‘Mess’ of 125 taxes suffocating business: Tax Institute

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An “unnecessary array” of taxes and inefficiencies has been presented to the government, but the road to reform continues to be hindered by the political system, according to the Tax Institute.

Facing a parliamentary standing committee, Professor Robert Deutsch, the Tax Institute’s senior tax counsel, welcomed the opportunity to showcase a number of issues in the tax system that impede business investment, touching on a wide range of issues including tax rates to complex small business concessions.

“First, the incredible and, in our view, unnecessary array of taxes that apply to a range of different tax bases and in respect of different tax years, at both the Commonwealth and state/territory levels, give rise to complexity and unnecessary additional costs to business that should be avoided,” said Professor Deutsch.

“On the best estimate we have to date, there are some 125 different types of taxes levied in Australia: 99 at the federal level, 25 at the state level and one at local government level. That is an impressive array of taxes, depending on how you interpret the word ‘impressive’.”

When prompted by Labor MP Matt Thistlethwaite if it was time for Australia to implement a comprehensive overview of the taxation system, similar to what New Zealand has done, Professor Deutsch acknowledged that it was timely, but expressed cynicism of accomplishing true reform.

“I’m very cynical about the prospects for any genuine reform arising from that. I simply make the point that New Zealand, which you’ve drawn our attention to, has a very different political system,” said Professor Deutsch.

“Without a Senate, they can achieve a lot more in the way of tax reform than can we. I say that quite openly and bluntly because with the way the Senate operates, politically it is really at the whim of the crossbenchers, and that seems to be a position that is going to continue for some time.

“Whilst that is the prevailing position, genuine tax reform, no matter how many reviews you have, is very unlikely to happen.”

The corporate tax rate political football

Pointing to the corporate tax rate cuts saga, Professor Deutsch said the long, drawn-out process of securing a rate reduction was a prime example of how the political system would not engender tax reform.

“We are now in a position where the corporate tax rate is being reduced but it’s going to take, even under the current arrangement, a number of years,” said Professor Deutsch.

“I understand why it’s happened, and it’s largely been as a result of a compromise that was reached through the Senate.

“If we wanted to go down that path, that should have been the path that we went down immediately. But, of course, it couldn’t happen and it’s not going to happen immediately. That’s fairly clear now. It will take a number of years, but it’s created a lot of problems for small and large businesses with changes to the franking rate.”

Professor Deutsch was also quick to point out that in considering tax reform, a focus on merely reducing the corporate tax rate was not sufficient.

“The first is that we’re not arguing that a corporate tax cut is a fix for everyone and for all our problems,” he added.

“I think this is part of a much broader jigsaw puzzle that needs to be considered in totality. It’s not just a matter of the corporate tax cut.”

 

TRANSFER BALANCE ACCOUNT REPORT (TBAR) REPORTING

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What is it?

Since 1 July 2017, the ATO has a limit on the amount that can be transferred into the pension phase in superannuation. This is called the Transfer Balance Cap and it is currently $1.6million across all retirement phase pensions in all funds over the individual’s lifetime.

TBAR enables us to record and track an individual’s balance for both their transfer balance cap and total superannuation balance

 

What events are required to be reported?

SMSF only reports to the ATO if one of its members has an event that impacts on their Transfer Balance Cap. Reporting obligation will generally impact at the income level stage of the pension recipient therefore if a member has multiple income streams, reporting will be based on the value and account details on each of those income streams. What is required to be reported to the ATO:

  • Pension commutations
  • Commencement of any new superannuation income streams
  • Cessation of any superannuation income streams
  • Structured settlement contributions received on or after 1 July 2017
  • Value of existing superannuation income streams as at 30 June 2017 (& in most cases up until 1 July 2018)

SMSFs with only accumulation balances in the fund are not required to report any transfer balance events, other than structured settlement contributions until a superannuation income stream commences.

 

What events are NOT required to be reported?

  • Any ongoing monthly 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 interest has been exhausted
  • The death of a member
  • Information that individuals report to us directly using a Transfer balance event notification form (NAT 74919). Typically, this is when the following events occur
  • Family law payment split
  • Debit event from fraud, dishonesty, or bankruptcy
  • Structured settlement contributions made before 1 July 2007.
  • Information other funds will report to us, such as a member’s interest in an APRA fund

 

How and when do these events need to be reported?

If a member’s pension balance in their SMSF at 30 June 2017 was greater than $1 million, reporting will be required. Any events that occur within each quarter will be required to be reported to the ATO within 28 days after the end of the specific quarter in which the event occurred.

Where all members of an SMSF have a total superannuation balance (in pension phase) of less than $1 million, the SMSF can report this at the same time as when its Annual return is due.

All super funds, including SMSFs will be required to report transfer balance cap (TBC) events via the TBAR, which can be submitted via one of the three following channels:

  • A paper form
  • An online form
  • Bulk data exchange

Please contact our office for more information.

R&D Tax Incentive Overhaul

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The Research and Development (R&D) tax incentive is an offset designed to encourage eligible companies to undertake R&D activities that are likely to benefit Australia’s wider economy. It provides a tax offset to eligible companies that conduct eligible R&D activities which are classified as experimental activities that are conducted in a scientific way for the purpose of generating new knowledge of information.

Since its implementation, successive governments have undertaken reviews into the effectiveness of the incentive. The 2016 Review of the R&D Tax Incentive and 2018 Innovation and Science Australia 2030 Strategic plan found the R&D tax incentive did not fully meet its policy objectives of inducing business research and development expenditure beyond “business as usual” activities”.

