Super Guarantee: “Employees” or “Independent Contractors”?

/in /by

An “employee” for superannuation guarantee purposes includes anyone who is an employee at common law. The relationship between employer and employee is often described as a “contract of service” whereas the relationship between principal and independent contractor is a “contract for services”.

However, defining the contractual relationship between the employer and employee can be a difficult task. The matter of whether a person is an employee is a question of fact to be determined by examining the terms and circumstances of a contract, with regard to the key indicators. No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered.

It is necessary to look beyond the legal form of the contract to the substance of the arrangement. Parties cannot deem a relationship between themselves to be something that it is not simply by giving it a different label. However, the ATO considers that such a clause may be used to help overcome any ambiguity as to the true nature of the relationship.

The changing nature and diversity of modern work arrangements and practices has made it increasingly necessary for the courts to adopt a broader multi-factorial test to discover the “real substance” of the relationship in question. The courts have also shown an increasing willingness to strike down “disguised employment relationships” that deliberately seek to position a relationship outside of the superannuation guarantee regime and other laws.

The absence of a simple and clear definition explaining the distinction between an employee and an independent contractor is problematic for those seeking to comply with their superannuation guarantee obligations. The ATO has issued Ruling SGR 2005/1 which discusses the various indicators that should be considered in determining whether a person is an employee (“contract of service”) or an independent contractor (“contract for services”). Broadly, this requires consideration of the right to control how, where, when and who is to carry out the work. This is often referred to as the “control test”. While the control test is still an important factor (especially for distinguishing traditional employment relationships), it is not the sole indicator of whether or not a relationship is one of employment. Indeed, the control test is just one of the relevant indicators to be considered.

The modern approach taken by the courts and tribunals to determine whether an employment relationship exists is to consider the “totality of the relationship”. In this multi-factorial approach, the question of whether a person is an employee or an independent contractor may be simply expressed as follows:

  • Is the person performing the work an entrepreneur who owns and operates a business?
  • In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Similar occupations but different outcomes

The following two cases decided in the Administrative Appeals Tribunal (AAT) demonstrate that different outcomes can be reached despite similar occupations of the workers involved – and that the outcomes of the cases very much depended on the evidence presented before the AAT.

In Trustee for the SR & K Hall Family Trust v FCT [2013] AATA 681, the plumbers were held to be employees and not independent contractors, despite using their own vehicles and tools. The AAT found the plumbers used the taxpayer’s tools for specialised jobs, wore the taxpayer’s logo and did not present themselves as contractors pursuing their own business independent of the taxpayer. In conclusion, it held the taxpayer had failed to discharge the onus of proving that the superannuation guarantee default assessments that the Commissioner had issued to it were excessive.

In XVQY v FCT [2014] AATA 319, the taxpayer was successful in arguing that the plumbers engaged by it were not employees. The AAT took into account the evidence in relation to control, the non-representation of the employer by the worker, the results character (the workers were responsible for satisfactory completion of the jobs), the capacity of the workers to delegate, the assumption of risk by the workers, and the significant ownership of the tools and equipment of the workers. The AAT considered the taxpayer had adequately discharged the onus of proving its case and set aside the Commissioner’s decision.

For taxpayers seeking to argue that workers are independent contractors and not employees, the above cases demonstrate the need to have evidence to address the various factors the courts and tribunals would consider in assessing whether workers are employees or independent contractors.

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Sort Out the Income You Must Lodge on Your Tax Return

/in /by

Broadly speaking, if you are a resident of Australia, you must annually lodge an income tax return and pay annual taxes on worldwide income from many sources.

If you are lodging directly, the deadline is October 31 for the previous tax year ending on June 30. If the deadline falls on a weekend, you can lodge on the following Monday without incurring a penalty.  Taxpayers who lodge through tax agents should check with them for their deadlines, which vary. You must, however, contact a tax agent by October 31 if you are using one for the first time or are switching to a new one.

Here is a list of the most common sources of income you must report to the Australian Taxation Office (ATO).

Employment

With some exemptions, you must declare all income generated from employment. The most common types of employment income are:

  • Salary, wages and tips;
  • Allowances from your employer, such as a car allowance; and
  • Lump sum payments. Concessional treatment may apply, such as when you receive termination payments.

Pensions, Annuities and Government Payments

  • Pensions, which are series of superannuation income streams, generally have both a taxable and a tax-free component.
  • Annuities — a series of payments typically purchased with a lump sum from a life insurer — also contain taxable and non-taxable elements.
  • Government payments include payments such as age pensions and youth allowances.

Some government payments are subject to income tax while others are not. For example, disability support pensions can be taxable or exempt depending on, among other things, the age of the recipient.

