Welcome to the November edition of Pulse.

In this issue, we discuss the Federal Government’s new requirement for directors to obtain a unique Identification Number (Director ID) as part of a suite of reforms to address phoenix activity. We look at who does and doesn’t need a Director ID, as well as when you need to apply.

This edition also features information on claiming work-related car and home office expenses in light of the ATO’s recent crackdown, as well as a feature article on tax implications for deceased estates.

Director Identification Numbers (Director IDs)

As you may have seen in the June edition of our Exchange newsletter, as part of a package of reforms to address phoenix activity, the Federal Government is introducing a new requirement for directors to have a unique identification number (Director ID) from November 2021.

Facilitated by the Australian Business Registry Services (ABRS), which is a newly established function of the ATO, the Director ID will help:

Prevent the use of false director identities
Government regulators trace a director’s relationship with past companies
Identify and eliminate director involvement in unlawful activity

Who needs a Director ID?

You will need a Director ID if you’re the director of a:

Company (with an ACN)
Aboriginal and Torres Strait Islander corporation
Corporate trustee, for example, of a self-managed super fund
Charity or not-for-profit organisation that is a company or Aboriginal and Torres Strait Islander corporation
Registered Australian body e.g. an incorporated association that is registered with ASIC and trades outside the state or territory in which it is incorporated
Foreign company registered with ASIC and carrying on business in Australia regardless of where you live

Who doesn’t need a Director ID?

You won’t need a Director ID if you’re:

A company secretary (but not a director)
Acting as an external administrator of a company
Running a business as a sole trader or partnership
Referred to as a ‘director’ in your job title but have not been appointed as a director under the Corporations Act or the CATSI Act
A director of a registered charity with an organisation type that is not registered with ASIC to operate throughout Australia
An office of unincorporated association, cooperative or incorporated association established under state or territory legislation, unless the organisation is also a registered Australian body

When can I apply?

You can apply for a Director ID from November 2021.

Directors must apply for their Director ID themselves as they need to verify their identity i.e. no one can apply on a Director’s behalf.

How do I apply?

Details on how to apply for your Director ID can be found on the ABRS website.

Like to know more?

Please contact your adviser at Financial Decisions to discuss further.

Claiming car and home office expenses

With many people working from home over the past 18 months, the ATO is continuing to shine the spotlight on taxpayer claims for work-related car and home office expenses.

Car expenses

Using sophisticated analytics to compare expenses with similar jobs, the ATO will contact taxpayers directly if they identify a questionable claim for car-related expenses. If further scrutiny is warranted, they may even contact employers to confirm whether a taxpayer was required to use their own car for work-related travel.

There are three golden rules to remember when it comes to claiming car expenses:

Trips between home and work can’t be claimed, unless you’re transporting bulky equipment;
Avoid ‘double dipping’ by claiming car expenses paid for or reimbursed by your employer; and
Make sure you keep records to prove how you worked out your claim.

Home office expenses

If you’re an employee of a company who works from home, you may be able to claim a deduction for expenses you incur at home that relate to your work. To claim these expenses, you must:

Be working from home to fulfil your employment duties, not simply carrying out minimal tasks such as occasionally checking emails or taking calls; and
Have incurred additional expenses as a result of working from home.

There are different methods available to calculate your expenses depending on the income year and time period you’re claiming work from home expenses. These include:

Fixed rate method – a fixed rate of 52 cents for each hour you worked from home.
Actual cost method – calculate the actual expenses you incurred to produce your income when working from home.
Shortcut method – only available from 1 March 2020 to 30 June 2022, the shortcut method enables you to claim 80 cents for each hour you work from home, however you’re unable to claim any other work from home expenses, even if you bought new equipment. The shortcut method covers phone and internet expenses, the decline in value of equipment and furniture, and electricity and gas for heating, cooling and lighting.

Tax implications for deceased estates

In addition to grieving the loss of a loved one, you may also be responsible for managing the deceased estate. If you’re the Legal Personal Representative (LPR) of the estate, there are key tax issues such as income, CGT and stamp duty that can impact the beneficiary of the estate.

Income Tax

Although less relevant in the context of property and deceased estates, income tax is still an important consideration. For example:

The deceased was a property developer who held property as trading stock.

