Client Alert (May 2015)

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Tax planning

There are many ways in which entities can defer income, maximise deductions and take advantage of other tax planning initiatives to manage their taxable incomes. Taxpayers should be aware that in order to maximise these opportunities, they need to start the year-end tax planning process early. Of course, those undertaking tax planning should be aware of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide a number of tax savings for entities.

Deferring assessable income

  • Income received in advance of services being provided is, generally, not assessable until the services are provided.
  • Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
  • A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If the disposal of an asset will result in assessable income, a taxpayer may want to consider postponing the disposal to the following income year.
  • Rollover relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.

Maximising deductions

Business taxpayers

  • Taxpayers should review all outstanding debts prior to year-end to determine whether there are any potential debtors who will be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, the taxpayer could consider writing off the balance as bad debt.
  • The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the continuity of ownership test before deducting the prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the same business test.
  • A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
  • Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to conditions.

Non-business taxpayers

  • Non-business taxpayers are entitled to an immediate deduction for assets used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
  • The self-employed and other eligible persons are entitled to a deduction for personal superannuation contributions subject to meeting conditions such as the 10% rule.

Companies

  • Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the benchmark rule.
  • Loans, payments and debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and their associates. Shareholders and entities should consider repaying loans and payments on time or have appropriate loan agreements in place.
  • Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
  • Companies may want to consider consolidating for tax purposes prior to year-end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.

Trusts

  • Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
  • Trustees should consider whether a family trust election (FTE) is required to ensure that any losses or bad debts incurred by the trust will be deductible and to ensure that franking credits will be available to beneficiaries.
  • Taxpayers should avoid retaining income in a trust because it may be taxed in the hands of the trustee at the top marginal tax rate.

Capital gains tax

  • A taxpayer may consider crystallising any unrealised capital gains and losses to improve their overall tax position for an income year.
  • Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.

Superannuation

  • Individuals who wish to take advantage of the concessionally taxed superannuation environment but wish to stay under the relevant contributions caps should consider keeping track of contributions and avoid making last-minute contributions that would be allocated to the next financial year.
  • For 2014–2015, the general concessional contributions cap is $30,000. For those who are aged 49 or over on 30 June for the previous income year, a higher $35,000 cap applies.
  • For 2014–2015, the non-concessional contributions cap is $180,000. Individuals under 65 years may bring forward the non-concessional cap for the next two years (ie $540,000 over three years from 2014–2015).
  • From 1 July 2013, excess concessional contributions tax has been abolished. Instead, excess concessional contributions are included in an individual’s assessable income (and subject to an interest charge).
  • From 1 July 2013, excess non-concessional contributions tax continues to apply where relevant, unless the option to withdraw excess contributions is exercised. Associated earnings will be included in the individual’s assessable income (subject to a 15% tax offset).
  • Individuals with salary-sacrifice superannuation arrangements may want to have early discussions with their employers to help ensure contributions are allocated to the correct financial year.
  • From 2012–2013, individuals earning above $300,000 are subject to an additional 15% tax on concessional contributions. However, despite the extra 15% tax, there is still an effective tax concession of 15% (ie the top marginal rate less 30%) on their contributions up to the relevant cap.

Fringe benefits tax

  • The four rates used in the statutory formula method for determining the taxable value of car fringe benefits have been replaced with a single statutory rate of 20% for fringe benefits.
  • The first $1,000 of the aggregate of the taxable values of “in-house” fringe benefits (ie in-house expense payment, in-house property and in-house residual fringe benefits) provided to an employee during a year is exempt from FBT. However, the $1,000 reduction does not apply to an in-house benefit provided on or after 22 October 2012 under a salary packaging arrangement.

Individuals

  • For the 2014–2015 income year, the general tax-free threshold available to Australian resident taxpayers is $18,200.
  • Certain low income taxpayers are entitled to the low income offset. The maximum offset for 2014–2015 is $445.
  • The medical expenses offset is being phased out and will no longer be available after 2018–2019. Transitional arrangements will allow taxpayers to claim the offset from the 2012–2013 income year until the end of the 2018–2019 income year, subject to limitations.
  • The private health insurance offset has been means tested since 1 July 2012. There are three private health insurance incentive tiers.

Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. 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. The Bulletin 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.

Profiting from Happiness

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Blayney, M. (2015). Profiting from Happiness. In The Black, March 2015.

A smile can go a long way in a healthy workplace. A recent study from the University of Michigan’s Ross School of Business discovered that happy employees work harder than unhappy ones, call in sick less frequently, go the extra mile when performing a task, stick at a job and attract like-minded people to their cause. The report, conducted over seven years, concluded that these productive staff members share two character traits: a sense of vitality and a willingness to learn.

As economies contract and margins continue to be squeezed, the emerging discipline of positive psychology is changing the way we work. Organisations the world over are beginning to take workplace happiness seriously. Clinical psychologist Dr Timothy Sharp is so serious about it that he answers to the name Dr Happy when he’s not at home. And maybe when he is. As “Chief Happiness Officer” at Sydney’s The Happiness Institute, Sharp is a little bullish about putting smiles on dials.

Take the example of the Parnassus Workplace Fund, an American mutual fund that invests exclusively in large firms with outstanding workplaces. The idea grew wings in 2005 after a fruitful investment return analysis was performed on Fortune magazine’s “100 Best Companies To Work For” list, Since the fund’s inception, it has delivered annual returns of almost 10 per cent, nearly double the S&P 500 Index average same period.

Those sorts of numbers fuel Andrew Bayly, a positive psychology consultant who has run repeat programs in the strategy implementation, leadership development and engagement areas at seven of the ASX’s Top 20 firms. He believes the potential benefits of a happy workplace justify any initial or ongoing outlay. “A happy state will lead to creativity and you’ll be able to connect with others more easily, quickly and productively. There is sound evidence that links happy and optimistic states of mind with more productive lives,” says Bayly, who recently graduated with a Master of Applied Positive Psychology from University of Melbourne’s newly formed Centre for Positive Psychology.

So in practical terms, how can we keep employees happy? Is it as simple as assembling a ping-pong table and firing up the PlayStation? “We definitely need more than gimmicks, but it’s amazing how many organisations believe such an overly simple approach will work. Fun and play are important, but so too are finding ways to give employees meaning and purpose in their work,” insists Sharp. Leadership is crucial. Workplace psychologists often say people don’t quit their jobs, they quit their managers, and finding leaders who manage positively is fundamentally important to productivity.

In many workplaces, inclusion is key, but beyond that, expressing gratitude to employees should be a conscious and regular occurrence. “Being grateful when things are going well and disciplining yourself to do that works for some people,” Bayly says. “The act of being thankful to people when needed builds relationshi­ps and these things make us feel good.” “The best organisations focus more on the strengths of people than on their weaknesses,” Sharp adds.

More than anything, we are happy when we are making progress and doing meaningful work. We want to be challenged, recognised and rewarded accordingly and, importantly, we can all play a part in making our workplaces happier.

 

“If there’s one thing I’ve learned from working with many teams and organisations, it’s that the most effective interventions target the organisation from as many directions as possible,” Sharp says. “This means that yes, leaders need to lead, but also that every single employee has a role to play and should be encouraged to get actively involved in generating positivity.”

Client Alert – Explanatory Memorandum (April 2015)

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Separate ATO appeals unit needed to resolve tax disputes

The Government has released the Inspector-General of Taxation’s report on the ATO’s management of tax disputes. The report was prepared at the request of the House of Representatives Standing Committee on Tax and Revenue to assist with the large business and high-wealth-individual themes of its Inquiry into Tax Disputes. The Inspector-General’s report will now be considered by the Committee as part of the Inquiry. In releasing the 147-page report, the Government said the “recommendations by the Committee, as well as those of the Inspector-General, will be considered by the Government on conclusion of the Inquiry”.

The Inspector-General observed that a key concern for taxpayers “appears to be a lack of separation between the ATO’s original decision makers and its officers who review such decisions” and that this gives “rise to a lack, or perceived lack, of independence leading taxpayers to believing their cases were not reconsidered afresh and they were denied a fair hearing”. This, in turn, leads taxpayers to believe they cannot have their matter objectively considered until they reach the Administrative Appeals Tribunal (AAT) or the Federal Court.