As a response to the reports, the government announced in the 2018 Budget that it will be overhauling the R&D tax incentive to better target the program and ensure its integrity. In short, in draft legislation released, the government has proposed an introduction of an “R&D premium”, which is the rate of the non-refundable offset plus the applicable company tax rate. The premium will depend on the aggregated annual turnover of the company as well as the R&D “intensity” in some cases.

For companies with an aggregated annual turnover of $20m or more, the R&D premium will be based on R&D intensity, calculated as a proportion of eligible R&D expenditure (up to $150m) and total expenditure (which will be based on the tax returns of the company applying for the incentive). The company will be entitled to differing percentage points of the non-refundable offset based on the intensity of the R&D activity varying from 4 percentage points for 0% to 2% intensity, to 12.5 percentage points for intensity above 10%.

For companies with aggregated annual turnover below $20m, the refundable R&D offset will be a premium of 13.5 percentage points above the applicable company tax rate. However, cash refunds from the refundable R&D tax offset will be capped at $4m per year and those amounts that cannot be refunded can be carried forward as a non-refundable tax offset to use in future income years. It has also been proposed that clinical trials will be exempted from the $4m refund cap, provided it satisfies the Therapeutic Goods Administration definition of a clinical trial.

The government said it was “committed to backing R&D investment and the economic opportunities and jobs it generates. At the same time, we need to make sure that the investment of taxpayers’ money is well targeted by encouraging companies to do more, and not just be rewarded for R&D they would have conducted without an incentive…by better targeting R&D investment, these changes will lead to new ideas, products, services and jobs.”

The proposed overhaul has been met with a subdued response from various industry groups, particularly in the technology and digital space which see the proposed changes as potentially being limiting. There is concern that start-ups that incur high R&D costs prior to earning significant income may worse off as the refund cap could reduce their cash flow at a time when they need it the most.

Does your company claim R&D?

If your company claims the R&D tax offset currently and you would like to know how the changes may affect you, we can help. Or maybe you are in the middle of setting up your own digital start-up would like some help in understanding the R&D tax incentive offset, we are here for you.

Tax Time Focus Areas for Individuals

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It’s tax time again, as you gather your receipts and other assorted tax documents, you should also turn you mind to what the ATO is paying close attention to this year. This year, the ATO is focusing on taxpayers who claim “other” work-related expense deductions at label D5 on individual tax returns.

According to the ATO, taxpayers need to be able to show that they spent the money themselves and were not reimbursed, the expense was directly related to earning their income, and they have a record to prove it. Where the expense is for both work and private use, only the work-related portion can be claimed. The ATO urges taxpayers to remember that they are not automatically entitled to claim standard deductions and that all expenses need to be substantiated.

As a part of their focus on other work-related expense claims, the ATO will also be closely scrutinising work-related car expenses which around 3.75m individuals claimed in 2016-17 totalling $8.8bn. Assistant Commissioner Kath Anderson said:

“While most people want to do the right thing, we know the rules can be a bit tricky for some and we are seeing a lot of mistakes. We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed.”

There are two ways a deduction for car expenses can be calculated under tax law, the cents-per-kilometre method (which limits claims for work-related travel up to 5,000 km) and the log-book method in which a log book is kept for a continuous 12-week period to determine the work-related percentage of the actual expenses incurred.

Around 870,000 individuals claim the maximum amount under the cents-per-kilometre method each year, and the ATO is concerned that there is an erroneous belief among taxpayers that the maximum claim is a standard deduction that does not require evidence of any travel. While it notes that using the cents-per-kilometre method does not require a log book, taxpayers will still need to show evidence of the number of kilometres travelled by using a diary for example, if required.

This year, the ATO is using enhanced technology and data analytics to identify unusual claims, which includes comparing taxpayers to others in similar occupations earning similar incomes. It says its models are particularly useful in identifying individuals claiming things like home to work travel or trips not required as a part of their work.

The ATO is advising taxpayers that it may request proof that the travel for work was required, this is especially significant in circumstances where individuals may claim the transport of bulky tools or equipment as required by their work. It warns individuals this year, it’ll be on the lookout for false logbooks, claiming home to work travel, claiming for expenses paid for by the employer, incorrect claiming of home to work travel where bulky tools are not involved, and claiming expenses for a car which is under a novated lease.

Need help at tax time?

Bring in your receipts and associated tax documents, we can help you navigate the murky water of deductions and get you the maximum claim you are entitled to. If you’re thinking of claiming other work-related expenses or car expenses this year, let us look over your claim to make sure it’s all above board to avoid a future ATO investigation.

Explanatory Memorandum August 2018

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Government launches new service to simplify business registrations

The government on 29 June 2018 officially launched the new stand-alone Business Registration Service, providing a simpler and clearer way to register a business. The service can be used for things such as applying for an Australian Business Number (ABN) or goods and services tax (GST) registration. It is designed for people starting a new business as a sole trader, company, partnership, trust or superannuation fund. Existing businesses with an ABN can also use the service to apply for tax registrations such as GST.

Revenue and Financial Services Minister Kelly O’Dwyer said the service will be more efficient for businesses, and they will avoid applying for registrations they do not need. She said the Business Registration Service is an integral part of the government’s National Business Simplification Initiative.

Over 140,000 registrations have been submitted since the trial version of the service was released in April 2017. The Business Registration Service has reduced the average time taken to obtain a business and associated licences to under 15 minutes, the Minister said.

The Department of Industry, Innovation and Science, the ATO, ASIC and the Department of the Treasury collaborated to develop the service, which is available at www.business.gov.au.

Source: http://kmo.ministers.treasury.gov.au/media-release/076-2018/.