If the LPR continues carrying on the property development business and makes an appropriate election, the trading stock is treated as if there was no death. The closing value of the trading stock on the date of death return will be the opening value of the stock in the estate’s first tax return. In these circumstances, the death does not trigger a taxing event. However, if the LPR will not be carrying on the property development business, the stock will be attributed with its market value as at date of death. Put simply, if the property development business comes to an end on death, there is a taxing event.

2. The transfer of depreciating assets (e.g. curtains and other fixtures and fittings)

Upon death, a ‘balancing adjustment event’ occurs in respect of any depreciating assets held. To avoid triggering a taxing event by transferring the assets to an LPR, the termination value or sale price will be its adjustable or written down value as at date of death. However, when depreciating assets are distributed to a beneficiary, they are deemed to be disposed of at market value, which can trigger a taxing event.

Capital Gains Tax (CGT)

A deceased person’s assets are determined to have been acquired by their LPR on the date of death, and any capital gain or loss on death is disregarded. Similarly, when an asset of the deceased is transferred from the LPR to a beneficiary, any capital gain or loss made by the LPR is disregarded. A CGT event technically occurs, however it does not give rise to tax.

There are limitations on this exemption:

The asset being transferred must be an asset of the deceased. It cannot be an asset that the LPR has acquired after death.
If the property is strata titled, subdivided or improved during the estate administration process.
The asset must pass to the beneficiary in their capacity as beneficiary. CGT applies if the beneficiary buys an asset from the estate.

Calculating the new cost base
As the LPR is the legal owner of the deceased’s tax and financial records, they need to calculate the cost base on death or pass on the relevant records to the beneficiary. In addition, the new cost base will depend on whether the deceased purchased the asset pre CGT (i.e. before 20 September 1985) or post CGT. Let’s assume that the asset in question is real property:

If the property was pre CGT in the hands of the deceased, the cost base will be the market value (determined by a licensed valuer as soon as possible after death) of the property as at date of death.
If the property was post CGT in the hands of the deceased, the cost base will be the deceased’s historic cost base.
If the property was a main residence (whether pre CGT or post CGT), the cost base will be the market value as at date of death.

Joint tenancy
With a higher cost base and therefore a lower capital gain, treating an asset as pre CGT clearly has its benefits. When determining whether the property is pre CGT or post CGT, it’s important to firstly consider the ownership history and other events that may have affected the property such as joint tenancy. If there are two joint tenants, each is deemed to have a 50% interest. Let’s look through both the pre CGT and post CGT lens:

For a property purchased pre CGT, the deceased share passes to the surviving joint tenant with a cost base equal to market value of that share. However, only 50% of the property owned by the survivor will not attract CGT when a capital gains event occurs in relation to the property.
For a property purchased post CGT, the deceased’s share of the property will pass to the survivor with the deceased’s cost base for that share.

Individuals (and trusts) can access a 50% discount on any capital gain they generate on an asset they have held for at least 12 months. For deceased estates, the 12 month period is not reset on death (except for pre CGT assets). The LPR, and ultimately the beneficiary, gets the benefit of the asset holding period of the deceased. The same applies for the survivor of a joint tenant property. This means that an asset can be disposed of within 12 months of date of death (providing it has been at least 12 months since the deceased purchased the asset) and still obtain the benefit of the 50% discount.

Small business concessions

If the deceased owned a property that was used in a small business, the LPR or beneficiary can access the small business concessions if they dispose of the property within two years of the date of death. Further, the property would have qualified for the CGT small business concessions if the deceased had disposed of it immediately before their death.

Treatment of testamentary trusts

In very general terms, property in an estate can pass from the deceased to the LPR, from the LPR to the trustee of a testamentary trust, and then finally from a trustee to a beneficiary of the testamentary trust. In this process, any capital gain or capital loss will be disregarded.

Stamp duty

Stamp duty legislation in the state or territory where the property is located will need to be considered, however stamp duty is generally not payable in the transmission of property from the deceased to the LPR, or to a beneficiary. However, it’s a different matter if a property is sold by the LPR to a beneficiary rather than distributed to the beneficiary. In this case stamp duty is likely to apply.

Pulse – November 2021