The Inspector-General noted that while the ATO’s recent initiatives represent a positive step in its management and resolution of tax disputes, “there is a need for further improvements which was sustainable over time and made available to all taxpayers including small business and individual taxpayers”. In this regard, the Inspector-General recommended the “creation of a separate and dedicated Appeals Group, led by a new Second Commissioner, to embed the improvements within the ATO structure and provide a framework that is less dependent on the views and ideals of the ATO leadership of the day”. The Inspector-General said this move would also bring the ATO more in line with comparable international revenue authorities.

The proposed new Appeals Group would manage and resolve tax disputes for all taxpayers, including the conduct of pre-assessment reviews, objections and litigation (including identifying test cases and providing oversight on settlements), as well as championing the use of alternative dispute resolution (ADR) throughout the dispute cycle. Mr Noroozi said the separation from both the ATO’s compliance and legal advisory functions would facilitate a fresh and impartial review of the taxpayer’s case. Officers of the new proposed area would be empowered to resolve disputes through the most appropriate means, taking into consideration the individual circumstances of the taxpayer, their case, and an assessment of the ATO’s precedential view. Additionally, he said the new area would ensure that settlements are appropriately scrutinised and in the best interests of the community.

Mr Noroozi acknowledged submissions calling for a separate agency to manage tax disputes, noting that such an agency would represent the highest levels of independence. He also noted that there would be challenges with this option, for instance increased costs and overlap with existing external review bodies such as the AAT. However, Mr Noroozi said he believes that this option should be considered in future if significant concerns persist following implementation of the Appeals Group.

The Inspector-General was of the view that it was paramount that the proposed Appeals Group be headed by a new Second Commissioner, in order to achieve the highest level of independence while retaining the dispute management function within the ATO. Mr Noroozi noted that such roles are statutorily appointed and their tenure and remuneration pre-determined by the Government and the Remuneration Tribunal, respectively. He said such an arrangement accords with the views of the International Monetary Fund on the separate leadership of an internal appeals function where organisational and practical separation (such as through a separate agency) cannot be achieved.

The Inspector-General also said he believed that a legislated framework pursuant to which the ATO can establish protocols to manage intra-agency communication would further foster the independence of the proposed Appeals Group. In this regard, the Inspector-General recommended that the Government consider legislative change. Mr Noroozi pointed out that the US model for managing intra-agency communication provides a helpful guide. He added that stakeholders were “generally supportive” of this approach drawing comparisons to the use of “Chinese walls” in large professional service firms to manage conflicts of interest.

Source: Inspector-General of Taxation, “The Management of Tax Disputes”, January 2015, www.igt.gov.au/content/reports/tax_disputes/downloads/management_tax_disputes.pdf; Assistant Treasurer’s media release, 27 February 2015, http://jaf.ministers.treasury.gov.au/media-release/010-2015.

Single Touch Payroll consultation noted big changes afoot

On 28 December 2014, the Government announced that it would cut red tape for employers by simplifying tax and superannuation reporting obligations through Single Touch Payroll.

Under Single Touch Payroll, employers will be required to electronically report payroll and super information to the ATO when employees are paid, using Standard Business Reporting-enabled software. In addition, Single Touch Payroll will streamline TFN declarations and Super Choice forms by providing a digital channel to simplify the process of bringing on new employees. It could also cut red tape by notifying super funds and government agencies, such as the Department of Human Services, when an employee ceases employment.

Single Touch Payroll will be available from July 2016. To meet their Single Touch Payroll obligations, employers would be required to use, and if necessary acquire, appropriate payroll software. The ATO noted the Government has yet to make final decisions on its implementation.

The ATO had released a discussion paper which sought submissions on:

  • transition arrangements;
  • suggestions on how to minimise implementation and compliance costs; and
  • the potential for employers to remit employee PAYG withholding and the super guarantee at the same time employees are paid.

The closing date for submissions was 6 March 2015.

The following are some key points raised by the ATO in the paper:

Reporting capability

The reporting function in Single Touch Payroll will eliminate paper-based payroll reporting by requiring businesses to report digitally instead. This will reduce the double handling of data. The ATO would also be notified of the super contribution amounts that the employer will pay to the super fund. As a result of the ATO’s improved visibility of employee super entitlements and payments, the ATO will be in a better position to ensure that businesses are meeting their employee super obligations.

Real-time reporting and payment capability

Despite the Single Touch Payroll reporting function offering significant benefits, it is unable to solve the potential problem of businesses accruing large quarterly pay-as-you go (PAYG) withholding, and superannuation bills being due for payment at around the same time. By reporting and paying the PAYG withholding and superannuation guarantee (SG) for employees at the payroll cycle, businesses would be able to smooth out the cash flow spikes that previously existed. However, the increased frequency of payments will result in cash flow impacts, particularly on transition. The following additional points are made by the ATO:

  • There are a small percentage of businesses in a net GST refund position, or entitled to fuel tax credits, that are also likely to see an impact on cash flow.
  • Changes to the frequency of payments may have consequences for other business practices, such as payment of invoices.
  • Employers would face the initial transition impact of paying the PAYG withholding and super bill for the last reporting period at the same time as moving to paying their tax and super at the payroll event. However, the ATO noted that there will be no change to a taxpayer’s ability to enter into a payment arrangement for those who struggle to meet their obligations.
  • The increase in payment frequency for SG will have an impact on the volume of payments and contribution messages going through SuperStream gateways and clearing houses. This may result in an increase in administrative costs associated with making super contributions.

Commencing employment

A common problem is businesses not receiving information regarding their employees’ choice of super fund on time. With Single Touch Payroll, employees would be offered the option to supply their details electronically through an online government portal directly to their employer’s payroll software. Alternatively, employees or employers could enter the employee’s details directly into the employer’s payroll software and have the ATO validate the details.

Cessation of employment

The introduction of Single Touch Payroll could allow businesses to easily notify super funds, the ATO and the Department of Human Services of employees that have ceased employment. This could be done via payroll software allowing for an “employee ceased” indicator to be entered. Super funds will be able to receive information on employees who are no longer employed. Super funds could also use the information to communicate with members about choosing the fund for future employment.

Administration of penalties

As with other areas of tax and super, administration penalties may apply for failures to meet certain obligations under Single Touch Payroll. The ATO says the Commissioner will “provide support to employers making a genuine attempt to comply with their obligations under Single Touch Payroll”. As a result, the ATO says discretion in the administration of penalties under Single Touch Payroll “will be necessary during the transition period and ongoing”. In this regard, the ATO is seeking comments on the circumstances in which the Commissioner should use his discretion in administering penalties.

Software

Businesses or their payroll providers may be required to either purchase or upgrade existing software, potentially at an additional cost. In the past, it was recognised that all businesses may not be able to buy, continually upgrade and operate the latest computer systems. Based on the experience with Real Time Information in the United Kingdom, the ATO says it is “expected that some basic, entry-level software packages will be available free of charge”. It says this will help businesses that do not currently use software transition into an electronic business model without software costs.

Transition options

Any employer will be able to transition to Single Touch Payroll from July 2016. The Commissioner will be able to delay the start date to allow for situations where employers find it difficult to meet the required timetable. The paper sets out a potential phased approach to implementing Single Touch Payroll based on whether an employer has a withholding greater or less than $100,000. It suggests that employers with withholding greater than $100,000 could fully transition to Single Touch Payroll by July 2018 (with exemptions to apply in exceptional circumstances). However, the ATO suggests employers with withholding less than $100,000 could transition to Single Touch Payroll by July 2019 (with exemptions to apply in exceptional circumstances).

Source: ATO, Single Touch Payroll discussion paper, 16 February 2015, https://www.ato.gov.au/General/Consultation/What-we-are-consulting-about/Papers-for-comment/Single-Touch-Payroll-discussion-paper.

Time limits on trustee tax assessments clarified

The ATO has issued Practice Statement PS LA 2015/2 outlining its practice of limiting the period within which it will raise an original trustee assessment. It notes that the practice means returns lodged by trustees are broadly exposed to similar time limits for review as other taxpayers.