Illegal early access to super: ATO warning about scammers

The ATO has issued a warning to be aware of scammers who promise to organise access to people’s retirement savings for a fee. Deputy Commissioner James O’Halloran said, “attempting to access your super early in this way is illegal, and people need to be aware of the financial dangers of falling prey to these promoters. These people could cost you a big part of your hard-earned retirement savings.”

Unscrupulous promoters encourage people to illegally access their super early to help with expenses such as the purchase of a car, paying off debts, sending money to overseas relatives and taking a holiday. The ATO has seen promoters, mostly in western Sydney, targeting people with small to medium super balances, those involved in local community groups, and those who may not have engaged with their super before being approached.

The ATO suggests the following course of action if you are approached by someone claiming to be able to help with early access to super:

  • do not sign any documents;
  • do not provide the person with any of your personal details;
  • stop any involvement with the scheme, the organisation or the person who approached you; and
  • seek professional advice.

Source: www.ato.gov.au/Media-centre/Media-releases/Suburban-scammers-pushing-illegal-early-access-to-super/.

ATO gives small businesses the chance to seek independent review of ATO audit position

From 1 July 2018, the ATO is running a 12-month pilot to extend its independent review service to certain small business taxpayers. An independent review is where an independent technical officer from outside the ATO’s audit area reviews the merits of the ATO’s audit position before the assessment or amended assessment is issued.

The independent review is conducted by an officer from the ATO’s Review and Dispute Resolution business line. This officer will not have been involved in the audit and will bring an independent “fresh set of eyes” to the case. The independent reviewer will consider the documents setting out the taxpayer’s position and the ATO audit position. They will schedule a case conference with the taxpayer and the ATO audit officer generally within one month of receiving the taxpayer’s review request. The case conference is an opportunity for all parties to assist the independent reviewer with understanding the facts and contentions.

The independent reviewer will then consider both parties’ positions and prepare recommendations as to the appropriate outcome. They will communicate the outcome to the taxpayer and the ATO audit officer. The ATO audit team will finalise the audit in accordance with the independent reviewer’s recommendations.

The ATO says the pilot is limited to small business disputes involving income tax audits in Victoria and South Australia. (When the pilot ends, the ATO will decide whether to expand the program to other small businesses.) Disputes relating to the following topics are excluded: GST, superannuation, fringe benefits tax, fraud and evasion findings, and penalties and interest.

Eligible businesses with an audit in progress will be contacted directly by their case officer and offered the opportunity to participate in the pilot, the ATO said.

Source: www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-resolving-disputes/Independent-review/Independent-Review—Small-Business-Pilot/.

Transacting with cryptocurrency: updated ATO info

The ATO has updated the information on its website dealing with tax and cryptocurrency. The ATO says a capital gains tax (CGT) event occurs when a person disposes of their cryptocurrency. A disposal can occur when someone:

  • sells or gifts cryptocurrency;
  • trades or exchanges cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency) – if the cryptocurrency received cannot be valued, the capital proceeds from the disposal are worked out by using the market value of the cryptocurrency disposed of at the time of the transaction;
  • converts cryptocurrency to fiat currency like Australian dollars; or
  • uses cryptocurrency to obtain goods or services.

If a taxpayer holds the cryptocurrency as an investment, they will not be entitled to the personal use asset exemption. However, if it is held as an investment for 12 months or more, the taxpayer may have an entitlement to the CGT discount to reduce a capital gain made on disposal.

If a taxpayer holds cryptocurrency as an investment and they receive a new cryptocurrency as a result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), the ATO says they do not derive ordinary income or make a capital gain at that time as a result of receiving the new cryptocurrency.

The ATO also notes that taxpayers may be able to claim a capital loss if they lose their cryptocurrency private key or their cryptocurrency is stolen. In this context, the ATO says the issue is likely to be whether the cryptocurrency is lost, whether the taxpayer has lost evidence of their ownership or whether they have lost access to the cryptocurrency.

Source: www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia—specifically-bitcoin/.

Tax gap for individuals is $8.8 billion, says ATO

The ATO has published the income tax gap for individuals not in business in 2014–2015. The gap is an estimate of the difference between the tax the ATO collects and the amount that would have been collected if every one of these taxpayers was fully compliant with the law. While no country will ever have a zero tax gap, revenue authorities continually strive to keep the gap to a minimum.

The estimated net tax gap for such individuals in 2014–2015 is approximately 6.4%, or $8.8 billion. In other words, the ATO estimates that individuals not in business paid over 93% of the total theoretical tax payable in 2014–2015.

Key components of the tax gap are:

  • deductions for work-related expenses – common mistakes include deduction claims where there was no connection to income, claims for private expenses and claims where there are no records to show that an expense was incurred;
  • omitted income, particularly in relation to undeclared cash wages (an element of the black economy) – the ATO’s estimate of the proportion of the $8.8 billion tax gap for individuals not in business that is attributable to unreported income from cash wages is $1.4 billion; and
  • deductions for rental property expenses – the most common reasons for adjustments to rental items on a tax return are a lack of, or incorrect, apportionment of expenses. This includes, for example, deduction claims where the property was only available to rent for part of the year or claims for interest expenses where a portion of the loan was used for private purposes. The ATO also sees mistakes relating to capital works and capital allowance deductions.

Each case of taxpayer error or non-compliance that the ATO identifies (as part of the random enquiry program it uses to estimate the gap) can involve multiple adjustments across the return. Of the 2,388 adjustments made in identified cases, the ATO said almost 70% related to deduction items, and 51% (or 1,212) of all adjustments made were at work-related expense items. Of those work-related expense adjustments, 78% (or 949) were made in tax agent-prepared returns.

Adjustments to items tended to fall between $150 and $1,000 in value, with the median adjustment being $210. While these adjustments are individually small, the ATO notes that when they are tallied across the whole population, the effect is significant. On average, three items were adjusted in each tax return.

