Spring 2022 Tax Bulletin
In This Issue
Claiming deductions for crypto losses
Sharing Economy/Marketplace Reporting
Beware the “shrinking” CGT Concession Thresholds
Applying for your Director ID
It is a legal requirement for all Australian company directors (whether resident in Australia or not) to obtain a Director ID (DIN). This is an integrity measure introduced to:
- prevent the use of false and fraudulent director identities,
- make it easier for external administrators and regulators to trace director’s relationships with companies over time, and
- to identify and eliminate director involvement in unlawful activity.
Directors (including alternate directors) must apply by 30 November 2022. Failure to apply on time is a criminal offence and penalties of up to $13,200 may apply.
You will only ever need one Director ID. You don’t have to apply for another one if you become a director of other companies or corporations.
You must apply for your own Director ID to verify your identity. No one can apply on your behalf. The easiest way to apply is online at www.abrs.gov.au. Alternatively, you can apply over the phone on 13 62 50 (current wait times are over 30 mins) or by paper (allow 28 days for processing).
What you will need to complete your online application
You will need the following information to verify your identity:
- a myGovID with either a Standard or Strong identity strength
- if you don’t have one, visit How to set up myGovID. You will need to verify your identity with at least two Australian identity documents (driver’s licence, passport, birth certificate, visa, citizenship certificate, ImmiCard, Medicare card).
- your tax file number (TFN) – providing your TFN is optional but it speeds up the process
- your residential address, as recorded by the ATO
- answers to 2 questions based on details the ATO knows about you from the following:
- Bank account details
- Notice of Assessment
- Super account details
- Dividend statement
- Centrelink payment summary
- PAYG payment summary
Once you have obtained your Director ID number, please email the details to our office at admin@maroo.com.au .
Claiming deductions for crypto losses
The 2022 financial year proved to be extremely volatile in the cryptocurrency market. Bitcoin went from an all-time high of nearly $90,000 in November 2021 to below $30,000 in June 2022. In a falling market, a number of clients realised crypto losses prior to 30 June 2022. The ability to classify such losses as revenue losses will have a significant tax impact for clients.
The ATO’s view
The ATO appears to have a strong preference for cryptocurrency being on capital account. Their website guidance provides a detailed section on ‘How to work out and report CGT on crypto’ which states “the most common use of crypto is as an investment, in which case the crypto asset is a CGT asset”. A number of clients have also had a ‘CGT event’ flagged on their ATO pre-fill reports for crypto transactions identified by the ATO.
In a declining market, it is clearly in favour of the ATO to treat crypto losses on capital account as such losses can only be offset against capital gains.
What the Courts have said
To date, we do not have any cases in Australia that have been decided on the capital vs revenue distinction of cryptocurrency. However, we have a long history of case law that deals with this issue more generally.
FCT v Myer Emporium is a High Court case decided nearly 40 years ago. An important principle from this decision is that gains or losses from an isolated transaction can be treated on revenue account provided the transaction was entered into:
- with a profit-making motive; and
- in a business-like or commercial manner.
Subsequent to this decision, the ATO issued TR 92/4 which sets out the circumstances in which losses from an isolated transaction can be claimed on revenue account.
The 2020 Full Federal Court decision in Greig v FCT allowed a tax deduction for losses incurred on the disposal of shares from an isolated transaction based on the Myer Emporium principle. An important issue that was considered in this case was the ‘business-like or commercial manner’ condition.
The Greig decision will be an important precedent for clients wanting to claim a revenue loss on cryptocurrency. Whilst Greig’s case dealt with shares, the principles from this case are also applicable to cryptocurrency.
The two key requirements that clients will need to demonstrate if cryptocurrency losses are to be treated as deductible, are whether there was a profit-making intention when the crypto was acquired and whether the crypto was acquired in a business-like or commercial manner.
For the first requirement, there should not be great difficulty in arguing the profit-making motive for crypto – this is due to cryptocurrency not having the ability to pay dividends or other income, unless the crypto is used for staking rewards or other peer-to-peer financial services in the DeFi space. Therefore, the only conceivable purpose for acquiring crypto would be for a profit-making purpose.
The second requirement, which was the contentious issue in Greig, will depend on whether there is evidence that the crypto was acquired, held and disposed of in a ‘business-like’ or commercial manner. The ATO has outlined a number factors as being relevant for this in TR 92/3 (which also applied to TR 92/4). Applying these factors to clients that have transacted in cryptocurrency, it is important that they can demonstrate some level of sophistication, skills and knowledge and research undertaken in relation to the relevant cryptocurrency. Using specialised software to analyse trends and record keeping would be one indicator of this.
Sharing Economy/Marketplace Reporting
The ATO have identified a tax compliance risk in the “sharing economy”. This risk[1] is of sellers not paying the right amount of tax either due to a lack of awareness of their tax obligations, or due to deliberate under reporting of their activities in the sharing economy because of a perceived lack of detection by the ATO.
