Yearly Archives: 2015

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Newsletter: December 2015

Tax negotiation limited to known debt amounts

Two company taxpayers have been unsuccessful before the Federal Court in seeking to set aside statutory demands issued by the ATO.
The matter essentially involved two individuals who carried on property development activities through several entities (including the taxpayers) and their recollections of an alleged “global deal” with the ATO at a meeting on 10 April 2014 to resolve various debt recovery disputes – including security arrangements – while objections and appeals were on foot. The taxpayers contended that, after the meeting, the ATO sought demands that were contrary to the “deal” (this included a demand for a security in the amount of $8 million in relation to a related trust) and made “threats” to issue statutory demands. The statutory demands against the two taxpayers were issued in September 2014.
The Federal Court dismissed the taxpayers’ applications to set aside the statutory demands. The Court said it did not doubt that the individual representing the taxpayers held a “genuine subjective belief” that he and the ATO had entered into a binding legal agreement at the April 2014 meeting that went beyond the terms of the Deeds of Agreement, which were subsequently executed. However, it considered the representative’s subjective belief was not supported by either objective documentary evidence or by the evidence of the ATO representatives who attended the meeting, which it preferred. Among other things, the Court accepted the ATO’s evidence that the negotiations involved only “established debts” reflected in a spreadsheet that was used at the meeting and did not include further tax liabilities, including those of the trust.
TIP: The above case demonstrates that to avoid confusion among negotiating parties, particularly in relation to future treatment of liabilities, agreements as to arrangements and the terms must be reached and agreed to by the parties in a subsequent written Deed of Agreement.

 

CGT roll-over for small business restructures on the way

The Government has released exposure draft legislation that proposes to provide roll-over relief for small businesses that change their legal structure. The proposed measures were announced in the 2015–2016 Federal Budget, and will apply to the transfers of assets occurring on or after 1 July 2016. Public consultation closes on 4 December 2015.
The proposed measures will provide an optional roll-over where a small business entity transfers a business asset to another small business entity without changing the ultimate economic ownership of the asset. The roll-over can also apply to affiliates or entities connected with the small business entity for assets they hold that are used by the small business entity.
The roll-over will apply to gains and losses arising from the transfer of capital assets, depreciating assets, trading stock or revenue assets between entities as part of a small business restructure. Discretionary trusts may be able to access the roll-over if the assets continue to be held for the benefit of the same family group.
TIP: The proposed new roll-over is in addition to roll-overs currently available where a sole trader or partner in a partnership transfers assets to, or creates assets in, a company in the course of a business restructure. Note also that, with any proposed “tax relief”, the devil is in the detail. Please contact our office for further information.

 

ATO starts issuing “certainty” letters

The ATO has commenced contacting more than half a million individual taxpayers to let them know that their recently submitted tax returns “are shipshape and will not be subject to further review”. The ATO said people who receive one of its “certainty” letters (also known as “A-OK” letters) can be assured that the ATO is happy with their tax returns, and has closed its books permanently on their returns, providing there is no evidence of fraud or deliberate avoidance.
The letter is being trialled with a sample of people who meet certain criteria. This includes having broadly simple tax affairs, a taxable income of under $180,000, and a good lodgement and compliance history. Depending on the success of the trial, the ATO said it aims to expand the program to more taxpayers for Tax Time 2016.
TIP: Despite the aim to provide “certainty”, it remains to be seen how the letters will operate in practice, particularly if the Commissioner can change his position on the issued letter if taxpayers amend their 2015 tax return or if the Commissioner relies on the concept of fraud or evasion to invalidate the certainty letter.

 

Government rejects SMSF borrowing ban recommendation

Direct borrowings by superannuation funds via limited recourse borrowing arrangements (LRBAs) are safe (at least for the next three years), following the Government’s decision to reject the Murray Financial System Inquiry recommendation to ban or restrict LRBAs. This is welcome news for trustees of self-managed superannuation funds (SMSFs) who have faced uncertainty about the future of such borrowing arrangements, which have become popular for investments in direct property and shares.
In releasing its response, the Government said that it did not agree with the recommendation. While the Government noted there are “anecdotal concerns” about LRBAs, it said the data did not justify policy intervention at this time. However, the Government said it will commission a report on leverage and risk in three years’ time. According to the Government, this timing will allow recent improvements in ATO data collection to wash through the system. The report will be used to inform any consideration of whether changes to the borrowing rules might be appropriate at a future date.
TIP: Despite the Government’s “green light” for LRBAs, a decision to establish an SMSF and invest in property using an LRBA is not one to be taken lightly. It would be prudent to obtain professional tailored advice on any possible LRBA issues that should be considered before committing to purchase a property via an SMSF.
Car expenses and FBT concessions on entertainment
A Bill is currently before Parliament that introduces two important changes. Key details are as follows.
Work-related car expenses
The Bill proposes to repeal the “12% of original value method” and the “one-third of actual expenses method”. Taxpayers will continue to be able to choose to apply the “cents per kilometre method” (for up to 5,000 business kilometres travelled), or the “logbook method”, depending on which method in their view best captures the actual running costs of their vehicle.
The Bill also proposes to provide a streamlined process for calculating the “cents per kilometre method” by providing a single rate of deduction. That is, the current three rates based on vehicle engine capacity will be replaced with a single rate of deduction. In the 2015–2016 income year, the rate will be set at 66 cents/km. The changes are proposed to apply from 1 July 2015.
TIP: So the Government will set 66 cents/km as the rate for using the “cents per kilometre method”, irrespective of a car’s engine size. Based on 2012–2013 figures, this would see those who drive smaller vehicles getting a slight increase in deductible expenses, and those who drive larger cars having a decrease in their deduction.

