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.”

 

Proposed Superannuation Guarantee Amnesty from 24th May 2018

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The deductibility and removal of the administration component proposed in the Amnesty depend on the passage of legislation. Until this occurs, the current law applies.

On 24 May 2018, Minister for Revenue and Financial Services announced External Link the commencement of a 12 month Superannuation Guarantee Amnesty (the Amnesty).

The Amnesty is a one-off opportunity for employers to self-correct past Super Guarantee (SG) non-compliance without penalty.

Subject to the passage of legislation, the Amnesty will be available from 24 May 2018 to 23 May 2019.

Employers who voluntarily disclose previously undeclared SG shortfalls during the Amnesty and before the commencement of an audit of their SG will:

  • not be liable for the administration component and penalties that may otherwise apply to late SG payments, and
  • be able to claim a deduction for catch-up payments made in the 12-month period.

Employers will still be required to pay all employee entitlements. This includes the unpaid SG amounts owed to employees and the nominal interest, as well as any associated general interest charge (GIC).

The Amnesty applies to previously undeclared SG shortfalls for any period from 1 July 1992 up to 31 March 2018.

The Amnesty does not apply to the period starting on 1 April 2018 or subsequent periods.

Employers who are not up-to-date with their SG payment obligations to their employees and who don’t come forward during the Amnesty may face higher penalties in the future.

Accessing the Amnesty is a simple process. If you are able to pay the full SG shortfall amount directly to your employees’ super fund or (funds), then complete a payment form and submit it to us electronically through the business portal.

If you are unable to pay the full SG shortfall amount directly to your employees’ super fund or (funds), then complete and lodge a payment form and we will contact you to arrange a payment plan. If you chose to, you can start payment before we contact you. This will reduce the GIC you would otherwise have to pay.

Explanatory Memorandum July 2018

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Business lending practices in spotlight at Royal Commission

Bank lending practices for small and medium enterprises (SMEs) were in the spotlight when the Financial Services Royal Commission (FSRC) held round three of its public hearings from 21 May to 1 June 2018. This round of hearings focused on the conduct of financial services entities when providing credit to SMEs. The hearings will also explore the legal and regulatory regimes, as well as self-regulation under the Code of Banking Practice.

The Royal Commission is interested in SME lending practices as they are an important sector of the economy – over two million SMEs account for more than 65% of private sector employment. The aggregate value of bank lending to small business (defined as loans of less than $2 million) accounts for around 28% of total bank lending to business. In addition to loan facilities and revolving trade finance, a Financial Services Regulatory Commission background paper notes that other financial products are often provided to SMEs, such as cashflow finance management and access to payments systems for credit cards and EFTPOS. SME owners also often rely on their personal finances and real estate to provide security to obtain access to SME finance.

The Royal Commission considered issues with SME lending practices by reference to case studies involving ANZ, Bank of Queensland, CBA, Westpac and Suncorp. The approach of the banks to enforcement, management and monitoring business loans will be considered by reference to case studies from CBA/Bankwest and NAB.

Remote and regional areas

The fourth round of the Royal Commission’s public hearings (25–29 June 2018) is focusing on issues affecting those who live in remote and regional communities, which relate to farming finance, natural disaster insurance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.

The Royal Commission is expected to provide an interim report by 30 September 2018, with a final report due by 1 February 2019.

Personal tax cuts now law

The Government’s seven-year personal income tax reform plan passed Parliament on 21 June 2018 intact after the Senate did not insist on earlier amendments that would have removed the third step from the plan. The Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 then received Royal Assent on 21 June 2018 as Act No 47 of 2018.

The personal income tax changes, announced in the 2018–2019 Federal Budget, are as follows:

  • Step 1 will see a new non-refundable Low and Middle Income Tax Offset (LMITO) from 2018–2019 to 2021–2022, designed to provide tax relief of up to $530 per individual for each of those years. The offset will be delivered on assessment after an individual submits their tax return and will be in addition to the existing low income tax offset (LITO). The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar.
  • Step 2 will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018. In 2022–2023, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar for income between $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.
  • Step 3 will increase the top threshold of the 32.5% bracket from $120,000 to $200,000 from 1 July 2024, removing the 37% tax bracket completely. Taxpayers will pay the top marginal tax rate of 45% for taxable income exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

Tax rates and thresholds for 2018–2019 onwards

The following table reflects the now legislated personal tax threshold and rate changes (bold), excluding the 2% Medicare levy.

