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Taxwise Business News – Jun 2012

IN THIS ISSUE

The end of the financial year is fast approaching and it’s time to start planning to prepare for your 2012 Income Tax Return. Now is a good time to start reviewing certain assets and liabilities owned by your business and consider what should be done prior to 30 June 2012. Some suggested areas for review are:

  • Review your depreciable assets (capital allowances) register and write-off or dispose of any assets no longer used. Examples of depreciable assets are computer equipment, office furniture (eg desks and chairs) and kitchen appliances;
  • Carry out any repairs and maintenance required so you can recognise the deduction by 30 June;
  • Review receivables and see if any bad debts can be written off;
  • Negotiate with lenders to see if you can prepay some investment loan interest expenses prior to year end;
  • Re-consider funding strategies for your business – end-of-year is a good time to consider whether you have the right debt funding and equity funding mix in place;
  • Consider any newly announced concessions from the recent May Budget. There may be things you can do now to take advantage of these concessions in the next financial year. For example, do you need to dispose of assets prior to year end? Do you need to defer acquiring certain assets until after the new financial year begins?
  • Talk to your tax adviser if you think you might incur tax losses this year and how you might be able to preserve those losses to apply against taxable income in future years.

To do!See your tax agent in relation to any of the above and for any end-of year planning tips. Your tax agent knows your business and is the best person to help you plan for the end of the 2011-12 tax year and for the start of the 2012-13 tax year.

Small Business Benchmark Updates

Small business benchmarks are financial ratios developed to help a business compare its financial performance to similar businesses in the same industry. The benchmarks provide guidance on what figures, such as amounts of income, the ATO would normally expect a business in that particular industry to report. The ATO uses these benchmarks to work out which businesses in particular industries might be avoiding tax by not reporting some or all of their income.

The ATO has updated its small business benchmarks with information from the 2010 financial year and they have also published new activity statement ratios for a range of industries. Benchmarks are now based on the most recent data available. The number of benchmark ratios has increased so businesses can now check their performance and recordkeeping against a greater range of ratios.

To do!

  • If your business falls outside the benchmarks that apply to your particular business, you may need to consider reviewing your records to ensure all your income and expenses, in particular cash amounts, are being recorded. Businesses in the same industry will differ from each other, though there will be common themes among them. It is well worth taking the time to review your business’s individual circumstances and satisfy yourself you are able to account for any difference between the industry benchmark and your business’s performance.
  • Your tax agent will be able to assist you to review your business’s performance and look at ways to bring your business’s performance to within the industry benchmarks, if appropriate.

A) Changes starting in the 2012-13 Income Year

i) Small Business: instant asset write-off and simplified depreciation

An “instant write-off” amount of $6,500 (increased from $1,000) will apply to small businesses who acquire “low cost” assets from 1 July 2012. “Low cost” assets might include, for example, inexpensive items of equipment, such as office furniture. In addition, an instant write-off for the first $5,000 of the cost of a motor vehicle purchased by a small business will also be available (unless the vehicle can be written off immediately).

Other changes simplifying depreciation for small businesses include the creation of a “general small business pool”. This will be made up of depreciating assets that you might already have in separate pools of assets (that are being depreciated at a faster rate than if they were not in
3 a pool) that will now be combined. Assets will be depreciated at a rate of 15% in the first year and at 30% in each subsequent year.

If you are currently considering some new asset purchases, your tax agent is the best person to help you decide when you should make those purchases.

To do!See your tax agent for advice on new business asset purchases, including what and when you should purchase.

ii) Entrepreneurs tax offset changes

The entrepreneurs tax offset is a tax offset equal to 25% of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less.

The entrepreneurs tax offset ceases to be available on 30 June 2012. The new small business asset instant write-offs and depreciation pool in effect replace this tax offset.

Urgent Note!If you are planning on claiming the entrepreneurs’ tax offset this year, talk to your tax agent soon!

B) Budget 2012-13 Announcement – Loss Carry Back for small business

As announced in the Federal Budget on 8 May 2012, starting in the 2012-13 income year, companies (and entities taxed like companies) will be able to carry back up to $1 million of tax losses incurred in the 2012-13 year to offset against tax paid in the 2011-12 income year. From the 2013-14 income year, tax losses will be able to be carried back and offset against tax paid up to two years earlier.

You should talk to your tax agent about how you might be able to take advantage of these rules and carry back any tax losses your business may have to offset against tax you have paid in prior years.

Note!If you incur any tax losses in the 2012-13 income year, you might be able to carry them back to offset against tax paid in earlier years. Speak to your tax agent to ascertain whether you are able to do this.

In the 2012-13 Budget, the Federal Government announced several changes will occur to the CGT provisions, including:

  • How certain CGT rollovers (that allow taxpayers to defer recognising capital gains) would apply to trusts, superannuation funds and life insurance companies. The changes ensure certain provisions that relate to certain types of taxpayers (eg absolutely entitled beneficiaries, bankrupt individuals, security providers and companies in liquidation) interact appropriately with certain CGT rollover provisions and with the “connected entity test” in the small business entity provisions. Taxpayers may apply these changes from the 2008-09 income. Otherwise, the measures will apply from the date of Royal Assent of the new provisions.
  • How certain rollovers that affect assets replacing revenue assets and trading stock apply to interposed companies, broadening the availability of the rollovers for all interests (eg shares) that qualify for the general conditions of each of the rollovers, rather than only shares in a tax consolidated group. These changes apply from Budget night (7.30pm AEST 8 May 2012).
  • These changes apply from Budget night (7.30pm AEST 8 May 2012), so if you are considering applying this rollover to a transaction, see your tax agent for assistance on how the changes might impact your transaction.
  • Amendments to the CGT rules so the same outcomes apply where a taxpayer receives compensation, damages or certain insurance proceeds indirectly through a trust as they would have if they had received the proceeds directly. It will also ensure that insurance policies owned by superannuation funds that were treated as being exempt from CGT prior to the 2011-12 Budget changes to compensation payments and insurance policies continue to be exempt from CGT. As this change is effective from the 2005-06 income year, you should speak to your tax agent to see if there is any impact on amounts of compensation payments you have received (if any) and insurance policies you have taken out since the 2005-06 income year.

To do!If you think any of the CGT changes are likely to affect your business, see your tax agent for advice on what, if any, impact the changes might have to your business.

In prior income years, trustees who were required to make resolutions prior to distributing income to beneficiaries had until 31 August following the end of the income year to make the resolutions. This extension came out of two old income tax rulings which the ATO withdrew in September 2011. This means that all trustees affected by this change must issue their resolutions by 30 June. As this change applies to the current year (1 July 2011 to 30 June 2012), trustees will need to make their resolutions by 30 June 2012.

To do!Check with your tax adviser how this change might affect you if you are a trustee.

The Budget edition of TaxWise referred to recently announced changes to the living-away-from-home allowance (LAFHA). The proposed changes:

  • Mean that employees, rather than employers, will be liable to tax on any LAFHA received that is not exempt;
  • Limit access to LAFHA to temporary residents who maintain a residence in Australia and who are required to live away from it for work purposes;
  • Require individuals to substantiate their actual expenditure on food and accommodation in excess of the statutory amount.

These changes are due to apply from 1 July 2012. All employers who provide these types of benefits to their employees should consider reviewing their current arrangements and seeing how these proposed changes might affect those arrangements.

To do!If you think the proposed LAFHA changes will impact arrangements you have in place with your employees, you should speak to your tax agent to discuss how these changes might affect you and your employees.

Note!The legislation has not been finalised yet so the details of the changes could change. Your tax adviser is the best person to keep you up to date with these developments.

A) Previous Announcements

In March 2012, changes to super were announced. These changes include:

  • The superannuation concessional contributions cap will remain at $25,000 for individuals under 50 years of age up to and including the 2013-14 financial year, commencing 1 July 2013;
  • From 1 July 2011, eligible individuals will be able to have refunded to them contributions to their superannuation fund that exceeded the concessional contributions cap (amounts up to $10,000 only). This amount will be treated as assessable income to the individual (and subject to tax at the individual’s applicable marginal tax rate for the year) rather than being subject to “excess contributions tax”.
  • The ATO can disclose an individual’s superannuation interests and benefits to a regulated superannuation fund or public sector superannuation scheme, an approved deposit fund, retirement savings account (RSA) provider or their administrators. The purpose of this change is to assist administrators of these bodies to gain access to a member’s superannuation interests, including amounts held by the ATO, and help their members consolidate their superannuation interests; and
  • Employers MUST report on employees’payslips the amount of superannuation contributions they will make on behalf of an employee as well as the date on which they expect to pay the contribution into the superannuation fund. The employer must also specify on the payment slip the name and number (if applicable) of the fund to which the contribution has been or will be paid.

B) Budget 2012-13 Announcements

The following announcements were made in the 2012-13 Budget in relation to superannuation changes:

  • Increasing concessional contributions caps (also known as pre-tax contributions) for individuals over 50 with low superannuation balances announced in the 2010-11 Budget has been deferred and will now start on 1 July 2014. This measure is intended to allow individuals aged 50 and over with superannuation balances below $500,000 to contribute up to $25,000 more in concessional contributions than allowed under the general concessional contributions cap of $25,000, which will apply to them in the 2012-13 and 2013-14 income year. In 2014-15, the general cap is likely to increase to $30,000 (the higher cap for individuals aged over 50 would then be $55,000).
  • Individuals with income greater than $300,000 (including superannuation contributions) will have the tax concession on their contributions reduced from 30% to 15% (excluding the Medicare levy). That is, the flat superannuation contributions tax rate will increase from a rate of 15% to a rate of 30%.
  • From 1 July 2012, the tax offset that applies to Employment Termination Payments (ETP) will be limited so that only that part of an affected ETP, such as a golden handshake, that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the ETP tax offset.
  • Amounts above $180,000 (known as the “whole-of-income cap”), will be taxed at marginal rates. This cap will complement the existing ETP cap (which will be $175,000 in 2012-13, indexed) which ensures that the tax offset only applies to amounts up to the ETP cap.

With effect from 1 July 2012, a new system will apply to GST, the luxury car tax (LCT), the wine equalisation tax (WET) and fuel tax credits to harmonise the system under which these taxes are collected with the self-assessment system that applies to companies and certain other entities for income tax purposes. The amendments apply to tax periods for the GST, LCT and WET and the fuel tax return periods that commence on or after 1 July 2012.

This means that the current system that applies to indirect taxes will now be aligned with the self-assessment system that applies for income tax purposes. Under the new system, for example, the Commissioner will be able to make a determination that errors made on a previous Activity Statement can be corrected on a current Activity Statement.

To do!See your tax adviser to find out how these changes may affect your compliance obligations, such as preparing your Business Activity Statements, for GST, LCT, WET and fuel tax credit purposes.

Anti-avoidance provisions contained in the tax law are aimed at trying to prevent taxpayers from structuring transactions and entering arrangements designed to avoid tax. Avoiding tax is different to evading tax which is a criminal offence.

Anti-avoidance provisions might apply in cases such as where a taxpayer tries, for example, to structure a transaction to gain a tax benefit that may not ordinarily arise if the transaction is carried out in another way and there aren’t necessarily sound commercial reasons why the transaction was structured in a particular way.

On 1 March 2012, the Federal Government announced that changes will be made to the existing general anti-avoidance provisions contained in the Federal Income Tax Act. The Government has not specified how it intends to change the general anti-avoidance provisions, though the amendments are intended to “clarify” how these provisions apply.

However it is important to be aware that the changes are intended to apply from 1 March 2012. So if you are currently considering entering into a transaction, you should seek advice from your tax adviser around the potential tax implications that may arise from the proposed transaction and guidance on what impact the general anti-avoidance provisions might have, if any.

Proposed amendments to the “director penalty regime” were announced by the Assistant Treasurer on 18 April 2012 to expand the tax law protections afforded to protect workers’entitlements and impose greater obligations on directors. The amendments will:

  • Expand the director penalty regime to include superannuation guarantee amounts meaning that directors will also be held personally liable for their company failing to pay employees’super contributions;
  • Ensure that directors cannot have their director penalties remitted by placing their company into administration or liquidation when unpaid Pay As You Go (PAYG) withholding or superannuation guarantee amounts remain unpaid three months after the due date; and
  • Restrict access to PAYG withholding credits for company directors and their associates where the company has failed to pay withheld amounts to the Commissioner.

Anyone who is a director of a company with employees should familiarise themselves with these proposed amendments as they directly impact a director’s obligations and responsibilities under the tax law in respect of employee entitlements.