The ATO observed claims for expenses that were actually paid for or reimbursed by the employer, as well as claims that appeared legitimate, but could not be substantiated. The ATO also saw mistakes and guesswork relating to apportioning work-related expenses along with claims for “standard” deductions where exceptions to substantiation provisions exist. Many taxpayers believed they did not have to explain their claim if a substantiation exception was applicable.

ATO Deputy Commissioner Alison Lendon said, “seven out of ten returns randomly selected for review had one or more errors. A smaller number of people are deliberately doing the wrong thing – that has a significant impact on revenue. These people can expect closer attention from us, especially this tax time.” The ATO will increase the use of data and technology to identify outliers, streamline processes, access third party data and provide pre-filled information in tax returns.

Additional note: The ATO reportedly has 500 tax agents in its sights and expects to review the practices of about 150 of them this year. With around 41,500 registered tax agents in Australia as at 30 June 2017, this is a low percentage so some perspective is required here. The ATO is concerned that too many of the errors it detected are what it terms “avoidable mistakes”, eg not checking records thoroughly.

Professor Bob Deutsch, Senior Tax Counsel at The Tax Institute, says the individual tax gap figure “suggests that the extent of non-compliance among individuals is substantially higher in macro terms than for large corporate groups.” However, in percentage terms, Professor Deutsch points out that there is approximately only a half percentage point difference – 6.4% for individuals versus 5.8% for companies. He says individuals contribute roughly 40% of the tax revenue and large corporate groups only contribute about 12%.

Source: www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-gap/Individuals-not-in-business-income-tax-gap/.

ATO warns about scammers at tax time

The ATO has warned taxpayers to be on “high alert” for tax-related scams.

ATO Assistant Commissioner Kath Anderson said most taxpayers expect some form of interaction with the ATO during tax time, and scammers take advantage of this to gain money and personal information from victims. She said scammers are busy all year round, but the ATO always sees an increase in activity at tax time. In fact, more than 37,000 scam attempts were reported to the ATO during tax time last year, she said. “Although many people were alert and didn’t fall for the scams, hundreds handed over a total of more than $630,000, and thousands handed over their personal details.”

The Assistant Commissioner said the most common scam is still the “fake tax debt” phone scam, but the ATO is also seeing an increase in “fake refund” or “refund for a fee” scams, and email and SMS scams enticing people to click a hyperlink, download a file or open an attachment.

Scammers frequently claim to be from the ATO and according to Ms Anderson, taxpayers should be wary of any phone call, text message, email or letter about a tax refund or debt, especially if they were not expecting it. The ATO regularly sends emails and SMSs and makes many calls each week, but Ms Anderson said, “there are some tell-tale signs that it isn’t the ATO, including that the ATO will not:

  • use aggressive or rude behaviour, or threaten [taxpayers] with arrest, jail or deportation;
  • request payment of a debt via iTunes, pre-paid visa cards, cryptocurrency or direct credit to a bank account with a BSB that isn’t either 092-009 or 093-003;
  • request a fee in order to release a refund owed to [a taxpayer]; or
  • email or SMS [taxpayers] asking [them] to click on a link to provide login, personal or financial information, or to download a file or open an attachment.”

If taxpayers are unsure about whether a call, text message or email is genuine, Ms Anderson said not to reply, and to call the ATO on 1800 008 540.

Source: www.ato.gov.au/Media-centre/Media-releases/Watch-out,-scams-about!/.

Income tax residency rules for individuals: Board of Taxation recommends reform measures

On 9 July 2018, the Board of Taxation publicly released its initial report on its review of Australia’s individual income tax residency rules. The report, Review of the Income Tax Residency Rules for Individuals, follows the completion of the Board’s review in August 2017. The Minister for Revenue and Financial Services, Kelly O’Dwyer, said the Board found that the current individual tax residency rules require modernisation and simplification. The Board also identified opportunities for tax arbitrage, for example where individuals become “residents of nowhere” when they leave Australia and do not become tax residents of another jurisdiction. Ms O’Dwyer said that before the government takes any position on these matters, she has asked the Board to consult further on key recommendations, including how Australia could draw on residency tests in other countries.

The report considered whether the current Australian individual income tax residency rules (largely unchanged since 1930) are sufficiently robust to meet the requirements of the modern workforce, address the policy criteria of simplicity, efficiency, equity and integrity, and take into account a significant number of cases heard since 2009 relating to individual residency.

Following a consultation process, the Board concluded that the existing residency rules are no longer appropriate and need to be modernised. Thus, it has recommended a two-step model as follows:

  • A primary “days count” bright-line test that automatically determines the residency status of inbound and outbound individuals. This test would be similar to the residency rules adopted in New Zealand and the UK.
  • For inbound individuals, the report considered an inbound individual to be resident if they are physically present in Australia for 183 days or more in a 12-month period. This test would provide certainty for individuals and reflect the need to ensure that it is not open to overly simplistic manipulation (for example, by staying in Australia for less than half of two separate income years in one 12-month period).
  • For outbound individuals, the report recommended individuals be considered non-resident if they work full-time overseas and spend less than 31 days working, or 61 days total, in Australia. Former residents would become non-resident if they spent less than 16 days in Australia; and individuals that have never been a resident of Australia would remain non-resident if they spent less than 46 days in Australia.
  • The Board also recommends a secondary test that takes into consideration individual facts and circumstances. This secondary test would apply if an individual did not satisfy the primary test. This test would leverage some existing case law with respect to the principles of the resides test, the domicile test (in particular, the permanent place of abode test) and the 183-day tests (in particular, the usual place of abode test).

