ATO Tax Audits

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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

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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/

2016 Federal Budget Summary

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In this Special Issue we summarise the key announcements of the 2016 Federal Budget. 

Personal taxation

Personal tax rates: small tax cut from 1 July 2016

From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000 in an attempt to address tax bracket creep. The Government expects this will stop around 500,000 taxpayers facing the 37% marginal tax rate and prevent average full-time wage earners from moving into the second-top tax bracket until 2019–2020.

Budget deficit levy not extended

In the lead-up to the Budget, the Treasurer indicated that the 2% Budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial three years. The levy applies for three years from 1 July 2014, and is due to cease at the end of the 2016–2017 financial year.

Business taxation

Company tax rate to reduce to 25% by 2026–2027

The Government intends to reduce the company tax rate to 25% over the next 11 income years.

The measure will be phased in from 1 July 2016, depending on company size (ie aggregated annual turnover). Small businesses will benefit sooner. The phase-in for all companies will be completed in the 2026–2027 income year.

Franking credits will continue to be calculated in the usual manner, by reference to the amount of tax paid by the company making the distribution.

Small business threshold to increase to $10 million

The small business entity threshold will increase from $2 million to $10 million from 1 July 2016.

As a result, a business with an aggregated annual turnover of less than $10 million will be able to access a number of small business tax concessions, including:

  • the simplified depreciation rules;
  • the simplified trading stock rules;
  • a simplified method of paying PAYG instalments calculated by the ATO;
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
  • immediate deductibility for various start-up costs;
  • a 12-month prepayment rule; and
  • the more generous FBT exemption for work-related portable electronic devices.

CGT concessions

The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).

Reduced tax rates for small business

The company tax rate for small business entities will reduce to 27.5% (from 28.5%) from the 2016–2017 income year. The rate is set to reduce further to 27% in 2024–2025 and then by one percentage point per year until it reaches 25% in 2026–2027.

Unincorporated businesses

To complement the company tax rate reductions, the tax discount (or tax offset) for unincorporated small businesses (eg sole traders and partners in a partnership) will increase over a 10-year period from 5% to 10%.

The tax discount will increase to 8% on 1 July 2016, remain constant at 8% for eight years, then increase to 10% in 2024–2025 and13% in 2025–2026, reaching a new permanent discount of 16% in 2026–2027. The maximum value of the discount will remain at $1,000.

From 1 July 2016, access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million (the current threshold is $2 million).

GST

GST and importation of low-value goods

From 1 July 2017, GST will be imposed on goods imported by consumers, regardless of the goods’ value. The GST liability will be imposed on overseas suppliers, using a vendor registration model. This means suppliers with Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia.

These arrangements will be reviewed after two years to “ensure they are operating as intended and take account of any international developments”.

GST small business taxpayers: election to use cash basis

From 1 July 2016, the Government proposes to extend the option for taxpayers to use the cash basis of accounting for GST to small businesses with an annual turnover of less than $10 million. Such entities would be able to account for GST on a cash basis and pay GST instalments as calculated by the ATO.

Superannuation

Superannuation pension phase: $1.6 million transfer balance cap for retirement accounts

From 1 July 2017, the Government proposes to introduce a transfer balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into a tax-free “retirement account” (also known as retirement phase or pension phase). Subsequent earnings on these pension transfer balances will not be restricted.

This transfer balance cap for amounts transferred into pension phase is intended to limit the extent to which the tax-free benefits of retirement phase accounts can be used for tax and estate planning.

Non-concessional contributions: $500,000 lifetime cap from Budget night

A lifetime non-concessional contributions cap of $500,000 is effective from 7.30 pm (AEST) on 3 May 2016. The lifetime non-concessional cap (indexed) will replace the existing cap of up to $180,000 per year (or $540,000 every three years under the bring-forward rule for individuals under 65).

The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Contributions made before 7.30 pm AEST on 3 May 2016 cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings (AWOTE).

Concessional contributions cap cut to $25,000 from 1 July 2017

The annual concessional contributions cap will be reduced to $25,000 for all individuals, regardless of age, from 1 July 2017. The cap will be indexed in line with wages growth.

The concessional contributions cap is currently set for the 2015–2016 and 2016–2017 income years at $30,000 for those under age 49 on 30 June of the previous income year (or $35,000 for those aged 49 or over on 30 June of the previous income year).

Members of defined benefit schemes will be permitted to make concessional contributions to accumulation schemes. However, the $25,000 cap will be reduced by the amount of their “notional contributions”.

