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Tax Newsletter September 2012
August 30, 2012 | 
Author Company tax rate cut comes with compromises
The Government’s Business Tax Working Group has recently released a discussion paper highlighting a number of possible ways in which a company tax rate cut could be funded from within the business tax system.
According to the Working Group, a comprehensive tax base that contains minimal special exemptions and deductions for certain investments can result in a more productive mix of different investment options and a broader tax base that will generate greater revenue to fund a lower company tax rate. Public consultation closes on 21 September 2012.
ATO compliance activities
The ATO has highlighted a number of areas that it will focus on in its compliance activities this year. This includes:
- incorrect claims for work-related expenses. In particular, the ATO says it will focus on claims made by plumbers, IT managers and defence force personnel. Taxpayers must keep written records for all their work-related expenses if their claims total more than $300;
- unrecorded and unreported cash transactions in the café and plastering industries. Note, the ATO is stepping up its use of third party information, such as information from suppliers, to identify under-reporting of income;
- incorrectly treating employees as contractors, particularly in the construction industry. In addition, the ATO notes that from 1 July 2012, businesses that make payments to contractors in the building and construction industry are required to report the payments to the ATO each year;
- treatment of private company profits, particularly in relation to loan arrangements; and
- superannuation obligations of employers, with a focus on cafés and restaurants, real estate businesses and carpentry businesses in home building or construction.
TIP: The ATO’s main tool for detecting non-compliance is matching information reported to it by taxpayers and third parties, such as financial institutions both in Australia and overseas. The ATO says its matching capabilities have grown strongly over the years. This financial year, the ATO expects to match over 600 million transactions.
ATO small business benchmarks
The ATO has been publishing small business benchmarks since 2009 as part of its strategy to help small businesses to compare their performances against similar businesses. The benchmarks are also used by the ATO to identify taxpayers who may be under-declaring income.
The Commissioner of Taxation, Michael D’Ascenzo, recently said that approximately 90% of small businesses in benchmarked industries fall within a benchmark ratio. However, he said around 76,000 businesses have reported income that is significantly below those benchmarks. To address this issue, Mr D’Ascenzo said the ATO wrote to around 30,000 small businesses regarding the benchmarks in 2010–2011. He said around 17% (or over 5,000) of the businesses have since started reporting income commensurate with the benchmarks, thereby lowering their risk profile with the ATO.
TIP: According to the ATO, the benchmarks may also prompt taxpayers to consider whether they have forgotten to claim any relevant deductions if they report significantly more net income than their industry peers. Please contact our office if you have further questions.
TIP: There are currently benchmarks covering over 100 industries including: accommodation and food services; building and construction trade services; education, training, recreation and support services; health care and personal services; manufacturing; professional, scientific and technical services; retail trade; and transport, postal and warehousing.
ATO alert on “dividend access share arrangements”
The ATO has warned taxpayers about arrangements where accumulated profits of a private company are distributed substantially tax-free to an entity associated with the ordinary shareholders of the private company.
The ATO says the dividends are generally distributed on a new class of shares that the private company has created and issued to the associated entity for nominal consideration. In addition, it says the dividends will often be fully franked such that the associated entity will bear little or no additional income tax.
The Commissioner said the ATO is concerned the arrangements are set up with the dominant purpose of avoiding tax. “While some arrangements may be claimed to be done for commercial and other non-tax purposes, we will be closely examining whether the way these arrangements have been set up would show a tax avoidance purpose,” said Mr D’Ascenzo.
Taxpayer fails to prove bank deposits were loans
The Commissioner has been successful before the Federal Court in overturning an earlier decision that had held that around $4.7 million deposited into a taxpayer’s bank account from an overseas bank were loans and that payments made in respect of the loans were deductible interest.
The taxpayer’s financial statements for the 1997 to 2008 income years recorded a loan liability to an overseas bank and substantial related interest expenses. The Commissioner argued that the asserted loan liability related to funds that the taxpayer received as assessable, and that none of the asserted interest payments were deductible.
In allowing the Commissioner’s appeal, the Federal Court held that the Administrative Appeals Tribunal (AAT) had made an error in finding that the taxpayer had discharged the onus of proving that the amounts were not income. The taxpayer is seeking to appeal to the Full Federal Court against the decision.
Amended assessment issued four years later was within time
In a recent decision, the AAT found a taxpayer was at all relevant times a beneficiary of a trust estate and that an amended assessment issued in April 2010 for the 2005 tax year was issued within time – that is, the Commissioner was allowed, in this instance, up to four years to issue an amended assessment. The amended assessment included an additional amount of $2.1 million.