 

FBT concessions on salary packaged entertainment benefits

 
The Bill proposes amendments to the law governing fringe benefits to introduce a separate grossed-up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses for certain employees of not-for-profit organisations, and all use of these salary sacrificed benefits will become reportable. The changes are proposed to apply from 1 April 2016.
TIP: Note that organisations affected include public and not-for-profit hospitals, public ambulance services, public benevolent institutions (except hospitals) and health promotion charities. It may be prudent to discuss with your adviser as to whether the above changes apply to your circumstances.

Amendments To The Personal Property Security Act (PPSA)

Amendments To The Personal Property Security Act (PPSA)

 
The Personal Property Securities Act 2009 (Cth) (PPSA) continues to evolve with interested parties needing to be aware of the implications of the changes.

The most recent change to the PPSA relates to leases or bailments of less than one (1) year duration for serial numbered goods. Serial numbered property includes motor vehicles, watercraft, aircraft, and some types of intellectual property. Short leases for these goods will no longer be considered a PPS lease and accordingly, these arrangements will no longer require a security interest to be registered on the PPSR.

The effect of this amendment is that, for these short term leases, proof of ownership will now be sufficient to enforce a leasor’s interest in the event of an insolvency event. Previously, anything less than a perfected security interest would have placed the leasor at risk of the asset vesting in an external administrator.

This is good news for the leasing industry, but care needs to be taken as all leases that extend past one (1) year or are of an indefinite term will still be subject to the PPSA and require registration to be secured.

A recent case in the Supreme Court of Victoria, Relux Commercial Pty Ltd (in Liquidation) v Doka Formwork Pty Ltd [2014] VSC 570, provides a reminder of the importance in complying with the requirements of the PPSA.

Pursuant to the PPSA, registration must occur within twenty (20) business days of the transaction under which the Security Interest was created. If the Security Interest is registered after this time, there is a risk that a liquidator or administrator may be able to enforce a claim on the asset/s if a relevant insolvency event occurs within the first 6 months of registration.

In the example case, the Liquidators of Relux were able to prove that Relux had an interest in assets leased from Doka that surpassed that of Doka as the owner. The Liquidators were able to make this claim, which has been upheld by the court, as Doka registered their Security Interest in the leased assets one (1) day after the twenty (20) day deadline. This resulted in an imperfect, and subsequently unenforceable, Security Interest.

Had Doka registered their Security Interest one day earlier, as required by the PPSA, they would have retained the title to their assets. Instead the Liquidator may now realise the assets for the benefit of Relux’s creditors.

Winding Up Applications And The ATO

Winding Up Applications And The ATO

 
Winding up applications initiated by the Australian Taxation Office (ATO):
The ATO’s activity on delinquent taxpayers is not a temporary measure. Winding up applications have continued in high numbers from May through to September 2015. It has been suggested that statutory demands, the precursor to a winding up application, are also being issued in historically high numbers.
 

 
As this increase in winding up applications is driven by a policy change – the reduction of the ATO’s threshold for pursuing debts from $300,000 to $30,000 – there is no reason to anticipate a change in the near future. So if the ATO has issued you with a statutory demand, or you are worried they may come knocking on your door soon, what are your options?
 

 
It is important to note that liquidation is not inevitable once a statutory demand has been received or a winding up application issued. Directors will have numerous opportunities to save their company – in fact many winding up applications that lead to liquidation do so simply because the application was uncontested.
 

 
To avoid liquidation, promptly responding to statutory demands before they escalate to a winding up application is the best course of action. If this is not possible, Directors still have various options to mitigate the risk of liquidation, but they must be implemented prior to the winding up hearing.
 

 
Some of these options are:

  • Appointing a Voluntary Administrator, with a view to proposing a Deed of Company Arrangement;
  • Negotiating a settlement of the debt;
  • Entering into an instalment arrangement so that the debt can be repaid in instalments over time;
  • Getting all statutory lodgements up-to-date to ensure the amount being claimed is correct; or
  • Challenging the winding-up application.

 

 
If you are concerned about the ATO pursuing any outstanding taxes owed by you, you should review the above list and consider what may suit your situation best.
 

 
Many of these options will require professional advice to implement, generally that of your existing adviser or lawyer. However, if it is decided that a Voluntary Administration is your best option, you will need to discuss this with an insolvency practitioner.

