entitled to input tax credits for acquisitions that relate to the purchase of the premises or to the ongoing lease of the premises where the requirements of section 11-5 are met
   4. The vendor of the commercial premises is not liable for GST relating to the lease where it is no longer in receipt of or entitled to rent or other consideration for the lease following the sale of the reversion.

• Last week, the Commissioner released –  GSTR 2012/D1 – a redraft of the redraft of the ruling  concerning the distinction between residential premises and commercial residential premises. Comments are due of 6 April 2012.

1. The original ruling – GSTR 2000/20 – was 40 pages
2. The redraft – GSTR 2011/D2 and this latest redraft are each 82 pages.

Is the length an indication that the legislation fails to differentiate clearlywhen the input taxation  of real property applies?

For my resolution for the new year … click here

Today, 14 December 2011, the Treasury has released exposure draft Regulations and explanatory material relating to the Government’s 2011-12 Budget measure, Tax compliance – reporting taxable payments.

The draft regulations seek to introduce a reporting regime requiring certain businesses in the building and construction industry to report annually to the Australian Taxation Office the details of payments made to contractors in the building and construction industry

The Regulations are proposed to commence on 1 July 2012.  The closing date for submissions on the exposure draft is  20 January 2012.

It appears that compliance with the regulations will involve difficulties for those businesses at the “margin” – e.g., those payers

1. that may not “derive” over 50% of their “business” income from the prescribed building and constructions services (or may not be able to predict that it will in the current financial year);
2. make acquisitions of services for private, general (or other) business purposes, rather than in the course of their building and construction business.

Given that this information will need to be identified and “coded” for retrieval each quarter in the accounts of the payer, it appears that additional work will have to be done to the IT systems of payers and the processes and procedures for input of accounts payable and purchases.

I have not been able to identify any indemnity for a payer that mistakenly discloses confidential information under these proposals – e.g., if the payer does not fall within a requirement to report the particular payment.

Once specified in regulations, a payer must report to the Commissioner within 21 days after the end of each quarter:

1. the name and ABN of each supplier; and
2. the total of the Division 405 payments made in the quarter.

The circumstances in which the proposed regulations are to apply to payments are:

(a) the purchaser is a business that is primarily in the building and construction industry;

(b) both the supplier and the purchaser have an ABN;

(c) the supplier supplies to the purchaser:

(i) building and construction services; or

(ii) a combination of goods and building and construction services, if the supply of the services is not incidental to the supply of the goods.

The regulations do not apply to payments within consolidated groups (but will apply for payments within GST groups?) nor to “withholding payments”.

A purchaser is taken to be a business that is primarily in the building and construction industry only if:

(a) in the current financial year, more than 50% of the purchaser’s business income is derived from providing building and construction services; or

(b) in at least one of the 2 financial years immediately preceding the current financial year, more than 50% of the purchaser’s business income was derived from providing building and construction services.

Building and construction services include any of the following activities, if the activities are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface:

(a) alteration;

(b) assembly;

(c) construction;

(d) demolition;

(e) design;

(f) destruction;

(g) dismantling;

(h) erection;

(i) excavation;

(j) finishing;

(k) improvement;

(l) installation;

(m) maintenance;

(n) management of building and construction services;

(o) modification;

(p) organisation of building and construction services;

(q) removal;

(r) repair;

(s) site preparation.

On 21 December 2011, Treasury released exposure draft legislation to give effect to the Budget announcement concerning GST-free health care procured by insurers.

The original consultation took place under a consultation paper released on 7 June 2011 dealing with health insurers.  The present exposure draft legislation expands upon that proposal to include arrangements entered into by workers compensation insurers, compulsory third party insurers and government entities.

The arrangements contemplated in the exposure draft involve the insurer or government entity  “procuring” or “arranging” for GST-free health services to be supplied to a third party “patient” pursuant to, where the arranger is an insurer, the insurance cover.

The need for the amendment arises because of the incorrect application of law by the ATO whereby the payment made by the insurer was regarded as consideration for the supply to the third party.  Interestingly, the insurance ruling – GSTR 2006/10 – did not repeat the error contained in GSTR 2006/9.  That is, the insurance ruling took an interpretation entirely consistent with the decision in Department of Transport case while the general supplies ruling – GSTR 2006/9 – did not.

One might question why the ATO did not recognise this divergence before now.