However, the ATO notes that in any income year, a trustee may be issued separate assessments under s 98 for each relevant beneficiary and/or an assessment under ss 99A or 99. It states that its practice about time limits applies separately to the making of each of these original assessments.

Generally, the ATO notes that it will not issue an original trustee assessment more than four years after the relevant trust tax return was lodged, or more than two years after lodgment for the 30 June 2014 and later income years if the trust was a small business entity (and none of the qualification in item 3 of the table in s 170(1) of the ITAA 1936 apply).

According to the PS LA, the time limits listed above do not apply in the following circumstances:

  • if the trustee has not lodged a trust return for the year in question;
  • if the Commissioner is of the opinion that there has been fraud or evasion;
  • where an extended or unlimited amendment period would apply; or
  • where the time limit is extended – in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits, the ATO may seek the trustee’s agreement to extend the period.

The PS LA contains five examples on practical applications of the above principles including examples of the time limit within which to raise an original trustee assessment; multiple trustee assessments; where time limits do not apply (unlimited amendment period); extension of time limits; and extended timeframes.

Date of effect

Practice Statement PS LA 2015/2 applies from 19 February 2015.

Source: ATO, Practice Statement PS LA 2015/2, 19 February 2015, http://law.ato.gov.au/atolaw/view.htm?docid=%22PSR%2FPS20152%2FNAT%2FATO%2F00001%22.

GST credits for employee accommodation refused

In a test case decision, the Federal Court has dismissed a taxpayer’s appeal concerning its entitlement to input tax credits (ITCs) for certain acquisitions relating to mining accommodation (employee/contractor housing) in Western Australia.

Background

The taxpayer, Rio Tinto Services Ltd, is the representative member for the Rio Tinto Ltd GST group, which includes Hamersley Iron Pty Ltd and Pilbara Iron Company (Services) Pty Ltd (PICS). The case was conducted as a test case re GST paid by Hamersley and PICS for October 2010 on expenditures including construction and purchase of new housing, refurbishment and repairs of residential housing, mould removal and general hygiene cleansing, and cleaning housing and landscaping. The Court noted that Hamersley owns around 2,300 houses and apartments in towns in the Pilbara.

Rio Tinto claimed it was entitled to ITCs of nearly $600,000 for acquisitions made by Hamersley and PICS in providing, and maintaining, residential accommodation for Hamersley’s workforce in the Pilbara region. The accommodation is leased to the workers and the provision of the accommodation is an input taxed supply under s 40-35. Hamersley makes losses on providing the accommodation and the rent charged is generally subsidised by the company.

Rio Tinto argued that the acquisitions in question were made wholly for a “creditable purpose” because the supply was not an end commercial objective in itself but was wholly incidental to Hamersley’s mining operations as a necessary and essential part of those operations.

The Commissioner accepted that the provision of the accommodation was a necessary and essential part of Hamersley’s business. However, he rejected the company’s ITC claims on the basis they fell within the terms of s 11-15(2)(a) of the GST Act because they related to making supplies that would be input taxed. The issues in question were: (i) whether the acquisitions were made solely or partly for a “creditable purpose”; and (ii) if made solely or partly for a “creditable purpose”, the amount of credit to which the taxpayer was entitled.

Decision

The Court noted that an acquisition is not a “creditable acquisition” to the extent it “relates to” making supplies that would be input taxed. Under s 40-35(1)(a), input taxed supplies include a supply of residential premises by way of lease.

The Court said Rio Tinto accepted that the provision of the accommodation was an input taxed supply and that there was a connection between the acquisitions and the provision of that accommodation. However, the company argued that the connection was not a relevant connection for s 11-15 purposes. It submitted that for s 11-15(2)(a) to apply, the making of an input taxed supply, and not the making of a taxable supply, must be the “moving cause” or “purpose” of the acquisition. The company contended that the “moving purpose” in supplying the accommodation was the carrying on of Hamersley’s enterprise of mining and selling iron ore (ie the making of taxable supplies), and not the leasing of accommodation as an end activity in itself (ie making input taxed supplies). Rio Tinto argued there was not a sufficient and material connection between the acquisitions in question and the making of input taxed supplies for the purposes of s 11-15(2)(a).

The Federal Court however disagreed and rejected Rio Tinto’s construction of s 11-15.

It was also argued by the taxpayer that the legislative policy (for the enactment of s 40-35) would be defeated by the Commissioner’s construction of s 11-15 by reason that Hamersley’s business is to profit from the making of taxable and GST-free supplies of iron ore, not from the provision of accommodation. In response, the Court said:

  • the task of statutory construction does not seek, as Rio Tinto sought to do, to identify or assume the underlying policy of a provision and then to construe that policy;
  • the fact that it may be necessary for Hamersley to subsidise the accommodation rent in order to attract and retain its workers, thereby making a loss, “does not gainsay the application of s 11-15(2)(a)”. The Court said the decision to provide the rental subsidy was a commercial choice by Hamersley that did not impinge on the proper construction of s 11-15;
  • it is the transaction that determines the GST outcome. The provision of the accommodation was an input taxed supply.

In the result, the Court dismissed the taxpayer’s application. In the Court’s view, the acquisitions in question all had a direct connection with Hamersley’s provision of leased accommodation and that connection constituted a sufficient material relationship for the purposes of s 11-15(2)(a). It held the acquisitions were not made for a “creditable purpose”.

Appeals update

The taxpayer has appealed to the Full Federal Court against the decision.

Rio Tinto Services Ltd v FCT [2015] FCA 94, www.austlii.edu.au/au/cases/cth/FCA/2015/94.html.

Penalty for promoting pharmaceuticals donations scheme

In a lengthy and detailed judgment, the Federal Court has found that a promoter of a scheme involving the purchase and donation of pharmaceuticals to charities with foreign operations engaged in conduct that resulted in himself and two other entities being a promoter of a tax exploitation scheme. As a result, civil penalties totalling $1.5 million were imposed.

Background

The Court said the promoter brought the scheme to Australia in 2009 and 2010. Under the scheme, participating entities incurred a liability to pay for pharmaceuticals for use in foreign markets, but liability for payment of 92.5% of the purchase price would be deferred for 50 years at very low interest. Participants would claim immediate deductions for the full amount of the purchase price.

The Court noted that this was only the second time it had been called upon to consider the civil penalties provisions of Subdiv 290-B of Sch 1 to the TAA, the first being in FCT v Ludekens [2013] FCAFC 100.

Decision

In the Court’s view, “the conduct of Mr Arnold, whether it was conduct on his part, conduct as the guiding mind and will of Leaf Capital or conduct as the guiding mind and will of Donors Without Borders was so integrated in its nature, planning, sequence, timing and supervision that it is not possible…to identify sets or sequence of acts and characterise those as being totally referrable to Mr Arnold, or Leaf Capital, or Donors Without Borders. In my view, the acts constituting the conduct of Mr Arnold cannot be allocated as being exclusive to himself or either of the two corporate respondents; their respective roles in the DWB Scheme were so overlapping in the conduct called for from Mr Arnold that each and every act on his part was related to the other acts on his part; they were all part of the same course of conduct.”

After reviewing the relevant law, cases, facts and submissions, the Federal Court concluded that: (i) the scheme was a “scheme” for the purposes of s 290-65(1) of Sch 1 to the TAA; (ii) at the time of the conduct mentioned in s 290-50(1), it was reasonable to conclude that each respondent (and each participant) entered into or carried out the scheme in question for the dominant purpose of getting a “scheme benefit” for each participant from the scheme; (iii) at the same time, it was not reasonably arguable that the scheme benefit was available at law; and (iv) by reason of (i), (ii) and (iii), the scheme was a “tax exploitation scheme” for the purposes of s 290-65(1).

The Court imposed a penalty of $1 million on the promoter, $400,000 on the second respondent, and $100,000 on the third respondent. Edmonds J said (at [171] and [207]): “Specific deterrence is a significant factor where, as here, the contraventions involved deliberate wrongdoing, sustained denials of contraventions and lack of remorse”.

