Director Identification Numbers Coming Soon

/in , /by

Being a director of a company comes with many responsibilities, this could soon increase with a government proposal to introduce a “director identification number” (DIN), a unique identifier for each person who consents to being a director. The DIN will permanently be associated with a particular individual even if the directorship with a particular company ceases. Regulators will use the DIN to trace a director’s relationships across companies which will make investigating a director’s potential involvement in repeated unlawful activity easier.

Although this initiative was conceived as a part of the anti-phoenixing measures, the introduction of the DIN will also provide other benefits. For example, under the current system, only directors’ details are required to be lodged with ASIC and no verification of identify of directors are carried out. The DIN will improve data integrity and security, as well as improving efficiency in any insolvency process.

At this stage, it is proposed that any individual appointed as a director of a registered body (i.e. a company, registered foreign company, registered Australian body, or an Aboriginal and Torres Strait Islander corporation) under the Corporations Act (or the CATSI Act) must apply to the registrar for a DIN within 28 days from the date they are appointed.

Existing directors have 15 months to apply for DINs from the date the new requirement starts. Directors that fail to apply for a DIN within the applicable time frame will be liable for civil and criminal penalties.

In addition to the penalties for failing to apply for a DIN, there are also civil and criminal penalties which apply to conduct that undermines the requirement. For example, criminal penalties apply for deliberately providing false identity information to the registrar, intentionally providing a false DIN to a government body or relevant body corporate, or internationally applying for multiple DINs.

The proposal initially applies only to appointed directors and acting alternate directors, it does not extend to de facto or shadow directors. However, the definition of “eligible officer” may be extended by regulation to any other officers of a registered body as appropriate. This will provide the flexibility to ensure the DIN’s effectiveness going forward. Just as the definition of eligible officer may be extended, the registrar also has the power to exempt an individual from being an eligible officer to avoid unintended consequences.

Recently, there have been cases in the media where individuals have unknowingly or unwittingly become directors of sham companies for various nefarious purposes. The DIN proposal inserts a defence for directors appointed without their knowledge, due to either identify theft or forgery. However, it notes that the defendant will carry the evidential burden to adduce or point to evidence that suggests a reasonable possibility that the defence exists, and once that’s done the prosecution bears the burden of proof. The government notes that the evidential burden has been reversed because it is significantly more costly for the prosecution to disprove than for the defence to establish.

Where to now?

Apart from ensuring that your identity is safe, we can help if you think you may inadvertently be a director of a company and no longer wish to be. Otherwise, if you’re the director and want to understand more about this potential change including the timeline, contact us today.

 

World Congress of Accountants – Audit

/in , /by

The World Congress of Accountants was a chance for leading experts to respond to thought-provoking and stimulating questions from tax regulations to tech disruption and provide some much-needed clarity on their future impact.

A significant area that was explored over the course of the four days was what exactly the term ‘audit’ means in today’s modern business environment and how auditors can continue to meet stakeholder expectations.

Stakeholder expectations on audit are based on the fact that a range of detailed audit procedures be applied by skilled individuals and the auditor be independent of financial statement preparers.

Little of an auditor’s work is directly visible to investors. It is the audit committee, as shareholder representatives and independent directors, who see and assess the behaviour and professional scepticism of the auditors. A recent Financial Reporting Council survey found that Audit Committee Chairs have been very satisfied with the quality of their external auditor with 92 per cent rating them excellent or above average.

Australia in particular has a strong foundation of stakeholder confidence in our businesses, based on open accountability, transparency and fair presentation of business results. These in turn rely on the judgement of management and directors on how they apply accounting standards.

The role of an auditor is to judge whether appropriate accounting standards have been applied by management and directors, and whether the view presented as a whole is consistent with auditor’s knowledge of the business.

This role is one in a series of measures that contribute to stakeholder confidence, including:

  • a work culture that instills the importance of independent thought and professional skepticism with partners and staff;
  • skilled and competent people;
  • effective audit processes and methodologies;
  • support from management and audit committees and others in the reporting framework; and
  • commitment and structures to support partners and staff undertaking robust work.

A key measure that is often forgotten from this list is courage.

Courage from the board to speak honestly to their investors, courage from investors to make informed decisions based on the information available to them, courage from government, regulators and standard setters to keep the focus on maintaining a strong capital market; and courage of auditors to have candid and open communication with management and audit committees.

The global profession needs to continue the discussion on the purpose of audit so we can continually evolve to meet modern stakeholder expectations.

 

Tax Consequences Of Compensation From Financial Institutions

/in , /by

The Royal Commission into misconduct tin the banking, superannuation and financial services industry has revealed some major deficiencies in terms of financial advice provided to consumers. Even though the Commission itself cannot fix or award compensation or make orders to require parties to a dispute to take or not take any action, the media exposure from the hearings have spurred many financial institutions to compensate their customers who received less than stellar treatment.

The tax treatment of this compensation depends on what the compensation is being paid for and how the investment was held. 

A compensation amount from a financial institution could include a combination of loss on an investment, refund or reimbursement of fees, and/or interest.  Compensation may also relate to multiple investments, with different amounts granted against each one. Therefore, if you receive compensation in this form, the tax consequences of each amount must be carefully considered.

If you receive compensation for loss on an investment (i.e. the value of your investments is lower than it would have been if you had received appropriate advice) and you have subsequently disposed of the relevant investment. The compensation received will most likely be treated as additional capital proceeds related to disposing the investments if you held the investment on capital account.