The good news is there are some concessions under the proposed amendments:

  • New directors will have time to familiarise themselves with a company’s accounts (30 days instead of 14 days) before being held liable for the company’s debts.
  • The ATO will be required to serve penalty notices on directors in all cases before commencing action.
  • Directors will also have available to them a new defence where they may face penalties for superannuation debts where, broadly, they had a reasonable basis for thinking that the worker was a contractor rather than an employee.

The amendments are contained in an exposure draft. Directors concerned by these proposed changes should ask their tax agents to keep an eye out for when these changes might become law.

All developers of residential premises should take note that the GST provisions have been amended to ensure that sales of residential premises that have been constructed under certain arrangements known as “development lease arrangements” will be subject to GST (ie they will be treated as sales of new residential premises).

Even if there has previously been a “wholesale supply” of the newly built premises to the developer (ie the freehold or long-term leasehold interest in the land transferred to the developer upon completion of the development on the land), this will still be the case. This is something that developers who build residential properties under these types of arrangements should be aware of.

There are also some changes under the GST law confirming that subdividing or strata-titling newly built residential property won’t have the effect of stopping the new building from being new residential premises.

You should be aware that these changes will apply from 27 January 2011. If you are a builder who has constructed new residential premises since 27 January 2011, you should see your tax agent to see if these amendments affect the GST treatment you have applied to your project. You might need to consider amending your previously lodged Activity Statements if these amendments impact your business.

To do!See your tax agent if you are concerned how these new GST provisions might affect the GST treatment of a residential development you have undertaken. You might need to amend your Activity Statements as well!

If you are in the Building and Construction industry and you have an Australian Business Number (ABN), you may need to report certain payments you make to contractors for certain building and construction services.

You need to report certain details in relation to the contractor to whom you make payments, including their ABN, name, address and amount you paid them (including GST). Generally, these amounts need to be reported to the ATO by 21 July, which is very soon after the financial year end.

As these rules apply from 1 July 2012, it might be a good time now to look at the kinds of records you keep in relation to payments you make to contractors and see if you need to change anything to help you comply with these new rules. Your tax agent can assist you with the types of records you might need to start keeping to help you meet this obligation, or it might turn out that you don’t need to change any of your record-keeping details and you will be able to meet this obligation.

Tip!You should take the opportunity now to consider the impact of this reporting obligation and make any necessary changes now so you are ready for 21 July 2013! See your tax agent if you need help with this.

DISCLAIMERTaxwise® 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.

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Taxwise Business News – Feb 2012

IN THIS ISSUE

A number of changes in relation to the taxation of superannuation have recently been announced:

  • Individuals earning up to $37,000 will effectively pay no tax on their superannuation guarantee contributions from 1 July 2012. Under the low income superannuation contribution, the 15% contributions tax will effectively be refunded into the superannuation account of the relevant taxpayer in 2013-14.
  • Reporting obligations will also be simplified and streamlined so that individuals who do not otherwise need to lodge an income tax return will not need to do so in order to claim the benefit of these reforms. Instead, the ATO will verify an individual’s income using available data to identify those taxpayers who qualify for assistance to boost their superannuation savings. These reforms will be especially helpful as approximately a million additional low-income earners will no longer have any income tax reporting obligations once the tax-free threshold increases from $6,000 to $18,200 as of 1 July 2012.
  • The government will pause the indexation of the superannuation general concessional contributions cap for one year in 2013-14, so it remains at $25,000. Indexation of the cap will be deferred until 2014-15, when the cap is expected to rise to $30,000. The pause in indexation of the general concessional contributions cap will also result in a pause in the indexation of the concessional contributions cap for individuals aged 50 and over and the non-concessional contributions cap.
  • From 1 July 2012, the government will reduce the super co-contribution (whereby the government matches the individual’s contribution dollar for dollar) by 50% to 50c per $1 contribution. This reduces the maximum benefit from $1,000 to $500. The measure also means that those earning more than $46,920 will no longer get a partial benefit compared with the current upper income threshold of $61,920.

These changes are unlikely to require a revision of your business practices in relation to superannuation contributions for your employees. However, it is important to be aware of these changes when making decisions in relation to your contributions in 2012. It is also important to bear these changes in mind when negotiating employment contracts with your employees.

To do!The laws governing the taxation of superannuation are set to change. Seek advice from your tax adviser so that you can find out how these changes affect you.

Due to the current budgetary restraints faced by the government, the implementation of a number of previously announced tax law measures will be deferred until a later date. In addition, a number of additional measures have also been announced. Further details are as follows:

  • The government will restrict the dependent spouse tax offset to those with spouses born before 1 July 1952, effective from 1 July 2012. This reform will not affect people whose spouse is an invalid or a carer, or who receive the zone, overseas forces or overseas civilian tax offsets.
  • The dependent spouse tax offset is a measure to reduce the amount of tax you’re expected to pay. To claim the offset, the dependent spouse cannot have earned more than $9,426 for the year, must be an Australian resident for tax purposes, and must have been otherwise dependent on the breadwinner. The main earner’s income has to be less than $150,000.

The government will defer the following previously announced tax reforms by one year:

  • The start date of the standard deduction for work-related expenses will be deferred until 1 July 2013. Once available, the standard deduction will start at $500 and then increase to $1,000 in the subsequent year. We will provide further detail on how the standard deduction will operate closer to its time of introduction.
  • The start date of the 50% tax discount for the first $500 of interest income will be deferred until 1 July 2013. This amount will increase to $1,000 in the subsequent year. We will provide further detail on how the discount will operate closer to its time of introduction.
  • The start date of the new tax system for managed investment trusts will be deferred until 1 July 2013.

The start date of the phase down in interest withholding tax for financial institutions will be deferred until 2014-15.

The government recently announced that, due to some perceived rorting of the existing tax treatment of the living-away-from-home allowance (LAFHA), changes will be made to:

  • Remove the taxation of LAFHA from the FBT sphere into the income tax sphere. This means that the employee (rather than the employer) is liable to be taxed on any LAFHA received that is not exempt,
  • Limit access to the tax exemption for temporary residents to those who maintain a residence for their own use in Australia, from which they are living away from for work purposes.
  • Require individuals to substantiate their actual expenditure on food and accommodation beyond a statutory amount.

These changes are due to apply from 1 July 2012, with consultation currently ongoing in relation to a range of implementation issues, including whether transitionalmeasures are appropriate.

According to the Treasurer’s media release, no permanent resident legitimately using this tax exemption for accommodation and food expenses will lose any entitlements.

Regardless, these changes will require re-examination of any LAFHA you pay to your employees, both in relation to the increased compliance burden that will result and also to determine the substantive issue ofwhether your employees will continue to benefit from the tax exemption.

If the tax outcome under the proposed laws differs from the outcome under the current laws, and the allowances paid to the affected employee are governed or affected by an existing arrangement (such as an employment agreement or a rental agreement), you will need to consider how the changes will affect those contracts and whether renegotiation is necessary.

To do!If you currently pay LAFHA to any of your employees, the rules are set to change from 1 July 2012. You should seek advice from your tax adviser in relation to how these changes will affect you.

After months of uncertainty for taxpayers and the ATO, the government announced its plan to tackle the issue of the tax treatment of rights to future income in the context of consolidation late last year.

This issue relates to the manner in which rights to future income (such as the right to receive payments under a contract) were treated on consolidation following legislative amendments in 2010 to equate such tax treatment with the treatment allowable outside the tax consolidation context.

Broadly, the amendments allowed the cost base in these rights to future income to be deducted over a set period. Notably, these amendments applied retrospectively to the start of the consolidation regime (ie 1 July 2002), as the amendments were considered at the time to be a mere clarification to restore a tax treatment that was always intended to result.

Uncertainty arose after the 2010 amendments in relation to the type of assets that could constitute a “right to future income” for these purposes. The government was of the view that some taxpayers were interpreting the provisions too broadly so as to allow amore generous tax treatment than was allowable outside the consolidation regime.

The government directed the Board of Taxation to investigate and report on the issue and has now announced that the Board’s recommendations (set out below) will be implemented retrospectively (ie from 1 July 2002).

The Board made the following recommendations for changes to the future operation of the consolidation rules:

  • The consolidation tax cost setting rules should apply only to assets already recognised for taxation purposes.
  • The residual tax cost setting rule should be modified so that, for the purpose of applying the rule to an asset, the consolidated group is taken to acquire the asset as part of a business acquisition.
  • The rights to future income rules should be limited to rights to unbilled income (or work in progress amounts) so that they align with deduction provisions in the general tax law.
  • The tax cost setting rules should treat majority-owned revenue assets as retained cost base assets, to prevent the double claiming of deductions by a single economic group in relation to the same revenue asset.

While the changes are retrospective, the specific impact will depend on the time when the relevant acquisition took place.

Corporate acquisitions that took place before 12 May 2010 will be affected by the changes, subject to the application of normal amendment periods. These changes are necessary to ensure that deductions are claimed only when it was intended.

Changes for the period between 12 May 2010 and 30 March 2011 will largely protect taxpayers who made business decisions on the basis of the current law before the Board’s review was announced.

For acquisitions after 30 March 2011, changes will be made to limit the circumstances in which deductions may be claimed and to ensure that a business acquisition approach is applied in specific circumstances.

Private rulings sought and received by taxpayers from the ATO, including written advice under advance compliance agreements, will be honoured.

To do!If you were involved in a business acquisition between 1 July 2002 and the present day, and the acquiring entity was part of a consolidated group, you should seek advice from your tax adviser in relation to how these changes affect you. Beware, these laws are very complex.

As noted in earlier editions of Taxwise, the government is currently undertaking a broad reform project in relation to the taxation of trusts.

Following the case of Bamford (in which the High Court confirmed that “trust income” for the purposes of Div 6 is determined by the trust deed), a number of previously established and accepted practices in relation to the taxation of trusts were potentially no longer legally viable.

These practices included:

  • Streaming particular types of income to specific beneficiaries.
  • Allowing primary production trusts to average income.
  • Allowing trustees and beneficiaries to enter into agreements to allocate the tax liability with respect to the capital gains of the trust.

The streaming amendments introduced just before 30 June 2011 were an interim measure to allow the streaming of franked dividends and capital gains.

As previously announced by the government, a broader review of the taxation of trusts is now underway in order to tackle the other problems set out above and to bring a degree of functional simplicity to the trust tax laws.

Consultation in relation to these models is ongoing, and legislation to implement the chosen option is due to come into effect on 1 July 2013.

To do!If you have a trust that you currently use as an estate and/or tax planning vehicle, you should consult with your tax adviser in relation to the effect that this rewrite may have on your affairs.

The tax treatment of losses is currently being examined.

It is not expected that the reforms will affect losses incurred to date. Instead, the new laws will likely apply in relation to losses incurred after the date of introduction of the measure/s.

An announcement in relation to possible reforms is expected in the middle months of this year, or as part of the 2012-13 Budget papers.

To do!If your business has been in a loss-making position, or you expect to incur tax losses in the years ahead, you should consult with your tax adviser in relation to the potential impact of these changes on your business.

Late last year, the High Court of Australia ruled that the Commissioner is not permitted to withhold GST refunds for any period of time in order to investigate the legitimacy of the refund it self.

This is set to change as a result of the GST self-assessment laws due to come into effect from 1 July 2012. The precise detail of this law has not yet been settled but it is likely that the Commissioner will, under the new laws, be able to withhold refunds for the purposes of investigation, with the taxpayer holding only limited rights of review in relation to the Commissioner’s decision to with hold.

In the meantime, the ATO is attempting to clear any back-log of outstanding refunds and is putting in place rapid-response teams to act in situations in which fraudulent claims are suspected.

Note!If you have a GST refund that has been withheld, it should be refunded in the near future. Any future GST refunds cannot be withheld by the ATO for the purposes of verification. However, your claims may still continue to be subject to post-refund scrutiny by the ATO in certain circumstances.

DISCLAIMERTaxwise® 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.

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Taxwise Business News – Nov 2011

IN THIS ISSUE

The carbon tax has passed the House of Representatives the Senate. This means that unless and until the legislation is repealed down the track, the carbon tax is here to stay and will come into effect from 1 July 2012. As such, it is important for you to understand how it affects your business.

Only around 500 businesses will be required to pay for their pollution under the carbon pricing mechanism. This number is not expected to change dramatically either during the fixed price period or once the “tax” becomes an emissions trading scheme down the track.

If you are unsure of whether your business will be subject to a requirement to buy permits in order to conduct your business you should consult with your tax adviser who will be able to assist you in working through your requirements.