“Potential promoters must be left in no doubt that acting on the commercial temptation to engage in the proscribed conduct in relation to tax exploitation schemes, so as to realise the significant potential rewards that can be available, will result in substantial penalties. The penalties need to be substantial enough to persuade potential promoters that it is not worth the risk of whether a tax exploitation scheme will escape the detection by the Commissioner.”

FCT v Arnold (No 2) [2015] FCA 34, www.austlii.edu.au/au/cases/cth/FCA/2015/34.html.

ATO reaction

In commenting on the case, ATO Deputy Commissioner Tim Dyce said the so-called philanthropic scheme was modelled on an arrangement which previously failed in Canada, and involved the purchase and donation of AIDS pharmaceutics to charities in Africa. “As we discovered, the purchasers only paid 7.5% of the grossly inflated price of the drugs, yet claimed tax deductions of 100%”.

Mr Dyce said that, in delivering his judgment, Justice Edmonds noted at least five grounds why the scheme was not available under the law, including that there was no actual delivery of the pharmaceuticals to the charities concerned at the relevant time.

Source: ATO media release, 6 February 2015, https://www.ato.gov.au/Media-centre/Media-releases/Promoters-of-AIDS-pharmaceuticals-donations-scheme-fined-$1-5-million.

Tax concessions following business sale cancelled

The AAT has confirmed that Pt IVA applied to a scheme carried out by taxpayers that enabled them to qualify for the CGT small business concessions by way of “creating” liabilities for the purpose of passing the maximum net asset value test (MNAV) test. Interestingly, the taxpayers argued (contrary to their lodged tax returns) that these liabilities did not “relate to” any relevant CGT assets and, therefore, the MNAV test had not been passed, in order to negate the Commissioner’s claim that Pt IVA applied to the arrangement.

Background

The taxpayers were the trustee of a unit trust that made the capital gain, its various family trust beneficiaries and certain “primary” individual beneficiaries of those family trusts. The unit trust carried on a business of manufacturing rain water tanks, pool shells and farm product (together with the related unit trust that operated various parts of the business). On 1 July 2005, the unit trust sold its business asset for over $8 million. Its tax return, and those of the other taxpayer beneficiaries who would receive the “flow-on” effect of the distributions of the gain, were prepared on the basis that the unit trust qualified for the CGT small business concessions.

However, several weeks before the sale, the business was restructured by way of introducing four new “protection trusts” to receive capital distributions from the unit trust in relation to re-valued goodwill (and resolutions were duly made to make such distributions). At the same time, loans were made by these protection trusts to the unit trust to finance these distributions (which were repaid soon after the sale). In addition, various loans existed between related trusts.

The Commissioner claimed the restructure, with the resulting new liabilities of the unit trust, was motivated by a desire to come within the (then) $5 million MNAV threshold in order to access the CGT small business concessions in respect of the capital gain of $5.4 million that the unit trust would otherwise have made on the sale but for the liabilities. In short, the Commissioner claimed that the liabilities in question – namely, unpaid present entitlements of $1.4 million, a loan-back of $500,000 and the loans totalling $50,000 between two related trusts – were “created” under the arrangement in order to obtain a “tax benefit” for Pt IVA purposes.

Accordingly, the Commissioner made Pt IVA determinations and issued amended assessments to increase the assessable income of both the family trusts (in proportion to their unit holdings in the unit trust) and their primary individual beneficiaries (in proportion to distributions previously made to them). In addition, the Commissioner imposed 50% shortfall “scheme” penalties. Note that the Commissioner also originally issued amended assessments to corporate beneficiaries of the family trusts but later conceded they were outside the time permitted for the making of amended assessments and abandoned his claim of “fraud or evasion”.

On the disallowance of the taxpayer’s objections to the amended assessments, the taxpayers applied to the AAT for review. Before the AAT, they argued that, contrary to the position they took on claiming the CGT small business concessions on the lodgment of their tax returns, they did not qualify for the concessions as the relevant liabilities did not in fact “relate to” any assets of the unit trust for the purposes of the MNAV test.

Decision

Subject to several minor adjustments, the AAT affirmed the Commissioner’s objection decisions and ruled that Pt IVA applied to the arrangement.

However, the AAT first found that the relevant liabilities did “relate to” the assets of the unit trust and therefore the taxpayers had prima facie qualified for the CGT small business concessions. Specifically, it found the taxpayers had not satisfied the onus of proving the liabilities were not “related to” the assets of the unit trust and that in its opinion, at least the unpaid present entitlements of $1.4 million and the loan-back liability of $500,000 were more than likely related to its assets.

In arriving at this conclusion, the AAT made the following points:

  • the taxpayers’ expert accounting evidence was not relevant (although may be of assistance) as the question of whether the liabilities were “related to” the assets was a matter of mixed fact and law on which the AAT was bound to reach its own conclusions;
  • the legal test is that a “real and substantial, but not remote” relationship must exist between a liability and the CGT assets of the taxpayers;
  • an inquiry as to the “purpose” of incurring the liability (as underpinned the taxpayers’ arguments) does not necessarily answer and, in fact, “may distract from the enquiry required by the legislation – is the liability related to the assets of the entity”?
  • the decision in Bell v FCT[2013] FCAFC 32 (where it was held that a loan taken out to fund distributions, instead of using existing trust resources, was not “related to” CGT assets of the trust) was to be distinguished on a number of grounds, including that in that case “the cash that represented the borrowing had been disposed of…”, whereas in this case, “the strategy seems to have been to avoid actually disposing of cash until after settlement of the sale in the following financial year”; and
  • the resulting calculation after taking into account relevant “liabilities” needs to reflect the economic value of the business and, in the ordinary course of events, the balance sheet of a business should demonstrate the economic value of a business – which in this case indicated the liabilities did “relate to” the CGT assets of the unit trust.

On the basis of finding that the MNAV test had in fact been passed, the AAT then addressed the issue of whether Pt IVA applied to cancel the tax benefits obtained by the taxpayers as a result.

After finding that the steps undertaken to “restructure” the business constituted a “scheme”, the AAT then found that tax benefits had been received, not by any of the family trusts beneficiaries, but by the primary individual beneficiaries of those trusts. It did so essentially on the grounds that in terms of determining the “alternative postulate” under the tax benefit test, “it was reasonable to postulate that the distributions would have been made [to these beneficiaries], in substance at least, on the basis of the resolutions that were seemingly prepared” in the relevant income year that the unit trust resolved to make the original distributions.

The AAT then found, by reference to the relevant “dominant purpose” factors in s 177D(b) of the ITAA 1936, that the taxpayers entered into the scheme for the dominant purpose of obtaining a tax benefit and not for any asset “protection purpose”. In this regard, the AAT also emphasised that the taxpayers failed to discharge the onus of proving such and stated that it was “unable to see how the scheme could be regarded as having any purpose other than obtaining a tax benefit”.

Finally, the AAT affirmed the 50% shortfall “scheme” penalties, noting also there were no grounds to claim that a “reasonably arguable” position had been taken.

Re Track and Ors and FCT [2015] AATA 45, www.austlii.edu.au/au/cases/cth/AATA/2015/45.html.

This issue of Client Alert takes into account all developments up to and including 17 March 2015.

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.

Client Alert (April 2015)

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Separate ATO appeals unit needed to resolve tax disputes

The Inspector-General of Taxation has called for a separate appeals unit within the ATO following a review of the ATO’s management of tax disputes.

The Tax Inspector noted that while the ATO’s recent initiatives represent a positive step in tax dispute management, more could be done to help small businesses and individual taxpayers. Mr Ali Noroozi said a separate, dedicated appeals unit within the ATO, should be led by a new Second
Commissioner.

The unit within the ATO proposed by the Tax Inspector would manage and resolve tax disputes for all taxpayers including the conduct of pre-assessment reviews, objections and litigation (including providing oversight on settlements), as well as championing the use of alternative dispute resolution. The Government said it would consider the recommendation along with any other recommendations to be made by a parliamentary committee that was examining tax disputes.

Single Touch Payroll consultation noted big changes afoot

Businesses need to be aware of big changes afoot with the implementation of the Government’s proposed Single Touch Payroll. Under Single Touch Payroll, employers will be required to electronically report payroll and superannuation information to the ATO when employees are paid, using Standard Business Reporting-enabled software.