As regards the “resident of nowhere” concern, the Board has recommended that the new residency test for outbound individuals should ensure that all residents remain residents unless and until tax residency is established in another jurisdiction.

The Board also considered that the “superannuation test” no longer achieves its policy objective for government staff and their families and has recommended that the new residency definition not include the superannuation test. The report states that, “should the government continue to treat government officials as residents, the new residency definition should include a more effective rule that reflects the government’s position, such as a specific government services rule.”

Source: http://kmo.ministers.treasury.gov.au/media-release/083-2018/.

Retirement income covenant needs more flexibility: KPMG

KPMG has released a submission in response to the Treasury position paper on the proposed retirement income covenant announced as part of the 2018–2019 Budget. The proposed covenant will require trustees of superannuation funds (including self managed superannuation funds) to formulate a retirement income strategy for fund members. This requirement is aimed at supporting the government’s development of a comprehensive income products for retirement (CIPR) framework.

While KPMG has expressed support for the establishment of a retirement incomes framework that aligns to the objective of superannuation, it has called for more flexibility for the advice models and the design of retirement income products. KPMG has recommended that trustees should be able to split the CIPR strategy into two phases – an account-based pension phase and a deferred lifetime annuity phase – and offer distinct products rather than a single blended product. Other product features, such as capital flexibility, may be as important as expected consistent income in the first phase, KPMG said.

The government is proposing to legislate the retirement income covenant by 1 July 2019, subject to a delayed commencement until 1 July 2020. This timing seeks to allow the market for pooled lifetime income products to develop in response to the changes to the Age Pension means test, and for other elements of the retirement income framework to be settled.

Source: https://home.kpmg.com/au/en/home/insights/2018/06/retirement-income-framework-development-kpmg-submission.html.

Illegal phoenix activity costs billions; new Phoenix Hotline

The ATO has released a new report on the economic impacts of potential illegal phoenix activity. It estimates that the annual direct impact of illegal phoenix activity on businesses, employees and the government was between $2.85 billion and $5.13 billion for the 2015–2016 financial year.

In particular, the report notes that:

  • the cost to businesses from unpaid trade creditors was between $1.2 billion and $3.2 billion;
  • the cost to employees from unpaid entitlements was between $31 million and $298 million; and
  • the cost to the government in unpaid taxes and compliance costs was around $1.7 billion.

The report, which was commissioned by the Phoenix Taskforce and prepared by PricewaterhouseCoopers, uses data from a range of information sources from Phoenix Taskforce member agencies, including ASIC external administration reports, details of unsecured creditors and unpaid superannuation, information from the Fair Entitlement Guarantee (FEG) scheme and ATO debts. Additionally, the report draws on the ATO’s more sophisticated taskforce data-driven Phoenix Risk Model (PRM) built from data from member agencies to identify the potential illegal phoenix population.

New Phoenix Hotline and website

The government has also established a new Phoenix Hotline to combat phoenixing activity and to protect compliant Australian workers and businesses. Revenue and Financial Services Minister Kelly O’Dwyer said, “the new Phoenix Hotline will make it easier to report suspected phoenix behaviour directly to the Australian Taxation Office so they can pursue those who are doing the wrong thing.”

Employees, creditors, competing businesses and the general public can confidentially provide information about possible phoenix behaviour via the hotline on 1800 807 875 or the ATO website. Disclosures will be protected by privacy laws and the government’s legislative action in protecting whistleblowers. “For those who try to beat the system, it’s only a matter of time before the law catches up with them,” Ms O’Dwyer said.

Sources: www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/The-economic-impact-of-potential-illegal-phoenix-activity-report/

http://kmo.ministers.treasury.gov.au/media-release/084-2018/.

Super funds deliver healthy returns for 2017–2018

The median “growth” superannuation fund delivered a healthy investment return of 9.2% for 2017–2018, with the top spot going to Hostplus with a return of 12.5%, according to superannuation ratings and research firm Chant West. Growth super funds are those with a 61–80% allocation to growth assets.

Every fund in the growth category had positive returns, with even the lowest performer delivering a 6.5% return. Growth funds have delivered nine consecutive years of positive returns, averaging about 9% a year, said Chant West senior investment manager Mano Mohankumar.

With share markets remaining resilient despite emerging risks, the better performing funds were those that had higher allocations to listed shares and to unlisted assets (eg property, infrastructure and private equity). Chant West reports that hedged international shares rose 10.8% (15.4% for unhedged), while Australian shares gained 13.2%.

Chant West found that industry super funds outperformed retail funds over 2017–2018, returning 10.3% versus 9%, and over 10 years (6.9% versus 6.3%). Mr Mohankumar said industry funds as a group have outperformed retail funds over the longer term largely because of their higher allocations to unlisted assets, such as private equity, unlisted property and unlisted infrastructure (currently 21% versus 5%), which have performed well.

Mr Mohankumar reminded investors that they need to judge investment returns against a fund’s risk objective. Risk is normally expressed as the chance of a negative return, and typically a growth fund would aim to post no more than one negative return in five years on average, he said.

Source: www.chantwest.com.au/resources/super-funds-have-that-positive-feeling-–-yet-again.

GST exemption for offshore sellers of hotel bookings to be removed: draft legislation released

On 20 July 2018, the Treasurer released draft legislation to ensure offshore sellers of hotel accommodation in Australia calculate their goods and services tax (GST) turnover in the same way as local sellers from 1 July 2019.

In particular, the government proposes to amend the GST Act by requiring offshore suppliers of rights or options to use commercial accommodation (eg hotels) in the indirect tax zone (broadly, Australia) to include these supplies in working out their GST turnover. If the GST turnover of such offshore suppliers equals or exceeds the registration turnover threshold, GST must be remitted for their taxable supplies.