Newsletter: November 2015

Unbundling phone and internet expense claims for work purposes

Individuals can claim deductions for mobile, home phone and internet expenses that have been incurred for work purposes. However, correct apportionment for work use is a key issue. According to the ATO, as there are many different types of plans available, taxpayers need to determine their work use using a reasonable basis.
For example, phone and internet services are often bundled. When a taxpayer is claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. If other household members also use the services, the taxpayer needs to take into account that use in their calculations.
TIP: If the taxpayer has a bundled plan, the ATO says they can identify their work use for each service over a four-week representative period during the income year. This will allow the taxpayer to determine their pattern of work use, which can then be applied to the full year. Please contact our office for assistance.

 

Student loan debt recovery from overseas

As part of the 2015 Federal Budget, the Government announced that Australians living and working overseas who have a Higher Education Loan Program (HELP) or Trade Support Loan (TSL) debt would soon be required to repay that debt in line with the obligations that apply for debtors who live and work in Australia.
The repayment obligations are expected to apply from 1 July 2017, based on income earned in the 2016–2017 financial year. The repayment obligations would only commence once the individual’s income reached the minimum repayment threshold. People heading overseas for more than six months would be required to register with the ATO, while those already overseas would have until 1 July 2017 to register.
TIP: The Government is intending to facilitate reciprocal arrangements with foreign governments. That is, the Government intends to share details of individuals to allow foreign governments to identify if their citizens with student loan debts are living and working here in Australia. At this stage New Zealand and the UK have been flagged for reciprocal arrangements.
TIP: Individuals can make voluntary repayments at any time to reduce their HELP debts. Currently, if you make a voluntary HELP repayment of $500 or more, you get a 5% bonus. If your HELP debt balance is less than $500 and you make a voluntary repayment to pay out the debt, you also get a 5% bonus. Voluntary payments are in addition to compulsory repayments. Any voluntary repayments you make are not tax deductible.

 

SMSF trustees warned to plan for cognitive decline

The ATO has highlighted the issue of cognitive decline, noting that dementia is on the rise and that it is important for trustees of self managed super funds (SMSFs) to have plans to ensure that financial matters will be effectively managed, if and when trustees no longer have the capacity to manage their funds.
“SMSFs are in reality usually managed by one trustee and require a high level of financial decision-making. While many trustees remain perfectly capable of effectively managing their financial affairs well past retirement age, there is a risk that some with diminished capacity to effectively manage their fund may nevertheless continue to do so. Most don’t have a plan for what to do if they get to this point”, said Kasey Macfarlane, ATO Assistant Commissioner, SMSF Segment, Superannuation.
In this regard, Ms Macfarlane said, it was essential that trustees “agree in advance about decision points and exit decisions, to have a will and appoint an enduring guardian and power of attorney”.

 

Tax debt release application refused

The Administrative Appeals Tribunal (AAT) has refused a couple’s application to be released from their tax debts after finding the couple (the taxpayers) would not suffer serious hardship if they were required to satisfy the liability. The tax debt the taxpayers sought to have released amounted to some $25,000. The taxpayers argued they should be released from the tax debts because their financial position was due to “serious family difficulties and problems”, which had distracted them from their tax affairs.
Although the AAT was sympathetic towards to the taxpayers, it concluded they had not discharged the onus of proving that they would suffer serious hardship if they were required to pay the relevant tax debts. The AAT reached this conclusion after calculating the taypayers’ fortnightly income and expenses. In this regard, the AAT noted the taxpayers were making more than the required minimum mortgage repayments and could draw down on their home loan.
Even if it were a case of serious hardship, the AAT said, it would not exercise the discretion to waive the debt. Among other things, the AAT noted that one of the taxpayers was a beneficiary in the estate of her mother and stood to receive approximately $200,000.
TIP: Serious hardship exists when payment of a tax debt would leave you unable to provide for basic living necessities for yourself and dependants. The Tax Commissioner has the discretion to release you from eligible tax debts; however, even if the Commissioner is satisfied that serious hardship would result from payment of the tax debt, he is not obliged to exercise the discretion in your favour.

 

Retiring partner’s individual interest in net income of partnership

According to a recent ATO Taxation Determination, where a retiring partner receives an amount representing his or her individual interest in the partnership net income, that amount is assessable under section 92 of the Income Tax Assessment
Act 1936. This is the case even if the partner retires before the end of the income year or the payment is received in a subsequent income year. Furthermore, the way the payment is labelled or described will not change the ATO’s conclusion that the receipt represents the partner’s share of partnership net income and needs to be brought to account under section 92.