According to the Government, Single Touch Payroll would cut red tape for employers and simplify tax and superannuation reporting.

TIP: Single Touch Payroll is expected to be launched in July 2016. In a brief public consultation period, the ATO highlighted potential impacts that the implementation of Single Touch Payroll could have on employers. Businesses or their payroll providers may be required to either purchase or upgrade existing software, potentially at an additional cost. Another concern is the immediate impact on cash flow, particularly during transition.

Time limits on trustee tax assessments clarified

The ATO has issued Practice Statement PS LA 2015/2 which outlines its practice of limiting the period within which it will raise an original trustee assessment. The practice means that returns lodged by trustees are broadly exposed to similar time limits for review as other taxpayers.

Generally, the ATO notes it will not issue an original trustee assessment more than four years after the relevant trust tax return was lodged, or more than two years after lodgment for the 30 June 2014 and later income years if the trust was a small business entity (and certain specific qualifications under the tax law do not apply). However, the ATO notes that the time limits can be extended in certain cases.

The following example illustrates the time limit within which the ATO can raise an original trustee assessment:

The 2010 income tax return for the Oak Family Trust was lodged on 9 May 2011. The trust was not a small business entity for the 2010 income year. An audit of the trust reveals that some of the trust net income should be assessed to the trustee. The Practice Statement provides that the Tax Office must issue an assessment to the trustee by 9 May 2015 (unless the time limit is extended).

GST credits for employee accommodation refused

The Federal Court has held in the recent decision of Rio Tinto Services Ltd v FCT [2015] FCA 94 (handed down on 19 February 2015) that the taxpayers are not entitled to input tax credits for providing remote region residential accommodation to employees who are required to live remotely in order to carry out their employment duties.

Broadly, the Federal Court held that the taxpayer, Rio Tinto, was not entitled to input tax credits for the acquisition made by Hamersley Iron Pty Ltd (Hamersley), a related company in Rio Tinto’s GST group, in providing and maintaining heavily subsidised residential accommodation for their employees in the remote Pilbara region of Western Australia, where they conducted mining operations.

The Federal Court was prepared to accept that Hamersley’s leasing activities may have been wholly incidental to its mining operation and merely a means to carrying on its business. However, the Court denied Hamersley input tax credits in relation to that activity on the basis of a narrower interpretation that the acquisition “relates to” the supply of residential accommodation by way of lease, being an input taxed supply (which means there is no GST credit).

TIP: At the time of writing, Rio Tinto has appealed to the Full Federal Court against the decision handed down by the Federal Court. The principles followed by the Federal Court could have wide-reaching implications for GST registered businesses, and the appeal process should be followed closely.

Penalty for promoting pharmaceuticals donations scheme

The Federal Court has imposed a $1.5 million penalty after finding a promoter of a scheme involving the purchase and donation of pharmaceuticals to charities with foreign operations engaged in conduct that resulted in himself and two other corporate entities being promoters of a tax exploitation scheme.

The ATO noted the penalty of $1.5 million was the “highest civil penalty to date”. In commenting on the decision of the Federal Court, ATO Deputy Commissioner Tim Dyce said the scheme involved the purchase and donation of AIDS pharmaceuticals to charities in Africa. “As we discovered, the purchasers only paid 7.5% of the grossly inflated price of the drugs, yet claimed tax deductions of 100%,” said Mr Dyce.

Tax concessions following business sale cancelled

The Administrative Appeals Tribunal (AAT) has confirmed that the general anti-avoidance rules under the tax law applied to a “scheme” carried out by taxpayers in order to enable them to qualify for the capital gains tax (CGT) concessions for small businesses on the sale of a business. In particular, the AAT examined the effect of a “restructure” of the business which occurred several weeks before the sale. An effect of the “restructure” was to enable the taxpayers to meet a requirement to access the CGT small business concessions.

Before the AAT, the taxpayers sought to argue that, contrary to the position they took on claiming the tax concessions on the lodgment of their tax returns, they did not qualify for the concessions. However, the AAT held the taxpayers did qualify for the concessions. It also held that, after finding that the steps to “restructure” the business constituted a “scheme”, the general anti-avoidance rules under the tax law applied to cancel the “tax benefit”. The AAT found the taxpayer entered into the scheme for the dominant purpose of obtaining a tax benefit (reduced tax) and not for any asset “protection purpose”.

TIP: The ATO uses data-matching to identify taxpayers that may be inappropriately seeking the CGT small business concessions. Business “restructures” which occur just prior to a particular transaction which result in significant tax benefits could potentially raise red flags. Where a restructure is effected for purposes such as asset protection (which the courts have said is a legitimate non-tax purpose), such benefits must be real and not simply illusory.

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.

Changing change management

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Gettler, Leon. ‘Changing Change Management’. Acuity 2.3 (2015): 48.

Five tips from management guru Tom Peters on how to make change management programmes work by Leon Gettler

TOM PETERS , one of the world’s most influential management thinkers, burst on to the scene 33 years ago with the publication of In Search of Excellence, an analysis of what sets successful companies apart.

He wrote this business book with fellow McKinsey consultant Bob Waterman and it became the model for other business writers. Originally it was self-published. More than 25,000 copies were sold directly to consumers until Warner bought it and sold 10 million more.

The book launched Peters on the path to becoming a global, jet-setting guru. The man The Economist called the “uber-guru” took to the world’s lecture circuits, his manic rants flowing through rooms like a river of electricity as he urged businesses to annihilate hierarchy and bureaucracy, to blow up organisations and drive innovation, to foster uniqueness and celebrate chaos.

Peters was one of the first to take to the blogosphere, in 1999. His Twitter output is prolific, added to his relentless calendar of speeches and client engagements, At 72, he shows no sign of slowing down.

Peters is scathing about the 70% failure rate of change management programmes. As he says, permanence is the last refuge of those with shrivelled imaginations so change has to be brilliantly managed.

He has five tips to make change management programmes work.

  1. “You have to want the change to occur so much, and excuse my American vernacular, that you are willing to take almost an infinite amount of shit along the way because change programmes, if they are significant, are rocky.The notion of a CEO or a person running a 500-person division ordering a change process, getting someone to develop a new system, implementing the system and have all go well with great profitability, the odds of that are as close to zero as can possibly be.”
  2. “Idiots fight enemies, geniuses build alliances. People running change programmes including CEOs need to spend 90% of their time with allies and 10% of their time with enemies. You don’t convert enemies with a radical change programme until you’ve got a lot of evidence underway, so ‘ally developing’ is the key period. You have to recruit them, you have to spend an incredible amount of time with them, you have to respect their input to the point that the change you’re trying to process might not look like what you began with, but it’s all about allies.”
  3. “Don’t let them nail you for the little crap. Save your energy for the important stuff and don’t allow yourself to be written off for silly trivial reasons.”
  4. “Start prototypes as fast as you can. The programme you implement will only vaguely look like the one you propose. You’ve got to learn stuff fast along the way. Forget planning and start acting. Just keep accumulating the wins and the losses. If you’re in a staff job like CIO or CFO, let the line people do the selling, not you. The guy you want in front of the chief executive officer, you want the guy who runs the distribution centre who has implemented your program and done a fantastic job with it. The more you stand on the back row and the more they get the full credit, the faster the changes will occur.”
  5. “It all gets back to tenacity. There are resilient people in the world and there are those who aren’t so resilient. Churchill did once say the ability to succeed is the ability to go from screw up to screw up without loss of nerve. Churchill had 60 years of problems and four good years. We remember him for four good years, as we should.”

WORLD BUSINESS FORUM

Tom Peters is speaking at the World Business Forum, sponsored by Chartered Accountants Australia and New Zealand, in Sydney 27-28 May 2015. wbfsydney.com

LEON GETTLER is an independent journalist, author and public speaker.

A general thinker’s tips for entrepreneurs

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Giuffre, Remo. ‘A General Thinker’s Trips For Entrepreneurs’. Acuity 2.3 (2015): 40. Print.

THERE ARE GOOD, bad and ugly things about being an entrepreneur. It’s a sporadically very rewarding but often very hard life.

Financial security is rarely a feature. Superannuation? What’s that?