For example, if you dispose of an investment, CGT event A1 occurs and any capital gains or losses are reported in the financial year you disposed of the asset. If you’re an Australian resident and have held the investment for at least 12 months, remember you may be entitled to the 50% CGT discount if you disposed of your investments for a capital gain. Where the compensation amount relates to more than one investment, you will need to apportion the additional capital proceeds to each disposal. An amendment to a prior year tax return may need to be requested where the disposal of investment and receipt of compensation happens in different financial years.

In relation to compensation for existing investments that you have not sold, you may need to reduce the cost base of the investment by the compensation amount you receive (for investments held on capital account). Again, apportionment is required where the compensation relates to more than one investment.

The compensation payment received may include an amount that is a refund or reimbursement of adviser fees, the tax treatment of which depends on whether you claimed a deduction for the adviser fees in your tax return. If you claimed a deduction for adviser fees, the refund or reimbursement will be assessable income in the year you receive it. If you did not claim a deduction for the adviser fees, you do not need to include the amount as your assessable income. However, if you included the adviser fees in the cost base of the investment, that must be reduced accordingly.

If you receive compensation which has an interest component, it is assessable as ordinary income and should be included in your tax return in the financial year it is received. Note that the tax treatment of compensation may differ if you held investments on revenue account, on trust, or the compensation relates to a superannuation account or a SMSF account.

Need more guidance?

Have you received a compensation amount and don’t know how to dissect it into the relevant parts? Or perhaps the compensation amount received relates to investments that were not held on capital account (i.e. revenue, on trust, or superannuation related)? Whatever your issue may be, we have the expertise to help, contact us today.

 

Government Debts And Your Travel Plans

/in , /by

Departure Prohibition Orders (DPOs) have long been used as a tool by the government as a way to stop those who owe debts from leaving the country before they pay their debts, even if they are just going on a holiday. It has been used successfully for more than a decade in the enforcement of child support payments, and by the ATO as well.

Now the government has started applying DPOs to prevent former welfare recipients from leaving the country over debts as small as $10,000.

So far, more than 20 DPOs have been issued and the Department of Human Services is looking to increase the use of DPOs to help recover more than $800m owed by more than 150,000 who are no longer in the welfare system. Those that are currently receiving a welfare benefit will not be caught under this measure and those that are experiencing genuine hardship can have their repayments deferred.

The Department has made it clear that they will only issue DPOs in cases where the individual has consistently refused to repay their debts and have ignored multiple warnings. In addition, those who are subject to a DPO will also continue to have interest charged on their debt until they take action to repay the money they owe. The real question is whether this increased used of DPOs as a way to exert pressure on individuals to pay their debts will spread to other areas such as ATO debts.

The ATO guidelines on DPO indicate that the Commissioner can issue a DPO where an individual has a tax liability and the Commissioner believes on reasonable grounds that it is desirable to issue a DPO to ensure that the individual does not depart Australia without wholly discharging the tax liability or making arrangements for the tax liability to be discharged. This is regardless of whether the individual intends to return. In addition, DPOs can apply to both Australian citizens and foreign nationals who are liable to pay Australian tax.

In deciding whether to issue a DPO, the ATO will take into account all relevant facts and circumstances, including whether: the debt can be recovered; disposal of assets had occurred; information to suggest concealment of assets exists (e.g. AUSTRAC reports); the individual has sufficient assets overseas to maintain a comfortable lifestyle; transfer of any assets overseas; the actual need for travel; recovery proceedings or audit activity in progress; and involvement in criminal activity.

It should be noted that the issuing of DPOs will only be pursued after initial collection activity which involves issuing a notice calling for payment and then having the debt referred for collection activity. While the ATO acknowledges that a DPO imposes significant restrictions on normal rights of individuals and deprives them of their liberty, it needs to be balanced with the protection of revenue.

Therefore, the Commissioner already has a wide remit to issue DPOs in circumstances he considers to be appropriate. Data from past years indicate that the majority of DPOs were issued in relation to tax fraud/evasion on an international scale, related to wealthy or high-net-worth individuals or their related entities. Even then, the fact that the ATO has issued relatively few DPOs in the past few years may be an indication that it will not be applying this method to pressure individuals with smaller tax debts.

Need help with a tax debt?

Even though the ATO is unlikely to stop you from going on holidays because you have a tax debt, it may still be prudent to take care of any debt you may have outstanding with the ATO, even if it’s a small one. We can save you money in interest charges and potentially get penalties remitted. Contact us today.

 

Super Transfer Balance Cap: Reporting Events

/in , /by

With the introduction of the transfer balance cap of $1.6m designed to limit the amount of capital that can be transferred into the tax-exempt retirement phase, certain events that track the movement of capital in and out of retirement phase, as well as other events now must be reported to the ATO to ensure the correct amount is in the transfer balance account.

Pre-existing pensions that members were receiving before 1 July 2017 that they have continued to receive and which are in retirement phase on or after 1 July 2017 should have already been reported to the ATO. In addition, the following common events must now also be reported:

  • start of new pensions, which began to be in retirement phase on or after 1 July 2017;
  • full and partial commutation of a pension on or after 1 July 2017 regardless of whether or not the commutation was paid out as a lump sum, retained in accumulation phase or rolled over to another super fund;
  • certain limited recourse borrowing arrangement (LRBA) payments that result in an increase in value of the interest that supports a member’s pension where the LRBA was entered into on or after 1 July 2017;
  • commutations in compliance with a commutation authority issued by the Commissioner; and
  • structured settlement contributions.