Currently, unlike GST-registered businesses in Australia, offshore sellers of Australian hotel accommodation are exempt from including sales of hotel accommodation in their GST turnover. This means they are often not required to register for and charge GST on their mark-up over the wholesale price of the accommodation.

The government says both Australian and foreign consumers are increasingly booking Australian hotel rooms through online services based offshore, which are taking advantage of an exemption designed for offshore tour operators. Removing the exemption is designed to level the playing field by ensuring the same tax treatment of Australian hotel accommodation, whether booked through a domestic or offshore company.

The measure will apply to sales made on or after 1 July 2019. Sales that occur before 1 July 2019 will not be subject to the measure even if the stay at the hotel occurs after this date.

Submissions close on 9 August 2018.

Source: https://treasury.gov.au/consultation/c2018-t310492/.

Client Alert – August 2018

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Government launches new service to simplify business registrations

The government has officially launched a new stand-alone Business Registration Service, providing a simpler and clearer way to register a business. The service is available at www.business.gov.au.

The service can be used for things such as applying for an Australian Business Number (ABN) or goods and services tax (GST) registration. It is for people starting a new business as a sole trader, company, partnership, trust or superannuation fund. Existing businesses with an ABN can also use the service to apply for tax registrations such as GST.

The Business Registration Service has reduced the average time taken to obtain a business and associated licences to under 15 minutes.

Illegal early access to super: ATO warning about scammers

The ATO has issued a warning to be aware of scammers who promise to organise access to people’s retirement savings for a fee. Unscrupulous promoters encourage people to illegally access their super early to help with expenses such as the purchase of a car, paying off debts, sending money to overseas relatives and taking a holiday. The ATO has seen promoters, mostly in western Sydney, targeting people with small to medium super balances, those involved in local community groups, and those who may not have engaged with their super before being approached.

ATO gives small businesses the chance to seek independent review of ATO audit position

From 1 July 2018, the ATO is running a 12-month pilot to extend its independent review service to certain small business taxpayers. This means those taxpayers can have the ATO’s audit position on their tax affairs independently reviewed.

The independent review is conducted by an officer from the ATO’s Review and Dispute Resolution business line. This officer will not have been involved in the audit and will bring an independent “fresh set of eyes” to the case. The independent reviewer will consider the documents setting out the taxpayer’s position and the ATO audit position. They will schedule a case conference with the taxpayer and the ATO audit officer, generally within one month of receiving the taxpayer’s review request.

The ATO audit team will finalise the audit in accordance with the independent reviewer’s recommendations. The pilot is currently limited to small business disputes involving income tax audits in Victoria and South Australia.

Transacting with cryptocurrency: updated ATO info

The ATO says a capital gains tax (CGT) event occurs when a person disposes of their cryptocurrency (eg Bitcoin). A disposal can occur when someone:

  • sells or gifts cryptocurrency;
  • trades or exchanges cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency) – if the cryptocurrency received cannot be valued, the capital proceeds from the disposal are worked out by using the market value of the cryptocurrency disposed of at the time of the transaction;
  • converts cryptocurrency to fiat currency like Australian dollars; or
  • uses cryptocurrency to obtain goods or services.

If you need assistance with the tax treatment of cryptocurrency, or the ATO’s record-keeping requirements for taxpayers who are involved in acquiring or disposing of cryptocurrency, please contact our office.

Tax gap for individuals is $8.8 billion, says ATO

The ATO has estimated that the net “tax gap” for individuals not in business in 2014–2015 is approximately 6.4%, or $8.8 billion. The gap is an estimate of the difference between the tax the ATO collects and the amount that would have been collected if every one of these taxpayers was fully compliant with the law.

In other words, the ATO estimates that individuals not in business paid over 93% of the total theoretical tax payable in 2014–2015.

ATO warns about scammers at tax time

The ATO has warned taxpayers to be on “high alert” for tax-related scams. ATO Assistant Commissioner Kath Anderson said the most common scam is still the “fake tax debt” phone scam, but the ATO is also seeing an increase in “fake refund” or “refund for a fee” scams, and email and SMS scams enticing people to click a hyperlink, download a file or open an attachment.

Scammers frequently claim to be from the ATO and taxpayers should be wary of any phone call, text message, email or letter about a tax refund or debt, especially if they were not expecting it.

Income tax residency rules for individuals: Board of Taxation recommends reform measures

The Board of Taxation has publicly released its initial report on its review of Australia’s income tax residency rules for individuals. The Revenue Minister said the Board found that the current individual tax residency rules require modernisation and simplification. The Board also identified opportunities for tax arbitrage, for example where individuals become “residents of nowhere” when they leave Australia and do not become tax residents of another jurisdiction.

The report considered whether the current rules (largely unchanged since 1930) are sufficiently robust to meet the requirements of the modern workforce, address the policy criteria of simplicity, efficiency, equity and integrity, and take into account a significant number of cases heard since 2009 relating to individual residency. The Revenue Minister has asked the Board to consult further on some key recommendations.

Retirement income covenant needs more flexibility: KPMG

KPMG has released a submission in response to the Treasury position paper on the proposed retirement income covenant announced as part of the 2018–2019 Budget. The proposed covenant will require trustees of superannuation funds (including self-managed superannuation funds) to formulate a retirement income strategy for fund members. This requirement is aimed at supporting the government’s development of a comprehensive income products for retirement (CIPR) framework.

Illegal phoenix activity costs billions; new Phoenix Hotline

The ATO has released a new report on the economic impacts of potential illegal phoenix activity. It estimates that the annual direct impact of illegal phoenix activity on businesses, employees and the government was between $2.85 billion and $5.13 billion for the 2015–2016 financial year.