The part of the package that is more likely to affect your business is the range of compensation measures that are being introduced as part of the carbon tax package.

For business, the most significant of these changes is the government’s announcement that the small business instant asset write-off threshold will be increased from $1,000 to $6,500 for depreciable assets from the 2012-13 income year.

The government is of the view that this measure will boost cash flow and help small businesses to grow and invest in assets.

While the measure is intended to boost investment in clean energy or energy efficient alternatives, businesses that are in a position to increase their investment in depreciable assets in any area of the business may be eligible to take advantage of this extended concession, and should therefore plan their acquisitions carefully and with the assistance of their tax adviser.

Note!The carbon tax has passed the House of Representatives and looks set to become the law of the land.

In addition to the carbon tax, a range of compensation measures were included in this package. Your business may be able to benefit from these measures.

You should consult your tax adviser to plan for these changes in advance and get the details you need.

The GST financial supply laws have always been difficult to apply.

In addition, the financial acquisitions threshold has historically been so low so as to deny input tax credits in respect of acquisitions that relate to financial supplies even for businesses for whom financial supplies constitute only a small percentage of their total business.

In recognition of the administrative burden imposed by these rules, the Government will, with effect from 1 July 2012 amend the GST financial supply laws to reduce compliance and administrative costs.

Specifically the law will be amended to:

Increase the financial acquisitions threshold input tax credit test from $50,000 to $150,000.

This will effectively triple the value of acquisitions (related to the making of financial supplies) that you can make before your input tax credits in respect of the GST on those acquisitions are considered not to be for a creditable purpose.

The measure is intended to simplify the GST treatment of financial supplies for a range of small businesses that do not make significant supplies of this nature.

Allow small businesses that account on a cash basis to access full input tax credits upfront when they enter into hire purchase arrangements.

At the moment these input tax credits are required to be apportioned over the life of the agreement.

Exclude bank deposit accounts from the current special rules for borrowings.

If you are unsure of how these changes will affect your GST compliance systems, you should consult with your tax advisor before the changes come into effect so that you can adequately plan for the changes and update your systems as necessary.

Note!The GST financial supply laws are set to get simpler as of 1 July 2012. You should consult your tax adviser to determine the effect of these changes on your GST compliance systems and undertake any necessary planning ahead of time.

In September 2011, the High Court handed down its judgment in the appeal from Roy Morgan Research Pty Ltd v FCT [2010] FCAFC 52.

While this case was famously reported in the press as affirming the constitutional validity of the Superannuation Guarantee Charge (SGC), it has also raised a separate issue that is much more immediate for businesses – many businesses still remain confused as to the circumstances in which the business is liable to pay SGC (especially in respect of contracts for labour).

As the liability to pay SGC lies with the employer, even where the employer and individual are mutually of the view that the relationship is a contractual agreement as a result of which the individual (and not the employer) is liable to make super contributions, the liability of the employer to pay SGC is not extinguished.

This means that employers may be required to make payments of SGC outside the contractual arrangement with the individual where the nature of the relationship differs (for legal purposes) from that considered to be the case by both parties.

Should such a situation arise, the employer will be liable to pay not just the SGC, but also interest and administration charges. In addition, SGC is not deductible and there is no legislative “cut-off” date for the liability to SGC.

While the ATO has noted in a practice statement that they will typically not seek to impose liability back further than five years, this practice statement does not represent a guarantee of any sort to employers caught in this situation.

Adding further fuel to this fire, legislative amendments in a Bill currently before Parliament seek to extend the Director Penalty Regime to unpaid Superannuation Guarantee Charge, so that directors will be personally liable for this payment.

As such, the potential pitfalls of an incorrect assumption in relation to your liability to make super contributions may be significant.

Note!If you are uncertain of whether you are required to make super contributions in respect of certain individuals, you should seek advice from your tax adviser to undertake a full review, and to ascertain your obligations.

The potential pitfalls of an incorrect classification may be significant!

This month the ATO released its final tax determination on the capital gains tax, employee share scheme and share buy-back consequences of dealing in shares in companies that are incorporated professional practices.

These determinations will affect any business that is or is going to be carried on in a company structure and provides professional services (for example medical practices, law firms or accounting firms).

By way of background, many practices of this nature were previously prevented from operating in an incorporated structure. As a result, many such practices were instead run through a partnership structure.

In order to prevent the crystallisation of capital gains and losses on the introduction or exit of partners in large practices (which would have caused significant compliance and cash flow difficulties), the Commissioner issued IT 2540 in 1989.

Broadly, this IT applied to certain partnerships that permitted the introduction of partners for nil (or nominal) consideration and permitted no capital proceeds to be paid to a retiring partner. In the IT, the ATO sets out the manner in which the Office will seek to tax such transactions.

This treatment is as follows: the ATO will treat the partnership as having no goodwill (for capital gains tax purposes). This means that when partners join or leave the partnership, no CGT gain or loss will typically be crystallised so long as the partnership holds no other assets and the partners are acting at arm’s length. TD 2011/26 is intended to mirror this outcome for:

  • Such partnerships that have since incorporated (as many are now permitted to do); and
  • Professional practices that have been set up in an incorporated structure.

Broadly, according to the determination, if:

  • Each shareholder is an individual and an active participant in the professional practice, and holds the shares legally and beneficially;
  • The shareholders are dealing with each other at arm’s length in relation to dealings in shares in the company; and
  • All such dealings are undertaken for either nil consideration or nominal consideration;

The ATO will accept that the company is a “no goodwill” practice so that the market value of the shares (for capital gains tax purposes) is equal only to the relevant percentage of the market value of any other assets in the company.

This treatment will also apply for the purposes of the employee share scheme provisions and the share buy-back provisions (when these draft TDs are finalised).

If your business provides professional services, and has either incorporated or you are thinking about incorporating the business, you should consult your tax adviser in relation to the applicable tax treatment of dealing in shares in this practice.

Note!If your business provides professional services, and has either incorporated or you are thinking about incorporating the business, the tax treatment of dealings in shares in the practice may have just become a lot clearer. You should consult with your tax adviser to discuss.

During the 2011-12 Budget, the government announced that a new reporting regime would be introduced requiring certain businesses in the building and construction industry to report annually to the ATO with details of payments made to contractors.

This new reporting regime will start on 1 July 2012.

The new regime is intended to “level the playing field” between the use of employees and contractors in the industry and ensure that employers correctly apply the distinction and therefore appropriate tax treatment to individuals that fall into either of these categories.

Under this regime, businesses will be required to report to the ATO any amounts paid to contractors along with each contractor’s ABN.

At this stage it is envisaged that payments for a supply made under a contract that is in whole or in part for the supply of building and construction services will need to be reported under this regime.

Only businesses will have these reporting obligations i.e. no individual that hires a contractor will be required to report payments under this regime. It is hoped that these additional reporting requirements will result in information which the ATO will use to target its compliance and education efforts.

Note!If you engage contractors to provide “building and construction services”, from 1 July 2012 payments that you make to these contractors will need to be reported separately to the ATO.

Much of the information required to be remitted will be available to you anyway, but you may have to reconfigure your reporting systems.

You should talk to your tax adviser about updating your systems to cope with this change.

The ATO has launched a number of new tools to assist taxpayers in the property sector, including a GST Property Tool and a Margin Scheme Eligibility product.

These tools are intended to assist taxpayers in fulfilling their compliance obligations, educate taxpayers that are uncertain of their obligations and provide a “self-help” mechanism that will allow taxpayers to assess the availability of certain options.

These tools are a great place to start if you want to learn a little more about your obligations. The tools may also assist you in getting together the right information for or asking the right questions of your tax agent in relation to your compliance obligations.

However, you should be careful to use the tools only as a guide and not as a given as the answers produced by the tools are not guaranteed in any way by the ATO. If you are not sure about any of the answers or detail provided within these tools, you should consult your tax adviser.

DISCLAIMERTaxwise® 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.

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Taxwise Business News – Jun 2011

IN THIS ISSUE

As the end of the financial year approaches, it’s time to take stock again of what the next year is likely to bring, tax-wise. Taking a proactive approach to planning is essential to ensure that you are well prepared for the year ahead.

Planning requires consideration of a number of factors, including:

  • Your personal circumstances; and
  • Your current year and projected salary/ business and investment income.

All of these factors will affect your end of income year tax strategies, as well as your tax planning for the next income year.

Your personal circumstances

Superannuation

Depending on your age, it may suit you to consider salary sacrificing greater amounts into superannuation before the end of the income year, so long as you do not exceed the concessional superannuation cap limits.

By way of reminder, there are caps on how much super you can contribute each year before being required to pay excess contributions tax at the rate of 46.5% of the excess. The superannuation contribution caps apply per financial year. There are two types:

1. Concessional (before tax) contribution caps. Concessional contributions include:

  • All employer contributions (including salary sacrifice); and
  • Personal contributions for which you claim an income tax deduction (eg self-employed people).

The concessional contribution cap is $25,000 per income year generally, and $50,000 per income year for taxpayers aged 50 years old and over for the 2011 and 2012 income years. As noted below, this is set to change in respect of the 2013 income year onwards.

2. Non-concessional (after tax) contribution caps. Non-concessional contributions include:

  • Personal member contributions (no tax deduction claimed);
  • Spouse contributions; and
  • Any excessive concessional contributions.

The non-concessional contributions cap is $150,000.

You should consider making additional contributions before the end of the income year to take full advantage of these caps. But make sure you do not exceed the contributions caps under any circumstances – just a few extra dollars can result in a substantial tax liability for excess super contributions tax.

In addition to the above, the government announced during the 2011-12 Budget that:

  • From 1 July 2012, persons who have been subject to excess contributions tax for the first time (due to making excess concessional contributions of less than $10,000) will be provided the option of having excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax at the rate of 46.5% on excess contributions.
  • From 1 July 2012, individuals aged over 50 years of age with total superannuation balances of less than $500,000 will have their superannuation contributions cap set to $50,000 in order to assist such individuals in contributing greater amounts into superannuation to fund their retirement.

Investment

Minors in receipt of unearned income

The Low Income Tax Offset is a tax rebate for individuals on lower incomes. It provides individuals with a total tax liability under the threshold with an offset equal to the tax liability. As such, the offset effectively increases the tax free threshold for low income earners. The maximum amount of the offset is $1,500.

Under current tax laws, people under 18 years of age (minors) face the following tax scale in relation to their “unearned” i.e. passive income.

  • $0 to $416 = NIL
  • $417 to $1445 = NIL + 66c for every $1 over $416
  • $1446 and over = 47% flat rate on the entire amount

On the basis of this schedule, it is currently possible to distribute $3,333 of passive income to a minor tax-free (depending on that minor’s other income sources). This is because a minor earning $3,333 would otherwise face a tax bill of $1,500 (i.e. 47% of $3,333), and the minor is entitled to an offset in respect of that entire tax liability reducing the total tax payable to nil.

The government announced in the 2011-12 Budget that the low income tax offset will not be able to be used to offset tax payable by minors in respect of their unearned income from 1 July 2011 onwards. This means that this is the last income year in which minors will be able to receive $3,333 of unearned income, effectively tax-free. From the 2012 income year onwards, this number will fall to $416, after which amount penalty tax rates will apply (as set out above).

This change will affect you if:

  • You currently have a family trust and distribute routinely to minors; and/or
  • There are minors in your family who receive passive income as a result of direct ownership of assets such as shares, units in managed funds, property etc.

In either scenario, you will need to consider whether it would be better for you and your family to rearrange affairs in order to ensure that these penalty rates of taxation are not payable by minors in receipt of unearned income over the threshold in the 2012 income year onwards.

If you have family members that you provide for, it may be worth considering whether tax-effective products such as education funds or insurance bonds may be suitable for you instead.

Tip!You should seek advice from your tax adviser and financial planner in relation to whether alternative investment structures may be better suited to your circumstances in light of announced Budget changes.

Capital gains and losses – timing

Due to falling rates of personal taxation in recent years, many taxpayers have ‘pre-poned’ the incurrence of capital losses. A capital loss is broadly the negative difference between what you paid for an investment and what you received when you sold that investment. Historically, by pre-poning a capital loss you could utilise it to reduce your capital gains in the earlier income year, effectively lowering the tax rate that would otherwise apply to that capital gain.

However, in the 2012 income year, effective tax rates will actually increase for a segment of the taxpayer population due to the requirement to pay the flood levy.