Interest, Dividends and Rent

Interest income is generally taxable. For example, if you put money into a savings account for your child, you may need to declare interest earned on that account. Life insurance bonuses are also taxable.

If you own shares in a company, you must declare all assessable dividends paid or credited to you. You may receive dividends as cash or bonus shares from listed investment companies, public trading trusts, corporate unit trusts and corporate limited partnerships as a distribution. If you are paid or credited with bonus shares, the issuing company should provide you with a statement indicating whether the stock qualifies as a dividend. Payouts are assessable income in the year they are paid or credited to you.

Australian resident company dividends are taxed under a system called “imputation.” The tax the company pays is “imputed” to the shareholders as franking credits attached to their dividends. Depending on your financial circumstances, your might be able to use those credits to offset other tax liabilities.

Rent and rent-related payments are taxable. As an example, money from a bond associated with a lease is taxable if you received it because a tenant defaulted. Other rent-related payments may have to be declared on your income tax return.

Capital Gains

Australia does not have a separate capital gains tax. Gains are simply added to your ordinary taxable income.

Capital gains typically result from the sale of assets, such as real estate, shares or managed fund investments. The gain is the difference between what you paid for the property and the amount you received when you sold it. There are, however, many other ways to generate capital gains. Complex rules govern when gains may trigger a tax obligation, which often depends on the type of asset.

Foreign Sources

If you qualify as an Australian resident, you are taxed on worldwide income. That means you must declare all income from sources outside the country, such as foreign pensions and annuities, foreign employment income, and capital gains on the sale of foreign assets.

Foreign income may also be taxed in the country from which the income is sourced, and that could result in double taxation. However, Australia has tax treaties with more than 40 countries, including all of its major trading partners, that minimise or eliminate double taxation.

Residency requirements are complex, so if you are not sure of your tax status, consult a professional.

Partnerships and Trusts

You must pay income tax on your share of a partnership’s net income and, generally, on trust income you receive as a beneficiary.

Compensation and Insurance

If you lose salary, you may have to declare money you receive from an income-protection scheme, such as Workers’ Compensation or accident insurance. Compensation received for a personal injury caused by others, the payments may be tax-free if certain conditions are met.

Tax-Free Payments

Some payments are not taxable. For example, some Australian government pensions, allowances, first-home saver account government contributions, superannuation co-contributions, child support and spouse maintenance payments are all tax-free.

Income tax regulations can be very complex in some situations so consult with your tax adviser to ensure you meet all your obligations with the ATO.

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Super Guarantee: “Employees” or “Independent Contractors”?

/in /by

An “employee” for superannuation guarantee purposes includes anyone who is an employee at common law. The relationship between employer and employee is often described as a “contract of service” whereas the relationship between principal and independent contractor is a “contract for services”.

However, defining the contractual relationship between the employer and employee can be a difficult task. The matter of whether a person is an employee is a question of fact to be determined by examining the terms and circumstances of a contract, with regard to the key indicators. No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered.

It is necessary to look beyond the legal form of the contract to the substance of the arrangement. Parties cannot deem a relationship between themselves to be something that it is not simply by giving it a different label. However, the ATO considers that such a clause may be used to help overcome any ambiguity as to the true nature of the relationship.

The changing nature and diversity of modern work arrangements and practices has made it increasingly necessary for the courts to adopt a broader multi-factorial test to discover the “real substance” of the relationship in question. The courts have also shown an increasing willingness to strike down “disguised employment relationships” that deliberately seek to position a relationship outside of the superannuation guarantee regime and other laws.

The absence of a simple and clear definition explaining the distinction between an employee and an independent contractor is problematic for those seeking to comply with their superannuation guarantee obligations. The ATO has issued Ruling SGR 2005/1 which discusses the various indicators that should be considered in determining whether a person is an employee (“contract of service”) or an independent contractor (“contract for services”). Broadly, this requires consideration of the right to control how, where, when and who is to carry out the work. This is often referred to as the “control test”. While the control test is still an important factor (especially for distinguishing traditional employment relationships), it is not the sole indicator of whether or not a relationship is one of employment. Indeed, the control test is just one of the relevant indicators to be considered.

The modern approach taken by the courts and tribunals to determine whether an employment relationship exists is to consider the “totality of the relationship”. In this multi-factorial approach, the question of whether a person is an employee or an independent contractor may be simply expressed as follows:

  • Is the person performing the work an entrepreneur who owns and operates a business?
  • In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Similar occupations but different outcomes

The following two cases decided in the Administrative Appeals Tribunal (AAT) demonstrate that different outcomes can be reached despite similar occupations of the workers involved – and that the outcomes of the cases very much depended on the evidence presented before the AAT.

