Client Alert (June 2016)

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Tax incentives to promote innovation

Innovative companies with an interest in getting involved in the “ideas boom” need to be aware of the Government’s proposed tax incentives to help promote innovation. The Government has released draft legislation to implement more of the proposed tax measures announced as part of its National Innovation and Science Agenda (released in December 2015).

One of the tax measures will allow companies that have changed ownership to access past year tax losses if they satisfy a similar business test. Under the current law, companies that have changed ownership must satisfy the same business test to access past year tax losses. This measure is designed to encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities to return to profitability.

The other measure proposes to allow taxpayers the choice to either self-assess the effective life of certain intangible depreciating assets (such as patents or copyrights) or use the statutory effective life. The current law only provides an effective life set by statute. According to the Government, changing the tax treatment for acquired intangible assets will make startups’ intellectual property and other intangible assets a more attractive investment option.

Car expenses and special arrangements for the 2016 FBT year

The ATO has released guidance about using the cents per kilometre basis for claiming car expenses and making fringe benefits calculations.

From 1 July 2015, separate rates based on the size of the engine no longer apply. Taxpayers can use a single rate of 66 cents per kilometre for all motor vehicles for the 2015–2016 income year. The Tax Commissioner will determine the rate for future income years. However, the ATO acknowledges that there has been uncertainty about the correct rate to apply for the 2016 FBT year, and has advised of a special arrangement for 2016 whereby it will also
accept 2016 FBT returns based on the 2014–15 rates (which are 65, 76 or 77 cents per kilometre depending on the engine capacity of the employee’s car).

TIP: For future FBT years, which end on 31 March, the ATO said employers should use the rate determined by the Commissioner for the income year that ends on the following 30 June. For example, for the FBT year ending 31 March 2017, employers should use the basic car rate the Commissioner determines for the 2016–2017 income year.

Holiday homes: tax considerations

Australians who let their holiday homes for only part of the year should be aware of the ATO’s compliance focus on excessive holiday home deduction claims.

The ATO has released guidance on claiming deductions in relation to holiday homes. If a taxpayer rents out their holiday home, they can only claim expenses for the property based on the proportion of the income year when the property was rented out or was genuinely available for rent. Notably, the new guidance indicates what is meant by “genuinely available for rent”. According to the ATO, factors that may indicate a property is not genuinely available for rent include that:

  • it is advertised in ways that limit its exposure to potential tenants (for example, the property is only advertised by word of mouth);
  • the location of, condition of or accessibility to the property mean that it is unlikely tenants will seek to rent it;
  • there are unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out; or
  • interested people are turned away without adequate reasons.

TIP: Although it is always prudent to check things over before tax time, holiday home owners may particularly want to take the opportunity to review their circumstances and ensure that any deduction claims are made correctly before “the taxman cometh”.

Individuals caught in “Panama Papers” leak

The ATO has advised that it is investigating more than 800 individuals after a leak of taxpayer data in relation to a Panamanian law firm.

Deputy Commissioner Michael Cranston said that since the completion of the offshore disclosure initiative “Project DO IT”, the ATO has ramped up its compliance work to deal with taxpayers who have failed to disclose offshore income and assets.

Mr Cranston said the ATO has been analysing the latest data against information these taxpayers had reported and against the information the ATO already has. The information the ATO received regards some taxpayers who it had previously investigated, as well as a small number of taxpayers who disclosed their arrangements to the ATO under Project DO IT. The information also regards a large number of taxpayers who have not previously come forward, including high-wealth individuals, and Mr Cranston said the ATO is already taking action on those cases.

ATO safe harbour for SMSF borrowings

The ATO has released guidelines that set out the
“safe harbour” terms on which trustees of self managed superannuation funds (SMSFs) may structure related-party limited recourse borrowing arrangements (LRBAs) consistent with an arm’s-length dealing. The ATO generally takes the view that an SMSF may derive non-arm’s length income (taxable at 47%) if the terms of an LRBA are not consistent with an arm’s-length dealing. If an LRBA is structured in accordance with the ATO’s guidelines, it will accept that the non-arm’s length income (NALI) rules do not apply.