For those who are beneficiaries of capped defined-benefit income streams, a different approach is taken for reporting commutations and new pensions. If an individual had a capped defined-benefit income stream before 1 July 2017, commuted it in full and started a new market-linked pension, they may exceed their transfer balance cap unintentionally. Therefore, the ATO will not be taking any compliance action if a fund doesn’t report the commutation of the original pension or the start of a new market-linked pension for a limited time. However, the fund is still required to report the pre-existing capped defined-benefit income stream.

So now that you know what needs to be reported, the next question is when or how often you need to report these events to the ATO. This depends on whether your SMSF is on an annual or quarterly cycle and is determined by when the SMSF first starts to have a pension in the retirement phase.

Where each member’s total super balance is under $1m, the SMSF must report transfer balance events annually, usually when the SMSF annual return is due.

If any member has a total super balance of $1m or more, the SMSF must report transfer balance events 28 days after the end of the quarter in which the event occurs by lodging a transfer balance account report. Note, the report only needs to be lodged if there is an event to report, if there isn’t an event, the SMSF isn’t required to lodge a transfer balance account report.

However, if a member has exceeded their transfer balance cap, the trustee must report any commutations earlier (either 10 business days after the end of the month or by a specific date denoted on the commutation authority). In addition, if you’re rolling your pension from an SMSF to an APRA fund, the commutation should be reported as soon as possible to prevent duplication due to different reporting times between APRA and SMSFs.

Do you need a hand?

Running your own SMSF can be a tricky exercise particularly with these new reporting rules. If you are confused or you need someone to help you look over your fund and make sure everything is above board, contact us today.

 

 

ATO warns on minimum pension payments

/in , /by

The Australian Taxation Office has issued a warning to trustees of self-managed super funds that lump sums, or partial commutations, no longer count towards a minimum annual pension payment.

The ATO says that if the minimum pension standards are not met in a financial year, none of the payments made during the year can be treated as super income stream benefits.

“Failing to meet the minimum pension payment standards now not only means that fund loses exempt current pension income for the year, there are also transfer balance account consequences,” the ATO says in an SMSF alert issued last week.

Under the account-based pension rules, trustees must meet minimum pension payment requirements. Income equivalent to a percentage of the account balance must be paid out each year, with the percentage changing with age.

The percentage factors are:

  • Under age 65, the minimum pension payment is 4 per cent a year;
  • Between 65 and 74, the minimum is 5 per cent a year;
  • Between 75 and 79, the minimum is 6 per cent;
  • Between 80 and 84, the minimum of 7 per cent;
  • Between 85 and 89, the minimum of 9 per cent;
  • Between 90 and 94, the minimum of 11 percent; and
  • For people aged 95 and over, the minimum is 14 per cent.

The SMSF Association’s technical director Peter Hogan says the ATO is concerned that trustees may not have caught up with all the changes to the system that occurred in July 2017.

Hogan says a lump sum used to count towards the minimum pension payment but no longer does.

Speaking at a recent Morningstar Investor Conference, Hogan says: “A pension can only be paid in cash. Cash payments plus commutations used to count towards the minimum but that does not apply anymore.”

If the minimum payment has not been made, the ATO can rule that the pension has ceased. It would then be ruled to have been in accumulation for that period and even before, with tax payments due.

Hogan says there are number of things SMSF trustees must get right when they start a pension.

“To start a pension, all the terms and conditions must be put in writing. For example, this is the time to nominate a reversionary pension recipient. It is difficult to add someone once the pension has started.”

The market value of the account must be reported to the ATO. Hogan says: “You have to be careful about how you do this. For an asset like property, you may need an independent valuation.”

Hogan says this is an appropriate time to review the fund’s investment strategy. “Because you have to make pension payments, it may be suitable to change the investment strategy to hold more cash. You would not want to be in a position where you have to sell assets to pay make pension payments.

“I recommend having 24 months of pension payments in cash, and top that up after each payment.

“Many trustees think they have to report to the ATO each time they make a pension payment, but you don’t.”

Hogan says one common misunderstanding is that the size of the pension balance must always be under the $1.6 million limit. “Pensions can grow. You are not penalised for good investment performance,” he says.

Source : http://www.shedconnect.com

 

Increasing Penalties For White-Collar Crime

/in , /by

As the Royal Commission into the misconduct in the banking, superannuation and financial services industry rolls on and uncovers more unscrupulous behaviour by the corporate and financial sector, the government is attempting to get on the front foot by addressing the perceived persistent misconduct by proposing to strengthen the penalty framework and enforcement regime available to ASIC to restore community confidence.

The proposal actually stemmed from a review commissioned in 2016 which identified a number of options to strengthen ASIC’s power and regulatory tools which the government has now acted on. Broadly, the government is proposing to:

  • increase maximum imprisonment penalties for certain criminal offences to reflect the seriousness of misconduct;
  • introduce a formula for the calculation of maximum financial penalties;
  • remove imprisonment as a penalty and increasing the financial penalties for all strict and absolute liability offences;
  • modernise and expand the civil penalty regime by increasing financial penalties for contraventions and making a wider range of offences subject to civil penalties;
  • harmonise and expand the infringement notices regime;
  • introduce a new test that applies to all dishonesty offences under the Corporations Act;
  • clarify that the courts are to give priority to compensating victims over ordering the payment of financial penalties.

The proposed changes would apply to individuals, AFSL licence holders, and body corporates. 

For example, the imprisonment penalty for AFSL holders failing to provide assistance to ASIC if requested will increase from 6 months to 2 years and AFSL holders that are aware of a defective financial services guide but do not rectify the defect could be jailed for 5 years (up from 2 years). Similar increases in imprisonment penalty applies to individuals involved in the contravention of certain corporate law.