The government has also established a new Phoenix Hotline to combat phoenixing activity and to protect compliant Australian workers and businesses. Employees, creditors, competing businesses and the general public can confidentially provide information about possible phoenix behaviour via the hotline on 1800 807 875 or the ATO website. Disclosures will be protected.

Super funds deliver healthy returns for 2017–2018

The median “growth” superannuation fund delivered a healthy investment return of 9.2% for 2017–2018, with the top spot going to Hostplus with a return of 12.5%, according to superannuation ratings firm Chant West. Growth super funds are those with a 61–80% allocation to growth assets.

Every fund in the growth category had positive returns, with even the lowest performer delivering a 6.5% return. Growth funds have delivered nine consecutive years of positive returns, averaging about 9% a year, said Chant West senior investment manager Mano Mohankumar.

GST exemption for offshore sellers of hotel bookings to be removed: draft legislation released

The Treasurer has released draft legislation to ensure offshore sellers of hotel accommodation in Australia calculate their GST turnover in the same way as local sellers from 1 July 2019.

Under the proposed changes, offshore suppliers of rights to use commercial accommodation (eg hotels) in the indirect tax zone (broadly, Australia) will be required to include these supplies in working out their GST turnover. If the supplier’s GST turnover equals or exceeds the registration turnover threshold, GST must be remitted for supplies that are taxable supplies.

 

Downsize to Boost your Super

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Now all the kids have all flown the coop and you’re left with an empty nest, it might be a good time to consider downsizing to pursue that ultimate retirement dream; fishing beside a river, surfing every morning, or getting up to that fresh country air. Your dream could be one step closer with the measure to allow people to make additional super contributions from the proceeds to selling their home.

From 1 July 2018, people aged 65 or over will make able to make additional non-concessional contributions of up to $300,000 from downsizing their home subject to certain conditions:

  • the principle place of residence must have been held for a minimum of 10 years and located in Australia;
  • contribution must be an amount equal to all or part of the capital proceeds of sale of an interest in a qualifying dwelling in Australia;
  • any capital gain or loss from the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or part;
  • contribution must be made within 90 days of disposing the dwelling (a longer time period may be allowed by the Commissioner);
  • a choice is made to treat the contribution as a downsizer contribution and the complying superannuation fund is notified in the approved form of this choice either before or at the time the contribution is made; and
  • the contributing individual has not previously made downsizer contributions or has had one made on their behalf, in relation to an earlier disposal.

The advantage with downsizer contributions is that the contribution is neither a concessional nor a non-concessional contribution, so if you have already reached your concessional or non-concessional contributions caps for the year, you are still able to make a contribution through the downsizer scheme, provided you meet all the conditions.

If you and your spouse jointly own a home, and decide to downsize, you can both benefit from this measure. For downsizing the same home, you and your spouse could potentially contribute a maximum of $600,000 into your individual super funds or SMSF. The other advantage with this measure is that the restrictions on non-concessional contributions for people with total superannuation balances above $1.6 million will not apply. Therefore, the total superannuation balance of the individual will also not affect their eligibility to make a downsizer contribution. However, any downsizer contributions will still be subject to the $1.6 million pension transfer balance cap.

Does this measure seem too good to be true? Well, there is also the Age Pension side you should be aware of. Currently, the family home is totally exempt from the Age Pension assets test, however, downsizer contribution may count towards the Age Pension asset test and any changes in your superannuation balance as a result of using this measure may also count towards the Age Pension Asset test.

Cash Payments Limit Coming Soon

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As a part of the crackdown on black economy, the Government is planning to introduce an economy-wide cash payment limit of $10,000. Any payments made to businesses for goods and services from 1 July 2019 would be captured, and if the transaction exceeds $10,000, payment will need to be made using an electronic system or by cheque.

This proposed measure has been introduced in response to the findings of the Black Economy Taskforce Final Report. The report noted there were significant risks to legitimate commercial behaviour resulting from using large undocumented cash payments to purchase cars, yachts, other luxury goods, agricultural crops, houses, building renovations, and commodities. According to Minister for Revenue and Financial Services:

“We…know that businesses that insist on cash payment may be doing so to avoid their tax, retain welfare payments, or avoid child support and other obligations, and may therefore receive an unfair competitive advantage over those businesses that do the right thing.”

However, consumers should note that the cash transaction limit will only be imposed for payments (for goods and services) to entities holding an Australia Business Number (ABN). The proposal will not apply to consumer to non-business transactions, such as those in second-hand markets such as Gumtree, or where the selling party does not have an ABN.

Further, the proposal will also not apply to financial institutions, so there will be no impediment on the abilities of individuals, businesses, or other entities to deposit large amounts of cash with their bank or to deposit cash in paying off loans with a financial institution. Although, any such deposits would be caught under the existing Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) reporting requirements to AUSTRAC.

Currently, the Government is planning to leverage the AML/CTF obligations to assist in the administration and enforcement of the cash limit. A combination of threshold transaction reporting and reporting of suspicious matters will be deployed, with the Black Economy Hotline facilitating community referrals on suspicious behaviour. Penalties will apply to both parties to the transaction should the $10,000 limit be breached, that is, the payer and the receiving business. According to the Government this will ensure that both business requesting cash payments and consumers pressuring businesses to take cash in exchange for a discount are captured.

If Australia implements this proposal, it will be in good company and join many other European countries that have introduced cash payments limit. The UK is currently consulting on the issue in a bid to crack down on those who use cash to evade tax and launder money. It seems the inevitable crackdown on cash and its links to illegal activities and avoidance of tax has begun.