Rate 2018–2019 to 2021–2022 2022–2023 and 2023–2024 2024–2025 onwards
0% $0–$18,200 $0–$18,200 $0–$18,200
19% $18,201–$37,000 $18,201–$41,000 $18,201–$41,000
32.5% $37,001–$90,000 $41,001–$120,000 $41,001–$200,000
37% $90,001–$180,000 $120,001–$180,000 N/A
45% $180,001+ $180,001+ $200,001+

Source: www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6111.

GST property settlement online forms

Amendments contained in the Treasury Laws Amendment (2018 Measures No 1) Act 2018 require purchasers of newly constructed residential properties or new subdivisions to remit GST directly to the ATO as part of settlement. This will apply from 1 July 2018.

The ATO says property transactions of new residential premises or potential residential land that involve GST to be paid directly to the ATO on or before settlement will require purchasers or their representatives to use the following online forms:

  • Form one, GST property settlement withholding notification, is used to advise the ATO that a contract has been entered into for new residential premises or potential residential land that requires a withholding amount. This form can be submitted any time after a contract has been entered into and prior to the settlement date.
  • Form two, GST property settlement date confirmation, is used to confirm the settlement date and can be submitted at the time of settlement and when the payment has been made to the ATO.

The ATO has provided instructions on how to complete the forms. The forms require the details of:

  • the contact person;
  • the property;
  • the GST withholding amount; and
  • purchaser and the supplier (vendor, seller, etc).

Both online forms can be completed and submitted by the purchaser or their representative. Depending on which state or territory the property is acquired in, the purchaser’s representative can include a conveyancer or a solicitor. The ATO says property suppliers are not required to submit these online forms.

Major ATO focus on work-related clothing and laundry this tax time

This tax time, the ATO will be closely examining claims for work-related clothing and laundry expenses. Assistant Commissioner Kath Anderson said, “last year around six million people claimed work-related clothing and laundry expenses, with total claims adding up to nearly $1.8 billion. While many of these claims will be legitimate, we don’t think that half of all taxpayers would have been required to wear uniforms, protective clothing, or occupation-specific clothing.” Clothing claims are up nearly 20% over the last five years and the ATO believes many taxpayers are making mistakes or deliberately over-claiming.

The ATO says that around a quarter of all clothing and laundry claims were exactly $150, which is the threshold above which taxpayers are required to keep detailed records about the expenses. “We are concerned that some taxpayers think they are entitled to claim $150 as a ‘standard deduction’ or a ‘safe amount’, even if they don’t meet the clothing and laundry requirements”, Ms Anderson said.

 

She said the $150 limit is there to reduce the recordkeeping burden, but it is not an automatic entitlement for everyone. “While you don’t need written evidence for claims under $150, you must have spent the money, it must have been for uniform, protective or occupation-specific clothing that you were required to wear to earn your income, and you must be able to show us how you calculated your claim”, the Assistant Commissioner said.

Ms Anderson also warned that “far too many are claiming for normal clothing, such as a suit or black pants. Some people think they can claim normal clothes because their boss told them to wear a certain colour, or items from the latest fashion clothing line. Others think they can claim normal clothes because they bought them just to wear to work.”

The ATO is concerned that the results from its random audit program show lots of taxpayers over-claiming by a small amount. “We know that some people think $150 is not a large amount and that nobody will notice if they over-claim. But while $150 might not be big individually, when you multiply it over millions of taxpayers, it adds up to a lot. And besides, no matter how small, other Australians shouldn’t be expected to wear your over-claiming.”

Case studies from the ATO

An advertising manager claimed $1,854 for clothing and laundry expenses. Her claim was for clothing purchased at popular fashion retail stores. When the ATO contacted her, she said she represented her company at work functions and awards nights and was required to dress a certain way. The ATO explained that expenses for conventional clothing are not deductible, even if the taxpayer is required to wear them for work, and/or only wear them for work.