In Trustee for the SR & K Hall Family Trust v FCT [2013] AATA 681, the plumbers were held to be employees and not independent contractors, despite using their own vehicles and tools. The AAT found the plumbers used the taxpayer’s tools for specialised jobs, wore the taxpayer’s logo and did not present themselves as contractors pursuing their own business independent of the taxpayer. In conclusion, it held the taxpayer had failed to discharge the onus of proving that the superannuation guarantee default assessments that the Commissioner had issued to it were excessive.

In XVQY v FCT [2014] AATA 319, the taxpayer was successful in arguing that the plumbers engaged by it were not employees. The AAT took into account the evidence in relation to control, the non-representation of the employer by the worker, the results character (the workers were responsible for satisfactory completion of the jobs), the capacity of the workers to delegate, the assumption of risk by the workers, and the significant ownership of the tools and equipment of the workers. The AAT considered the taxpayer had adequately discharged the onus of proving its case and set aside the Commissioner’s decision.

For taxpayers seeking to argue that workers are independent contractors and not employees, the above cases demonstrate the need to have evidence to address the various factors the courts and tribunals would consider in assessing whether workers are employees or independent contractors.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

 

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Using the Blackhole Expenditure Rule – Starting A Business

/in /by

It costs money to start a business, and generally you cannot deduct those expenses because they are not incurred as part of running a company.

Money spent to start a business is not considered as the cost of carrying on business. For example, before your company starts operating, it cannot deduct such costs as:

  • Performing preliminary research;
  • Traveling to meet potential clients or to secure export markets; or
  • Drawing up employment agreements.

However, you may be able to deduct some expenses that are characteristically typical for your type of organisation. For example, the Australian Tax Office (ATO) has held that an exploration business can deduct administrative expenses before earning assessable income. The allowed deductions include:

  • Renting business premises
  • Interest paid on loans to buy commercial premises;
  • Salaries; and
  • Furniture.

These deductions are subject to rules regarding losses from non-commercial business activities.

In addition, some business-related capital expenditures that cannot usually be  deducted but are legitimate business costs may be written off over five years under the blackhole expenditure rule. This applies only where the expenses are not otherwise accounted for — or are denied by some tax law provision — and applies only to entities which produce, or plan to produce, assessable income.

Under the blackhole rule, for example, your operation can write off such capital expenditures as the cost of feasibility studies, setting up or restructuring.

The rule also covers many costs related to holding depreciating assets and certain expenses forming a part of the cost base of a CGT asset such as land and buildings.

Where a capital cost is not addressed elsewhere in the tax laws, a deduction is likely to be available over five years for costs incurred on or after 1 July 2005. These expenses include:

  • Marketing costs, not including entertainment;
  • The costs of checking land titles, but not the expenses involved in traveling to find assets to purchase;
  • Loan application and mortgage discharge fees;
  • Capital and non-capital costs of owning an asset acquired after 20 August 1991, but not the costs of becoming the owner; and
  • Certain lease and licence termination payments.

This is a complex area of tax deduction and capitalisation. Consult your adviser who can help you to plan early-stage spending in ways that let you take advantage of the blackhole expenditure rule.

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

 

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Electronic data-matching

/in /by

Electronic data-matching is a key tool used by the ATO to check compliance. Most people are willing to meet their tax and superannuation responsibilities. However, there are a small minority of taxpayers who don’t fully meet their responsibilities. The ATO says it uses a range of measures to identify those taxpayers, including the use of electronic data-matching.

Data-matching helps the ATO to identify fraud against the Commonwealth. The ATO says its data-matching programs make it possible for it to do the following:

  • detect people and businesses operating outside the tax system;
  • ensure that people and businesses required to lodge returns do so;
  • check that income and capital gains are declared correctly;
  • check claims for GST and fuel tax credits; and
  • recover debt.

The ATO says it receives data from a range of external sources, including banks, financial institutions and other government agencies. The data is then electronically matched with the ATO’s own data holdings to help it identify, for example, individuals who may not be reporting all their income.

An example of something that could easily be picked up in a data-match that could attract the attention of the ATO would be the purchase or sale of houses, cars and boats – but with little to no income declared in tax returns. As well, the ATO can also check whether taxpayers have declared all bank interest in their returns. It can also cross-reference social security payments with tax returns.

The ATO is also looking to increase its use of data analytics to predict the lodgment patterns of taxpayers, their propensity and capacity to pay in debt cases, and objections from audit cases.

The ATO has broad powers to collect information from both public and private organisations. Some of the main types of information sought by the ATO include the following:

  • investment income information from banks, financial institutions and investment bodies;
  • payments to contractors and employees from employers;
  • details of motor vehicles sold, transferred or newly registered from state and territory motor vehicle registering bodies;
  • pensions, benefits and other payments from other government bodies;
  • substantial sales made on websites such as eBay;
  • share transactions from stock exchanges and share registries; and
  • payments made for building and construction services from businesses in the building and construction industry.