Concessional contributions catch-up for account balances under $500,000

From 1 July 2017, individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions for “unused cap amounts” where they have not reached the concessional contributions cap in previous years. Unused cap amounts will be carried forward on a rolling basis for five consecutive years. Only unused amounts accrued from 1 July 2017 will be available to carry forward. The measure will also apply to members of defined benefit schemes.

Superannuation contributions tax (extra 15%) for incomes $250,001+

The income threshold above which the additional 15% Div 293 tax cuts in for superannuation concessional contributions will be reduced from $300,000 to $250,000 from 1 July 2017.

Currently, individuals above the high income threshold of $300,000 are subject to an additional 15% Div 293 tax on their “low tax contributions” (essentially concessional contributions), effectively doubling the contributions tax rate for concessional contributions.

The extra 15% Div 293 tax does not apply to concessional contributions which exceed an individual’s concessional contributions cap (proposed to be set at $25,000 for all taxpayers from 1 July 2017). Such excess concessional contributions are effectively taxed at the individual’s marginal tax rate. The maximum amount of Div 293 tax payable each year will be limited to $3,750 (ie 15% of the $25,000 cap) from 1 July 2017.

Tax deductions for personal super contributions extended

From 1 July 2017, all individuals up to age 75 will be eligible to claim an income tax deduction for personal super contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional super contributions up to the concessional cap.

To access the tax deduction, individuals must lodge a notice of intention to claim the deduction (generally before they lodge their income tax return) with their super fund or retirement savings provider. Individuals will be able to choose how much of their contributions to deduct.

Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes.

Please contact our office for further information on (02) 9954 3843.

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

Changes in Higher Education Loan Programme (HELP) debt and/or a Trade Support Loans (TSL) Debt

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Australians with a Higher Education Loan Programme (HELP) debt and/or a Trade Support Loans (TSL) debt who are moving overseas for longer than six months will need to provide the ATO with their overseas contact details within seven days of leaving the country. The requirement follows recent legislative changes.

ATO Assistant Commissioner Graham Whyte has said that affected people can provide their international contact details using the ATO’s online services (for example, through their ATO account linked to myGov).

“Don’t worry if you don’t know your new international residential address yet. Just provide us with your best contact address while you’re away, like your parents’, and update your contact details when you’re settled. The most important thing is that you’re still able to receive correspondence from us while you’re overseas”, said Mr Whyte.

Australians who are already overseas need to update their details no later than 1 July 2017. From 1 July 2017, anyone living overseas and earning above the minimum repayment threshold will be required to make loan repayments, just as they would if they were living in Australia.

“We will be in touch closer to the time with more information about how to report income and make loan repayments”, Mr Whyte said. “For now, all travellers with a HELP and/or TSL debt need to do is update their details and factor in potentially making repayments from 1 July 2017”, he added.

Repayment income and rates

A notice has been gazetted specifying the 2016–2017 financial year HELP repayment income thresholds and rates. They are shown in the following table.

HELP repayment thresholds and rates 2016–2017
For repayment income in the range Percentage rate to be applied to repayment income
Below $54,870 Nil
$54,870 to $61,120 4%
$61,121 to $67,369 4.5%
$67,370 to $70,910 5%
$70,911 to $76,223 5.5%
$76,224 to $82,551 6%
$82,552 to $86,895 6.5%
$86,896 to $95,627 7%
$95,628 to $101,900 7.5%
$101,901 and above 8%

Getting help

From 1 July 2017, student debt holders will need to work out their worldwide income for the 2016–2017 financial year and report details to the ATO.

The arrangements will apply to both new and existing debts. Debts will continue to be indexed each year until paid off. Students can make additional voluntary repayments at any time to reduce their debt, and the debts can be repaid from overseas.

You may wish to seek professional tax advice to determine your residency status and assess your worldwide income. Please contact our office for further information on (02) 9954 3843.

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

Do You Have to Pay Capital Gains Tax When Selling a Home?

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Let’s say you have been living in your only home for many years but now you want to move to a smaller place. You have built up quite a bit of equity so you are likely to receive a large profit when you sell. Will you have to pay capital gains tax on the money? Generally speaking, you do not need to pay capital gains tax when you sell your home because it likely falls under the “main residence exemption” to capital gains tax.
The home is strictly residential and not used to produce income.Specifically, you may not be liable for any capital gains tax when selling your home if the following conditions are satisfied:

  • The place has been your home for the entire period of ownership.
  • Your property satisfies certain conditions related to things like the size.

If you satisfy some but not all of the above conditions, you may be liable for some capital gains tax, but perhaps not the full amount that would normally be payable. Please consult your adviser for details. There are many situations where tricky capital gains tax questions can arise relating to the sale of a home. For example, suppose you are in the process of moving from one home to another and there is a period of time during which you own two homes at the same time. How do the rules then apply when you sell your first home? Your adviser can provide answers to such questions.