A car detailer claimed work related laundry expenses of over $20,000 per year over two years. When questioned, the taxpayer told the ATO he worked out the laundry expense at the rate of $227 per hour, as he valued his personal time. He then made a voluntary disclosure that his claim was excessively high and in no way a reasonable amount to claim. The ATO said the taxpayer’s claims were reduced to $0 in accordance with his voluntary disclosure. As he made a voluntary disclosure before the audit progressed, no penalties were applied.

Advisory Board to help clamp down on the black economy

The term “black economy” refers to people and businesses who operate outside the tax and regulatory systems, or who are known to the authorities but do not correctly report their tax obligations.

The Government is establishing a new Advisory Board to support its reform agenda to disrupt the black economy. The Minister for Revenue announced on 22 June 2018 that Mr Michael Andrew AO, who provided strong leadership to the Black Economy Taskforce last year, will chair the Black Economy Advisory Board.

The Advisory Board will include members of the private and public sector who will provide strategic advice on trends and risks in the black economy. The Advisory Board will also advise the Treasury about implementation of the Government’s decisions attacking the black economy and contribute to a Government report every five years about new threats emerging in the black economy.

The Minister said the Government’s actions to date have included a $10,000 limit on cash transactions, a comprehensive strategy to combat illicit tobacco, reforms to the ABN system, restricting government procurement to businesses that have acceptable tax records, and $315 million in additional funding to the ATO to increase its enforcement activity against black economy behaviour.

Source: http://kmo.ministers.treasury.gov.au/media-release/072-2018/.

Superannuation system: Productivity Commission draft report

On 29 May 2018, the Productivity Commission released a draft report recommending changes to improve the superannuation system by addressing unintended multiple accounts and default funds that underperform.

Deputy Chair of the Productivity Commission Karen Chester said that with default funds being tied to the employer and not the employee, many members end up with another account every time they change jobs. Currently, a third of accounts (about 10 million) are unintended multiples, meaning members pay excess fees and insurance premiums of $2.6 billion every year. According to the Commission, fixing these twin problems of entrenched underperformance and multiple accounts would lift retirement balances for members across the board. The difference in retirement balance could be up to $407,000 for a new workforce entrant when they retire in 2064 (or $61,000 for a 55-year-old today), Ms Chester said. Submissions on the draft report are due by 13 July 2018.

The main recommendations proposed in the draft report are as follows:

  • Defaulting only once for new workforce entrants – a new mechanism for default funds whereby members would only ever be allocated to a default super fund once, upon entering the workforce. Under the proposal, new employees would be given a choice from a “best in show” list of up to 10 superannuation products identified by an independent and expert panel. If the employee fails to make a choice within 60 days, they should be defaulted to one of the products on the shortlist, selected via sequential allocation.
  • Elevated MySuper authorisation – an elevated threshold for MySuper authorisation (including an enhanced outcomes test). The draft report recommends that funds should be required at least every three years to obtain independent verification of their outcomes test assessment, comparison against other products in the market and determination of whether members’ financial interests are being promoted. In addition, funds should be required to report to the Australian Prudential Regulation Authority (APRA) annually on how many of their MySuper members switched to a higher-fee choice product within the same fund each year. If funds fail to meet these elevated standards for five or more years, they should have their MySuper authorisation revoked, the draft report says.
  • Cleaning up lost accounts – super funds should be required to transfer all lost and unclaimed accounts to the ATO, with the ATO empowered to reunite balances with a member’s active account (unless the member actively rejects consolidation).
  • CGT relief for mergers – to faciliate fund mergers, the Government should make CGT relief permanent for funds that merge, and require APRA to report annually to the Council of Financial Regulators on the extent to which the MySuper outcomes test is bringing about fund mergers.
  • Insurance – the Government should legislate to require trustees to cease all insurance cover on accounts where no contributions have been obtained for the past 13 months, unless they have obtained the express permission of the member to continue providing the insurance cover (note that the Government introduced legislation on 21 June 2018 proposing measures to protect low-balance and inactive super accounts from excessive fees and inappropriate insurance).

This draft report from the Productivity Commission has largely been overshadowed by the ongoing work of the Royal Commission into banking and financial services. Nevertheless, the inquiries complement each other. The Productivity Commission’s draft report provides an in-depth analysis of the super system, while the Royal Commission is focused on the conduct of those operating in the financial services industry. The Productivity Commission is expected to coordinate its final report with any findings and recommendations from the Royal Commission.