As such, you may be better off “crystallising” capital losses and offsetting them against capital gains in the 2012 income year. What that means is you may be able to reduce the total taxable capital gains that fall in the 2012 income year, and therefore the effective tax rate that will be applied to those gains. But remember – if you cannot offset your capital losses against capital gains in any income year, the losses will be quarantined and carried forward until you derive capital gains. What that means is if you incur a capital loss in the 2012 income year that you cannot utilise, you won’t be able to use it to reduce your salary or business income.

Current and projected income

If you anticipate that your salary or business income is likely to increase in the next income year, it may be worth considering ways in which you can defer incurring any deductions available to you until the next financial year. Alternatively you could pre-pone any income (such as bonuses) to this income year. For example, Betty works for Simple Pty Ltd. According to Betty’s employment contract, she is entitled to receive a bonus based on performance once every calendar year.

Betty can choose when she would like her bonus to be calculated and paid during the year. If Betty is liable to pay the flood levy in the 2012 income year, she may be better off asking for her bonus to be calculated and paid before 30 June 2011.

Remember, it is crucial that these options are legitimately available to you and are exercised for commercial reasons other than tax. Also, the 2012 income year will likely be the last income year in which you will be required to substantiate deductions less than $500 – as re-announced during the 2011-12 Budget, the government is seeking to introduce a standard deduction of $500 for the 2013 income year. The government intends to increase the standard deduction amount to $1,000 for the 2014 income year. Speak to your tax adviser before considering the standard deduction as you may be entitled to a higher deduction.

Use of private company assets

If you hold shares or are the associate of someone who holds shares in a private company, you should bear in mind that the laws were changed last year so that any assets owned by a private company (such as for example a holiday house) that are used by either the shareholders or associates of the shareholders will result in a “deemed dividend” that must be included in the assessable income of the shareholder. The value of the deemed dividend is the market value of the use of or right to use the assets in question. Speak with your tax adviser for further clarification on this.

The government announced during Budget 2011-12 that the availability of deductions in respect of income that is Youth Allowance or other government benefits will be legislated away for the 2012 income year onwards. However, eligible taxpayers will still be entitled to claim deductions for the current and past income years.

In recognition of the fact that many taxpayers will not have retained their receipts in relation to such deductions for past income years, the ATO announced earlier this year that students in receipt of Youth Allowance would be entitled to automatic $550 deductions for the 2007, 2008, 2009 and 2010 income years. Students who have an entitlement to a deduction of a greater amount and are able to substantiate the higher entitlements may file their 2011 income tax return (or an amendment to earlier income tax returns) accordingly.

In late May 2011, the ATO announced that this treatment would be extended to recipients of Austudy and Abstudy. As with Youth Allowance recipients, taxpayers who have an entitlement to a deduction of a greater amount and are able to substantiate the higher requirements may file their 2011 income tax return (or an amendment to earlier income tax returns) accordingly.

In addition, the ATO has acknowledged that recipients of Jobstart and Newstart allowance may also be entitled to claim certain deductions. However such taxpayers will not be entitled to the automatic $550 deduction. Ordinary substantiation requirements will typically apply.

Tip!If you have been in receipt of Youth Allowance, Austudy, Abstudy, or Jobstart or Newstart allowance, you may be entitled to certain deductions against this income for the 2007 to 2011 income years. You should consult with your tax adviser to obtain further details.

The ATO recently issued a taxpayer alert in relation to the claiming of holiday travel as work related or self-education expenses. Broadly, the ATO is looking at arrangements where taxpayers have undertaken domestic or overseas travel to a holiday destination and, have also undertaken educational or work related activities whilst on the trip.

In such circumstances, the ATO has noted that the cost of the travel will typically only be deductible to the extent that the expenses relate to the education or work related activity. Where an expense has a dual purpose, the cost needs to be apportioned on a reasonable basis as between the deductible and non-deductible components. See your tax adviser to ascertain how much of the cost is deductible for tax purposes.

DISCLAIMERTaxwise® 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 toconsult their tax adviser for advice on specific matters.

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Taxwise Business News – Feb 2011

IN THIS ISSUE

This may be the best time of year to take stock of your tax affairs and engage in proactive tax planning.

Many businesses wait until tax time to start thinking about their tax obligations. Usually this leaves time for little more than a short review and completion of tax returns.

However, thinking about your tax obligations now will give you the opportunity to consult with your tax adviser and engage in proactive tax planning on a wide range of issues.

What should you do?

As tax considerations extend well beyond merely compliance obligations, you should take the time to ensure that your tax affairs are structured in the manner that best suits your needs. The right tax structure will provide the solid foundation on which you can build the rest of your business.

Here are a few tips to get you started.

1. Evaluate your business structure

The structure in which your business is set up will depend significantly on your needs.

Each possible structure offers its own advantages and disadvantages, such as:

  • Running your business through a company offers asset protection and access to the corporate tax rate. However, losses are trapped inside the company and getting earnings out of the company will require you to either pay top-up tax or put the loan on a commercial footing. Dividends and capital returns need to be paid to all shareholders equally, and any transfer of shares may attract a liability for capital gains tax. In addition, capital gains made by the company will not attract the 50% CGT discount.
  • Setting your business up in a trust allows you to distribute income and capital gains to different beneficiaries in different years. However, each beneficiary will have to pay tax on his/her share of the net income of the trust at his/her marginal tax rate every year. Any losses will be trapped inside the trust.
  • Running your business through a partnership will allow you to distribute income and capital gains in accordance with the partnership agreement. Losses can be passed on to individual partners who can usually offset these losses against their other assessable income. However, any changes in the composition of the partnership will usually result in inherent capital gains being realised for tax purposes. Holding assets in this structure also offers very little asset protection.
  • Self-managed super funds (SMSFs) are increasingly being used as an alternate structure in which to hold passive investments. However, the activities that an SMSF can engage in are quite limited and the compliance burden associated with running an SMSF can be high.

If you think the structure in which you currently run your business may not be the best structure for you, the New Year is a good time to discuss alternative structures with your tax adviser.

Rolling your business from one structure to another will usually result in tax consequences which you may be able to defer via a rollover.

In addition, depending on your carry-forward losses and other tax attributes, it may better for you to effect a change of structure at certain times as compared to others.

2. Consider your current and future cash and financing requirements

The New Year may be a good time for you to evaluate the suitability of your current debt/equity financing balance.

The tax consequences of debt and equity financing differ significantly, and considerations of your short to medium-term business plans should also be taken into account when evaluating your financing needs.

If you are planning an expansion or contraction of your business, this is a good time to consider the appropriateness of your financing structure.

3. Consider any elections that you may be entitled to make

There are several elections under the income tax Acts that may be available to you.

Some examples are the election to consolidate, rollover elections, elections to access certain small business concessions, and TOFA elections.

The New Year is a good time for you to consider if any of these elections may be appropriate for you.

4. Succession planning – do you anticipate any changes in control or ownership?

If your business is operated by or employs various family members, this is a good time to stop and consider issues of succession planning, such as the stake that each family member has in the business, the nature of this stake (ie equity holding or employee), and the manner in which you anticipate these interests changing in the short to medium term.

Your tax adviser can assist you in negotiating issues of succession planning, including the transfer of interests and helping you to achieve your goals in the most tax-effective manner.

The government and the ATO have implemented measures to help taxpayers in flood-affected areas to get back on their feet.

How might you be affected?

The ATO is able to assist such taxpayers in a number of ways, including by:

  1. Fast-tracking refunds;
  2. Giving people extra time to pay debts – without interest charges;
  3. Giving more time to meet BAS and other lodgment obligations – without penalties;
  4. Helping to reconstruct tax records where documents have been destroyed, and make reasonable estimates where necessary;
  5. Offering visits from field officers to help reconcile lost records;
  6. Helping people to claim tax hardship concessions; and
  7. The ATO has also granted an automatic one-month extension for the lodgment of monthly activity statements and related payments (from the original due date of 21 January 2011 to 21 February 2011) for businesses with addresses within one of the identified flood affected postcodes.

What should you consider?

The ATO is encouraging businesses with superannuation guarantee obligations which are not able to make their contributions for the quarter to lodge a “Superannuation Guarantee Charge Statement – Quarterly (NAT 9599)”form as soon as possible because, until this statement is lodged, nominal interest (currently at the rate of 10%) will accrue on shortfall contributions.

As this interest is paid to the employee (to compensate for lost earnings), the ATO has no discretion to waive it.

Affected people can contact the ATO directly on 1800 806 218.

The government has also announced that all “bucket” donations of $10 or less may be deducted by the donor without substantiation.

Affected taxpayers should also explore the many forms of government assistance that may be available at www.disasterassist.gov.au.

To do!If your business is situated in a flood-affected area, you should contact your tax agent as soon as possible to arrange the necessary deferrals.

When you are ready to tackle your tax affairs, your tax agent can help you deal with the ATO.

The government announced recently that it would be imposing a flood levy on Australian taxpayers to help with the cost of rebuilding damaged or destroyed infrastructure in flood-affected areas in Queensland, Victoria and New South Wales.

The levy will be applied over the financial year ending 30 June 2012 and will be calculated based on your taxable income in that income year.

Taxpayers who were affected by the floods or earn less than $50,000 will be exempt from paying the levy.

Broadly, the levy will be applied as follows:

  • Taxable income greater than $50,000 but less than $100,000 will attract a levy of 0.5%.
  • Taxable income greater than $100,000 will attract a levy of 1%.

The following table illustrates how much flood levy you will have to pay depending on your assessable income in the 2012 income year.

Taxable IncomeFlood Levy ($)
$50,000$0
$100,000$250
$150,000$750
$200,000$1,250

While this levy has been announced by the government, it needs to pass both Houses of Parliament before it can be imposed.

Note!If you earn more than $50,000 in the 2012 income tax year, you will need to pay the flood levy.

Generally, GST is levied on all goods and services consumed in Australia. This means that, while exports are generally GST-free, all goods imported into Australia are subject to GST at the rate of 10%.

As a result, businesses that import goods into Australia in the course of that business are required to remit 1/10th of the taxable value of the goods to the ATO on importation.

However where the value of such imports is AUD$1,000 or less, no GST is required to be remitted.

The current debate about the GST threshold has received a great deal of publicity of late, and is certainly worthy of consideration if you import goods as part of your business.

Online sales

The broader issue in this debate is online sales and the shifting landscape of the retail sector.

The government has announced a Productivity Commission review into this sector, and is also hosting an online retail forum in early 2011 to “encourage and support Australian retailers to explore online options”. People interested in participating in this online forum should register their interest at [email protected]

You should also explore the Small Business Online Program if your business could benefit from guidance in this area.

Note!The current debate on the GST threshold has highlighted the significant role that online sales are increasingly playing in the retail sector.

If you sell online or are thinking about it, you should consider seeking assistance from one of the many recently announced government programs.

What’s it about?

The Federal Court recently handed down its decision in the case of Colonial First State Investments in relation to the interests of unit holders, and the ability of the trust to stream capital gains to different unit holders.

This case may affect taxpayers who use a trust where any beneficiaries under the trust have a “fixed” entitlement pursuant to which the trust has been streaming tax attributes (such as capital gains and franking credits).

This finding may have significant consequences for taxpayers who use trusts and have determined their tax obligations on the basis of beneficiaries fixed entitlements under the trust.

To do!Taxpayers who use “fixed” trusts should speak to their adviser about reassessing their trust deed to ensure that the entitlements of beneficiaries are not affected by the finding in this case.

What's it about?

The ATO has recently issued a fact sheet setting out its revised approach to debt collection titled “Firmer action approach to debt collection”.

This fact sheet sets out when the ATO will take “firmer action” to recover tax debts.

The fact sheet is part of a broader ATO push to wind back some of the concessions offered to taxpayers during the global financial crisis.

What should you do?

If you have trouble settling your tax liabilities, you should contact your tax adviser as soon as possible to discuss the issue as you may be able to avoid firmer action and negotiate a payment arrangement that you are able to comply with.

As set out in the fact sheet, firmer action involves:

  • Issuing a notice to a third party (for example, a bank) who owes you money or holds money on your behalf requiring them to pay all or part of that money to the ATO
  • Initiating bankruptcy or wind-up proceedings, beginning with the issuing of a summons/statutory demand
  • Pursuing company directors personally for the PAYG withholding component of the debt (director penalties)
  • Issuing a writ/warrant of execution authorising the seizure and sale of your property to pay a judgment debt plus costs
  • In rare circumstances, requiring you to pay a bond or provide security in respect of any tax-related liability that the ATO think may be at risk of not being paid.