From time to time, the ATO will release details of specific data-matching projects. Some of these projects take place over a number of years; however, some are ongoing. Examples of data-matching projects undertaken by the ATO include the following:

  • Credit and debit card sales – this project involved the ATO obtaining data from banks and financial institutions of credit and debit card sales made by businesses. This project was largely targeted at identifying business owners under-reporting or omitting business income.
  • Motor vehicle sales and transfers – the ATO sought data from state and territory motor vehicle registering bodies. The project gathered data on all motor vehicles that were sold, transferred or newly registered with a value of $10,000 or more. This project targeted individuals who were not reporting all their income or who were trying to avoid their tax obligations.
  • Significant online selling – the ATO targeted significant online selling to help it identify people operating “off the books” and not declaring all their income. Note that the Government has also matched social security records against taxpayers running successful eBay stores to help it identify cases of welfare payment fraud.
  • Share market transactions – the ATO sought data from stock exchanges and share registries to help it assess whether taxpayers were correctly declaring capital gains and income from the disposal or sale of shares.

Taxpayers need to be aware that the ATO can extend the length of time for which such projects run. It can also expand the breadth of information sought under the projects. Taxpayers should also be aware of information exchange agreements the ATO has with various foreign revenue authorities. From time-to-time, the ATO may even target a specific industry to identify businesses that may be participating in the cash economy.

Note that taxpayers’ privacy is protected by the Privacy Act 1988 and the strict secrecy provisions of the Income Tax Assessment Act 1936, the Taxation Administration Act 1953 and other tax law. These laws prohibit ATO staff from accessing, recording or disclosing any person’s tax information except in the performance of ATO staff duties.

Where the ATO finds a discrepancy

Where a discrepancy is identified (eg interest income not declared in a tax return), the ATO said it will check to see if the amount has been returned at another label by mistake. If the ATO decides to contact the taxpayer in relation to a discrepancy, it will provide the taxpayer with details of the discrepancy, and give the taxpayer the opportunity to check their records and contact the ATO if it has made a mistake.

Where a person has made an error due to poor record-keeping or a misunderstanding of the law, the ATO said it will work with them to correct their tax return and to improve their understanding of their obligations.

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

 

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Small businesses not seeking accountants’ advice

/in , , /by

Source: http://www.accountantsdaily.com.au/professional-development/9168-sme-missing-out-by-not-seeking-accountants-advice

The Voice of Australian Business survey, undertaken by Bentleys, shows SMEs are missing out by not taking advantage of this expert advice.

The survey revealed a number of alarming statistics such as less than half of all surveyed businesses used an accountant or financial adviser to review their banking relationship in the last year.

Ross Prosper, director of taxation and business services at Bentleys Western Australia, said SME owners who don’t seek the services of an adviser could be doing their business a disservice.

“With approximately two million SMEs operating in Australia, these businesses form a significant part of the Australian economy,” he said.

“While experts in their own field, many SME owners are failing to maximise opportunities by engaging professional external accountants and financial advisers, who are experts in business and financial advice,” Mr Prosper added.

When asked who they turned to for advice and insight in running their business; friends, family and online media were the most common sources for small business owners. The strongest influence on business decision making was financial data from their own business (37 per cent) beating out accountants with just 30 per cent.

When examining the number of SMEs who use the services of an external consultant, the size of the business was seen to have a direct correlation. The survey showed 29 per cent of small businesses and 38 per cent of medium-size businesses reported using external consultants and advisers, compared to 18 per cent of micro businesses.

Mr Prosper said regardless of business size, SME owners should feel comfortable in seeking the insights of an external adviser.

“Ultimately, the goal of a business or financial adviser is to help clients achieve their goals. That may mean simply creating a budget to manage cash flow or developing an entire business strategy and then holding them accountable against this plan,” he said.

“Business advice and financial planning isn’t about pushing your client to purchase a product, it’s about advising and assisting them to reach their goals. A good adviser will provide strategic advice from a whole-of-wealth perspective, so that owners are free to focus on other aspects of the business that will ultimately help the business to grow.

“Ask friends and family for a recommendation or do your own research to find someone who you think will be a good fit for you and your business. And remember, a good external consultant will have a genuine interest in the success of your future; won’t push unnecessary products; and will be with you for the long term,” said Mr Prosper.

Trust Tax Tips 2016

/in /by

Here are some useful tax tips and reminders concerning trusts:

Beneficiaries

Trustees should check their trust deed and make sure that they only make distributions to eligible beneficiaries. Only an eligible beneficiary can be presently entitled to income of a trust estate. If distributions are not made to eligible beneficiaries then the net (taxable) income of the trust may be assessed to the trustee or default beneficiaries.