Source: www.pc.gov.au/__data/assets/pdf_file/0003/228171/superannuation-assessment-draft.pdf.

SMSF compliance: don’t slip up

With the self managed superannuation fund (SMSF) annual return lodgment deadline upon us, minds should have already turned to meeting compliance requirements. The 2016–2017 financial year includes a few twists and turns which trustees should factor in to avoid late lodgment.

The super changes from 1 July 2017 mean that SMSFs members with a pension balance of more than $1.6 million may need to consider reducing any excess, resetting CGT cost bases and getting actuarial certificates. This is in addition to the usual issues such as calculating taxable income and what expenses are deductible for the SMSF.

With all these changes, the ATO has allowed an extension to lodge returns by 2 July.

Beware the transfer balance cap

If people have a total balance of more than $1.6 million in pension phase as at 30 June 2017 in all of their super funds, they should have already reduced it to no more than $1.6 million by 1 July 2017, otherwise a penalty will apply. The excess can be either transferred to accumulation phase or withdrawn as a lump sum. For anyone in receipt of a defined benefit pension with a value of more than $1.6 million, or a combination of defined benefit and account based pension over that amount, an adjustment of all account-based pensions will be required. Any adjustment for these purposes can allow access to CGT relief, but there are exceptions.

Eligible for CGT relief?

Where a pensioner has reduced the balance of their account-based pension to meet the $1.6 million cap, or they are in receipt of a transition to retirement pension (TRIS), they may have access to the transitional CGT cost base reset. The reset allows a fund to notionally sell the CGT asset at its market price and immediately notionally acquire it to reset the cost base for CGT purposes. The operation of the reset depends on whether the fund calculates its exempt and taxable income on a segregated or proportional basis. If the segregated basis is used, it is possible for the CGT asset to reset its cost base between 9 November 2016 and 30 June 2017, but if the proportional basis is used the market value on 30 June 2017 applies to reset the cost base.

Why would you reset the CGT cost base of the fund? The answer lies in the potential tax benefits. It’s not compulsory to reset if you qualify and sometimes, it may be better not to. Don’t forget the reset is available only if the amount you have in pension phase on 30 June 2017 is more than $1.6 million or you were receiving a TRIS at that time.

If you decide to reset the CGT cost base of an asset, an election must be made and information is required about the amount of the reset that is deferred at ss 8F and 8G of the fund’s Capital Gains Tax Schedule. Once the election is made, it’s irrevocable.

Is an actuarial certificate needed?

In some circumstances, an SMSF will be required to obtain an actuarial certificate. The certificate is required if, at sometime during the 2016–2017 financial year, the fund calculated its exempt pension income on a proportional basis. An actuarial certificate is not required if the fund used the segregated basis or the fund was wholly in pension phase throughout the financial year. For the 2017–2018 financial year, an actuarial certificate will also be required for all SMSFs where at least one fund member has a total superannuation balance of at least $1.6 million as at 30 June in the previous financial year.

Keep track of contributions

Keeping track of contributions is something trustees need to do. All contributions should be classified on the basis of their taxation and preservation status. If a fund member decides to claim a tax deduction for personal contributions, they will need to complete an election. It needs to be given to the fund when their tax return is lodged with the ATO, or by the end of the financial year after the contribution has been made, whenever is the latter. Trustees will be required to acknowledge receipt of the election.

Tax deductions for expenses

Deductions for expenses paid by SMSFs depend on a number of situations depending on whether the expense has been incurred in gaining the fund’s assessable income. This means that any expenses that relate to exempt current pension income (ECPI) are not deductible, as they are incurred in gaining the exempt income of the fund. A fund that has accumulation and pension members will apportion expenses between those that are deductible and those that are not. There are some expenses which can be claimed in full, whether they are linked to exempt or assessable income of the fund. These expenses include the ATO’s supervisory levy and premiums for death and disability cover.

Recordkeeping

Good SMSF compliance hinges substantially on good recordkeeping. But not every fund is necessarily good at it.