TIP: The ATO previously announced a grace period whereby it will not select an SMSF for review provided that arm’s-length terms for its LRBA are implemented by 30 June 2016, or the LRBA is brought to an end before that date. Importantly, the ATO’s guidelines require arm’s-length payments of principal and interest to be made for 2015–2016 (including where the arrangement is brought to an end). If an LRBA does not meet all of the safe harbour terms, it does not mean that the borrowing is deemed not on
arms’-length terms. Rather, trustees who do not
meet the safe harbour terms will need to otherwise demonstrate that their arrangement was entered into and maintained consistent with arm’s-length terms.


ATO’s data-matching net widens

The ATO has announced details of its various data-matching programs. Most of the announcements regard extensions to existing data-matching programs. Records obtained through the programs will be electronically matched with ATO data holdings to identify non-compliance with registration, lodgment, reporting and payment obligations under taxation laws. The following are key points:

  • The ATO will acquire details of registered voters on the Commonwealth electoral roll from the Australian Electoral Commissioner. This data-matching program aims to identify taxpayers who are not registered with the ATO when they are required to be.
  • The ATO will acquire data from businesses that it visits as part of its employer obligations compliance program during the 2016–2017, 2017–2018 and 2018–2019 financial years. This program aims to obtain intelligence to identify risks and trends about contractors who may not be complying with their taxation obligations.
  • The ATO will acquire data relating to electronic payments made to merchants through specialised payment systems for the 2014–2015, 2015–2016 and 2016–2017 financial years. This data will be used to detect unreported income and to identify those operating a business but failing to meet their registration, lodgment and payment obligations.

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

Using the Blackhole Expenditure Rule – Starting A Business

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

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

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

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

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

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

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

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

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

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

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

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

 

Want to know more?

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

 

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

Electronic data-matching

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

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

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

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

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

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

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

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

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

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

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

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

Where the ATO finds a discrepancy

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

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

 

Want to know more?

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

 

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

Small businesses not seeking accountants’ advice

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

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

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

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

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

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

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

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

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

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

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

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

Trust Tax Tips 2016

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Here are some useful tax tips and reminders concerning trusts:

Beneficiaries

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

Trustee resolutions

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

Lodging trust income tax returns

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

Exempt entities as beneficiaries

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

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

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

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

Property developments trusts

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

Discretionary distributions to SMSFs

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

 

Want to know more?

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

 

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

Phone & Internet Claims – Tax Deduction 2016

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

Substantiating claims

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

Apportioning work use for phones

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

Incidental use

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

Usage is itemised on taxpayer’s bills

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

Example – phone calls are itemised on your bill

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

Usage is not itemised on taxpayer’s bills

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

Example – non-itemised account

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

Bundled phone and internet plans

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

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

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

The ATO provides the following example.

Example 1 – apportioning bundled services

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

Step 1 – work out the value of each bundled component

Mobile phone

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

Internet

$60 per month as identified on her bill

Home phone

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

Step 2 – apportion your work related use

Home internet use

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

Sujita can claim $66

Mobile phone use

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

Sujita can claim $176

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

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

ATO warns on over-claiming

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

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

Want to know more?

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

 

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

ATO Tax Audits

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

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

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

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

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

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

Conduct of audits

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

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

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

During the audit, taxation officers are required to:

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

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

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

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

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

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

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

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

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

Audit techniques

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

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

Want to know more?

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

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

Federal Election on 2 July 2016

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

Budget night

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

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

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

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

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

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

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

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

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

The Opposition’s Budget reply

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

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

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

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

Bills that received Royal Assent and those that have lapsed

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

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

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

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

Note that the lists above are not exhaustive.

Want to know more?

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

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

2016 Federal Budget Summary

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

Personal taxation

Personal tax rates: small tax cut from 1 July 2016

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

Budget deficit levy not extended

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

Business taxation

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

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

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

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

Small business threshold to increase to $10 million

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

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

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

CGT concessions

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

Reduced tax rates for small business

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

Unincorporated businesses

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

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

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

GST

GST and importation of low-value goods

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

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

GST small business taxpayers: election to use cash basis

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

Superannuation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax deductions for personal super contributions extended

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

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

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

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

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

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

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

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

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

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

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

Repayment income and rates

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

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

Getting help

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

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

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

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