Trustee resolutions

To ensure beneficiaries are presently entitled to trust income, all trustees must make a resolution by 30 June of that income year. This resolution establishes which beneficiaries are presently entitled to the trust’s income and helps determine who is to be assessed on the trust’s taxable income. If the trust deed requires an earlier resolution to be made, the requirements of the deed should be followed.

Lodging trust income tax returns

It is important to lodge the income tax return by the lodgment due date. Generally all trusts that derive income during the year must lodge an income tax return. It is also important that labels 53A and 54W on the trust tax return concerning distributable income are completed correctly.

Exempt entities as beneficiaries

The Government introduced two rules for the 2010–2011 and later income years that may apply where a trustee makes a tax-exempt beneficiary entitled to income of a trust estate.

The first is a “pay or notify” rule. Where a tax-exempt entity has been made presently entitled to income of the trust estate, the trustee must either pay the entire entitlement to that entity or notify them of their entitlement within two months of the end of the income year. Otherwise, the trustee will be assessed in relation to the amount.

The second rule, called a “benchmark percentage” rule, applies where a tax exempt entity is presently entitled to an amount (excluding capital gains or franked distributions) that results in a disproportionate share of the net income being attributed to it. In this case the trustee will be assessed on this amount. This would occur, for example, if the tax-exempt entity is made presently entitled to all of the trust’s income and that amount is significantly less than the trust’s taxable income. In those circumstances, the trustee would be assessed on the disproportionate or excessive amount originally attributed to the tax-exempt entity.

For both rules, the taxpayer may apply to the ATO to not assess the trustee.

Property developments trusts

The ATO has advised that it has noticed some trusts in the property development industry are characterising their business income as capital, rather than revenue, to take advantage of the 50% CGT discount. According to the ATO, the trust should not be characterising the profits from the sale of the developed property as being a capital gain because the trust is either carrying on a business or is involved in a profit-making undertaking involving the development.

Discretionary distributions to SMSFs

The ATO has highlighted concerns relating to self-managed superannuation fund (SMSF) annual returns where discretionary trusts distributions were reported. The ATO said trustees were asked to check the trust deed of the distributing trust (and any resolutions) to determine whether the amount reported at Label 11M (gross trust distributions) was non-arm’s length income. The ATO has reminded trustees to ensure distributions from discretionary trusts are correctly reported in the SMSF annual return.

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

 

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Phone & Internet Claims – Tax Deduction 2016

/in /by

The ATO has released information on claiming deductions for mobile, home phone and internet expenses for work purposes. The following are some key points made by the ATO.

Substantiating claims

Taxpayers need to keep records for a four-week representative period in each income year to claim deductions of more than $50. These records may include diary entries, including electronic records, and bills. Evidence that the employer expects the taxpayer to work at home or make some work-related calls will also help the taxpayer demonstrate that they are entitled to a deduction.

Apportioning work use for phones

As there are many different types of plans available, taxpayers will need to determine their work use using a reasonable basis. The ATO provides the following guidance.

Incidental use

If work use is incidental and the deduction claim does not exceed $50 in total, the ATO says the taxpayer may make a claim based on the following, without having to analyse their bills: $0.25 for work calls made from the taxpayer’s landline; $0.75 for work calls made from the taxpayer’s mobile; and $0.10 for text messages sent from the taxpayer’s mobile.

Usage is itemised on taxpayer’s bills

If the taxpayer has a phone plan and receives an itemised bill, the taxpayer needs to determine their percentage of work use over a four-week representative period that can then be applied to the full year. The percentage needs to be worked out on a reasonable basis. This could include: the number of work calls made as a percentage of total calls; the amount of time spent on work calls as a percentage of total calls; or the amount of data downloaded for work purposes as a percentage of total downloads. The ATO provides the following example.

Example – phone calls are itemised on your bill

Julie has an $80 per month mobile phone plan, which includes $500 worth of calls and 1.5GB of data. She receives a bill which itemises all of her phone calls and provides her with her monthly data use. Over a four-week representative period Julie identifies that 20% of her calls are work-related. She worked for 11 months during the income year, having had 1 month of leave. Julie can claim a deduction of $176 in her tax return (20% x $80 x 11 months).

Usage is not itemised on taxpayer’s bills

If the taxpayer has a phone plan but does not receive an itemised bill, the taxpayer can determine their work use by keeping a record of all their calls over a four-week representative period and then calculate their claim using a reasonable basis. The ATO provides the following example.

Example – non-itemised account

Ahmed has a prepaid mobile phone plan which costs him $50 per month. Ahmed does not receive a monthly bill, so he keeps a record of his calls for a 4-week representative period. During this 4-week period, Ahmed makes 25 work calls and 75 private calls. Ahmed worked for 11 months during the income year, having had 1 month of leave. Ahmed calculates his work use as 25% (25 work calls/100 total calls). He claims a deduction of $138 in his tax return (25% x $50 x 11 months).