The other interesting thing about the proposal is that it attempts to ensure that victims who suffer damage as a result of a contravention of a civil penalty provision in the Corporations Act will be compensated before the payment of financial penalties. Currently, only the ASIC Act and Credit Act provide for the compensation of victims in situations where the defendant does not have sufficient financial resources to pay both a financial penalty and compensation.

Under this new proposal, the court can make any order it sees fit to ensure an amount remains available for compensation. Compensation proceedings need not have been commenced for the court to consider the amount that might reasonable be likely to be payable and to make an appropriate amount for compensation available.

Want to find out more?

If you’re a director of a company, these changes could potentially apply to you. To find out more details about the penalties and what could be caught under the new proposal, contact us today.

 

 Can’t Buy Me Love: Conscientious Coupling and Binding Financial Agreements

/in , /by

The breakdown of a relationship is frequently ranked second, after the death of a loved one, as one of life’s most stressful events. With a third of all Australian marriages ending in divorce, and similar statistics in other countries, it’s little wonder that “conscious uncoupling” has become the ideal divorce strategy (and not just for celebrities). But the reality for many of us is quite different. So, what if there were ways of limiting the emotional and financial fallout of a relationship split?

In fact, there is: by having a financial agreement in place before getting married or moving into together.

Romantic? Not really. It’s true that a discussion about the relationship’s possible end isn’t exactly at the top of any couple’s list when planning a life together. But there are many pluses to having an agreement, and it’s unarguably a pragmatic move.

Love tops the charts as the most popular song theme, but money ranks a close second – and of course the two are intrinsically linked, in pop culture and in life.

A prenuptial (prenup) or cohabitation agreement can benefit you both, fostering better upfront communication about financial matters and helping you to budget and plan a financial future as a couple.

It can also provide a hefty ballast for your future financial stability as individuals.

In 2016, the Senate Economics Committee undertook a study of gender disparity in financial security and concluded that “a husband is not a retirement plan”. Clearly, a relationship breakdown can leave either party, or both – regardless of their genders – poorer than their married or single counterparts.

So, how can we help you to plan for a “conscientious coupling”?

What does this type of agreement include?

A prenup or cohabitation agreement typically covers:

  • assets – what will be treated as marital or defacto assets, such as jointly owned real estate, and what will be treated as non-marital assets (for example, this could be an asset that one party owned before the marriage or cohabitation);
  • division of assets – which assets each person would be entitled to, and in what proportion, if the relationship ended;
  • financial arrangements on the death of one spouse – this can be useful for blended families and where, for example, you want an inheritance to go to a person or an entity other than your relationship partner;
  • Future changes – whether the terms will change, for example, if children are involved; whether they are to inherit assets, etc.

Traditionally, these types of agreements are popular where one partner has significantly more assets than the other, or where the partners or their parents have businesses or an inheritance that they wish to retain if the relationship ends. An agreement can help ensure these important things are protected.

How do you make the agreement legal?

A prenup needs to be approved by the Family Court of Australia and both parties must have sought independent legal advice. For defacto agreements, we suggest you speak to a lawyer about the possibility of registering your agreement with the Family Courts in the form of consent orders.

What about tax?

We recommend that you and your partner each engage lawyers in the drafting of your agreement, but we can help with financial and tax strategy, particularly in more complex areas of tax law, which require some flexibility and skillful forward-planning. Here’s a snapshot of some of the areas to consider.

Stamp duties

If property ownership transfer is part of an agreement, then no stamp duty is payable if the property is transferred from one partner to another or sold.

Superannuation

Superannuation held by each partner, whether you are entering a marriage or defacto relationship, can also be split by agreement. Self-managed superannuation funds (SMSFs) have more flexibility for restructuring than funds regulated by the Australian Prudential Regulation Authority (APRA).

Capital gains tax roll-over relief

Capital gains tax (CGT) roll-over relief may also apply. As a general rule, CGT is payable on all changes of asset ownership occurring on or after 20 September 1985. However, if you transfer an asset to your partner as a result of the breakdown of your relationship, there is automatic roll-over relief from CGT in certain cases. This can include transferring assets into or out of a family trust as part of a settlement, as seen most recently in the case of Sandini Pty Ltd v FCT [2017] FCA 287 (22 March 2017).

Future and estate planning

Binding financial agreements provide another way to ensure your long-term financial planning goals are not destroyed by a failed relationship, helping to protect your business or inherited family assets. They can be useful in estate planning, too, as they can help achieve some security for people in second marriages or who have children from previous relationships. Provisions for children can be written into an agreement.

Need to talk it over?

While it might be an unwelcome topic to think about before it happens, the end of a relationship often forces people into making financial decisions at the worst time. We can help you minimize the possible negative consequences by helping you to plan your agreement with a solicitor and the ongoing management of your tax affairs

Client Alert: November 2018

/in /by

Transfer balance cap: ATO highlights admin issues

On 30 August 2018, ATO Assistant Commissioner Superannuation Tara McLachlan gave a speech on “Administration issues under the transfer balance cap” at the Tax Institute Sixth National Superannuation Conference.

Ms McLachlan highlighted several issues regarding common superannuation events that will need to be reported to the ATO (such as the start of new pensions that began to be in retirement phase on or after 1 July 2017), multiple transfer balance events, excess transfer balance determinations and more.

Australian Small Business White Paper: tax reform a key

After more than 18 months of extensive research and consultation, the Institute of Public Accountants (IPA) and the IPA Deakin SME Research Centre have released the second edition of the Australian Small Business White Paper.