What records should be kept, when and for how long? Some SMSFs have resolutions and minutes for every investment transaction while others don’t go into much detail at all. But what level of detail is really necessary? The answer lies in the fund’s trust deed, investment strategy and what is required by the tax and superannuation legislation.

Every time an SMSF makes or disposes of an investment, the transaction needs to be seen in the context of the fund’s investment strategy and the degree to which allowable asset classes, ranges and allocations are specified in that strategy. This will have a bearing on the amount of documentation required.

The legislation does not include specific provisions for recording SMSF investments. This means that investment reporting requirements for all superannuation funds apply to SMSFs as well. In this context, it seems reasonable the more detailed the fund’s investment strategy the less likely it is to record investment decisions. However, in contrast, an investment strategy written in very general terms may mean recording of investment transactions more frequently and in greater detail.

For example, a fund with a single balanced option is unlikely to have to meet each time a contribution is made to decide where the money should go. In contrast, if the fund’s investment strategy is couched in broad terms and a member wishes to select specific investments as permitted by the fund’s trust deed, then documents indicating whether the selection is consistent with the overall investment strategy of the fund are likely to be worthwhile.

There are some areas where best practice seems to dictate that detailed documentation and/or minutes should be prepared, especially where the transaction is linked to specific provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regs). Examples include:

  • acquisition of direct property, which can be owned wholly by the fund or owned jointly with other parties – documents would include those relating to the purchase of the property, rental agreements, agent appointments, plus those relating to service providers to handle repairs and maintenance;
  • any collectible or artwork which requires documentation relating to insurance, storage and possible leasing, which may be required due to the legislation;
  • loans by the SMSF to related and non-related parties which require a written loan agreement specifying the terms and conditions of the loan;
  • any “in specie” contribution or acquisition of an investment, which needs to be tested against the acquisition of assets from related parties and accompanied by a minute stating the transaction is permitted;
  • any in-house asset acquisition should be documented, as the 5% testing of the amount needs to be verified at time of acquisition, as well as outlining how the ongoing monitoring of the limit will be conducted; and
  • finally, any investment where the trustees act more in the capacity of investment manager, rather than trustee should be documented as the terms and conditions of the investment should be documented.

So it’s important you document all significant meetings and decisions of your SMSF. It’s a legislative requirement and keeping your reporting obligations up-to-date will help see that your fund remains compliant.

Even where an SMSF is involved, minutes and resolutions need to be taken seriously and read carefully before signing. They provide an official and legal record, or evidence of actions and decisions made by the trustees. If the minutes and resolutions are ambiguous and unclear they can lead to possible legal ramifications. Just because an SMSF is small doesn’t change things; minutes and resolutions are just as important as they are for larger funds.

Trustees should affirm the investment strategy at least annually noting whether all current investments are consistent with that strategy. This will then cover any other investment related transactions that do not require specific documentation.

Make sure the investment strategy is reviewed or varied when certain member-related events occur. This would include admission, resignation or death of a new member, or the commencement of a pension benefit or lump sum.

Other good reasons for recording information about the fund’s investments relate to the trustees being challenged. Documenting an investment decision can be used as a legal defence to justify why it was made. Documentation assists auditors in carrying out their responsibilities under the SIS legislation and for reporting to the ATO as regulator of SMSFs.

The superannuation law requires that some records must be retained for various periods. For example, the fund’s accounting records, annual returns and other statements are required to be kept for at least five years. However, minutes of meetings such as reviewing the fund’s investment strategy, changes of trustees, member reports and storage of collectables and personal use assets need to be kept for at least 10 years. Documents like the fund’s trust deed and other essential documents should be retained if the trustees consider the fund may be subject to challenge.

Keeping records for an SMSF serves many purposes to provide a “corporate memory” for the fund which may be required for compliance purposes as well as to protect trustees from any unfounded challenges.

Time to start on SMSF returns

So, if you haven’t got to work on this year’s SMSF return, it’s certainly time to start now in view of the changes to super that have taken place. Don’t forget to make an adjustment if the total of your pension balances are impacted by the transfer balance cap, reset the CGT cost base if appropriate and arrange for an actuarial certificate if required. Then there’s making sure contributions are correctly classified, income is properly accounted for and deductions are correctly classified.