If, as an entrepreneur, you could choose another life, maybe you would. But generally the fact of the matter is you have no choice. It’s in the blood.

If that’s you, then here are my top eight tips for entrepreneurs.

  • Passion

Consider three factors. There’s what you love to do. There’s what you’re objectively good at. And finally, there’s what will enable you to earn enough money to live.

If you’re not already in the place of equilibrium where those three factors intersect, then you should be heading there with all due haste. But, start with passion. Love what you do. Life is too short to spend time doing work that doesn’t bring joy to yourself and others.

  • Vision

Clarity of vision is critical. If you don’t know what it’s all about, your employees and customers have no hope.

It’s always better when people understand why they are doing what they are doing, and ideally why those reasons are worthwhile. Being able to give people context and a shared sense of purpose is an important part of being an effective leader.

  • Travel hopefully

Be optimistic. Hope is paramount.

To quote Robert Louis Stevenson: “To travel hopefully is a better thing than to arrive, and the true success is to labour.” A feeling of optimism about the future delivers a high quality of life in the present. The outcomes of your endeavours are actually irrelevant to the quality of the life you live in the present.

  • Instinct and cool

Some things are really quite wonderful, but you can’t always know why.

Listen to your inner voices. Hone and trust your own instincts. Quiet confidence is cool.

  • Creativity

Find your own path. Create your own world and value. Celebrate your differences.

Also, be mindful of the value of systems for the creative process.

Having a system in place enhances your capacity to be creative.

It’s like knowing that the bars of the jungle gym are solid and sturdy. When that’s the case you will feel able to swing more confidently and higher.

  • Networks

The golden thread connecting my . projects over many years has been the design, development and nurturing of passionate and engaged customer or member networks. A networked structure really is a better mousetrap for any customer-facing business.

Not B2C. B=C. THEM=US. The community is the brand.

That way, your customer network becomes both your development and marketing engines for the new business.

  • Do good work

Good work is its own reward. The best marketing is a delighted customer.

So, focus on developing the best possible product or experience that you possibly can. Give it 100%.

  • Persistence

The critical ingredient for all entrepreneurs is persistence. Seek and ye shall eventually find. You win some. You lose some.

Rejection is actually the norm. The important thing is to keep trying. Don’t be defeated by rejection. Vision + Hope + Persistence = Success.

Future Tech

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Adam Ferguson. (2015). Future Tech. Acuity. 2 (1), p36-p38.

THE RAPID GROWTH

of cloud services and products and the adoption of the technology among the small business community has created a raft of benefits for industry and the economy.

In the first quarter of this year, just under a third of SMEs in Australia and New Zealand reported using cloud products and services in the MYOB Business Monitor Digital Nation report. According to the report, businesses that are using the latest technology tend to be earning more, as well as enjoying more sales and a greater level client engagement.

But, as with any new technology, it pays to be aware of any potential downsides for business clients – especially where their most valuable data is concerned.

Data security and the cloud

Data security is one of the most common concerns for SMEs considering a move to the cloud. For businesses, the loss of data can be disastrous, especially if it includes tax records or sensitive client information. For many business owners, keeping data in-house just feels safer. They take comfort in knowing information is stored on a server on the premises. However, in truth, keeping your data in a cloud server with a reputable and reliable vendor is, most often, far more secure than storing it on an internal system. Cloud storage means data can be backed up across multiple, world-class data centres, with an array of fail safes and backups in place.

The security systems offered by reputable providers are also far more comprehensive than most businesses can afford. In addition, they are constantly monitored and updated – not just when there is a reported issue, but as part of a constant improvement cycle.

In saying this, it is important to be aware that standards in the field are not always consistent. A good example of this in the online accounting field is the practice of screen scraping to collect bank data. Employed by some providers, this practice can put both the security and accuracy of clients’ data at risk.

Screen scraping is collecting screen data from one application and translating it to another. It is useful for capturing data from older applications so it can be displayed using more modern interfaces.

In MYOB’s experience, the bank feeds feature is one of the most popular on the cloud platform. It allows bank transactions to be automatically imported and matched to the correct accounts in the business’ accounting software. This process saves the accountant, bookkeeper and/or business owner many hours of tedious data entry and significantly reduces errors through incorrect coding or recording of figures.

MYOB recommends the bank- authorised data collection system provided by BankLink, which provides secure bank transaction data via direct feeds from financial institutions, without the need for a client to share bank login details.

The data is supplied in a “read only” format, ensuring it cannot be changed and the owner retains full control of it. The entire process complies with the stringent Payment Card Industry Data Security Standard for the safe handling of transaction data and meets the requirements of more than 100 financial institutions.

Who owns your info? Data sovereignly and the cloud

Another key concern for clients, particularly if they want to take advantage of services that offer a better price or range of features, is the control they maintain over their data.

The concept of data sovereignty is one that has become more widely discussed with the growth of the cloud and internet-based services in general. This covers three broad areas:

  • who has access to data?
  • who controls the data?
  • how will that data be made available if the client wants to switch providers?

Although control of access is an important issue, it’s what happens when a business leaves a cloud service that makes questions of data sovereignty so relevant. Before a business signs up to any cloud provider, it’s important they have a clear picture of the form in which their data will be returned, and how long it will take to get it all back. In particular, businesses or their advisers need to find out if they will get their data back in a useable form – one that will allow them to continue to work offline – or if they will just be given a report on their data. This is, of course, a real concern not only because of the impact it can have on the day-to-day running of a business, but also in terms of any government regulations around record keeping.

One or many – who is responsible?

One of the areas that can make understanding both security and sovereignty issues more complex is where a provider bases its service on multiple add-on solutions. When using these services, rather than a single provider, businesses need to be aware of the standards and practices of every provider. For example, if one of them stops trading, who is responsible for managing any disruption, retrieving data and providing any required support?

Ultimately, the onus of managing these relationship is likely to fall on the businesses themselves, making it very important they understand the implications of using a range of providers, and ensuring they have adequate backup in place to cover any eventuality.

Evaluating a cloud provider

High standards of security and access should be a given for leaders in the technology industry. For businesses to evaluate their chosen provider, however there are a range of other elements to consider that will provide a more comprehensive picture of the provider they are choosing to handle their vital business data.

  • Reputation: This is likely to be the first thing that most businesses consider, but it is important to get an objective view on the provider that can meet a business’ evolving needs over the long term
  • Cost: When evaluating cost, it is important to consider whether a business is getting everything it needs for the advertised price, or whether add-on solutions will be required, increasing the overall cost of choosing a particular provider.
  • Transparency: When it comes to protecting and managing data, nothing is worse than a surprise. So it’s important businesses choose a cloud vendor who is as transparent as possible, especially about the terms of any service level agreement, or about important metrics like availability, frequency of outages and exit terms.
  • Backups: Businesses should also be clear on their process for creating backups if data is lost. Is this something that is provided automatically or do they need to do it themselves?
  • Availability: This is an important metric as it measures how often the cloud solution that businesses will be using is available. No system is perfect, but a really good provider should be able to guarantee 99% availability.
  • Support: When something goes wrong, most businesses want to know that their cloud provider is going to provide them with the support they need. It’s particularly worth considering the benefits of a provider that offers real time phone support over those that offer email support, or live chat.

Tax Wise Individual News (April 2015)

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IN THIS ISSUE
Medicare Levy Surcharge and Private Health Insurance Rebate

Superannuation guarantee rateSuper contributions caps

Changes to superannuation excess concessional contribution cap

Are you paying super fund fees unnecessarily?

Time limits for Family Assistance lump sum payments

Dabbling in Bitcoin? What’s the ‘tax’ story?

What’s the ATO’s view of GST and crowdfunding?

Are you in a partnership?

Correcting arrangements involving private companies and shareholders and their associates

Nil activity statements must be lodged

If you work in the building and construction industry

Do you own a rental property?