Bundled phone and internet plans

Phone and internet services are often bundled. When taxpayers are claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. If other household members also use the services, the taxpayer needs to take into account their use in their calculation.

If the taxpayer has a bundled plan, they need to identify their work use for each service over a four-week representative period during the income year. This will allow the taxpayer to determine their pattern of work use, which can then be applied to the full year. A reasonable basis to work out the taxpayer’s work-related use could include:

  • for internet usage:
    • the amount of data downloaded for work as a percentage of the total data downloaded by all members of the taxpayer’s household; and
    • any additional costs incurred as a result of the work-related use, eg if work-related use results in the taxpayer exceeding their monthly cap;
  • for phone usage:
    • the number of work calls made as a percentage of total calls;
    • the amount of time spent on work calls as a percentage of total calls; and
    • any additional costs incurred as a result of work-related calls, eg if work-related use results in the taxpayer exceeding their monthly cap.

The ATO provides the following example.

Example 1 – apportioning bundled services

Sujita has a $100 per month home phone and internet bundle. The bill identifies that the monthly cost of Sujita’s phone service in her bundle is $40, and her internet service is $60. Sujita brings in her mobile phone plan of $90 per month and receives a $10 per month discount. Her total costs for all services are $180 per month. Sujita worked for 11 months during the income year, having had 1 month of leave. Based on her itemised accounts, Sujita determines that the work-related use of her mobile phone is 20%. Sujita also uses her home internet for work purposes, and based on her use she determines that 10% of her use is for work. Sujita does not use her home phone for work calls. As the components are part of a bundle Sujita can calculate her work-related use as follows:

Step 1 – work out the value of each bundled component

Mobile phone

$90 per month minus the $10 per month discount = $80 per month

Internet

$60 per month as identified on her bill

Home phone

Sujita does not need to determine the home phone costs as she does not use this service for work purposes.

Step 2 – apportion your work related use

Home internet use

10% work-related use x $60 per month = $6 work-related use per month x 11 months

Sujita can claim $66

Mobile phone use

20% work-related use x $80 = $16 per month x 11 months

Sujita can claim $176

In her tax return Sujita claims a deduction of $242 for the financial year ($66 home internet use + $176 mobile phone use)

Sujita cannot claim work-related use of her home phone as she did not use it for work.

ATO warns on over-claiming

Taxpayers should be aware that unusually high work-related expense claims may attract the attention of the ATO. It is important to carefully review deductions before lodging your tax return to avoid a delay in getting a return.

In this regard, the ATO has reminded taxpayers that its ability to identify and investigate claims that differ from the norm is improving due to rapid technology enhancements and data-matching.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

 

Article as seen at http://checkpointmarketing.thomsonreuters.com/

ATO Tax Audits

/in /by

Voluntary compliance of taxpayers is the ATO’s main goal. However, the ATO also undertakes a range of compliance activities to detect, deter and address non-compliance. If the ATO considers that a taxpayer may not be meeting certain tax obligations, or if it does not believe that a review can be sufficient, it may conduct an audit of the taxpayer’s tax affairs.

A tax audit is a formal examination by the ATO of a taxpayer’s tax affairs to see if the taxpayer has complied with the tax laws, including whether all assessable income has been declared and that the deductions and tax offsets claimed in a tax return are legitimate.

Apart from the statutory powers of access and of obtaining information (which are subject to certain limitations, including legal professional privilege and public interest immunity), tax audits are not governed by any specific provisions other than those sections that entrust the Commissioner of Taxation with the general administration of tax legislation. The Commissioner may conduct a tax audit notwithstanding the existence of pending criminal and civil proceedings, provided there is no interference in the administration of justice.

Decisions made in the course of an audit are only reviewable under the Administrative Decisions (Judicial Review) Act 1977 if made under a specific legislative provision.

The ATO frequently uses statistical sampling to help with audits. In Re Carter and FCT [2013] AATA 141, the ATO used cost of goods sold (COGS) industry benchmarks in the course of an audit of a florist’s business, leading to the issue of amended assessments. The AAT ruled that, in the circumstances, it was acceptable to use those benchmarks.

Professional fees incurred by a taxpayer in relation to a tax audit are generally deductible under s 25-5 of the Income Tax Assessment Act 1997.

Conduct of audits

The ATO takes the taxpayer’s circumstances into account when making decisions, and seeks to minimise the cost and inconvenience, caused by audits, to the taxpayer. Taxation officers are required to conduct audits in an impartial, fair, reasonable and professional manner, treating all taxpayers in accordance with the law and the principles outlined in the Taxpayers’ charter. The charter sets out:

  • the service and other standards a taxpayer can expect from the ATO,
  • a taxpayer’s rights under the law;
  • and a taxpayer’s tax obligations.