“Numerous policy recommendations have been adopted from the first edition which was launched in 2015. However, we recognize that the state of our economy is reliant on the productivity, growth and prosperity of the small business sector, so this work must be ongoing”, said IPA CEO Professor Andrew Conway.

The Paper covers a range of topics, including productivity, regulation and workplace relations, and makes several tax reform recommendations relevant to small businesses and personal income tax.

ATO expects 200,000 to miss out on refunds by failing to lodge

The ATO expects that 200,000 people could miss out on a tax refund this year because they haven’t lodged a tax return.

Assistant Commissioner Kath Anderson has said that many salary and wage earners end up with a tax refund, but some are missing out because they fail to lodge on time.

Taxpayers had until 31 October to either lodge their own return, or ensure they are on an agent’s books, Ms Anderson said. Failing to lodge by the deadline can attract a penalty of $210 for every 28 days that the return is overdue, up to a maximum of $1,050.

Black economy: electronic sales suppression tools now banned

Activities involving electronic sales suppression tools (ESSTs) and that relate to people or businesses with Australian tax obligations are now legally banned under recent changes to the law.

ESSTs come in many forms, such as:

  • an external device connected to a point of sale (POS) system;
  • additional software installed into otherwise-compliant software; or
  • a feature or modification, like a script or code, that’s part of a POS system or software.

These tools generally misrepresent or hide income by deleting or changing electronic transaction information, and falsifying sales or POS records.

People and businesses may face penalties of up to $1 million if they produce, supply, possess or use an ESST or knowingly assist others to do so.

Super work test exemption for recent retirees

The Government has released draft legislation and regulations to provide a one-year exemption from the work test for superannuation contributions by recent retirees aged 65–74 who have a total superannuation balance of less than $300,000. This proposal was announced in the 2018–2019 Budget.

Currently, people aged 65–74 must pass the “work test” – working at least 40 hours in any 30-day period during the financial year – in order to make voluntary super contributions.

Bringing forward small business tax cuts by five years

The Prime Minister has announced that the Government will bring forward its planned tax cuts for small business by five years. The Labor Party has also indicated it supports bringing forward the tax cuts.

This means businesses with a turnover below $50 million will pay a tax rate of 25% in 2021–2022, rather than from 2026–2027 as currently legislated.

Corporate tax rates and small business tax offset changes

The Bill to accelerate the reduced tax rates for base rate entities has passed through Parliament and will soon become law. Under the new law, the corporate tax rate will reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years.

The new law also increases the small business income tax offset rate to 13% for 2020–2021. The offset will then increase to 16% for 2021–2022 and later income years.

Residential rental property travel expenses: ATO guidance

Since 1 July 2017, people, self managed super funds (SMSFs), “private” trusts and partnerships have not been permitted to claim non-business travel costs connected to residential rental properties as tax deductible. These costs also cannot form part of the cost base or reduced cost base of a capital gains tax (CGT) asset.

The ATO has released new guidance about this, including details about the legal meanings of “residential premises” and “carrying on a business”.

Tax on compensation received for inappropriate advice

On the heels of the banking and financial services Royal Commission, the ATO has published information about how tax applies for people who receive compensation from a financial institution that provided inappropriate advice and/or did not provide advice it should have. This can include compensation for the loss of an investment, or a refund of fees or interest.

Capital gains tax comes into play, and the compensation amount may count as part of your assessable income if it’s a refund of adviser fees that you’ve already claimed as a tax deduction.

ATO set to issue excess super contribution determinations

The ATO has started issuing excess concessional contributions (ECC) determinations for the 2017–2018 financial year. Superannuation fund members will receive these ECC determinations if they have made super contributions above the concessional cap amount for 2017–2018.

Fund members may also receive an amended income tax return assessment together with the ECC determination, and may need to pay additional amounts to the ATO. This is because any super contributions you make over the concessional cap need to be included in your assessable income for the financial year, and an interest charge applies.

 

Explanatory Memorandum November 2018

/in /by

Transfer balance cap: ATO highlights admin issues

On 30 August 2018, ATO Assistant Commissioner Superannuation Tara McLachlan gave a speech on Administration issues under the transfer balance cap at the Tax Institute Sixth National Superannuation Conference. She highlighted the following:

  • Common events that will need to be reported include:
  • the start of new pensions which began to be in retirement phase on or after 1 July 2017; and
  • full and partial commutation of pensions on or after 1 July 2017, regardless of whether or the commutation was paid out as a lump sum, retained in accumulation phase or rolled over to another super fund.
  • Self-managed superannuation funds (SMSFs) do not need to report:
  • pension payments made on or after 1 July 2017;
  • investment earnings and losses that occurred on or after 1 July 2017;
  • when an income stream ceases because the capital has been exhausted; or
  • the death of a member – although if the member’s pension was reversionary, reporting of the pension may be required.
  • Individuals can use myGov online to see what amounts have been credited to their transfer balance account.
  • As multiple transfer balance events occur when individuals have multiple pensions paid from the same fund, it’s important to cancel incorrect events before reporting the correct information, otherwise a duplication can occur.

Other issues mentioned during the speech concerned the treatment of excess transfer balance (ETB) determinations, commutation authorities, partial commutations and minimum pension requirements.

Source: www.ato.gov.au/Media-centre/Speeches/Other/Administration-issues-under-the-transfer-balance-cap/.

Australian Small Business White Paper: tax reform a key

After more than 18 months of extensive research and consultation, the Institute of Public Accountants (IPA) and the IPA Deakin SME Research Centre have released the second edition of the Australian Small Business White Paper.