The ATO notes that a partner’s individual interest in the net income of a partnership is essentially a question of fact in each case, to be determined by reference to the partnership agreement, the partnership’s accounting records and any other relevant documents. The ATO notes that its approach in the Determination is a departure from several private rulings, in which it took such receipts into account under the capital gains tax (CGT) rules. The ATO says that an amount representing an individual interest in partnership net income may also represent capital proceeds from a CGT event; however, any capital gain that would otherwise arise is reduced to the extent that it is assessable under other provisions.
TIP: The Taxation Determination applies to assessments made after 3 June 2015. The ATO says it will not seek to disturb favourable assessments made before that date.

 

ATO targeting ride-sourcing drivers and eBay online sellers

 
The ATO has announced that it will acquiring details of ride-sourcing drivers from ride-sourcing facilitators. The data will be matched electronically with ATO data holdings to identify people. The ATO said the aim of the data-match is to identify taxpayers that can be provided with tailored information to help them meet their tax obligations, or to ensure their compliance with the tax law. The ATO estimated that records relating to between 10,000 and 15,000 individuals will be matched.
TIP: The ATO has affirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The ATO has previously advised that it expects all drivers involved in providing ride-sourcing services to be registered for goods and services tax (GST). Please contact our office for information and assistance.
The ATO is also acquiring online selling data from eBay relating to registrants who sold goods and services to a value of $10,000 or more during the period 1 July 2014 to 30 June 2015. The data requested includes information that will enable the ATO to match online selling accounts to taxpayers, including names, addresses and contact information, as well as information on the number and value of transactions processed for each online selling account. It is estimated that records relating to between 15,000 and 25,000 individuals will be matched.

Newsletter: October 2015

Excessive deduction claims on holiday homes on ATO hit list

The ATO is increasing its focus on holiday home investors and, in particular, whether they are correctly claiming deductible expenses. A key concern is when people make claims for expenses when the property was not available for rent. The ATO has recently advised that it will be sending letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home was rented out or was genuinely available for rent.
TIP: Holiday home investors should be aware that the ATO appears to be taking a broad approach in monitoring rental deductions. Where relevant, it may be prudent for holiday home investors to take this opportunity to review the rules surrounding holiday home tax deductions to ensure that any risks or issues are addressed in a timely manner. It may also be a good idea to review records now so that you are prepared should the taxman come knocking. If you have any questions about this issue, please contact our office.

 

Foreign property investors – reduced penalty period ending

The ATO has reminded foreign investors that the reduced penalty period for possible breaches of Australia’s foreign investment rules for purchases of Australian real estate will close soon. The reduced penalty period is only available until 30 November 2015. From 1 December 2015, new criminal and civil penalties will apply. The ATO said if foreign investors disclose a breach of the rules for residential real estate purchases during the reduced penalty period, depending upon their circumstances, they may:

 

 

  • be given a concessional period of 12 months to divest themselves of the property, rather than a shorter period;
  • not be referred for criminal prosecution.

 

Payroll tax grouping – know the rules

For payroll tax purposes, businesses may be grouped with other businesses if there is a link between the companies. Businesses may be deemed linked in several ways. One of the most common ways is where two or more businesses are controlled by the same person or persons. However, there are specific exclusions under the payroll tax grouping rules which could apply for a business depending on the circumstances. This will require making an application to the relevant state or territory revenue authority.
When a group exists, only a single tax-free threshold will apply to the whole group. That is, the separate businesses themselves will not each have the benefit of the tax-free thresholds. Each member of the group will be liable for any outstanding payroll tax of the other group members. Therefore, it is important for businesses to identify whether they could be grouped for payroll tax purposes.
TIP: The potential eligibility for exclusion from the payroll tax grouping rules should be assessed. Furthermore, as business conditions may change and as part of the overall management of a business, it may be prudent to regularly examine your business’s payroll tax obligations.

 

No GST credits for mining accommodation

The Full Federal Court has dismissed a taxpayer’s appeal from an earlier decision which held it was not entitled to input tax credits for acquisitions relating to providing accommodation to employees and contractors working in the Pilbara.
The taxpayer, Rio Tinto Services Ltd, was the representative member of the Rio Tinto Ltd GST group, which carried on a large-scale mining enterprise in outback Australia. The group provided and maintained residential accommodation for its workforce in various locations, comprising some 2,300 houses and apartments. This was operated at a considerable loss, for example, in 2010 the taxpayer received $6.1 million in rent but the associated costs exceeded $38.8 million.
The case was conducted as a test case for GST paid in October 2010 on expenditure including construction and purchase of new housing, repairs, cleaning and landscaping. The taxpayer claimed it was entitled to input tax credits of nearly $600,000 for acquisitions made in providing and maintaining residential accommodation for the group’s workforce in the Pilbara region. It argued the housing for its workers were a necessary part of its mining operations.
The Full Federal Court said it was clear from the facts that all of the acquisitions related wholly to making supplies of rental residential accommodation. Although the supplies of accommodation were for the broader business purpose of carrying on the taxpayer’s mining operations, it said this did not alter the fact that the acquisitions all related to supplying premises by way of lease, which were input taxed supplies.