Selling or closing down a business

ATO Updates

The Privacy Commissioner and the Tax File Number privacy rule

Medicare Levy Surcharge and Private Health Insurance Rebate

Income thresholds
Legislation was passed in October 2014 to pause for three years the income thresholds which determine the tiers for the Medicare levy surcharge and government rebate on private health insurance from the 2015-16 financial year. Usually the income amounts would be increased by an indexed amount, but this is not going to happen for the next three years. The tables below set out the income levels for singles and families and confirm the income amounts will remain the same from the 2015 to the 2018 income years:

 

Singles

Income Year Base Tier Tier 1 Tier 2 Tier 3
2013-14 $88,000 or less $88,001 – $102,000 $102,001 – $136,000 $136,001 or more
2014-15 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more
2015-16 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more
2016-17 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more
2017-18 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more

 

Family

Income Year Base Tier Tier 1 Tier 2 Tier 3
2013-14 $176,000 or less $176,001 – $204,000 $204,001 – $272,000 $272,001 or more
2014-15 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more
2015-16 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more
2016-17 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more
2017-18 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more

It is anticipated indexation to increase the income amounts will begin again from the 2018-19 income year.

Private health insurance rebate percentage

From 1 April each year, the private health insurance rebate percentages for premiums paid will be subject to an annual adjustment. The rebate adjustment factor is based on a formula that uses the Consumer Price Index and the average annual increase in premiums. The first annual adjustment occurred on 1 April 2014.

This means there will be two different rebates to enter in your tax return for each tax year:

  • from 1 July 2014 to 31 March 2015, and
  • from 1 April 2015 to 30 June 2015.

These different rebates appear on your private health insurance statement as two separate lines. Both must be entered on your tax return.

The rebate amount for the period 1 July 2014 to 31 March 2015 is:

Age range Base Tier Tier 1 Tier 2 Tier 3
Under 65 years 29.04% 19.36% 9.68% 0%
65 – 69 years 33.88% 24.20% 14.52% 0%
70 years and over 38.72% 29.04% 19.36% 0%

Please note: We are awaiting the private health insurance rebate percentages for the period 1 April 2015 to 30 June 2015. We expect to receive these in April and will send them to you as soon as they are released.

Private health insurance rebate – reversal of amendments

The ATO has advised that it regularly matches data with health insurers to identify taxpayers who received the private health insurance (PHI) rebate through reduced premiums and have also claimed them in their income tax return. When this double claim occurs, the ATO automatically amends the taxpayer’s assessment to remove the rebate.

The ATO has reviewed amendments to reverse double claims for the PHI rebate and has identified some that have been made outside the taxpayer’s period of review.

The ATO says that in limited circumstances an assessment may be amended at any time to give effect to the provisions that relate to the PHI rebate.

The ATO has advised that if there are taxpayers affected, the ATO will write to the taxpayer’s registered contact (this could be your tax agent) about this decision and tell them a notice of amended assessment will issue soon. If you have been affected by this, you may have already received a notice of amended assessment, in which case, you should talk to your tax agent about it.

Medicare Levy Surcharge amounts

The following Medicare Levy surcharge amounts apply for the 2014-15 Income Year depending on which income tier you fall into (refer to the income tables above):

Income Tier Base Tier Tier 1 Tier 2 Tier 3
Surcharge amount 0% 1% 1.25% 1.5%

To do!
Completing your private health insurance rebate information in your tax return has become a little tricky with the introduction of an annual adjustment on 1 April for the private health insurance rebate percentages as now you have double the information to include in your return. See your tax agent for help in completing this part of return.

Superannuation guarantee rate

Previous editions of TaxWise have noted the change in the superannuation guarantee rate amounts. The rates have been included again as, if you are an employee, you should make sure your employer is contributing the right amount into your superannuation account:

Year Superannuation guarantee rate percentage
From 1 July 2013 9.25%
From 1 July 2014 9.5%
From 1 July 2015 9.5%
From 1 July 2016 9.5%
From 1 July 2017 9.5%
From 1 July 2018 9.5%
From 1 July 2019 9.5%
From 1 July 2020 9.5%
From 1 July 2021 10%
From 1 July 2022 10.5%
From 1 July 2023 11%
From 1 July 2024 11.5%
From 1 July 2025 12%
  Note!
 Check you are getting the right amount of super being paid into your super fund.

per contributions caps

With the super guarantee rate having changed, it is worth remembering what the contributions caps are as well.
The concessional contributions general cap includes:

  • employer contributions (including contributions made under a salary sacrifice arrangement);
  • personal contributions claimed as a tax deduction by a self-employed person.

The non-concessional contributions cap includes personal contributions for which you do not claim an income tax deduction.

Both of these are noted in the table below.

Income year Concessional contributions
general cap		 Non-concessional
contributions cap
2014-15 $30,000** $180,000
2015-16 $30,000 $180,000

**If you are 49 years old or over on 30 June 2014, the concessional contributions cap is temporarily increased for the 2014-15 income year to $35,000. This cap is not indexed and will cease to apply when the indexed cap that otherwise applies reaches $35,000.

Changes to superannuation excess concessional contribution cap

From 1 July 2013, if you exceed your concessional contributions cap, the excess amount will be included in your assessable income and taxed at your marginal rate. An interest charge also applies.

You can choose to release out of your super fund up to 85% of the excess contribution made if you complete an election form. If you do elect to release an amount, the ATO will issue your super fund with an ‘excess concessional contributions release authority’. Your super fund must pay the amount to be released to the ATO (as well as return the release authority statement) within 7 days.

The released amount must be paid directly to the ATO and is to be treated as a non-assessable, non-exempt benefit payment to the member.

To do!
It is worth checking your super fund account to ensure no excess contributions have gone in, or if they have, considering whether you want to withdraw them. Talk to your tax agent if you are unsure whether the right amount of super has been paid into your account.

Amendment to taxing excess super contributions

Following on from the above, the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 amends some provisions that relate to the taxation of excess super contributions to:

  • provide individuals with an option to be taxed on the earnings associated with their excess superannuation non-concessional contribution at their marginal tax rate;
  • ensure that individuals whose superannuation benefits are involuntarily transferred from one superannuation plan to another plan are not disadvantaged through the transfer; and
  • remove the need for a roll-over benefit statement to be provided to an individual whose superannuation benefits are involuntarily transferred, and allow taxation officers to record or disclose personal information in certain circumstances.

If you are concerned you have made excess contributions to your super fund, speak to your tax agent about whether you are likely to be affected by any of these recent changes.

The Bill received Royal Assent on 19 March 2015.

Are you paying super fund fees unnecessarily?

The ATO noted in a recent media release that Australians with multiple superannuation accounts could be paying thousands of dollars in unnecessary fees every year. According to new figures released by the ATO, 45% of working Australians have more than one superannuation account.

The ATO is encouraging taxpayers with multiple accounts to consider consolidating their superannuation into one preferred account. Australian Prudential and Regulation Authority (APRA) figures show the median figure for fees and charges paid by Australians for a low cost superannuation account is $532 per year.

To do!
Do you have multiple super fund accounts and are wasting money on unnecessarily paying fees in all the funds? If so, it is time to combine all your super into one account. Your tax agent can help you to do this.

Time limits for Family Assistance lump sum payments

If you want to claim any of the following family assistance payments for the 2014 financial year, you must lodge your claim with the Department of Human Services (Centrelink) by 30 June 2015 to be eligible:

  • Family Tax Benefit
  • Child Care Benefit
  • Single Income Family Supplement (SIFS).

Your tax agent will be able to help you make this claim.

Dabbling in Bitcoin? What’s the ‘tax’ story?

On 17 December 2014, the ATO issued its position on how it will treat Bitcoin, a digital currency, for tax purposes. The ATO’s views are:

Income Tax

  • Bitcoin is not a ‘foreign currency’ for the purposes of the income tax law because the ATO does not view Bitcoin as currency or foreign currency in the context in which those terms operate for the purpose of the Australian tax law (TD 2014/25).
  • Bitcoin is a ‘CGT asset’ for the purposes of the income tax law as it is regarded as ‘property’ for the purpose of the tax law (TD 2014/26).
  • Bitcoin is trading stock when held for the purpose of sale or exchange in the ordinary course of a business because it is regarded as property for tax purposes (TD 2014/27).

FBT

  • The provision of Bitcoin by an employer to an employee in respect of their employment is a property fringe benefit (TD 2014/28).