 

Client Alert July 2018

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Business lending practices in spotlight at Royal Commission

Bank lending practices for small and medium enterprises (SMEs) were in the spotlight when the Financial Services Royal Commission (FSRC) held its third round of public hearings in late May. These hearings focused on the conduct of financial services entities providing credit to SMEs.

SMEs are an important sector of the economy – over two million SMEs account for more than 65% of private sector employment. The Royal Commission considered issues with SME lending practices by reference to case studies involving ANZ, Bank of Queensland, CBA, Westpac and Suncorp.

The next round of the Royal Commission’s public hearings focuses on issues affecting people in remote and regional communities, including farming finance, natural disaster insurance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.

Personal tax cuts now law

The legislation to enact the Government’s seven-year personal income tax reform plan, as announced in the 2018 Federal Budget, passed Parliament on 21 June 2018.

Under the plan, a new non-refundable Low and Middle-Income Tax Offset (LMITO) will be available from 2018–2019 to 2021–2022, providing tax relief of up to $530 to low-income individuals for each of those years. The new offset will be in addition to the existing low-income tax offset (LITO). The top threshold of the 32.5% tax bracket will increase from $87,000 to $90,000 from 1 July 2018.

In 2022–2023, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will also increase.

The top threshold of the 32.5% bracket will then increase from $90,000 to $120,000 from 1 July 2022.

The legislation passed without amendments, although some had been raised in the Senate that would have prevented increasing the top threshold of the 32.5% bracket from $120,000 to $200,000 from 1 July 2024, removing the 37% tax bracket completely. This third step of the seven-year plan will now go ahead under the new tax law. And finally, taxpayers will pay the top marginal tax rate of 45% for taxable income exceeding $200,000.

GST property settlement online forms available

From 1 July 2018, purchasers of newly constructed residential properties or new subdivisions must pay the related GST directly to the ATO as part of the settlement.

The ATO says property transactions of new residential premises or potential residential land that involve GST to be paid directly to the ATO on or before settlement will require purchasers or their representatives to use the following online forms:

  • Form one, GST property settlement withholding notification, is used to advise the ATO that a contract has been entered into for new residential premises or potential residential land that requires a withholding amount. This form can be submitted any time after a contract has been entered into and prior to the settlement date.
  • Form two, GST property settlement date confirmation, is used to confirm the settlement date and can be submitted at the time of settlement and when the payment has been made to the ATO.

Depending on which state or territory the property is acquired in, the purchaser’s representative can include a conveyancer or a solicitor.

Major ATO focus on work-related clothing and laundry this tax time

This tax time, the ATO will be closely examining claims for work-related clothing and laundry expenses. Clothing claims are up nearly 20% over the last five years and the ATO believes many taxpayers are making mistakes or deliberately over-claiming. Around a quarter of all clothing and laundry claims in recent years were exactly $150 – the amount claimable without a specific requirement to keep detailed records about the work-related clothing expenses.

TIP: The ATO has issued a stern reminder that the $150 threshold is not a “safe amount” that everyone can claim. We can help make sure your tax return claims are done right – contact us to find out more.

Advisory Board to help clamp down on the black economy

The Government is establishing a new Advisory Board to support its reform agenda to disrupt the black economy.

The term “black economy” refers to people and businesses who operate outside the tax and regulatory systems, or who are known to the authorities but do not correctly report their tax obligations.

The Advisory Board will include members of the private and public sector who will provide strategic advice and contribute to a report every five years about new threats emerging in the black economy.

The Government’s related actions to date have included a $10,000 limit on cash transactions, a comprehensive strategy to combat illicit tobacco, reforms to the ABN system, restricting government procurement to businesses that have acceptable tax records, and $315 million in additional funding to the ATO to increase its enforcement activity against black economy behaviour.

Superannuation system: Productivity Commission draft report

The Productivity Commission has released a draft report that recommends a range of changes to improve Australia’s superannuation system.

With default funds being tied to the employer and nsot the employee, many people end up with another super account every time they change jobs. Currently, a third of accounts (about 10 million) are unintended multiples, meaning that Australians pay excess fees and insurance premiums totalling $2.6 billion every year. According to the Commission, fixing these problems would lift retirement balances for members across the board – for example, a new workforce entrant today could earn around $407,000 more by the time they retire in 2064.