When considering whether you may be liable for capital gains tax when selling your home, here are some answers to commonly asked questions:

What is a “Place?”

The place or dwelling must be mainly residential. It can be a traditional home, cottage, apartment, unit in a retirement village, houseboat or a mobile home.

Is the Place Your Main Residence?

Although there is no single decisive factor here, things you should consider are the type of things that make a place “a home” in the ordinary sense. For example, some important considerations include:

  • Are your personal belongings in the home?
  • Do you have utility services (telephone, gas or electricity) connected to the address?
  • Is your mail delivered to the address?
  • Is this your address on the electoral roll?

There are many other factors to consider that vary depending on individual circumstances. Ask your tax adviser what factors might work to your advantage.

What Is Your Ownership Period?

As mentioned above, the place must be your home for the whole time you own it in order to be fully exempt from capital gains tax. This is referred to as the ownership period. It generally starts on the date you get legal ownership under a contract and ends on the date of sale under a contract.

But there can be certain complications to this rule. For example, if after you buy a home, you cannot move in straight away for some reason. You generally may have to wait until you move in to claim the place as your home for capital gains tax purposes. Consult your adviser for your specific situation.

What if I Want to Build a Place on Land I Own?

There are also specific rules if you build a place on land you already own. Generally, land by itself may not be considered a main residence. Only after you finish building a place and it becomes your home, can you claim the capital gains tax exemption when you sell. However, there are certain circumstances where you can treat land as your main residence.

Further advice

The above is a discussion only, and further advice should be obtained before implementing a new strategy. Please contact our office to discuss your circumstances and to obtain tailored advice.

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

Are the costs of establishing a self-managed super fund (SMSF) deductible?

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Answer: 

The costs of establishing a superannuation fund would typically be classified as non-deductible capital expenditure. Clearly the SMSF trust – or any interest in the trust – does not qualify as a “depreciating asset” for the purposes of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997).

A “blackhole” deduction under section 40-880 of the ITAA 1997 may be available (5-year write-off), but the key issue would be whether the SMSF proposes to carry on a business: see section 40-880(1). This is a complex issue, as typically superannuation funds are involved in passive investments rather than conducting a business.

However, a superannuation fund can carry on a business of investing or trading in shares – this is acknowledged in Taxation Ruling TR 93/17. (Whether an entity is carrying on a business is considered in Taxation Ruling TR 97/11.)

The factors that need to be considered include the following:

  • the purpose and intention of the taxpayer in engaging in the activities (to be assessed objectively);
  • an intention to make a profit from the activities (to be assessed objectively), even if only a small profit is made or a loss is incurred (although if a loss is incurred every year for a number of years, that suggests the activity may be more in the nature of a hobby);
  • the size and scale of the activities – they must be in excess of domestic needs, but need not be the only activities of the taxpayer and can be carried on in a small way;
  • repetition and regularity of the activities – however, the expression “carry on” does not necessarily require repetition (see FCT v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 81) and an isolated activity may constitute the commencement of a business;
  • the activities being carried on in a systematic and business-like manner typical of that type of business (eg detailed and up-to-date records and accounts should be kept); and
  • the existence of a business plan.

All relevant factors must be considered in combination and as a whole, and no one factor is likely to be decisive.

Sole purpose test

A significant issue would be whether a “business” element would trigger a breach of the sole purpose test that applies to SMSFs (s 62 of the Superannuation Industry (Supervision) Act 1993).

Establishing a business element to activate a blackhole deduction would not necessarily mean that the superannuation fund has breached the sole purpose test. Rather, a superannuation fund carrying on a business is just a possible indicator that the sole purpose test has been contravened. So if the trustee of an SMSF can demonstrate a business element, it may be possible to substantiate that there is no breach of the sole purpose test.

Other issues

While the costs of establishing a superannuation fund are not typically deductible, taxation advice may be deductible under section 25-5 of the ITAA 1997, to the extent that the advice is about the operation of tax laws or costs incurred are for managing the taxpayer’s “tax affairs”. However, in Drummond v FCT [2005] FCA 1129, a taxpayer was denied a deduction under section 25-5 for “taxation advice” when establishing a superannuation fund because the advice included matters outside the scope of managing the taxpayer’s tax affairs.

Also note that Taxation Ruling TR 93/17 discusses deductions that a superannuation fund may be able to claim.