 

ATO’s proportionate compliance approach to SMSFs

From 1 July 2014 the ATO has three new regulatory compliance powers to deter and address contraventions of the superannuation law by trustees of self-managed super funds (SMSFs). These three new powers include the ability of the ATO to issue education directions, rectification directions and administrative penalties. The new laws were introduced to give the ATO more flexible and proportionate powers to deal with the various levels of noncompliant behaviour by trustees.
It is important for trustees to understand the ATO’s compliance approach to administrating the SMSF sector. A key message that the ATO has been communicating to all trustees is for them to rectify a breach as soon as it is identified. According to ATO Assistant Commissioner, SMSF Segment, Superannuation, Kasey Macfarlane, in these circumstances, the ATO would be “unlikely to apply further sanctions unless other factors are identified, such as if the same or similar contraventions frequently arose”.
Ms Macfarlane said the ATO uses “the new powers and penalties to drive compliance, not to increase revenue”. “So while you can expect to see us actively using the directions powers, in a large percentage of cases our application of SMSF administrative penalties will be more judicious, via favourable remission requests, for first offences,” she said.

 

Find your small lost superannuation accounts

A Bill has been introduced into Parliament which contains legislative amendments to increase the account balance threshold below which small lost member accounts will be required to be transferred to the Commissioner of Taxation, ie from $2,000 to $4,000 from 31 December 2015, and from $4,000 to $6,000 from 31 December 2016.
TIPS:

  • Moving all your super from multiple accounts into one account (known as “consolidating your super”) might help you to save on fees and make managing your super easier.
  • There may be sound reasons for maintaining a separate small superannuation account. It may be prudent to assess those reasons and, if those reasons are still valid, to take steps to ensure that you remain an active fund member.
  • Individuals are able to claim back their superannuation from the Commissioner at any time. Interest, calculated in accordance with the Consumer Price Index (CPI), has been payable on unclaimed superannuation money repaid since 1 July 2013.
  • Please contact us for further information.

BUSINESS OWNERS MOVING TO RETIREMENT

Many thousands of small and medium businesses are expected on the market in the next ten years as the Baby Boomer and Builder generations prepare their businesses for sale.

 

Survey of Business Owners
The result of a recent survey indicated Seventy-Five percent of business owners surveyed intend to sell their business over the next ten years.

 

Applying these statistics to the current number of businesses in this sector across Australia (those with between 3 and 200 employees) expect to see in excess of 300,000 businesses on the market within this ten year period.

 

The Pool of Buyers
With the volume of businesses on the market, vendors are expected to outweigh purchasers.

 

Demographics play a major role. A trade sale is the most popular exit option with many business owners believing their business will be bought by a competitor. However, with 77% of business owners aged 51 and above, there’s a likelihood that these competitors are also seeking an exit.

 

This begs the question; where are the purchasers? In the current financing environment, banks and other lenders require substantial collateral to secure a loan. This is a luxury that many in the younger generations do not have.

 

The end result is expected to be downward pressure on price; unwelcome news for business owners who have worked in their business since inception.

 

Prepare your Business for Sale
Business owners’ often only seek advice when they are actually ready to sell. While it’s possible to prepare the business for sale quickly, it can often lead to a band-aid approach to issues rather than a structured process that adds value and makes the business an attractive investment.

 

If you’re looking to exit your business, it’s critical that you plan early and obtain comprehensive advice. In doing so, you’ll be better able to position the business to attract buyers and gain maximum value.

Newsletter: September 2015

Small business tax discount on the way

In a surprise – but welcome – move in the 2015 Federal Budget, the Government announced a small business tax discount. The Government said that, with effect from 1 July 2015, individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset through the individual’s end-of-year tax return.
Example: A person running a business as a sole trader has an annual turnover of $300,000 and taxable income of $75,000. Under the current law, the business would pay tax, at the owner’s marginal tax rate, of around $16,000 in total. Under the proposed new law, the $16,000 tax bill on the business income would be reduced by 5%, or $800. While there is no change in the owner’s tax rate, under the new law the owner would pay only $15,200 tax.
Legislation to implement the small business tax discount is currently awaiting formal enactment.

 

Ride-sharing provider challenges ATO’s GST view

Uber BV has lodged an application in the Federal Court to challenge the ATO’s view on GST in relation to ride-sharing drivers.
In May 2015, the ATO released information on its website providing its view of the tax obligations of people providing services in the sharing economy.
The ATO was of the view that people who provide ride-sourcing (or ride-sharing) services were providing “taxi travel” under the GST law, and were therefore required to register for GST regardless of turnover, charge GST on full fare amounts, lodge BASs and report income in their tax returns. The ATO had given ride-sourcing drivers until 1 August 2015 to obtain their ABN and be registered for GST.
However, in a company statement, Uber argued that the ATO’s position unfairly targets Uber’s driver-partners. In the meantime, the ATO has maintained its view that people who provide ride-sourcing services are providing “taxi travel” under the GST law, and that it expects all ride-sourcing drivers to be registered for GST.
TIP: According to the ATO, although ride-sourcing drivers need to account for the GST on full fare amounts, they can also claim GST credits for relevant business expenses. The ATO says drivers must report income earned from providing ride-sourcing services; however, they can also claim deductible business costs. Please contact our office for assistance.