 

A stocktake of Superannuation policy

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The following is a brief stocktake of the main changes introduced  from 1 July 2017.

$1.6m total superannuation balance

Once a member’s total superannuation balance hits $1.6 million, there is no further opportunity to make any further non concessional contributions. However, subject to certain regulations, if the member’s balance subsequently falls below $1.6 million, the member may again be permitted to contribute more non concessional contributions.

$1.6m transfer balance cap

The $1.6 million transfer balance cap (TBC) was introduced to limit the total amount that a member can transfer into the tax-free pension phase; now referred to as the retirement phase.

Previously, the earnings on assets supporting pensions, including transition to retirement income streams (TRIS), were tax free without any maximum limit. The TBC measure caps the exempt current pension income (ECPI) exemption of each member to $1.6 million of capital that can be used to commence a pension.

Consequently, many members with pension balances above $1.6 million prior to 1 July 2017, should have reduced their pension account to $1.6 million by 30 June 2017.

Division 293 threshold

From 1 July 2017, the threshold at which high income earners pay an extra 15 per cent additional contributions tax was reduced from $300,000 to $250,000. This includes salaries and super contributions in total.

Annual concessional contributions cap reduced to $25,000

From 1 July 2017, the annual concessional contributions (CC) cap was reduced to $25,000 each financial year (indexed in line with AWOTE). Previously, the general limit for the prior financial year was $30,000 (or $35,000 for those aged 49 or above on 1 July 2016).

Tax deduction for personal superannuation contributions

From 1 July 2017, members have been eligible to claim an income tax deduction for personal superannuation contributions up to their concessional contributions cap without, broadly, having to satisfy the test that no more than 10 per cent of earnings is from employee-like activities.

Transition to retirement income streams (TRIS)

As noted above, from 1 July 2017, the tax exemption on earnings derived from assets supporting a TRIS was removed. Therefore, a member with a TRIS who had reached preservation age, but had not yet retired or attained 65, fund earnings on TRIS assets is now taxed at 15 per cent (i.e., the same rates as if these assets remained in the accumulation phase).

However, on 22 June 2017 the Coalition government introduced a new form of TRIS that can be in retirement phase and obtain a pension exemption. This is where the member has attained age of 65 and retired. This is referred to as a “TRIS in retirement phase”.

Broadly, a TRIS in retirement phase is treated in the same manner as an account-based pension that is subject to the ECPI exemption. Such a TRIS is also subject to the $1.6 million TBC limit.

 

Extracted from an article by Daniel Butler (DBA Lawyers)

 

The Lure of Fraud

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IN BRIEF__________________________________________________________________________________________________________________________

  • Fraud is on the rise and is often very costly for victims.
  • Gambling and financial pressures may encourage a trusted professional to commit fraud.
  • Paul Andon FCA is speaking at CA ANZ’s Business Valuation and Forensic Accounting Conference 2018 in Sydney on 13-15 August.

________________________________________________________________________________________________________________________________

Fraud is on the rise and high-profile cases are often very costly for victims. The 2011-2012 case involving ING and a Sydney-based female accountant saw the multi-national insurance and finance company defrauded of A$43m.

Paul Andon FCA is an associate professor in the School of Accounting at the University of New South Wales whose research focuses on how individuals involved in fraud sustain their offending over long periods. His research examines case studies in the accounting profession and investigations into whistleblowing incentives.

Typical offender behaviour

“Situation is as much an important factor as the individual themselves,” he says. “People can be coerced. People may not necessarily be the kind of sociopathic type that may wish to engage in criminal behaviour but may still find themselves in a position where they feel like fraud is a necessity to deal with a personal problem.”

Andon’s research suggests that gambling has been a common driver of fraud and given rise to the “crisis responder”.

“A lot of people who engage in offending are doing so out of a feeling of necessity because, for example, they have a gambling problem, or because there are problems financially at home,” he says. “Fraud is seen as the only way out of their quite immediate and pressing financial problems.

“There are profiles around a typical offender but our research tries to push the fact that, depending on the situation, any character type or any personality type can be susceptible to finding themselves in a situation where they may look to commit fraud.”

Financial pressure

An individual’s environment and personal circumstances need to be considered when analysing the drivers of economic crime.

“A lawyer may find themselves in trouble professionally because they are not getting the revenue they need to keep their business afloat,” says Andon. “So they may look to source funds from their trust accounts to try and prop up the business.”

Individuals involved in crimes of necessity can be categorised as crisis responders, opportunity takers, opportunity seekers or deviant seekers. Andon is yet to find a trend favouring either long-term or short-term fraud.

“It can be a range of different sorts of pressures that people can experience that might lead them down what we call a ‘crisis responder’ driver to fraud,” Andon says.

Andon recalls a case that involved a married couple and battered wife syndrome. To deal with the pressure from her husband, the wife attempted to gain greater financial means to please her spouse and turned to fraud in an attempt to fund a better lifestyle.

Undetected fraud

Fraud can go undetected for long periods when perpetrators incrementally siphon funds from their victims over time. “So much fraud goes unreported,” Andon says. “Of the frauds we have looked at, which we put under the umbrella of ‘serious workplace fraud’, some can go on for a long time, decades even.”

While Andon doesn’t sympathise with white-collar criminals, his research leads him to believe that most people who commit fraud have experienced significant trauma.

“For the ordinary person it’s not necessarily this social psychopath that we are talking about when we are talking about fraud offenders,” he says.

“Many of them are every day, otherwise upstanding people and for some reason they have found themselves in a situation where they have cooked the books or engaged in fraud offending. They are stuck in that situation and it’s not something they can unwind easily. It can be quite a stressful situation.”