GST

  • A transfer of Bitcoin from one entity to another is a ‘supply’ for GST purposes. The exclusion from the definition of supply for supplies of money does not apply to Bitcoin because Bitcoin is not ‘money’ for the purposes of the GST Act.
  • The supply of bitcoin is not a ‘financial supply’ nor an input taxed supply.
  • A supply of bitcoin is a taxable supply if the requirements under the GST Act are met.
  • A supply of bitcoin in exchange for goods or services will be treated as a barter transaction.
  • Bitcoin is not goods and cannot be the subject of a taxable importation. However, an offshore supply of Bitcoin can be a taxable supply under the ‘reverse charge’ rules.
  • An acquisition of Bitcoin will not give rise to input tax credits under the provisions of the GST Act which allow input tax credits for certain acquisitions of second-hand goods.
  • A supply of Bitcoin is not a supply of a voucher.

(See GSTR 2014/3)

The reasoning behind the ATO’s positions is very technical. If you are interested to understand more about it, your tax adviser will be able to tell you more.

Note!
If you are dabbling in Bitcoin, beware the possible tax implications for you.Also, at the time of writing, there is a Senate committee conducting an inquiry into how Australia should regulate digital currency, including how the tax system should treat digital currency, such as Bitcoin. The tax treatment for Bitcoin could potentially change pending the outcome of the inquiry due to report in August this year.

What’s the ATO’s view of GST and crowdfunding?

Crowdfunding involves using the internet and social media to raise funds for specific projects or particular business ventures. For ATO information about the GST treatment of crowdfunding, go to the ATO’s website.

Are you in a partnership?

In November last year, the ATO issued an addendum to Taxation Ruling TR 2005/7:

  • TR 2005/7A1 – Income tax: the taxation implications of ‘partnership salary’ agreements

The addendum amends the ruling to include the taxation consequences of a partner’s salary where the partnership is a corporate limited partnership.

As a result, ATO ID 2002/564 (Income Tax Partner Salary in A Corporate Limited Partnership) has been withdrawn.

If you are in a partnership, this change might affect you. Talk to your tax adviser to see if you are affected in any way.

Correcting arrangements involving private companies and shareholders and their associates

Recently, the ATO published on its website information about what to do if a private company has, for example, made a loan to a shareholder that is a ‘deemed dividend’ for tax purposes. A taxpayer can take corrective action by, for example, putting the right loan documentation in place, to ensure that the amount is not captured by the ‘deemed dividend’ rules (colloquially known as “Division 7A”).

Your tax agent will be able to assist you if you have any concerns about loans or other arrangements you may have in place with a private company, so it is always best to consult your tax professional for help with these sorts of things.

Note!
If you have a loan from a private company, check with your tax adviser to see if you need to take any corrective action.

Nil activity statements must be lodged

If you have Activity Statements to lodge, even if your Activity Statement is nil for a particular period, the Activity Statement still needs to be lodged. Failure to lodge an activity statement, even one with zero obligations, may delay processing and result in penalties.

It is good to stay on top of these obligations and obtain the assistance of your tax agent to ensure you lodge your Activity Statement on time, every time.

Tip!
The ATO has published some tips for getting your Activity Statement right which you can find on the ATO website.

If you work in the building and construction industry

The ATO has published the following information about the taxable payments reporting obligations of persons in the building and construction industry:

Do you own a rental property?

The ATO has advised that it has redeveloped the letters it is sending to agents and taxpayers regarding reviews of rental legal and/or borrowing expense claims to make the letter clearer. In feedback, the ATO was asked to provide information on the specific area of the expense claims it is reviewing. The re-drafted letters now identify:

  • return label and amounts in question;
  • the proposed adjustments;
  • what to do in the event of a disagreement; and
  • where to find relevant information on ato.gov.au about what can be claimed, including QR reader codes to scan for smart phones or tablets.
To Do!
You should see your tax adviser if you have a rental property and receive one of these letters.

Selling or closing down a business

If you are selling or closing down a business, there are some important tax obligations for the business that you should attend to, such as:

  • ensuring all outstanding Activity Statements and returns (income tax, FBT) have been lodged;
  • put in all requests for any refunds owed to your business;
  • cancel any PAYG withholding registrations for the business; and
  • cancel the business’ ABN (which should also result in the cancellation of other registrations such as GST).

More information can be found on the ATO’s website.

ATO Updates

Are you a director of a company?

The ATO advises that it has created a new page on its website with information about the director penalty regime, which is all about what happens when a company deducts PAYG withholding amounts from its employees’ salaries and wages, but fails to remit those amounts to the ATO. To access the page, go to the ATO website

Deductibility of working with children checks

The ATO advises that the requirement for people to obtain a Working with Children check will be introduced in NSW and exists in many other states. For information about when the cost of a working with children check is deductible, check the ATO website.

GST – avoiding common errors

For ATO advice about avoiding common errors that may occur when completing activity statements, accounting for GST and claiming GST credits, go to the ATO website

Farm management deposits scheme

For ATO information about the farm management deposits scheme, go to the ATO website.

The Privacy Commissioner and the Tax File Number privacy rule

The Privacy Commissioner has issued a new privacy rule under the privacy law about Tax File Numbers, to replace the previous Tax File Number Guidelines 2011. The new rule is the Privacy (Tax File Number) Rule 2015 (Legislative Instrument F2015L00249; registered 4 March 2015).

The primary purpose of the rule is to regulate the collection, storage, use, disclosure, security and disposal of individuals’ Tax File Number (TFN) information. A breach of the rule is an interference with privacy under the Privacy Act. Individuals who consider that their TFN information has been mishandled may make a complaint to the Privacy Commissioner.

The rule explicitly authorises the use and disclosure of TFN information by a TFN recipient (such as the Commissioner of Taxation and the trustees of a superannuation fund) for the purpose of giving an individual any TFN information that the TFN recipient holds about an individual. This ensures that the TFN Rule does not prevent an individual being given access to his or her information under Australian Privacy Principle 12 of the Privacy Act, or another Act that provides for access by persons to documents.

DISCLAIMER

Taxwise® News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

A Cut Above

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Andy Mclean. (2015). A Cut Above, Acuity. 1 (4), p50.

If your business stakes its reputation on delivering high-quality services or products, then it’s essential you have the capability to execute-especially when the clock is tacking and deadlines loom.

Andy Mclean writes, there are a number of lessons that leaders can apply to any business aiming to deliver premium quality.

  1. Lead by example

Whatever size your business is, there’s no substitute for getting among your people and customers. If you lose touch with the way people experience your business, you will make poor leadership decisions

  1. Never, ever accept second best

If your business trades on being premium, you cannot afford to compromise on quality at any stage. Get your suppliers and your staff into a mindset that only the best will do.

  1. Leak from the outside in

“Innovation stems from looking at the business from the customer’s perspective.

  1. Collaboration creates dedication

Giving your staff input keeps them interested and gives them a stake in what you are doing. It also means the business never stands still, it’s evolving. And it encourages a culture of problem solving too. So get everyone’s ideas on the table.

  1. Listen to loyal customers

“Whatever industry you work in, repeat business is golden. Marketers always say that it’s easier to retain customers than to attract new ones. So if you have loyal customers, take the time to find out why they keep coming back to you. Their insights will help you hold onto them, and help you find ways to develop similar loyalty from other customers.

 

For more details on this article, please see acuitymag.com

7 Business Habits That Drive High Performance

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Nicholas S Barnett. (2015). Seven Business Habits That Drive High Performance. Acuity. 2 (1), p46-p47.

Why do some professional service firms continue to outperform their competition?
Why do some continue to grow and others decline and become less relevant?
Why do some retain and grow their client base while others lose clients and shrink?

Yes, there are short-term initiatives to give firms a boost, like hiring one of the more senior specialists from another firm or taking on a whole term form a competitor. Bust a sustained advantage over competition. It means embedding certain important things so deeply in the culture and DNA of the firm that your competitive advantage and way of life cannot be replicated. So what those few important things.?

Those seven habits are:

1. Live an inspiring vision

2. Communicate clear strategies

3. Develop your people

4. Go out of your way to recognise your people

5. Genuinely care for your people

6. Listen and adapt to your customers’ needs

7. Continually improve your systems

For more information about this article, please see acuitymag.com