The ATO will generally take firmer action when:

  • The ATO has unsuccessfully tried to contact you multiple times
  • You repeatedly default on your payment arrangements
  • Your debt is escalating and the ATO considers that there is no evidence that you will be able to meet your ongoing tax obligations
  • You have been subject to an audit where deliberate avoidance was detected and payment avoidance is continuing
  • There is evidence that liquidation is being used to avoid financial obligations, without risking assets and with the full intention of resuming business operations through a new entity (ie “phoenix” activity).

If you have been subject to firmer action of this nature, you should contact your tax adviser to resolve the situation.

If you are able, it is advisable to pay the debt in full as soon as possible.

Otherwise, the ATO will consider deferring firmer action if you make an agreed lump sum payment towards your outstanding tax debt and enter into a direct debit payment arrangement for the balance of the debt.

If you have a debt of greater than $100,000, you will need to demonstrate that your business is viable before the ATO will defer the firmer action.

Note!You may be subject to firmer action from the ATO on debt collection if you have outstanding tax liabilities. If you are unable to meet your tax liabilities, you should contact your tax adviser as soon as possible.

DISCLAIMERTaxwise® News is distributed 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 toconsult their tax advisor for advice on specific matters.

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Taxwise Business News – Sep 2010

IN THIS ISSUE

The ATO recently released its compliance program for 2010/11.

In relation to tax compliance for small and medium enterprises the ATO will be focussing on a variety of issues, including the following:

Business activity statements – the ATO will be focussing on compliance issues related to BASs, specifically reported property sales and acquisitions and application of the margin scheme rules.

Capital gains and losses – the ATO will be focussing on the calculation of capital gains and losses including in relation to the application of small business CGT concessions, other CGT concessions or rollovers, calculation of cost base, capital gains and losses on the disposal of shares and property (including non-residents).

Cash economy – the ATO will be focussing onbusinesses that conduct a high level of cash transactions (such as paying cash-in-hand wages) in order to identify taxpayers that may be using cash transactions to hide income and evade tax obligations.This includes the use of business benchmarks which allow comparisons between similar businesses to identify typical or expected turnover levels.

Company deregistration – the ATO will be examining the affairs of taxpayers who deregister companies.

Employer obligations – the ATO will be monitoring employers’ compliance with their PAYG withholding obligations and superannuation guarantee obligations. In relation to superannuation, the ATO will be focusing on road freight transport, automotive repair and electrical service industries. The ATO will also continue to work with promoters, industry representatives and sporting bodies to provide guidance on withholding obligations for visiting entrepreneurs and sportspersons.

Financial supplies – the ATO will be focussing on the GST consequences of transactions related to financial supplies, especially in relation to the appropriate identification and linking of acquisitions to the making of financial supplies. The ATO will focus specifically on capital raising activities, managed funds or superannuation funds, contributory mortgage schemes, small financial transactions (such as pawnbrokers etc) and mergers and acquisitions.

Fringe benefits tax – the ATO will be focussing on the treatment of motor vehicles, in particular appropriate recording of private use in relation to luxury car purchases and exempt vehicles.

GST– the ATO will be focussing on the GST impact of cross-border transactions, integrity of GST refunds, sales of property and issues concerning retirement villages.

International transactions – the ATO will be focussing on foreign source income, deductions relating to cross border transactions and the application of the thin capitalisation and transfer pricing provisions.

Losses –the ATO will be focussing on the utilisation of losses, especially the incorrect treatment of capital losses as revenue losses.

Personal services income – the ATO will be focussing on contractors to ensure that all PSI is appropriately disclosed, with a particular focus on engineers and computer technology specialists in the mining industry.

Self managed superannuation funds (SMSFs) – the ATO will be focussing on loans to related parties, deductions claimed for exempt current pension income, treatment of losses and re-reporting of member contributions.

Shareholder loans – the ATO will be focussing on amounts paid or distributions made by private companies to shareholders or connected entities to ensure any deemed dividends are appropriately reported.

Trusts – the ATO will be focussing on the TFN reporting obligations of trustees in respect of beneficiaries to whom distributions are made.

Tip!Although the ATO is targeting the areas mentioned above, businesses should not think that this means that the ATO will not be looking at other areas too. They will!

The new employee share scheme rules have now come into effect, and will affect the taxation of all employee share scheme interests provided on or after 1 July 2009.

These rules broadly require any discount on issue to be assessed upfront unless there is a real risk that the employee may forfeit the interest.

Where there is a real risk of forfeiture, the market value of the interest (less any consideration paid) is generally included in the employee’s assessable income at the time that this risk falls away.

Under the new rules, employers that provide employee share scheme interests are required to provide information to the Commissioner and to the relevant employee about the interests provided, and in some cases withhold and remit withholding tax from amounts paid to an employee that has not quoted his/her TFN to the employer.

This information, in the form of an ESS Statement, is required to be provided to employees by July 14 and the Commissioner by August 14 (for taxpayers with a June 30 year end).

Information required to be provided includes:

  • Details about the provider of the interests (such as ABN and address);
  • Details about the employee (such as name and TFN); and
  • Details about the employee share scheme interests, such as amount and market value on issue/acquisition (where the interests are taxed up-front) or market value at the time that the taxing point occurs (if taxing point was deferred but occurred during the income year.)

The ESS Statement containing this information may be amended once lodged with the ATO and can be found at www.ato.gov.au.

Employers should also consider whether they have any employees who have acquired employee share scheme interests but not quoted their tax file number, as the employer may be required to withhold and remit withholding tax from amounts paid to such employees.

To do!Taxpayers whose have provided employee share scheme interests during the 2010 income year should ensure they have completed the ESS Statement and provided it to employees and the ATO.

The ATO has finalised its draft ruling on the impact of unpaid present entitlements in favour of private companies in the form of TR 2010/3 and has released a draft practice statement on the application of its position, in the form of PSLA 3362.

This ruling constitutes a significant shift in the way a lot of taxpayers had been treating unpaid present entitlements prior to the release of the ATO’s draft ruling. As sections of the ruling apply both before and after the date of its release, taxpayers should carefully consider the application of the ruling in relation to all income years in respect of which income tax returns remain open for amendment.

This ruling relates to when an unpaid present entitlement in favour of a private company will be treated as a “loan” for the purposes of Division 7A, and therefore treated as a deemed dividend to the shareholder of the company, where the trust is a related entity of the shareholder. The ruling broadly applies in the following situation:

  • A private company has a present entitlement to an amount from a related trust (i.e. it can call for immediate payment of the amount by the trust);
  • The amount remains in the trust rather then being distributed to the private company (i.e. there is an unpaid present entitlement); and
  • The amount is used by the trust for its own purposes or intermingled with other trust funds (as opposed to being held by the trust on a sub-trust for the company).

The ruling concludes that a Division 7A loan will arise where:

  • A private company beneficiary lends (by agreement, authorisation or ratification) money in satisfaction of an unpaid present entitlement;
  • The trustee creates a loan for the benefit of the private company beneficiary pursuant to the trust deed instead of creating an unpaid present entitlement;
  • There is a subsisting unpaid present entitlement and the private company has in substance effected a loan or provided financial accommodation in respect of that unpaid present entitlement; or
  • An unpaid present entitlement has been allowed to remain outstanding for use by the trust generally (as opposed to being used or invested or lent for the absolute benefit of the corporate beneficiary).

The draft practice statement sets out practical guidance to assist in the application of the Commissioner’s position, including guidance in relation to:

  • When a loan agreement may be considered “express” or “implied”
  • When a “loan” may be taken to have been made
  • The resulting tax consequences if a loan is taken to have been made
  • The review period that will apply in relation to such loans (generally the ATO will not review the tax consequences of such loans outside the standard amendment period applicable)
  • How to determine whether funds representing the unpaid present entitlement are being used for the company’s sole benefit (as opposed to trust purposes) and the evidence that may be used to substantiate the position taken
  • How to determine if there is a sub-trust in place
  • Application of the Commissioner’s discretion under Division 7A to deemed loans as per the ruling

Note!As these issues are complex, taxpayers should consider the impact of the ruling and the practice statement on their affairs very carefully.

The Commissioner has released his Decision Impact Statement in respect of the High Court’s decision in Bamford v FCT [2010] HCA 10 and a practice statement setting out guidance on the application of the current law (PSLA 2010/1).

The DIS acknowledges the High Court’s decision in this case i.e. that

  • “income of the trust estate” is to be determined with reference to the general law of trusts rather than taxation law;
  • The general law of trusts defines income with reference to a governing set of principles;
  • However, these principles are merely presumptions that may be displaced by express provision in the trust instrument.
  • As such, where the trust deed deems an amount to be “income” of the trust, the amount will constitute “income of the trust estate” for the purposes of applying section 97.

The DIS also reaffirms the view that the proportionate approach (as opposed to the quantum approach) is to be applied when calculating the percentage of the net income of the trust on which a beneficiary is taxable.

The Commissioner has also released PSLA 2010/1 which affirms that the Commissioner will apply the law as set out in the High Court’ s decision in Bamford on a go-forward basis.

Under PSLA 2010/1, taxpayers who relied on either:

  • The Commissioner’s view; or
  • Any other view that was reasonably open having regard to other relevant authorities

for the 2010 income year or earlier, will have taken a reasonably arguable position. As a result, such taxpayers will not be liable for administrative penalties on any resulting shortfall amount.

Risk Area!Taxpayers whose affairs involve the use of trusts should consider whether their income tax returns in respect of the 2010 income year and earlier were lodged in accordance with the High Court’s decision in Bamford.

The ATO has released its Decision Impact Statement in relation to Luxottica Retail Australia Pty Ltd v Commissioner of Taxation [2010] AATA 22. This case involves consideration of the GST treatment of frames and lenses in spectacles.

The DIS sets out a particularly narrow view of the circumstances in which a taxpayer will be entitled to a refund of any overpaid GST. Specifically, the Commissioner has noted that a taxpayer may only be entitled to a refund of overpaid GST where that GST will subsequently be refunded to the actual customer.

As such, taxpayers that have inadvertently overpaid GST will need to consider whether a refund will be available for the amount.

Tip!Taxpayers who have overpaid GST may not be entitled to a refund. As such, taxpayers should take special care when preparing their activity statements.

For businesses that are experiencing continuing financial distress, the ATO is offering services including flexible payment arrangements, interest-free deferrals of activity statement liabilities, cash flow relief through reduced uplift factor for PAYG and GST instalments and PAYG instalment variations.

Businesses in hardship should contact the ATO as early as possible to explore available options, otherwise the ATO may seek to take firmer action with businesses that default on payment arrangements, or do not have the capacity to pay.

Tip!Businesses that are struggling in the current economic climate may want to approach the ATO to explore available assistance options.

The scope for registering as a tax agent under the transitional provisions (under the new regime) closed on 31 August 2010.

If you are required to be registered as a tax agent, you will now need to apply based on the standard rules.

DISCLAIMERTaxwise® 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.

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Taxwise Individual News – Jun 2010

IN THIS ISSUE

  1. Making undeducted contributions of $1000.00 to superannuation where personal income is below about $58K to obtain the Government Super Co-Contribution BEFORE 30th June 2010. Please note, if you make a $1000 undeducted (non-concessional) contribution for your children into a Super Fund, the child, if working, will also be eligible for the $1000 Government Co-Contribution.
  2. If you are over 55 years old and have funds in superannuation, you should consider placing your self in a Transition to Retirement Pension (TRT) as the earnings and capital gains of your superfund assets will no longer pay ANY tax.
  3. Making deducted superannuation contributions before 30th
  4. Employers should be aware that all super liabilities for employees MUST be physically paid over to relevant superannuation funds by the 30th June 2010 or you will NOT be able to claim a tax deduction for the unpaid amount.
  5. Write off obsolete stock and bad debts.
  6. Acquire any assets (that are needed of course) of less than $1000 value before the 30th June as full deduction is allowed if you are a Small Business Entity. Please contact our office if you require any assistance with the above.

Personal tax rates

The following changes take effect from 1 July 2010 to the individual tax rates (the changes are in bold):

Current Taxable Income ($ p.a.)Rate %
Nil to 60000
6001 to 35 00015
35 001 to 80 00030
80 001 to 180 00038
180 001 plus45
From 1 July 2010 Taxable Income ($ p.a.)Rate %
Nil to 60000
6001 to 37 00015
37 001 to 80 00030
80 001 to 180 00037
180 001 plus45

More for low income earners

From 1 July 2010: The Low Income Tax Offset (LITO) will increase to $1500 per annum (compared with $1350 in the previous year) giving a tax free income threshold of $16 000 for taxpayers with incomes up to $30 000 per annum in 2010–11 (compared with $15 000 in the previous year).