Tip: The end of the financial year is a good time to take a closer look at your super arrangements. Do you need to roll together accounts or change funds? Could you make salary sacrifices to reduce your tax payments and boost your retirement balance? Let us know if you’re considering these super questions.

SMSF compliance: don’t slip up

With the self managed superannuation fund (SMSF) annual return lodgment deadline upon us, minds should have already turned to meeting compliance requirements. The 2016–2017 financial year includes a few twists and turns which trustees should factor in to avoid late lodgment.

The major super changes from 1 July 2017 mean that SMSFs members with a pension balance of more than $1.6 million may need to consider reducing any excess, resetting CGT cost bases and getting actuarial certificates. This is in addition to the usual issues such as calculating taxable income and what expenses are deductible for the SMSF.

With all of these changes to be considered, the ATO has allowed an extension to lodge returns by 2 July.

Record keeping reminders

Good SMSF compliance hinges substantially on good record keeping. Some SMSFs have resolutions and minutes for every investment transaction while others don’t go into much detail at all. But what level of detail is really necessary? The answer lies in the fund’s trust deed, investment strategy and what is required by the tax and superannuation legislation.

For example, a fund with a single balanced option is unlikely to have to meet each time a contribution is made to decide where the money should go. In contrast, if the fund’s investment strategy is couched in broad terms and a member wishes to select specific investments as permitted by the fund’s trust deed, then documents indicating whether the selection is consistent with the overall investment strategy of the fund are likely to be worthwhile.

The superannuation law requires that some records must be retained for various periods. For example, the fund’s accounting records, annual returns and other statements must be kept for at least five years. Minutes of meetings for purposes such as reviewing the fund’s investment strategy, changes of trustees, member reports and storage of collectables and personal use assets need to be kept for at least
10 years. The fund’s trust deed and other essential documents should be retained if the trustees consider the fund may be subject to challenge.

Keeping records for an SMSF serves many purposes to provide a “corporate memory” for the fund, which may be required for compliance purposes as well as to protect trustees from any unfounded challenges.

Single Touch Payroll: Are You Ready?

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If you run a business, you’ve probably heard a lot about Single Touch Payroll (STP) recently, so what is it and how does it affect you? Basically, STP aligns your reporting obligations to the ATO to your payroll processes. Each pay cycle you send information to the ATO including employees’ salaries and wages, allowances, deductions, other payments (i.e. termination of employment, unused leave or parental leave pay), PAYG withholding and superannuation.

You do not need to change anything you do now, you can still pay your employees on a weekly, fortnightly, or monthly cycle. If you’re running a business with 20 or more employees, what you will need to do before 1 July 2018 is to check with your payroll software provider for an update that will send all the relevant information automatically to the ATO.

To find out if you’re running a business with 20 or more employees, for STP purposes, you need to do a headcount of your employees as at 1 April 2018. You will need to include, full-time employees, part-time employees, casual employees, employees based overseas, any employees absent or on leave (whether it be paid or unpaid), and seasonal workers, on the payroll on 1 April and that worked any time during March 2018. Directors and officeholders however are not included in this headcount as they are not considered to be “employees” within the common law meaning of the term.

As you can see, under STP, many businesses with less than 20 full-time equivalent employees could be caught under the system, therefore you need to be aware of your business’ obligations. When you contact your payroll software provider, if the update to STP is ready, you will need to start reporting through STP from 1 July 2018 (provided you’re an employer with 20 or more employees). However, a deferral may be applied for with the ATO if you think your business won’t be ready.

Some payroll software providers have already applied for more time to update their products, and if your business’ payroll software provider has a deferred start date, you do not need to apply for another deferral. If your business does not or will not have access to a payroll solution that is STP-ready you can ask a third party such as a registered agent or a payroll service provider to report STP data on your behalf.

If you’ve done the headcount and discover that you’re an employer with 19 or less employees, you can breathe a sigh of relief, STP isn’t due to start for you until 1 July 2019, but you can choose to report through STP before that date if your business and the software are both ready. As an administrative concession, during the first 12 months of a business reporting through STP, it will be exempt from administrative penalties for failing to report on time; unless the ATO has first given written notice advising that a failure to report on time in the future may attract a penalty.