“Numerous policy recommendations have been adopted from the first edition which was launched in 2015. However, we recognise that the state of our economy is reliant on the productivity, growth and prosperity of the small business sector so this work must be ongoing”, said IPA chief executive officer Professor Andrew Conway.

The White Paper covers a range of topics, including productivity, regulation, taxation, SME financial markets and workplace relations. On taxation, it makes several recommendations:

  • Broaden the base and lift the rate of GST (subject to appropriate equity measures).
  • Cut direct taxes.
  • Undertake a zero-base design of a thoroughly modern taxation system.
  • Reform and simplify the personal income tax scale.
  • Standardise the company tax rate at 25%.

It also poses a number of thought-provoking questions, including:

  • What would it look like if Australia’s GST rate rose to 15% and personal income taxes were slashed or removed for a new entrepreneur’s first five years in business?
  • What does a tax system look like that rewards rather than punishes people under the age of 50 for saving for their retirement?
  • Why do we have excess contributions taxes for those wanting to remove the burden from the state in their retirement?
  • What about a tax rate that applied a tax-free threshold at $30,000 per annum and 15% for minimum wage earners?

Source: www.publicaccountants.org.au/news-advocacy/media-releases/australian-small-business-white-paper-released.

ATO expects 200,000 to miss out on refunds by failing to lodge

The ATO expects that 200,000 individuals could miss out on a tax refund this year by failing to lodge a return.

So far this tax time, the ATO says over 2.7 million taxpayers have already lodged their income tax returns via myTax, while another 4.3 million taxpayers have lodged via a tax agent. Assistant Commissioner Kath Anderson says many salary and wage earners end up with a tax refund but some are missing out because they haven’t lodged.

Taxpayers have until 31 October to either lodge their own return, or ensure they are on an agent’s books, Ms Anderson said. Failing to lodge by the deadline can attract a penalty of $210 for every 28 days that the return is overdue, up to a maximum of $1,050.

The ATO believes that some taxpayers may not lodge a return, even if they are due a refund, because they don’t realise they need to. For example, where they are on a low income or haven’t worked recently. Ms Anderson said others might be worried about lodging because they haven’t lodged for several years and suspect that they may have a debt, which often causes them stress and anxiety. For self-preparers, the payment is due on 21 November whether or not a return is lodged. Ms Anderson said the ATO will help people who may have difficulties paying a tax debt, and tailor a payment plan to the taxpayer’s circumstances. The ATO is also alert to some people who are deliberately not lodging in an attempt to avoid their child support obligations.

The ATO also reminds that taxpayers who have already lodged, but realise that they have made a mistake, should make an amendment using myTax or by contacting their tax agent. Not correcting errors may mean the ATO has to contact the taxpayer, which may cause unnecessary processing delays. More information on making an amendment is available on the ATO’s website at www.ato.gov.au/fixamistake.

Source: www.ato.gov.au/Media-centre/Media-releases/Are-you-missing-out-on-a-tax-refund-/.

Black economy: electronic sales suppression tools now banned

Activities involving electronic sales suppression tools (ESST) and that relate to people or businesses with Australian tax obligations are now legally banned, effective from 4 October 2018. This is part of the measures under the recently passed Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018. People or entities may be liable for criminal and administrative penalties if they produce, supply, possess or use an ESST or knowingly assist others to do so.

The ATO has noted that ESSTs can come in different forms and are constantly evolving. For example, an ESST can be:

  • an external device connected to a point of sale (POS) system;
  • additional software installed into otherwise-compliant software; or
  • a feature or modification, like a script or code, that is a part of a POS system or software.

An ESST may allow income to be misrepresented and under-reported by:

  • deleting transactions from electronic record-keeping systems;
  • changing transactions to reduce the amount of a sale;
  • misrepresenting a sales record, for example by allowing GST taxable sales to be re-categorised as GST non-taxable sales; or
  • falsifying POS records.

It is now an offence to produce or supply an ESST, possess an ESST or incorrectly keep records using an ESST. A court may impose a criminal penalty up to a maximum of 5,000 penalty units (currently $1,050,000). Otherwise, the ATO may impose an administrative penalty of 60 penalty units (currently $12,600).

The ATO has found cases of taxpayers using such software to deliberately not report all their cash income, falsely report regular losses and/or manipulate their employee obligations.

However, businesses may have inadvertently purchased software with a suppression function. The ATO has advised there will be a transitional grace period for these businesses – if the software was purchased before 9 May 2017 (the date the measures were announced), the business has until 3 April 2019 to advise the ATO and apply for the transitional arrangements.

The ATO has reiterated the need for taxpayers to keep detailed records of every transaction.

Source: www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Ban-on-electronic-sales-suppression-tools/.

Super work test exemption for recent retiree contributions

The Government has released draft legislation and regulations to give effect to its 2018–2019 Federal Budget measure to provide a one-year exemption from the work test for superannuation contributions made by recent retirees aged 65–74 who have total superannuation balances less than $300,000. Currently, individuals aged 65–74 must work at least 40 hours in any 30-day period in the financial year in which the contributions are made (the work test) in order to make voluntary contributions.

The draft regulation proposes to amend reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 to allow these recent retirees to make voluntary contributions to their superannuation for 12 months from the end of the previous financial year in which they last met the work test.

The member’s total superannuation balance will be assessed for eligibility against the $300,000 threshold at the end of the previous financial year. Once eligible, there will be no requirement for individuals to remain below the $300,000 balance cap for the duration of the 12-month period.