The LITO is no longer available once the taxpayer’sincome reaches $67 500 in 2010–11.

Medicare levy threshold

With effect from 1 July 2009, the Government proposes to increase the low income Medicare levy threshold to:

  • $18 488 for a single person (up from $17 794 for 2008–09);
  • $31 196 for a family (up from $30 025 for 2008–09); and
  • $27 697 (up from $25 299 for 2008–09) for pensioners below Age Pension Age (65 but increasing to 67 over the next 13 years).

In addition to the key changes outlined above, the following changes were also announced as part of the Federal Budget.

Optional standard deductions for work related expenses

From 1 July 2012 the Government will provide individual taxpayers with an optional standard deduction of $500 in lieu of claiming work-related expenses and the cost of managing their tax affairs. The standard deduction will be increased to $1,000 from 1 July 2013.

Note!This measure is available to all taxpayers regardless of whether they have work related expenses or expenses related to managing their tax affairs.

In other words – under the current proposal any taxpayer can claim the standard deduction.

No taxpayers will be disadvantaged. Taxpayers with expenses above the standard deduction will be able to continue to claim those expenses when lodging their tax return under the existing rules.

WHAT IF MY EXPENSES ARE GREATER THAN THE STANDARD DEDUCTION?All taxpayers will have the option to lodge an income tax return and continue to claim all their deductible expenses rather than the standard deduction being offered by the Government.

50% tax discount for certain interest income

From 1 July 2011, the Government will provide individuals with a tax discount equal to 50% on up to $1,000 of interest earned, including on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products.

This means that for a person earning an average pre-tax interest rate of 6%, the discount would apply up to a savings balance of just over $16,500.

This change will result in some individuals and families becoming eligible for transfer payments oreligible for a larger transfer payment, such as Family Tax Benefit, Baby Bonus, Child Care Benefit, Education Tax Refund, Commonwealth Seniors Health Card (CSHC) and the Pensioner Supplement (which is linked to eligibility for the CSHC).

Superannuation – minor amendments

The Government will make a number of minor amendments to improve the operation of the superannuation legislation, with intended effect from the 2010-11 income year.

The amendments will include:

  • Permanently allowing a claim for a deduction for eligible contributions to be made to successor superannuation funds;
  • Increasing the time-limit for deductible employer contributions made for former employees;
  • Clarifying the due date of the shortfall interest charge for the purposes of excess contributions tax;
  • Allowing the Commissioner of Taxation to exercise discretion for the purposes of excess contributions tax before an assessment is issued; and
  • Providing new arrangements for public sector defined benefit schemes which fund benefits through “last minute contributions”.

Superannuation co-contribution - pause to the indexation of the income

The Government will freeze for 2010-11 and 2011-12 the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.

Under the superannuation co-contribution scheme, the Government provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for people with incomes of up to $31,920 in 2009-10(with the amount available phasing down for incomesup to $61,920). This measure will freeze these thresholds at $31,920 and $61,920 for two years.

Permanent reduction to the superannuation co-contribution

The Government will permanently retain the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that is payable on an individual’s eligible personal non-concessional superannuation contributions at $1,000.

Henry Report – Highlights

The following are the highlights of the Government’s response.

  • A Resource Super Profits Tax (RSPT) will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia’s non-renewable resources;
  • The States and Territories will be provided with new, ongoing infrastructure funding, with an initial total amount of $700m in 2012/13;
  • A refundable resource exploration rebate will be provided to companies, set at the prevailing company tax rate, for exploration expenditure carried out in Australia from 2011/12;
  • The company tax rate will be reduced to 29% from 2013/14, and to 28% from 2014/15;
  • The company tax rate for “eligible small business companies” will be reduced to 28% from 2012/13;
  • The immediate write-off for assets of small businesses will be extended to assets valued at less than $5,000 from 1 July 2012;
  • The superannuation guarantee charge will be increased by annual increments until it reaches the plateau level of 12% by 2019/20;
  • The entitlement to the SGC will be broadened by lifting the maximum age threshold from 70 to 75 years of age;
  • The concessional contributions cap will be raised to $50,000 per year for workers who are 50 and over and who have superannuation balances of under $500,000; and
  • A new Government superannuation contribution will be created which will pay up to $500 for workers with adjusted taxable incomes of up to $37,000.

The measures that the Government has announced that it will implement that may affect individuals are discussed in more detail below.

Superannuation

The Government has decided to implement four changes to superannuation.

The first two changes apply to superannuation concessional contributions. The Government will introduce a new concessional contribution thresholdfor low superannuation balance workers aged 50 and over and it will also create a new Government contribution for workers who earn less than $37,000 a year.

The second group of measures impact on the superannuation guarantee charge scheme (SGC). The SGC will be increased up to a target level of 12% and it will now apply to workers below 75 years of age.

These changes are outlined in further detail below.

SGC increased to 12%

The Government has announced that it will increase the SGC to a maximum of 12% by the 2019/20 financial year. The charge will increase in increments as outlined in the table below. Income year SGC annual rate Increase from previous year.

Income yearSGC annual rateIncrease from previous year
2009-10 to 2012-139%None
2013-149.25%0.25%
2014-159.5%0.25%
2015-1610%0.5%
2016-1710.5%0.5%
2017-1811%0.5%
2018-1911.5%0.5%
2019-2012%0.5%

SGC cut-out age extended to 75

The entitlement age for the SGC will be lifted for workers, with the cut-out age limit increasing from 70 to 75 years of age. This change will commence on 2013/14 and will align the SGC cut-out age with voluntary and self-employed contributions.

New concessional contribution cap for mature low super balance workers

The concessional contribution cap will be doubled for eligible workers who are 50 years of age and older. Workers who are aged 50 or older and who have superannuation balances of under $500,000 will be able to make contributions of $50,000 per year (indexed annually according to Treasury).

The Government has referred to the measure as a “catch-up”. This low balance cap applies from 1 July 2012 and effectively replaces the current transitional cap for workers aged 50 and older which expires on 30 June 2012.

Additional Government contribution for low income workers

A new Government contribution will apply to low income workers from 1 July 2012. The Henry Review recommended taxing all superannuation contributions as individual’s assessable income and providing an offset.

However, the new contribution is an offset that applies only to workers earning $37,000 or less. The contribution is calculated by applying a matching rate of 15% on concessional contributions made, with a maximum rebate of $500. This means that concessional contributions made by low income workers above $3,333 will receive no additional rebate amount.

Future reforms

The Government has promised that in the coming months it will have more to say on a number of areas considered by the review, especially making tax time simpler for everyday Australians, improving incentives to save and improving governance and transparency of the tax system. This would be done over the Government’s second term.

The Government noted that many everyday Australians find the personal tax system complex, and the overwhelming majority seek professional assistance to complete their annual tax returns. The Government is interested in exploring ways to reduce the burdens the tax system places on working Australians, while maintaining their access to the appropriate tax treatment of legitimate expenses. The Government will have more to say on this issue in coming months.

The Government also said that it is also important to move towards a system that improves how Australiansinteract with the tax and transfer system. The Government is interested in looking at how the tax and transfer system should operate into the future in a way that helps people and businesses make informed decisions that are in their best interests. These reform opportunities will be considered by the Government.

The specific simplification measures recommended by the Henry Review include:

  • The introduction of a tax and transfer client account which would include presentation of income earned from all sources, tax withheld, tax liabilities, transfers received, other information from third parties, complete information from past periods, an optional single point for updating personal information, and the ability to test the impact of hypothetical changes in circumstances (Rec 122)
  • The provision of pre-filled personal income tax returns to most personal taxpayers as a default method of settling their tax affairs each year (Rec123)
  • The reform of existing tax and transfer provisions in order to support improvements in client experience, including greater alignment of income definitions and reporting, rationalising of personal tax deductions and offsets, and streamlining of mandatory administrative requirements (Rec 124)
  • The collection of information required for determining tax liabilities and transfer entitlements from third parties, including employers, Government agencies, financial institutions, and share and property registries (Rec 125)
  • The development of a single client account for tax and transfer financial information, for example by linking records and existing client identifiers (Rec 130)
  • Pursuing further approaches (extending and building on Standard Business Reporting) to reduce the compliance costs associated with business interactions with Government (Rec 126). Small businesses should be assisted in becoming business ready when they commence business (Rec 127)
  • Regularly monitoring the interaction of the tax and transfer system (Rec 131 to 135).

DISCLAIMERTaxwise® 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.

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Taxwise Business News – Jun 2010

IN THIS ISSUE

  1. Making undeducted contributions of $1000.00 to superannuation where personal income is below about $58K to obtain the Government Super Co-Contribution BEFORE 30th June 2010. Please note, if you make a $1000 undeducted (non-concessional) contribution for your children into a Super Fund, the child will also be eligible for the $1000 Government Co-Contribution.
  2. If you are over 55 years old and have funds in superannuation, you should consider placing your self in a Transition to Retirement Pension (TRT) as the earnings and capital gains of your superfund assets will no longer pay ANY tax.
  3. Making deducted contributions by Companies, Trusts and sole traders to reduce profitability BEFORE the 30th June 2010. Note: Companies and individuals are taxed at the 30% and 46.5% marginal tax rates which are significantly higher than the 15% tax rate of Super Funds.
  4. Employers should be aware that all super liabilities for employees MUST be physically paid over to relevant superannuation funds by the 30th June 2010 or you will NOT be able to claim a tax deduction for the unpaid amount.
  5. Write off obsolete stock and bad debts.
  6. Acquire any assets (that are needed of course) of less than $1000 value before the 30th June as full deduction is allowed if you are a Small Business Entity.

Please contact our office if you require any assistance with the above.

Some business related Budget measures that may be of interest to businesses are outlined below.

Consolidation: calculation and collection of income tax liabilities

The Government will improve the operation of the rules relating to the calculation and collection of income tax liabilities from consolidated groups and multiple entry consolidated groups (MEC groups) by:

  • Clarifying that the Commissioner of Taxation can recover unpaid PAYG liabilities under the liability for payment rules, with effect from 11 May 2010;
  • Clarifying that the liability for payment of tax rules applies to MEC groups, with effect from 11 May 2010;
  • Clarifying that an entity that pays its contribution amount under a tax sharing agreement can leave a consolidated group or MEC group clear from any further liability, with effect from the 2004-05 income year;
  • Ensuring that, where there is a change in the provisional head company of a MEC group during an income year, any PAYG instalments paid by the former provisional head company on behalf of the group are attributed to the group, with effect from 1 July 2002; and
  • Clarifying that relevant parts of the income tax law apply to MEC groups in the same way as they apply to consolidated groups, with effect from 1 July 2002.

Changes to CGT to make it easier for businesses to restructure

The Government will introduce legislation to make amendments to the CGT provisions to improve the ability of businesses to restructure. The Government will:

  • Extend the CGT rollover for the conversion of a body to an incorporated company;
  • Make the share sale facility exclusion more broadly available for CGT rollovers; and
  • Allow CGT demerger relief for certain demerger groups that currently cannot access the relief.

The three measures will apply to CGT events happening after 7.30 pm (AEST) on 11 May 2010.

In relation to the second amendment, the Government will allow Australian interest holders access to a broader range of CGT rollovers where an entity restructures usinga share or interest sale facility for foreign interest holders. Currently, where a business restructures and it uses a share or interest sale facility for foreign interest holders, Australian resident interest holders are unable to access some CGT rollovers.

The share sale facility exclusion that currently operates in limited circumstances for Authorised Deposit-taking Institutions will be extended to operate more broadly for other entities and for other relevant CGT rollovers.

In relation to the third change, the Government will amend the CGT demerger relief provisions to allow another member of a demerger group to qualify as the head entity of the group where the existing head entity cannot demerge its interests in the demerger group. The measure will correct a defect in the current legislation that prevents demerger groups from accessing demerger relief where the group includes a corporation sole or a complying superannuation entity.

Look-through treatment for earnout arrangements

The Government will allow all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset. The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007.

Earnout arrangements are used to structure the sale of a business (or business assets) to manage uncertainty about the value of the business. Under the earnout arrangement, an earnout right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business.

Currently, an earnout right is treated as a separate CGT asset – see draft Taxation Ruling TR 2007/D10. This treatment can result in anomalous outcomes for taxpayers where the actual payments under the earnout right differ from the amounts estimated at the start of the arrangement, such as by reducing access to the CGT small business concessions.