The charter has no legal effect, but the Commissioner has said that the ATO will always follow the charter.

During the audit, taxation officers are required to:

  • explain the purpose of any interview or visit;
  • ask clear and unambiguous questions;
  • answer any reasonable and relevant questions;
  • allow the taxpayer to be represented (except in limited circumstances);
  • inform the taxpayer in advance when the taxation officer will have a legal adviser present; and
  • give the taxpayer reasonable time to collect records, documents and papers and to gather information (unless the ATO has reason to believe that the existence or integrity of the documents is at risk).

The ATO expects taxpayers to provide complete and accurate responses to requests for information and to be truthful and honest in their dealings with the ATO. Tax shortfall penalties may be increased if the taxpayer obstructs the ATO during an audit.

The taxpayer will be given a signed copy of the taxation officer’s written record of interview (if requested) and a written receipt for any records collected, and will be kept informed of the progress of the audit. The ATO may appoint outside consultants to assist with an audit, without consulting the taxpayer.

A taxpayer can request copies of information in the taxpayer’s audit files under the Freedom of Information Act 1982. However, there are a number of grounds on which the Commissioner may refuse access to certain information.

At the completion of or, in some cases, during an audit, the ATO will:

  • explain the basis of any adjustments made as a result of the audit;
  • inform the taxpayer of any errors detected (which has resulted in the taxpayer paying too much or too little tax);
  • explain the reasons for any penalty or interest;
  • give the taxpayer the opportunity to explain any circumstances which could justify a reduction of any penalty or interest; and
  • provide the taxpayer with written notification of the outcome of the audit, the taxpayer’s review rights and any remedies that may be available.

If necessary, an amended assessment will be issued, although it should be noted that the taxpayer’s right to object to an amended assessment is restricted.

It is not uncommon for disputed issues which arise during an audit to be settled by negotiation. Settlement discussions (which are on a “without prejudice” basis) may take place at any stage of a tax dispute. The ATO may seek to settle a tax dispute where it is considered to be consistent with good management of the tax system.

There is no benchmark for how long an audit should last, as the complexity varies from case to case. However, the ATO aims to complete large company audits within two years. Where the taxpayer has been cooperative, the ATO has committed to remit any general interest charge (GIC) to the base rate for any period that the audit extends beyond two years. Note: the Commissioner also has the discretion to remit the GIC.

Audit techniques

The methods of auditing individuals and small businesses include the following:

  • a “T” account, which is prepared in conventional form, recording all items of cash income and expenditure;
  • asset betterment evaluation, which refers to the process of establishing the increase or decrease in the taxpayer’s net assets over a particular period, with adjustments for non-allowable expenditure, non-taxable receipts and items, such as depreciation, that do not involve expenditure. The object is to verify the correctness of any taxable income returned; and
  • specific audits of particular business areas that have been found to require regular scrutiny, eg trading stock, repairs, management and service fees, depreciation, bad debts and salaries to associated persons.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Federal Election on 2 July 2016

/in /by

The Treasurer has handed down his first Budget, an “election Budget”. Labor has made it clear that it will reject some of the key revenue measures announced in the Budget. A number of Bills containing important tax changes have been enacted and some other Bills have lapsed. With less than two months for an election campaign for the two main political parties, now is a good time to recap what has happened so far.

Budget night

On 3 May 2016, Treasurer Scott Morrison delivered his first Budget. Mr Morrison said the Budget was a national economic plan for jobs and growth, for a stronger economy.

“It’s not a typical Budget,” he said. “This is not a time to be throwing money around, you have to spend money wisely, you have to target it and the ultimate test is will it drive jobs and growth.”

The Treasurer said that the people making the economy work were small-to-medium enterprises (SMEs). The Budget announced a number of changes to support small businesses, with some changes starting on 1 July 2016.

The Budget contained a number of significant taxation and superannuation announcements. These included a modest reform of the tax brackets by increasing the $80,000 tax bracket threshold to $87,000, in an attempt to address tax bracket creep; major superannuation changes (balance cap on retirement accounts, lifetime non-concessional contributions cap, transitional to retirement change); a further crackdown on multinational enterprise (MNE) tax avoidance; and GST changes on the importation of low-value goods.

The Government also confirmed that the 2% temporary budget deficit levy (on incomes over $180,000) would expire at the end of the 2016–2017 financial year, as currently legislated.

While the Budget itself was relatively quiet on GST changes, in a pre-Budget interview on Sky News on 1 May 2016, the Prime Minister said there would be no change to the GST in the next Parliament.