 

Crowdfunding for small proprietary companies: consultation

Crowd-sourced equity funding (or equity crowdfunding) is an innovative form of fundraising that allows a large number of individuals to make small equity investments in a company.
The Government is looking at ways to facilitate equity crowdfunding and has released details of its proposed regulatory framework for public companies. However, a key part of the Government’s public consultation is to also examine whether its proposed regulatory framework for public companies should be extended to proprietary companies.
The Government notes that proprietary companies are subject to limitations under the Corporations law on the way they can raise funds. These limitations make it difficult for proprietary companies to effectively use equity crowdfunding to raise funds from a large number of small shareholders. Accordingly, the Government is seeking views on way it could amend the law to make capital raisings by small proprietary companies more flexible. Public consultation closes on 31 August 2015.

 

SMSFs in pension phase need to exercise care

The ATO is of the view that most trustees of self managed super funds (SMSFs) do the right thing. However, it has identified a number of issues concerning SMSFs in pension phase, noting the growing number of people expected to receive a pension in the next 10 years.
The following gives a snapshot of some key issues identified by the ATO:

 

 

  • Setting up and starting a pension: In the pension establishment phase, a fundamental and critical question that should not be overlooked is whether the member has reached preservation age. The ATO has reminded trustees that the legislated rise in the preservation age came into effect from 1 July 2015 – this affects people born after 30 June 1960.
  • Paying a pension: One of the most common reasons for an SMSF in the pension phase not being entitled to applicable income tax exemptions under the exempt current pension income (ECPI) provisions is that the trustee has failed to pay the required annual minimum pension amount to a member.
  • Ceasing a pension: The ATO is starting to see a range of issues related to what happens in the unexpected event of a pensioner’s death. For example, is the nominated reversionary beneficiary entitled to receive a death benefit pension under the terms of the SMSF’s deed and the law?

TIP: The ATO is starting to see liquidity problems associated with real property exacerbated for SMSFs in pension phase where the asset has been acquired under a limited recourse borrowing arrangement (LRBA). As the income of the SMSF is diverted to meeting the loan obligations of the fund, the ATO has found there can be insufficient funds remaining to make the required pension payments. There is also an added level of complexity to LRBAs involving related parties where the trustees fall foul of the arm’s-length rules in an effort to try to overcome their liquidity issues. If you have any concerns, please contact our office for further information.

 

ATO data-matching: immigration visa holders

 
The ATO has announced that it will acquire names, addresses and other details of visa holders, their sponsors and migration agents for the 2013–2014, 2014–2015, 2015–2016 and 2016–2017 financial years from the Department of Immigration and Border Protection (DIBP). The purpose of the data-matching program is to ensure that taxpayers are correctly meeting their taxation obligations. It is estimated that records relating to one million individuals will be obtained.

 
The ATO has been data-matching visa data from the DIBP (and its predecessors) against ATO data holdings for a number of years. The ATO said this electronic data-matching has been very effective in assisting to mitigate compliance risks. According to the ATO, empirical evidence from earlier data-matching programs has confirmed an elevated level of risk within the subset of taxpayers who are first-time lodgers with DIBP links.

BUSINESS STRATEGY PLANNING. WORTH THE EFFORT?

Consider:
Take the time to review your business strategy as a whole and use a financial budget as a tool to reflect and manage that strategy.

 

The absence of a business strategy or failure to follow the strategy is an important issue which hampers a business achieving its potential in the SME market.

 

Each business will have its own unique considerations driven by its Industry, market position and stage in its lifecycle. There are a few common issues that all businesses should consider:

 

 

  • Value drivers – What are the key value drivers of the business and how effectively are they being managed?

 

  • Customers and clients – What does your client base look like, and how can you increase profitability and retention? This might involve reviewing your client list by fees, repeated work and loyalty, profitability, credit rating etc. and considering how well your customers are aligned with your strategy.

 

  • Employees – Now is the time to review key employees’ performance and remuneration. The new Employee Share Scheme rules proposed in the latest Federal Budget may present an opportunity to develop a more attractive incentive programme.

 

  • Market trends – Analyse current market trends and consider possible issues that may affect your business in the coming year.

 

  • Competitors – What are your key competitors doing? How will this affect your market position? It is important to also consider emerging competitors as new technologies allow start-ups and significantly smaller business to “act big”.

 

  • Marketing & Advertising – Often the first to go when budgets are tight, it’s important to review your marketing strategy to ensure that resources and investment are aligned with your business objectives.

 

  • Products/Services – When was the last time you viewed your offering from a client’s perspective? Are there any complementary services or products you can or should be providing? What is the market life of your service or product?

 

 

Carefully considering these issues as a starting point will allow not only for a clearer business strategy but a far more meaningful budget. The budget becomes a true reflection of where the business is heading and its performance.