The existing annual caps for concessional contributions and non-concessional contributions ($25,000 and $100,000 respectively) will continue to apply to contributions made under the proposed one-year exemption from the work test. However, the proposal would allow individuals to access the first year of the bring-forward arrangements in a particular financial year if their non-concessional contributions exceed their general non-concessional contributions cap ($100,000). Individuals would also be able to access unused concessional cap space to contribute more than $25,000 under existing concessional cap carry-forward rules during the 12 months.

The amendments would apply to eligible contributions made from 1 July 2019.

Source: https://treasury.gov.au/consultation/c2018-t331580/.

Bringing forward small business tax cuts by five years

Prime Minister Scott Morrison has announced that the Government will bring forward its planned tax cuts for small business by five years. He said the Government would introduce the necessary legislation in Parliament during mid-October 2018. Labor has indicated it will support the bring-forward of the tax cuts, thereby ensuring quick passage of the legislation through Parliament.

As shown in the following tables, this means businesses with a turnover below $50 million will have a tax rate of 25% in 2021–2022 rather than from 2026–2027 as currently legislated. Similar timing changes will apply to the roll-out of the 16% tax discount for unincorporated businesses.

Mr Morrison said this means that a small business that makes $500,000 profit will have an additional $7,500 in 2020–2021 and $12,500 in 2021–2022.

Company tax rates
2018–2019 2019–2020 2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 2026–2027
Corporate (%) (%) (%) (%) (%) (%) (%) (%) (%)
Existing legislated rates 27.5 27.5 27.5 27.5 27.5 27.5 27 26 25
Fast-tracked rates 27.5 27.5 26 25 25 25 25 25 25

 

2018–2019 2019–2020 2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 2026–2027
Unincorporated (%) (%) (%) (%) (%) (%) (%) (%) (%)
Existing legislated rates 8 8 8 8 8 8 10 13 16
Fast-tracked rates 8 8 13 16 16 16 16 16 16

Source: www.pm.gov.au/media/fast-tracking-tax-relief-small-and-medium-businesses.

Business tax rates and small business tax offset changes

The Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was introduced into and passed by the House of Representatives on 16 October 2018 and passed by the Senate on 18 October 2018. The Bill implements the proposal to accelerate reduction of the tax rate for base rate entities (ie corporate tax entities that derive no more than 80% of their income in passive forms and have an aggregated turnover of less than $50 million).

Corporate tax rate

Under the measures, the corporate tax rate for base rate entities will reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years. This means eligible taxpayers will have a tax rate of 25% in 2021–2022, rather than from 2026–2027 as previously legislated. This is summarised in the following table.

Year Revised rate Previously legislated
(%) (%)
2018–2019 27.5 27.5
2019–2020 27.5 27.5
2020–2021 26 27.5
2021–2022 25 27.5
2022–2023 25 27.5
2023–2024 25 27.5
2024–2025 25 27
2025–2026 25 26
2026–2027 on 25 25

Note that the tax rate for corporate tax entities which do not qualify as base rate entities remains unchanged at 30%.

Unincorporated businesses’ tax offset

In addition, the Bill increases the small business income tax offset rate to 13% of an eligible individual’s basic income tax liability that relates to their total net small business income (ie unincorporated businesses) for 2020–2021. This offset rate will then increase to 16% for 2021–2022 and later income years. This is summarised in the following table.

Year Revised rate Previously legislated
(%) (%)
2018–2019 8 8
2019–2020 8 8
2020–2021 13 8
2021–2022 16 8
2022–2023 16 8
2023–2024 16 8
2024–2025 16 10
2025–2026 16 13
2026–2027 on 16 16

Note that the small business income tax offset continues to be capped at $1,000 per individual per year.

The changes will commence in 2020–2021. The measure was previously announced by the Government on 11 October 2018. The speedy passage demonstrates that tax legislation can in fact pass through Parliament promptly, if it is deemed politically expedient.

 

Residential rental property travel expenses: ATO guidance

From 1 July 2017, non-business travel costs incurred by individuals, self managed super funds (SMSFs) and “private” trusts and partnerships in relation to residential rental properties are not deductible (s 26-31 of the Income Tax Assessment Act 1997). Such expenditure is also excluded from forming part of the cost base or reduced cost base of a CGT asset.

Law Companion Ruling LCR 2018/7, issued by the ATO on 10 October 2018, provides guidance on the following matters:

  • the meaning of the term “residential premises” in s 26-31;
  • the meaning of “carrying on a business” for the purposes of the business exclusion in s 26-31(1)(b), and
  • the application of s 26-31 to travel expenditure that serves more than one purpose.

LCR 2018/7 applies from 1 July 2017. It finalises Draft LCR 2018/D2 and contains the same views as the draft.

Residential premises

Section 26-31 of the ITAA 1997 refers to the “use of residential premises as residential accommodation”. The expression “residential premises” takes its meaning from the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), which defines it as land or a building that is occupied, or is intended to be and is capable of being occupied, as a residence or for residential accommodation. The ATO’s views on what constitutes “residential premises” for GST purposes are set out in GST Ruling GSTR 2012/5.

LCR 2018/7 mirrors the GST ruling by providing that:

  • the premises must be fit for human habitation, providing shelter and basic living facilities;
  • the actual use of the premises as a residence or for residential accommodation is relevant to satisfying the first limb of the definition (concerning actual occupation);
  • the second limb of the definition (concerning intended occupation) refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation;
  • the term of occupation or intended occupation is not determinative; and
  • the premises may be in any of a number of forms, including single rooms or suites of rooms within larger premises.