However recent amendments to the Taxable Payments Reporting System (TPRS) provisions mean that electronic distribution platform (EDP) operators will be required to report information regarding sellers on their platform. The data provided to the ATO will enable the ATO to data match to ensure that income tax and GST compliance is being met by the entities and individuals using these EDPs in the sharing economy.
Essentially, the sharing economy is an online marketplace run by electronic platform operators which connect consumers with people who have goods or services to sell, hire, rent or lease. Economic activity through a digital platform (such as a website or an app) where people share assets or services (labour) for a fee has been identified as part of the ATO’s digital economy risk areas.
EDPs operators provide administrative functions, such as facilitating payment and managing the platform through the use of peer reviews. Common sharing economy activities include:
- providing ride-sourcing/ride-sharing services for a fare, through platforms such as Uber, DiDi, Ola, Hi Oscar, Shebah or GoCatch;
- renting out a room or a whole house or unit on a short-term basis, through platforms such as Airbnb, HomeAway or Flipkey;
- sharing assets, including cars, caravans/RVs, car parking spaces, storage space or personal belongings, through platforms such as Camplify, Car Next Door, Spacer, Toolmates or Quipmo;
- providing personal services (sometimes referred to as the ‘gig economy’), including creative or professional services like graphic design, creating websites, or odd jobs like deliveries and furniture assembly, through platforms such as Airtasker, OneFlare, Mad Paws or Hark.
Reporting under the TPRS will be required by all EDPs who facilitate supplies that are “connected with Australia”. There is currently no minimum turnover test so presumably the ATO will require EDPs to report all sellers and all sales on their platforms for a given period. The indicative timetable for the EDPs to commence reporting is from:
- 1 July 2023: Taxi travel and short term accommodation platforms; and
- 1 July 2024: Everything else!
Where a client provides services or assets through an EDP for a fee, it would be prudent to consider the application of income tax and goods and services tax (GST) to their earnings and expenditure.
In particular, we recommend considering the requirement to register for and remit GST on their sales. Notably, the ATO can go back four years in backdating a GST registration where an entity was required to register and remit GST. In cases of fraud, the ATO can go back an unlimited period in backdating a GST registration and requiring GST payment. The four year restriction also applies to an entity’s ability to claim ITCs on expenditure incurred to make their sales income.
[1] Originally identified in Black Economy Taskforce’s Final Report May 201
Beware the “shrinking” CGT Concession Thresholds
There has been a great deal of activity over the past 12 to 24 months in the SME merger and acquisition space. Smaller businesses being acquired by larger businesses, smaller businesses merging and even some larger trade sales whereby multi-nationals swallow up profitable SME’s.
Reasons stretch from simply improving market sh7are, diversification and more commonly, being able to access staff, be they skilled or unskilled, to overcome the current workforce shortages.
As a result, business owners who are selling out are looking to the CGT Small Business Concessions (“the Concessions”) to determine whether they can qualify to reduce or even eliminate, the capital gain arising from the sale.
As many would be aware, there are a number of conditions that must be satisfied in order for the Concessions to apply, however a relatively new condition was introduced in 2018 that significantly limits the ability of business owners who sell shares in a company or units in a unit trust.
One of these new conditions requires that the underlying SME company or trust (the business entity being sold) must either be a CGT Small Business Entity (SBE) or satisfy the $6 Million Maximum Net Asset Value (MNAV) test in relation to the capital gain. The measure is intended to prevent the concessions being available for interests in entities that are carrying on a business that is not a small business as it has either substantial aggregated turnover or has significant net assets.
If we consider the CGT SBE test, that requires that the business entity have a turnover below $2 million (in the current or prior year) and in our experience, most businesses that still consider themselves small businesses have more than the $2 million turnover threshold, that threshold having been introduced into the tax law over 14 years ago.
In 2016, the then Government increased the SBE turnover threshold to $10 million for most SBE tax concessions, but not to access the CGT Concessions. This stayed at $2 million, where it began back in 2008.
This makes satisfying this part of the condition extremely difficult for a “growing” SME business.
The second part of the condition, the $6 million MNAV Test suffers from the same “threshold creep” affecting the SBE threshold. The $6 million threshold was also introduced from the 2008 year, having previously been set at $5 million of net assets.
In applying, these conditions today, business owners need to ensure that the company or unit trust in which they are selling shares or units meets at least one of the two additional conditions:
- It has an aggregated business turnover of less than $2 million; or
- It has a Net Asset Value of less than $6 million.
This is regardless of how many shareholders or unitholders there are and their respective ownership interests.
With the growth of many businesses, coupled with spiraling inflation, both the SBE and the MNAV thresholds are in dire need of updating, or their owners will not have the opportunity to access these raft of concessions that were introduced with the express objective of encouraging the continued investment in small businesses and to support the retirement of many hard working small business owners.
If you are considering the sale of part or all of your small business or are considering a change in how your business operates, you need to consider how these thresholds will impact your future tax position.
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