Newsletter: August 2015

Work-related and rental property claims on ATO’s watch list

Tax time is in full swing and the ATO has highlighted areas of concern for individuals ahead of tax return lodgment time. High on the ATO’s watch list is work-related expense claims that are significantly higher than expected. In particular, the ATO will be paying particular attention to claims that have already been reimbursed by employers and expenses that are, in fact, private. These items are not deductible.
TIP: You are entitled to claim deductions for some expenses that are directly related to earning your income. The expenses must not be private, domestic or capital in nature. If the expense is both private and work-related, you can claim a deduction for the work-related portion.
The ATO will also keep a keen eye on rental property deductions. The ATO will be playing close attention to:
• excessive deductions claimed for holiday homes;
• husbands and wives splitting rental income and deductions inappropriately for jointly owned properties;
• claims for repairs and maintenance shortly after the property was purchased; and
• interest deductions claimed for the private proportion of loans.
TIP: You can claim expenses relating to your rental property but only for the period your property was rented or available for rent (eg advertised for rent). If part of your property is used to earn rent, you can claim expenses relating to that part of the property. You will need to work out a reasonable basis to apportion the claim. Please contact our office for assistance.

 

Share-economy service providers need to assess tax implications

New internet and mobile technologies have allowed people to consider enterprises such as letting a spare room, letting a car space, doing odd jobs or other activities for payment, or driving passengers in a car for a fare. However, the ATO has warned that individuals providing such share-economy services may have tax obligations, which may include declaring income and registering for GST.
TIP: It may be prudent for all share-economy service providers to assess whether they are meeting their tax obligations. Please contact our office for assistance.
The ATO has also confirmed that people who provide ride-sharing services are providing “taxi travel” under the GST law. It said the existing tax law applies and therefore drivers are required to register for GST regardless of their turnover. Affected drivers must also charge GST on the full fare, lodge BASs and report the income in their tax returns.
TIP: Recognising that some taxpayers may need to take corrective actions, the ATO is allowing drivers until 1 August 2015 to obtain an ABN and register for GST. The ATO said it does not intend to apply compliance resources regarding GST obligations for drivers prior to 1 August 2015 – except if there is evidence of fraud, or other significant matters.

 

Franked distributions funded by capital-raising under scrutiny

The ATO has cautioned companies about raising capital to fund franked distributions. The ATO is reviewing arrangements where companies raise new capital to fund franked distributions and release accumulated franking credits to shareholders.
In a typical case, the ATO is seeing companies issue rights to shareholders and use funds raised to make franked distributions via special dividends or an off-market share buy-back. The ATO said these arrangements are distinct from ordinary dividend reinvestment plans involving regular dividends.
ATO Deputy Commissioner Tim Dyce said the distributions are unusually large compared to ordinary dividends and occur at a similar time, and in a similar amount, to the capital raised. “So, a potentially large amount of franking credits is released with minimal net changes to the company’s economic position. There is also minimal impact on the shareholders, except in some cases they may receive refunds of franking credits and in the case of buy-backs they may also get improved capital gains tax outcomes,” he added.
The ATO considers that the arrangements may not be compliant with the tax law. In particular, the ATO has warned of the potential application of the general anti-avoidance rules. It has also warned that penalties may apply to participants.

 

“Contrived” dividend arrangements used by SMSFs flagged by ATO

The ATO is investigating arrangements where a private company with accumulated profits channels franked dividends to a self-managed super fund (SMSF) instead of to the company’s original shareholders. As a result, the original shareholders escape tax on the dividends and the original shareholders (or individuals associated with the original shareholders) benefit as members of the SMSF from franking credit refunds to the SMSF.
The ATO was concerned that contrived arrangements are being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flow to, and are purportedly treated as exempt from income tax, in the SMSF because the relevant shares are supporting pensions. The ATO also warned the arrangement has features of dividend stripping which could lead the ATO to cancel any tax benefit for the transferring shareholder and/or deny the SMSF the franking credit tax offset.

 

Lump sum finalisation payment taxable

An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT) in a matter concerning the tax treatment of a lump sum finalisation payment. The Tax Commissioner considered the payment was assessable as ordinary income. The taxpayer disagreed.
In 1995, the individual was diagnosed with a number of illnesses and was deemed unfit for work. She was paid monthly benefits under her employer’s salary continuance policy, which she declared as assessable income. When that scheme discontinued, she commenced participation in a government scheme which continued the monthly payments. In 2008, she was informed that the Commonwealth intended to finalise its obligations and pay a final lump sum in July 2008. Under a deed of release, the scheme made a final payment of just over $2 million to the taxpayer, less an amount of $931,119.40 (being tax withheld and remitted to the ATO).
The AAT concluded the final payment was “income according to ordinary concepts” under the tax law. It was therefore assessable income to be taken into account in assessing the taxpayer’s taxation liabilities for the year ended 30 June 2009.