This measure will ensure that the CGT treatment of earnout arrangements does not create an impediment to the efficient market for the sale of businesses or business assets.

Further reductions in GST compliance costs for business

The Government will reduce compliance costs for businesses through a package of GST reform measures to help business owners spend less time wading through red tape.

These measures are designed to reduce the number of non-residents that need to be involved in the GST system and protect the GST base.

The key components of the plan are:

  • Restructuring the margin scheme provisions with effect from 1 July 2012. These are currently a way of working out the GST payable when property is sold as part of a business. This will clarify and simplify the rules and ensure greater certainty for taxpayers on issues surrounding the use of valuations;
  • Significantly increasing the threshold above which businesses need to interact with the financial supply provisions from $50,000 to $150,000 of input tax credits with effect from 1 July 2012;
  • Introducing measures to protect the GST base by reducing opportunities for businesses to inappropriately take advantage of the reduced input tax credit concessions by bundling services; and
  • Allowing small businesses accounting for GST on a cash basis to claim input tax credits upfront in relationto hire purchase arrangements. This change will significantly assist those businesses that have been forced into higher cost chattel mortgages following the introduction of the GST.

The reforms are the result of three reviews into specific aspects of the GST announced in the 2009-10 Budget following recommendations by the Board of Taxation’s Review of the Legal Framework for the Administration of the GST.

GST and cross-border transactions

The Government has announced that it will implement all the recommendations of the Board of Taxation from its Review of the application of GST to cross-border transactions, with effect from 1 July 2012.

The package will significantly reduce the number of non-residents who are unnecessarily drawn into Australia’s GST system by:

  • Limiting the connected with Australia provisions;
  • Expanding the compulsory reverse charge provision;
  • Extending the GST-free rules for cross-border supplies; and
  • Removing the need for some non-residents to register.

GST and cross-border transport supplies

The Government will make a number of minor revisions to its 2009-10 Budget measure that reduces GST compliance costs for businesses involved in the domestic transport of exported and imported goods, to ensure that the place of consignment will always be determined bythe place of delivery in the principal contract. This measure will have an ongoing negligible revenue impact and an ongoing negligible impact on GST payments to the States and Territories.

The measure will also ensure that ancillary services to the international transport of goods receive the same GST treatment as the transport supply that they facilitate.

Henry Report – Highlights

The following are the highlights of the Government’s response.

  • A Resource Super Profits Tax will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia’s non-renewable resources;
  • The States and Territories will be provided with new, ongoing infrastructure funding, with an initial total amount of $700m in 2012/13;
  • A refundable resource exploration rebate will be provided to companies, set at the prevailing company tax rate, for exploration expenditure carried out in Australia from 2011/12;
  • The company tax rate will be reduced to 29% from 2013/14, and to 28% from 2014/15;
  • The company tax rate for “eligible small business companies” will be reduced to 28% from 2012/13;
  • The immediate write-off for assets of small businesses will be extended to assets valued at less than $5,000 from 1 July 2012;
  • The superannuation guarantee charge (SGC) will be increased by annual increments until it reaches the plateau level of 12% by 2019/20;
  • The entitlement to the SGC will be broadened by lifting the maximum age threshold from 70 to 75 years of age;
  • The concessional contributions cap will be raised to $50,000 per year for workers who are 50 and over and who have superannuation balances of under $500,000; and
  • A new Government superannuation contribution will be created which will pay up to $500 for workers with adjusted taxable incomes of up to $37,000.

Reduced company tax rate from 2013/14

The Government has announced that the company tax rate will be reduced to 29% from 2013/14 and to 28% from 2014/15.

It was recommended in the Henry Report that the company tax rate be reduced to 25% over the short to medium term, with the timing subject to economic and fiscal circumstances (Rec 27).

Small business companies: lower tax rate

The company tax rate for “eligible small business companies” will be reduced to 28% from 2012/13 (ie two years earlier than for other companies).

Small business write-off changes

The capital allowances provisions will be changed in order to allow small businesses:

  • To write off immediately assets valued at under $5,000 (compared with the current $1,000 limit); and
  • To write off other assets (ie assets valued at over $5,000) in one depreciating pool at the rate of 30%.

Currently, depreciating assets may be allocated to 2 different depreciating pools. This will not apply to buildings.

The revised rules will apply from 1 July 2012.

RSPT

A Resource Super Profits Tax (RSPT) will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia’s non-renewable resources.

The RSPT will replace the crude oil excise, and operate in parallel with State and Territory royalty regimes.Projects within the scope of the Petroleum Resource Rent Tax (PRRT) will have the option of opting into the RSPT or staying in the PRRT. The election into the RSPT willbe irrevocable.

Under the RSPT a refundable credit for royalties paid to State and Territory Governments will be available. The refundable credit will eliminate investment distortions associated with the state royalty systems and ensure there is no “double taxation” of resource profits.

Under the RSPT the Government will guarantee to contribute 40% of the investment cost of a resource project.

The Government will consult extensively with stakeholders on the design of the RSPT. The consultation will also cover the need for exemptions from the RSPT where, due to compliance costs, there is no net benefit to society in applying the RSPT. This may occur in respect of low value minerals or micro businesses.

Future reforms indicated

The Government has promised that in the coming months it will have more to say on a number of areas considered by the review. The business related recommendation by the Government has said it will consider from the Henry Review include:

  • The collection of information required for determining tax liabilities and transfer entitlements from third parties, including employers, Government agencies, financial institutions, and share and property registries (Rec 125);
  • The development of a single client account for tax and transfer financial information, for example by linking records and existing client identifiers (Rec 130);
  • Pursuing further approaches (extending and building on Standard Business Reporting) to reduce the compliance costs associated with business interactions with Government (Rec 126); and
  • Small businesses should be assisted in becoming business ready when they commence business (Rec 127).

DISCLAIMERTaxwise® 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.

Read more

Taxwise Business News – Feb 2010

IN THIS ISSUE

  1. Making undeducted contributions of $1000.00 to superannuation where personal income is below about $58K to obtain the Government Super Co-Contribution BEFORE 30th June 2010.
  2. Making deducted contributions by Companies, sole traders to reduce profitability BEFORE the 30th June 2010.
  3. Employers should be aware that all super liabilities for employees MUST be physically paid over to relevant superannuation funds by the 30th June 2010 or you will NOT be able to claim a tax deduction for the unpaid amount.

Please contact our office if you require any assistance with the above.

In December 2009, the ATO released a draft ruling (TR 2009/D8) outlining how Division 7A should apply to private companies with an unpaid present entitlement from a trust.

Given the extensive consultations between the professional bodies and the ATO on this issue last year, the professional bodies were surprised by the content of the draft ruling released by the ATO in December. The professional bodies are currently preparing submissions in relation to the draft ruling.

The draft ruling outlines when the ATO considers that an unpaid present entitlement should be treated as a loan. A consequence of treating an unpaid present entitlement as a loan under Division 7A is that, unless the loan satisfies certain requirements, the loan will be treated as a deemed dividend for tax purposes.

Division 7A – background

Division 7A is designed to ensure that private companies are not able to distribute profits to shareholders by way of non-arm’s length payments or loans rather than as taxable dividends.

Where Division 7A applies, such payments and loans are treated as dividends in the hands of the shareholders.

Draft ruling

The draft ruling is concerned about when a private company will be taken to have made a “loan” to a shareholder for the purposes of Division 7A.

More specifically, the draft ruling is concerned about the situation where:

  • A private company has a present entitlement to an amount from a related trust (ie it can call for immediate payment of the amount by the trust);
  • The amount remains in the trust rather then being distributed to the private company (ie there is an unpaid present entitlement); and
  • The amount is used by the trust for its own purposes or intermingled with other trust funds (as opposed to being held by the trust on a sub-trust for the company).

The draft ruling provides that there will be a Division 7A loan where:

  • A private company beneficiary lends (by agreement, authorisation or ratification) money in satisfaction of an unpaid present entitlement;
  • The trustee creates a loan for the benefit of the private company beneficiary pursuant to the trust deed instead of creating an unpaid present entitlement;
  • There is a subsisting unpaid present entitlement and the private company has in substance effected a loan or provided financial accommodation in respect of that unpaid present entitlement; or
  • An unpaid present entitlement has been allowed to remain outstanding for use by the trust generally (as opposed to being used or invested or lent for the absolute benefit of the corporate beneficiary).

Based on some of the examples in the draft ruling, it is important to note that an unpaid present entitlement can be converted into a loan as a result of acquiescence.

In this regard, the draft ruling states that there may be a loan (by way of financial accommodation) where a private company authorises (including by acquiescence with knowledge) the continued use by the trust of funds representing the company’s unpaid present entitlement by not calling for:

  • The payment of that unpaid present entitlement; or
  • The investment of the funds representing the unpaid present entitlement for the company’s absolute benefit (as opposed to the funds being intermingled with the trust’s other funds).

Warning!Companies entitled to distributions from a trust that have remained unpaid for any length of time should carefully consider the application of the draft ruling.

In the 2009/10 Federal Budget, the Government announced its intention to tighten the rules relating to the taxation of benefits provided by a private company to its shareholders or their associates through the use of “lifestyle” assets (ie cars, boats, holiday houses, hobby farms).

Exposure draft legislation has now been introduced to implement the proposed changes to Division 7A. The professional bodies are currently preparing submissions in relation to the exposure draft legislation.

Draft legislation

The draft legislation removes the scope for private companies to allow company assets –such as real estate, cars and boats – to be used for free, or at less than their arm’s length value without paying tax.

Under the current Division 7A, certain payments and loans by private companies to their shareholders are treated as deemed dividends.

Under the new legislation the definition of “payment” has been expanded so that it includes a lease, licence or right to use company assets.

This means that all of the following scenarios could fall foul of Division 7A (subject to any exemptions being applicable):

  • Farmhouses used by farmers where the farmhouse is owned by the farming company and the company (rather than the farmer) is carrying on the farming business;
  • Any use of a company car, holiday house, boat or other asset by shareholders of the company; and
  • The right to use part of a shop or medical practice to live in where the relevant dwelling is owned by a company and the living space is more than 10% of the dwelling.

A quation to ask!Are your shareholders using company cars, houses (including farmhouses and holiday houses) or boats?

The new Tax Agent Services Regime will commence on 1 March 2010.

This regime will affect all tax and BAS agents providing tax agent or BAS services. This includes, but is not limited to persons providing tax advice, ascertaining tax liabilities, entitlements or obligations and representing clients in dealings with the Commissioner. This will affect accountants, bookkeepers and some lawyers.

The new regime is intended to ensure that tax agent services and BAS services provided to taxpayers are of an appropriate standard.

Some of the key legislative elements of the new regulatory regime are summarised below.

The Tax Agent Services Act 2009 provides for:

  • The establishment of the new national Tax Practitioners Board;
  • A legislated Code of Professional Conduct to govern the provision of tax agent and BAS services;
  • A wider range of disciplinary sanctions which may be imposed by the Board;
  • Registration and regulation of tax agents and BAS agents; and
  • A “safe harbour” for taxpayers from penalties who use tax agents or BAS agents in certain circumstances.

The Tax Agent Services Regulations 2009 provide:

  • Requirements for registration as a tax agent and a BAS agent;
  • Definitions and requirements for recognition as a recognised tax agent association and recognised BAS agent association; and
  • Fees for registration.

It is essential that all tax practitioners and BAS agents understand the new regime and the impact it will have on them.

Do you need to register?

For tax agents, the answer to this question will depend on whether they are providing “tax agent services”.

A “tax agent service” includes, but is not limited to:

  • Preparing or lodging a return, notice, statement, application or other document about a taxpayer’s liabilities, obligations or entitlements under a taxation law;
  • Preparing or lodging on behalf of a taxpayer an objection against an assessment, determination, notice or decision under a taxation law;
  • Applying to the Commissioner for a review of, or instituting an appeal against, a decision on an objection;
  • Giving a taxpayer advice about a taxation law that the taxpayer can reasonably be expected to rely upon to satisfy their taxation obligations; and
  • Dealing with the Commissioner on behalf of a taxpayer.

Tip!If you are providing tax agent services it is time to consider the new regime in detail.

Do you meet the registration requirements?

To be eligible to register, an entity must satisfy:

  • A fit and proper person test; and
  • Prescribed qualification and education requirements.

The following case studies illustrate the registration requirements.

Who is fit and proper?

Two years ago, Bill was convicted of a drink driving charge. He received a suspended prison sentence.