The aim of the exposure draft legislation is clear – but it seems to go well beyond what is necessary to extend GST-free status to the supply of arranging for a GST-free supply to a third party.  The structure of the exposure draft legislation is that GST-free status is extended to a supply to an insurer or government agency if the supply:

1. is a supply of a service to an insurer or government agency; and
2. the service is the supplier making one or more other supplies of goods or services to an individual; and
3. at least one of the other supplies is *GST-free health and (where there is an insurer or third party scheme) is for settling one or more claims under the insurance policy or scheme.

The proposed amendment also allows that the health provider and insurer or agency can agree that the supply of the “arranging service” is taxable rather than GST-free.

Some areas of uncertainty in the draft are whether:

1. if the goods and services supplied to the patient are partly GST-free, whether the consideration paid by the insurer or agency must be apportioned between the GST-free and taxable parts – consider, for example, the supply of spectacles to a patient.
2. The description of the relevant supply to the insurer or government agency as “the service is the supplier making one or more other supplies of goods or services to an individual” is the simplest and most clear description of the arrangement in question.

On the face of it, compulsory third party schemes will be able to reduce their cost of claims under these proposals because arranging for GST-free health has either been taxable or the insurers would have ensured they paid the patient’s costs.

The Government’s budget announcement indicated a retrospective application from 1 July 2000 but the exposure draft is for supplies after 1 July 2012. The Explanatory Memorandum explains that taxpayers are able to rely on GSTR 2006/9   prior to the amendment taking effect.

For insurers not covered by GSTR 2006/9, it seems the benefit will have to wait.

This evening – 23 November 2011 – Treasury released exposure draft amendments to the GST law dealing with the treatment of appropriations.

The exposure draft EM states that the amendments are to restore the policy intent that the non-commercial activities of government related entities are not subject to GST.

It appears that the decision in TT-Line established an interpretation, in Treasury’s view, that was not intended.  Consequently, paragraph 9-15(3)(c) is proposed to be amended to state:

(c)  a payment is not the provision of consideration if:

(i)  the payment is made by a *government related entity to another government related entity; and

(ii)  the payment is covered by an appropriation under an *Australian law; and

(iii)  the payment is not made for a supply which is commercial in nature.

Note 1:       A payment by a State Department of Health to a State hospital to fund its operations, where the hospital commits to achieving certain health outcomes, is a payment for a supply which is not commercial in nature.

Note 2:       A payment by a Department to a government entity, which provides legal services on a fee for service basis, for the provision of legal services is a payment for a
supply which is commercial in nature.

Where is this stuff coming from?

The ATO have issued a recent draft ruling on “financial assistance” and a final ruling on the treatment of appropriations.  While we are still in the process of commenting on the former, it is apparent that neither ruling specifies the position under the Australian law where there is merely a funding paid by one government entity to another.  We no longer have, it seems, an understanding that a contribution to costs is NOT consideration for a supply!  The approach following TT Line seems to be an acceptance that there is consideration for a supply unless para 9-15(3)(c) applies!

What is going on?  NZ Refining was established law at the time of our GST legislation.  Our legislation reflects almost exactly the NZ  definition of consideration.

NZ amended its law prior to NZ Refining being decided and prior to the Australian law being introduced to deem subsidies to be for a supply made to the payer.  We have no such provision, so we should assume that the general rules do not capture a mere funding of operations.

Para 9-15(3)(c) is to handle the rare event where there may be an appropriation which would otherwise be consideration.  As DoT shows, TT-Line is NOT the norm.  If a government payment is made in circumstances where it is for the doing of something, the relevant supply is likely to be made to the payer – not to the third party as was found in TT-Line.

Lastly, it is not correct that Australia adopted a “commercial” vs “non-commercial” division.  Originally, charges made by Government were taxable unless excluded by Div 81 determination.  This is how “commercial activities” of Government were defined – if the Treasurer determined it wasn’t taxable, it was excluded.  Otherwise, Government charges were taxable.

The idea that funding or subsidies between government agencies will be treated as taxable ignores the fact that in almost all cases the payer will obtain a credit – under the correct analysis applied in DoT rather than the unusual finding in TT-Line.

If the supply and acquisition are made between Government entities, there is no change to the tax base – it is only household consumption (i.e., the spending of passenger in TT-Line) that is the subject matter of a value added tax.

If we tax funding by one Government entity to another, it is fully creditable to the payer – no  tax revenue – do not pass go – do not collect $200!  Taxing these things is just churning – inefficient and costly.  It was never intended that government to government funding should be taxed – this is clear from the 1998 White paper.

Can someone please stop this madness and ensure we return to the simple, logical object of the law as it was drafted?

Proposals of this nature ridicule the entire GST system.