Carrying on a business of property investing

A deduction is not denied under s 26-31 for travel expenditure necessarily incurred in carrying on a business. This exclusion covers taxpayers carrying on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. The ATO may take the following matters into account in determining whether a business of letting residential properties is being carried out:

  • the number of residential properties being rented out;
  • the hours per week spent actively engaged in managing the properties;
  • the skill and expertise exercised in undertaking these activities; and
  • whether professional records are kept and maintained in a business-like manner.

It is generally harder for individuals to demonstrate that they are carrying on a business of property investing than it is for companies (which are specifically exempt from s 26-31 anyway). In the ATO’s view, “the receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business”.

Apportionment if travel expense serves mixed income-producing purposes

The expenditure made non-deductible by s 26-31 is a loss or outgoing “insofar as it is related to travel”. The ATO says that the use of the word “insofar” means that an apportionment is required if there are mixed income-producing purposes for the travel costs. If a single outlay of travel expenditure is incurred partly for producing income from the use of residential premises as residential accommodation and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to fairly and reasonably assess how much of the amount relates to each purpose. Factors to take into account include floor-area ratio, rental income and travel time spent attending to each income-producing purpose.

Source: www.ato.gov.au/law/view/view.htm?docid=%22COG%2FLCR20187%2FNAT%2FATO%2F00001%22.

Tax on compensation received for inappropriate advice

The ATO has recently provided information about how the tax system applies for someone who receives compensation from a financial institution that provided inappropriate advice and/or did not provide advice it should have. This can include compensation for the loss of an investment, or a refund of fees or interest.

Capital gains tax comes into play, because CGT event A1 happens when an individual, disposes off an investment. The capital gain or loss made from a CGT event is to be reported in the same financial year as the event occurs.

Compensation may be paid to a person in connection with an investment they have already disposed of. This type of compensation payment can be treated as additional capital proceeds associated with the disposal. If more than one investment is associated with a compensation payment, the ATO says the additional capital proceeds need to be apportioned among the disposed-of investments.

If a person has been compensated for investments they still own, they need to reduce either the cost base or the reduced cost base by the compensation amount they receive, depending on whether they make a loss or gain when they later dispose of the investments. Again, the compensation amount needs to be apportioned if it relates to more than one investment.

A compensation payment may also include an amount that is a refund or reimbursement of adviser fees. If the compensated person claimed a deduction for the adviser fees in a tax return, the amount they receive as a refund or reimbursement will form part of their assessable income in the year they receive it. If they did not claim a deduction for the adviser fees, the refund or reimbursement does not form part of their assessable income. However, where the adviser fees were included in the cost base or reduced cost base of any investments, the cost base and reduced cost base must be reduced by the amount of the refund or reimbursement. When the person later disposes of the investment, these reductions will be used to calculate the capital gain or loss they make.

Source: www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Compensation-paid-from-financial-institutions/.

ATO set to issue excess super contribution determinations

From mid-October 2018, the ATO has started issuing excess concessional contributions (ECC) determinations for the 2017–2018 financial year. At the Superannuation Administration Stakeholders Group (SASG) meeting on 12 September 2018, the ATO said super funds should prepare for an influx of engagement and queries from members who receive these ECC determinations in relation to contributions above the $25,000 concessional cap for 2017–2018.

A taxpayer may also receive an amended income tax return assessment together with the ECC determination. This is because any excess concessional contributions are included in the taxpayer’s assessable income for the corresponding financial year (and subject to an interest charge). The taxpayer is also entitled to a 15% tax offset for the tax already paid by the super fund.

A taxpayer has 60 days from receiving an ECC determination to elect to release up to 85% of their excess concessional contributions from their super fund. However, they should first ensure that their super fund has correctly reported their contributions to the ATO before making an irrevocable election to withdraw any excess contributions.

Upon receipt of a valid election to release, the ATO will provide a release authority to the taxpayer’s relevant super fund requiring the amount specified to be paid to the ATO. The taxpayer will receive a credit equal to the amount released to the ATO. The ATO will use any money released from the individual’s super funds to first pay any tax or government debts before refunding any remaining balance to the individual. Accordingly, most taxpayers (below the top marginal rate) should have no tax debt on the released excess concessional contributions included in their assessable income.

Non-concessional contributions determinations

The ATO also started issuing excess non-concessional contributions (ENCC) determinations for 2017–2018 from mid-to-late October 2018. The non-concessional cap from 2017–2018 is $100,000 (or $300,000 over three years for those under 65), provided that they have a total superannuation balance of less than $1.6 million at 30 June of the prior year.

Taxpayers who exceed the non-concessional cap for the year and receive an ENCC determination can elect within 60 days to withdraw the excess non-concessional contributions (plus 85% of the associated earnings) from their super fund. The full amount of the earnings (100%) are then included in the taxpayer’s assessable income (and subject to a 15% tax offset). If an individual does not withdraw the excess contributions, they will be taxed at the top marginal tax rate (plus Medicare levy).

 

The ATO has previously suggested that for “most people” who exceed the non-concessional cap it is “easiest to do nothing”. If a taxpayer does not make an irrevocable election within 60 days of receiving an ENCC determination, the ATO says it will ask the taxpayer’s super funds to release and send excess amounts to the ATO. It will also amend the taxpayer’s income tax assessment to include the associated earnings, which will be taxed at the individual’s marginal tax rate (plus Medicare levy). While the ATO suggests that it is “easiest to do nothing” for “most people” who exceed the non-concessional cap, each taxpayer needs to consider the tax implications for their own circumstances.

Source: www.ato.gov.au/General/Consultation/Consultation-groups/Stakeholder-relationship-groups/Superannuation-Administration-Stakeholder-Group/.