“We’ve looked very carefully at the proposal to raise the GST…but we’ve rejected it,” Mr Turnbull said. “I can give you this absolute undertaking: there will be no change to the GST in the next Parliament,” he said. [Note: presumably this means there would be no change to the GST rate or base in the next term of a Coalition Government.]

The major revenue measures announced in the Budget include the following:

  • increasing the tax bracket at which the 37% tax rate starts from $80,001 to $87,001 from 1 July 2016;
  • a phased reduction in the company tax rate to 25% by 2026–2027;
  • major SME tax changes – small business threshold to be increased to $10 million and reduced tax rates for small businesses;
  • new measures directed at MNE tax avoidance, eg a diverted profits tax, hybrid mismatch measures, strengthened transfer pricing rules and a significant increase in administrative penalties;
  • superannuation:
    • $1.6 million transfer balance cap for retirement accounts;
    • Non-concessional contributions: $500,000 lifetime cap from Budget night;
    • Concessional contributions cap cut to $25,000 from 1 July 2017;
    • Concessional contributions catch-up for account balances less than $500,000;
    • Superannuation contributions tax (extra 15%) for income more than $250,001;
    • Transition to retirement income streams – integrity proposal.
  • The Government is to impose GST on goods imported by consumers regardless of value. The new rules will commence on 1 July 2017.

The Opposition’s Budget reply

On 5 May 2016, Federal Opposition Leader Bill Shorten delivered his reply speech stating that Labor will not support the Government’s 10-year plan to reduce the company tax rate to 25% for all companies by 2026–2027. However, Labor will support a tax cut for small businesses with a turnover of less than $2 million per year. He also confirmed that Labor is opposed to any increase in the GST rate.

On the superannuation front, Mr Shorten said Labor’s policies would only ever be prospective. As such, Labor does not support the Government’s proposed $500,000 lifetime cap for non-concessional contributions from Budget night. [Note: the Government’s proposed $500,000 lifetime cap would take into account all non-concessional contributions made on or after 1 July 2007 – although contributions made before the 3 May 2016 Budget night would not result in any tax penalty.]

Instead, Mr Shorten said Labor would support its own policies to reduce the superannuation tax concessions for the top end. [Note: presumably, this means that Labor does not support the Government’s proposed $1.6 million transfer balance cap for retirement accounts from 1 July 2017. If elected, Labor would run with its policy to cap the tax exemption for earnings on a superannuation fund’s pension at $75,000 per annum per person (roughly equivalent to earnings at 5% from a $1.5 million account balance) from 1 July 2017.]

Mr Shorten said Labor would support the Government’s proposed bracket creep measure to increase the 32.5% personal income tax threshold from $80,000 to $87,000 from 1 July 2016. However, Labor does not support the removal of the 2% temporary budget deficit levy (on incomes over $180,000) which is legislated to expire at the end of the 2016–2017 financial year.

Bills that received Royal Assent and those that have lapsed

A number of Bills containing important tax changes have received Royal Assent (just before the 2016 Federal Election was announced). These Bills include the following:

  • the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 which contains the following amendments:
    • ?amends the ITAA 1997 to encourage new investment in Australian early-stage innovation companies with high growth potential by providing investors in such companies with tax incentives. These incentives include a 20% carry-forward non-refundable offset and specific CGT exemptions; and
    • ? amends the early-stage venture capital limited partnership (ESVCLP) and venture capital limited partnership (VCLP) regimes within the Venture Capital Act 2002 and ITAA 1997 to improve access to venture capital investment and make the regimes more attractive to investors.
  • the Tax and Superannuation Laws Amendment (2016 Measures No 1) Bill 2016 which contains the following amendments:
    • ? amends the GST Act to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to GST in a similar way to equivalent supplies made by Australian entities;
    • ?amends the GST Act to better target the way Australia’s GST rules apply to cross-border supplies that involve non-resident entities; and
    • ?amends the tax law to increase the flexibility of Farm Management Deposits to assist primary producers.

With the issue of writs on 9 May 2016 for the holding of the 2016 Federal Election, all Bills that have not been passed by both Houses of Federal Parliament have lapsed. The Government is now in caretaker mode. These are the Bills:

  • The Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016 which  proposes to establish a remedial power for the Tax Commissioner to allow the Commissioner to make, by disallowable legislative instrument, one or more modifications to the operation of a taxation law to ensure the law can be administered to achieve its intended purpose or object.
  • The Tax and Superannuation Laws Amendment (2015 Measures No 3) Bill 2015 which proposes to abolish the seafarer tax offset and to reduce the research and development (R&D) tax offset rates by 1.5 percentage points.
  • The Superannuation Legislation Amendment (Choice of Fund) Bill 2016 which contains measures to enable employees under workplace determinations or enterprise agreements made from 1 July 2016 to choose their own superannuation fund.

Note that the lists above are not exhaustive.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/