This is a matter that would need to be disclosed to the Board for their consideration when determining whether Bill is a fit and proper person.

Does an accounting degree qualify you to register?

Bill has an accounting degree and has been working as an accountant for the last 12 months.

Unless the transitional rules are applicable, Bill will need to complete an approved course in Australian taxation law and commercial law to be eligible to register.

Does a diploma qualify you to register?

Bill has an accounting diploma. He has been working as a tax lawyer for the last 2 years.

Unless the transitional rules are applicable, Bill will need to complete an approved course in Australian taxation law and commercial law to be eligible to register.

Does a law degree qualify you to register?

Bill has a law degree and is admitted as an Australian legal practitioner. He has been working as a tax lawyer for the last 12 months.

Unless the transitional rules are applicable, Bill will need to complete an approved course in basic accountancy and Australian taxation law to be eligible to register.

Does work experience qualify you to register?

Bill does not have any tertiary qualifications. However, he has worked as an accountant for the last 8 years.

Unless the transitional rules are applicable, Bill will need to complete an approved course in basic accountancy, Australian taxation law and commercial law to be eligible to register.

What if I have not completed any of the required approved courses?

In this case, Bill would only be eligible to register if he is a voting member of a recognised professional association (such as the Taxation Institute) and he has at least 8 years of relevant work experience.

With the end of the fringe benefits tax (FBT) year only a matter of weeks away – 31 March 2010 – it’s that time of year to make sure you are on top of your FBT obligations. To get prepared, we suggest you:

  • Check whether you have provided any fringe benefits to your employees in respect of their employment that are taxable; and
  • Make sure you are ready to lodge your FBT return and pay any FBT liability on time.

Your FBT basics checklist for 2010

  • The current FBT year runs from 1 April 2009 to 31 March 2010
  • As an employer, you are responsible for calculating your FBT liability, if there is one, and paying any FBT liability.
  • If you have an FBT liability, you must lodge your FBT return and pay your FBT liability by 21 May 2010 (or 28 May if you are on the tax agent’s lodgment program).
  • FBT is separate from income tax and is levied at the top personal marginal rate of income tax, including the Medicare levy (ie currently 46.5%).
  • You can generally claim an income tax deduction for the cost of providing fringe benefits and for the FBT you pay.
  • Where the total taxable value of reportable fringe benefits for an employee is more than $2,000 for the current FBT year, you will have to disclose this value (grossed-up) on the employee’s payment summary.

DISCLAIMERTaxwise® 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.

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Taxwise Individual News – Nov 2009

IN THIS ISSUE

The changes announced to the exemption for foreign income (ie changes to s 23AG of the Income Tax Assessment Act 1997) have now been enacted.

As a result, the foreign income of Australians working overseas will no longer be exempt unless their foreign income is in respect of certain types of employment, that is:

  • An aid worker employed in the delivery of Australian official development assistance;
  • An aid or charitable worker employed by an organisation in providing overseas aid relief;
  • A specified government employee deployed overseas as a member of a disciplined force; or TM
  • An employee undertaking an activity of a kind specified in the regulations.

These changes may increase the cost of employing Australians to work overseas if the employees are to maintain an equivalent wage level. In addition to these costs, employers employing Australian residents to work overseas will face increased compliance costs.

Employees whose income is no longer exempt under s 23AG (or another provision) will be subject to tax in Australia on their foreign income.

Under the PAYG withholding provisions, from 1 July 2009, employers will need to withhold amounts from salary, wages, commission, bonuses or allowances they pay to an Australian resident individual as an employee who is working overseas.

The PAYG withholding provisions will have an impact on the cash flow of Australian residents working in low tax jurisdictions overseas due to higher levels of tax being withheld in Australia.

To mitigate this issue, the Government released a legislative instrument that requires employers to reduce the amount that would normally be withheld from payments to individuals engaged in foreign services to take into account the foreign tax that is required to be withheld and paid for the relevant payment period.

Australian resident employees working overseas, who are not subject to the PAYG withholding regime, will need to ensure they are complying with the PAYG instalments provisions. The PAYG instalment provisions require taxpayers to pay instalments towards their income tax liability.

Employees will also need to apply the foreign tax offset (FTO) provisions to ensure they do not suffer double taxation (ie taxation in Australia and taxation in the country in which employment is exercised). This means employees will have to have appropriate documentation evidencing the tax paid overseas to be able to claim the FTO when they lodge their Australian income tax return.

Further, all individuals working offshore should have their residency status for tax purposes reviewed. Therefore, for each employee, it will be necessary to determine on a yearly basis whether the employee:

  • Ceased to be a “resident of Australia”; or
  • Remained a resident of Australia; or
  • Is a “dual-resident” (ie a resident of Australia and another country for tax purposes).

Tip!Employees who work overseas should consider their residency status.

From 1 July 2009, the concessional contributions cap has been reduced from $50,000 to $25,000 per person. Further, the transitional concessionalcontributions cap until 30 June 2012 for persons aged 50 or over has been reduced from $100,000 to $50,000.

This is likely to have an adverse impact on the ability of many Australians saving for their retirement.

Under the current taxation regime, concessional contributions are initially subject to 15% tax and non-concessional contributions 0% tax when received by a complying superannuation fund.

If the level of contributions exceeds either the concessional cap, non-concessional cap or both, then the relevant fund member is subject to excess contributions tax as follows:

  • The amount of concessional contributions in excess of the concessional contributions cap is subject to penalty tax at the rate of 31.5%. This excess then also counts towards the non-concessional contributions cap.
  • The amount of non-concessional contributions in excess of the non-concessional contributions cap is subject to penalty tax at the rate of 46.5%.

Areas of concern

The first area of concern is where a member is already close to both the concessional contributions cap and also the non-concessional contributions cap.

This could occur, where the person has more than one position of employment and has salary sacrificed to the $25,000 limit with one position and then is subject to compulsory superannuation guarantee contributions with one or more other positions.

The person may have also contributed close to the non-concessional cap amount (being currently $150,000 p.a. or $450,000 if the person is 65 years or younger and the three year average rule is utilised). This might be a result of contributing funds available from an inheritance or sale of a business or investment.

The additional superannuation guarantee amounts may be subject to a total tax of 93% (ie the initial 15% tax on contributions at the superannuation fund level, plus a personal excess concessional contributions tax of 31.5%, plus a personal excess non-concessional contributions tax of 46.5%).

The second area of concern is simply where the new concessional contributions cap of $25,000 is inadvertently exceeded as a result of a person having employer contributions in excess of this amount.

This could occur if there are two or more unrelated employers meeting their respective superannuation guarantee responsibilities in respect of the person, pre existing salary sacrifice arrangements and/or fixed contribution arrangements to meet the cost of ancillary benefits such as death and permanent disablement insurance.

As a result the member might be subject to penalty tax of 31.5% as a result of matters largely outside their control.

Tip!Taxpayers should watch their super contributions so that they do not breach the cap and subject themselves to penalty tax rates – possibly as high as 93%!

The ATO recently released its compliance program for 2009/10.

In relation to tax compliance for individuals, the ATO will be focusing on a variety of issues, including the following issues:

Information matching – the ATO will be expanding their information matching capabilities. They will be looking to use such information to mitigate risks in relation to incorrect reporting in relation to employee share schemes, health insurance policies, eligibility fortax offsets and the Medicare levy exemption.

Executives and directors – the ATO will be focusing on income splitting arrangements used by directors and executives.

Refund fraud – the ATO will be increasing their usual checks to assist in identifying and eliminating refund fraud.

Foreign income – the ATO will be focusing on the correct reporting of foreign income (including bank interest, dividends, pensions, salary and wages).

Work expense claims – the ATO will be focussing on occupations with a pattern of large or increasing claims and returns that are not typical for particular occupations. Specifically, the ATO will be focusing on:

  • Truck drivers;
  • Sales and marketing managers;
  • Sales representatives; and
  • Electricians.

Tip!Some areas to watch out for when claiming work related expenses include:

  • having sufficient documentation to support motor vehicle and travel expenses;
  • the eligibility requirements for the living away from home allowance; and
  • home offices, mobile phones and interest expenses.

CGT record keeping requirements – the ATO will be focusing on attempts to offset capital losses against other income. There will be a focus on checking property transactions to ensure correct reporting for capital gains.

Self managed superannuation funds (SMSFs) – as discussed in detail below, the ATO will be focussing on loans, in house assets, borrowing and non-arm’s length transactions in relation to SMSFs.

Retail investment products – the ATO will be focusing on retail investment products (including managed investment schemes) to ensure that all claims are properly available under the law.

Superannuation – the ATO will be focusing on illegal early release of superannuation.

Tip!Although the ATO is targeting the areas mentioned above, this does not mean that the ATO will not be looking at other areas too.

The ATO will be conducting audits of SMSFs in 2009/10.

Recently, the ATO has released various material regarding SMSFs. Taxpayers should be aware of this material and the possible implications for their SMSF.

The hot topics on the ATO’s radar at the moment include:

  • PAYG obligations – where a benefit is paid, SMSFs may have PAYG withholding obligations. SMSFs do not have to withhold from all payments. However, if the SMSF fails to withhold where it is required to do so, penalties may be imposed.
  • Related party agreements – SMSFs need to be aware of the “in-house assets” rule which may be breached where SMSFs enter into arrangements (eg investments or loans) with
  • Related parties. If the SMSF breaches the in house assets rule, the fund may become non-complying.
  • Use of negotiable instruments (eg promissory notes, cheques to pay contributions) – the ATO is targeting the non-commercial use of negotiable instruments in transactions involving SMSFs (eg using a promissory note or cheque without intending to exchange money or assets). The ATO is concerned that SMSFs may be using such instruments to avoid liquidating assets, to change the timing of transactions or obtain tax advantages.
  • Unpaid trust distributions – the ATO has issued a ruling in relation to whether an SMSF breaches the superannuation laws where it is entitled to distributions from a related trust but it has not received the payments. The ATO’s ruling examines whether the in-house assets rule, arm’s length rule and / or sole purpose test will be breached by such arrangements.
  • Enduring powers of attorney – the ATO has issued a draft ruling in relation to the requirements to remain an SMSF if an enduring power of attorney is entered.

Many people may not be aware that the ATO is proposing to undertake a systems upgrade. This will involve a shut down of all the ATO systems.

Many people might not have considered what impact this may have on them or their businesses.

Some things to think about are:

  • Refunds will not generally be able to be obtained during the shut down or for some time afterwards due to system back logs;
  • Taxpayers will not be able to ring the ATO to obtain information;
  • Although tax agents will still be able to lodge documents (such as returns, BASs, activity statements etc) none of these documents will be able to be processed.

Tip!If you are expecting to receive a refund from the ATO in the early part of next year, lodge your returns as early as possible otherwise you might have to join the queue when the ATO comes back on line!

Although the Government’s paid parental leave (PPL) scheme will not apply until 1 January 2011, employees should be aware of the scheme as eligibility may play a part in their future decisions.

The PPL scheme is designed to assist new parents of children born or adopted after 1 January 2011. An eligible person will receive PPL payments at the Federal minimum wage level (which is currently $543.78 per week) for a maximum period of 18 weeks.

To be eligible for the PPL scheme, a person must be in paid work and have:

  • Been engaged in work continuously for at least 10 of the 13 months prior to the expected birth or adoption of the child; and
  • Have undertaken at least 330 hours of paid work in the 10 month period.

The scheme will cover employees including casual employees, self employed persons and contractors.

The PPL scheme will be income tested. To be eligible the person’s adjusted taxable income in the previous financial year can not exceed $150,000.

As tax time approaches, it is time to think about whether your family trust is in order. A trust can make a family trust election provided it passes the family control test. A family trust election makes a trust a family trust for tax purposes.

Broadly, the family control test will be satisfied if the trust is controlled by the family of the person named in the election.

In this context, family includes (but is not limited to) spouses, parents, grandparents, siblings, children, nephews or nieces. In some circumstances, companies, partnerships and trusts can also be considered to be members of the family.

The benefits of making a family trust election may include:

  • Access to franking credits;
  • Ability to utilise prior year losses and bad debt deductions;
  • Simplification of the continuity of ownership test; and
  • Simpler trustee beneficiary reporting rules.

A family trust election is usually lodged with the trust’s income tax return in the year from which the election is to take effect. The election will then apply for all future years. However, in limited circumstances the election can be revoked.

Each year the Commissioner of Taxation releases an approved form which can be used to make the election. The election does not have to be made on the approved form. However, where it is not, it must contain all the information requested on that form.

DISCLAIMERTaxwise® 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.

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