Further advice

The above is a discussion only, and further advice should be obtained before implementing a new strategy. Please contact our office to discuss your circumstances and to obtain tailored advice.

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

Private Health Insurance Rebate Thresholds

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Eligibility for the private health insurance (PHI) rebate is income tested against the PHI income thresholds, which are usually adjusted annually.From 1 July 2015, the income thresholds used to calculate the PHI rebate and the Medicare levy surcharge will remain at the 2014–2015 levels for three years. That is, the income thresholds will remain at the 2014–2015 levels for 2015–2016, 2016–2017 and 2017–2018.The rebate amounts will continue to be adjusted annually on 1 April based on a “rebate adjustment factor”. The rebate adjustment factor for 2016 is 0.963, and the industry-weighted average premium increase for 2016, including rate protection, is 5.59%.

Income thresholds/status Base tier Tier 1 Tier 2 Tier 3
Single $90,000 or less $90,001–$105,000 $105,001–$140,000 $140,001+
Family $180,000 or less $180,001–$210,000 $210,001–$280,000 $280,001+
Age Rebate for premiums paid, 1 April 2015–31 March 2016
Under 65 27.820% 18.547% 9.273% 0%
65–69 32.457% 23.184% 13.910% 0%
70+ 37.094% 27.820% 18.547% 0%
Age Rebate for premiums paid, 1 April 2016–31 March 2017
Under 65 26.791% 17.861% 8.930% 0%
65–69 31.256% 22.326% 13.395% 0%
70+ 35.722% 26.791% 17.861% 0%
Note: Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.


Prepaid premiums If you paid for your current financial year’s entire private health insurance cover in a previous financial year, you still need to enter the private health insurance policy details in your current year’s tax return.This will confirm that you had an appropriate level of private patient hospital cover for all or part of the financial year and, accordingly, ensure that the ATO does not charge the Medicare levy surcharge.Your insurer should provide you with a private health insurance statement. This statement will assist in completing the private health insurance policy details section of your tax return.If you prepaid your insurance for 12 or more months, you may want to consider contacting your private health insurer to discuss your income and rebate tier, and nominate a different tier where necessary.There is no requirement for you to change the level of rebate you receive as a premium reduction. However, it can reduce the chance of you facing a liability next tax time.

 

Disclaimer of Liability

Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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

Why having a corporate trustee for your SMSF can save you from potential costs

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Some of the key advantages of having a corporate trustee include:

Continuous succession – a company has an indefinite life span. A company makes succession to control more certain on death or incapacity.

Administrative efficiency – on the admission or cessation of membership, that person becomes or ceases to be a director of the company. Thus, the title to all assets remains in the trustee company’s name. The situation is vastly different with individual trustees. Each admission or exit of a member, who is also a trustee, involves considerable time and paperwork.

Sole member SMSF’s – you can have an SMSF where one individual is both the sole member and the sole director of the Trustee company; as opposed to sole member funds with individual trustees where you must have two individual trustees.

Greater asset protection – as companies have limited liability, they provide greater protection. The advantages of limited liabilities should never be underestimated.

Administrative penalties – there are a number of penalties that can be readily be imposed under s 166 of the Commonwealth Superannuation Industry (Supervision) Act 1993 by the ATO where no questions are asked. Each individual trustee is subject to a penalty of up to $18,000 per offence. In comparison, a company is only liable to one penalty amount per office.

Advisors should encourage clients to move to corporate trustees

Key steps involved with changing an SMSF trustee

  1. A careful review of the prior document trail – preferably each prior deed and deed of change of trustee is carefully reviewed to determine what are the most appropriate provisions that apply to changing the trustee.
  2. A review of applicable legislation such as the Trustee Act and stamp duty legislation of the relevant jurisdiction. In some cases the SMSF deed does not contain adequate power and a resort to the provisions in the Trustee Act of the relevant jurisdiction is required.
  3. In cases where the deed is out of date and does not have clear power to undertake a change of trustee, updating the deed first is advisable to ensure there is clear and appropriate power.
  4. Ensure that the SMSF deed have an appropriate ‘appointor’ power as the ability to appoint and remove trustees is one of the most important powers that can be exercised in relation to controlling an SMSF.

We advise our SMSF clients who currently have individual trustees to consider switching to a corporate trustee as soon as practicable, as not having a corporate trustee may result in costly disputes. We advise clients to seek advice on this from experienced advisers or solicitors specialising in this area.

If you would like more information how you can go about changing your SMSF from an individual trustee into a corporate trustee, please contact us on 02 9954 3843.

‘Getting your clients on board with having a corporate trustee’ SMSF Adviser Magazine written by Daniel Butler (March 2016): 10-11. Print