 

“Nomad” had continuity of association with Australia

 
An individual has been unsuccessful before the AAT in arguing that he had “let go” of Australia in 1999 to pursue his “nomadic” working life abroad and that his base of operations was in the United Kingdom.

 
The taxpayer was born in the United Kingdom, and worked as a diver and diving supervisor for overseas companies at many places around the world.

 
However, the AAT held he was a resident of Australia for the 2006 to 2011 income years for tax purposes. The AAT noted that the taxpayer’s physical, emotional and financial ties to Australia in those years were very strong. In particular, he jointly owned a home in Australia with his wife of over 23 years and his emotional ties to her were “clearly the most significant in his life”.

 
The AAT also held the taxpayer did not satisfy the rules to have his foreign sourced income treated as exempt income, nor was he entitled to any foreign tax offset as he had not produce evidence of any foreign tax paid on his overseas earnings.

 
The AAT therefore affirmed amended tax assessments which increased the taxpayer’s tax liability by around $300,000 for the relevant income years.

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

Issue of Shared Residency

Facts
Mr Shard worked overseas as an oilfield diver or supervisor on offshore platforms, barges and other vessels and derived income from foreign sources for that work.

 

From 1999 to August 2010, he worked various foreign companies overseas. He lodged an income tax return for 1999 in which he identified himself as a ‘non-resident’. He did not lodge income tax returns for 2000 to 2011.

 

In July 2011 he began working for an Australian company in Australia and applied for a TFN identifying himself as a resident.

 

In November 2011 he was sent a reminder to lodge his returns for 2000 to 2011, and was apparently advised of a review. He was sent a questionnaire in December 2011 that he returned in February 2012.

 

In the questionnaire he set out that he did not consider himself a resident between 2000 and 2011 as he had received a 1999 notice of assessment issued by a Deputy Commissioner which as additional information stated ‘ You have been deemed to be a non-resident of Australia for income tax purposes – no tax-free threshold is available to non-residents. If your residency status has changed, please read the information on residency in TaxPack.’ In addition to this, Mr Shard stated to the AAT that he had received written advice from a tax officer in 1998 that he was a non-resident for tax purposes. He was unable to provide evidence of this advice in the AAT and some of his evidence on this point was contradictory.

 

In the questionnaire he said that he considered his permanent home to be the UK, where he and his parents were born. He owned a house in Australia that his spouse lives in that he acquired in 1999, as well as a rental property that he acquired in 1991.

 

Mr Shard had married his current Australian wife in 1992 and he has been an Australian citizen since 2004.

 

When in Australia he resided at the property he owned with his wife. All his pay from his overseas employment was banked into his Australian home loan account. Mr Shard was able to provide no evidence of a home being maintained overseas, though he had some mail sent to UK addresses, being properties where he stayed while in the UK visiting family.

 

In October 2012 the ATO asked Mr Shard to lodge returns for 2006 – 2011 and while still under audit he did, but as a non-resident. The ATO in May 2013 issued amended assessments treating him as a resident. The tax, penalties and interest resulting from the amended assessments amounted to approximately $300,000. Penalties were imposed at the level of 50%.

 

 

Issues

 

Amongst the issues considered by the Tribunal were:

 

  1. Was he a resident of Australia according to ordinary concepts, and if no,
  2. Was his home in Australia, and if so, did he have a permanent place of residence overseas?
  3. Should the penalties and interest be remitted?

 

 

Decision

 

The Tribunal had little difficulty, given Mr Shard’s pattern of movements between 2005 and 2009 and in particular in 2010 and 2011 in treating him as a resident according to ordinary concepts. The Tribunal appears to have taken into account the fact that he had no offshore assets, that he transferred all of his employment income to Australia, that on outgoing passenger cards on trips to the UK he said he was going on ‘holiday’ (as opposed to back to a home there), outgoing and incoming passenger cards where he said he was a resident, that he maintained health insurance in Australia, and that he had a 23 year relationship with his wife, who he lived with when in Australia.

 

He was said to have maintained a ‘continuity of association’ with Australia throughout the relevant period and Mr Shard had claimed to have ‘let go’ of Australia in 1999, the relevant facts and evidence proved otherwise: Hafza v Director-General of Social Secur ty [1985] FCA 164.

 

The AAT also considered that Australia was Mr Shard’s ‘home of choice’ throughout the relevant period. He did not prove that any other home replaced Australia as his ‘home of choice’ at any time in the relevant period. With Australia as his home he could still be a non-resident if he had a permanent place of residence outside of Australia, but none of his places of work represented such a permanent place of residence, nor did the places he stayed while in the UK, on the balance of probabilities.

 

In relation to penalties the AAT was not satisfied that Mr Shard ever received advice from the ATO in 1998 that he was a non-resident, but that even if he had, it was reckless to rely on this advice some 8 to 13 years later and the penalties were maintained at their 50% level.

 

Citation Re Shard and FCT [2015] AATA 355 (Senior Member CR Walsh, Perth)
w http://www.austlii.edu.au/au/caseslcth/AATA/2015/355.html