The taxpayer lodged his 2005 tax return in April 2006, disclosing nil distributions from a family trust. He argued that as he had received no distributions in relation to the 2005 tax year, he was not a beneficiary of the trust estate at any time in that year and that the Commissioner therefore only had the standard two years to issue an amended assessment. However, the AAT disagreed and found that the amended assessment made within four years was within time.
Illegal early super release promoters to face penalties
The Government has announced that it will introduce penalties to deter promoters of illegal early release superannuation schemes. These schemes usually involve a promoter offering to assist individuals to gain early access to their super before they retire.
The Minister of Superannuation, Bill Shorten, said promoters of such schemes have in the past targeted vulnerable people, including those from non-English speaking backgrounds. He said promoters have taken fees of up to 50% of the members’ superannuation balances.
Mr Shorten said legislation to give effect to this measure is being progressed and will commence on formal enactment.
TIP: Early release of super is not always illegal. There are very limited circumstances in which members can legally access their super savings early, such as on compassionate grounds or where members experience severe financial hardship. There are very strict conditions to be met, and they include some restrictions.
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Property Newsletter – August 2012
The WA Investor’s Guide to the Latest Census Data
What does the latest census tell us about growth in WA and how the state has performed compared to the rest of the country? Are the foundations set for future price growth?
The first round of data has recently been released from the 2011 census and we now better understand who we are, how we have changed since the last census in 2006 and how we compare to the rest of the country. For property investors focused on the WA market, the figures make very interesting reading.
Most property investors understand the importance of population growth for driving the demand for housing, and, in this area, WA is in a league of its own. The resident population of WA is now 2,239,169 – up from 1,959,086 in 2006. This is an increase of 14.3 per cent, the same growth recorded for the Perth metropolitan area.
The rate of WA’s population growth is particularly large when you consider that it seems to be accelerating. After growth of 2.1 per cent in 2010, the 2011 calendar year saw the population grow by a whopping 2.9 per cent. This is more than twice the national average of 1.4 per cent and miles ahead of Queensland (1.5 per cent), another resource-rich state. What’s incredible is that despite Queensland having a population almost twice that of WA, our population increased by more people – the first time in history this has happened.
In fact, of the 20 fastest growing local government areas (with more than 1,000 people) in Australia, 17 of them are in WA including 9 out of the top 10!
The major areas of population growth are concentrated on the fringes of the city and rural areas of Western Australia, where there is plenty of land to develop. According to the latest census data, the local government area with the biggest growth in WA is the City of Wanneroo, which has seen an increase of 41,136 people or 37.1 per cent.
Property investors should be aware that while population growth is important for capital growth, population hotspots don’t necessarily make good investment candidates. The reason is that these areas tend to have a ready supply of available land, which has the effect of containing prices. We almost always invest in established areas of Perth for our clients that have a very limited potential supply of new properties.
Along with our incredible population growth, rents have also soared in WA. Over the past five years, the median weekly rent has increased to $300 from $170 in 2006, a jump of 76.5 per cent. Compare this to the national growth of 49.2 per cent and it gives you some idea of the pressures on the WA market.
Some might assume that the colossal rental growth in WA was due to the extraordinary rents for property in the north-west of our state. However, it’s easy to dismiss this idea when you look at what has happened in Perth. The median weekly rent in Perth has increased over the past five years to $320 from $180 in 2006, which is an increase of 77.8 per cent.
Incomes, which also play a role in the demand for property, have grown as well since the last census. Median total family income has increased from $1,290 per week to $1,781, equal to 38 per cent growth.
The figures from the latest census definitely make encouraging reading for any investors focused on the WA and particularly the Perth market. While many were expecting WA to lead the nation in a number of key indicators, few anticipated just how much the disparity would be with the rest of the country.
I believe the future definitely looks bright for the real estate market. With our accelerating population growth, improving affordability, an undersupply of new housing and an extremely tight rental market, it won’t be long before we lead the nation in another area – growth in property prices.
Perth Set to Become the Leading Property Market in Australia
The report ‘Residential Property Prospects 2012-2015’ released by BIS Shrapnel at the end of June is forecasting Perth to experience 22 per cent growth in the median house price by 2015 to become the strongest performing capital city in Australia.
WA is set to record the strongest growth in property prices over coming years, ahead of all other states and territories. The latest report released by BIS Shrapnel, Residential Property Prospects 2012-2015, reports that properties in the resource-rich states of Western Australia, Queensland and the Northern Territory are already showing signs of recovery and are set to improve further over the next three years.
Perth is predicted to experience the strongest growth in median house prices of 22 per cent by 2015, about 7 per cent growth each year with compound increases. Brisbane is forecast to closely follow at 20 per cent, Sydney at 17 per cent and Darwin at 15 per cent. Lower interest rates and accelerated population growth are indicators that conditions are starting to improve in these capital cities.
Western Australia’s strong fundamentals will underpin the growth phase, according to BIS Shrapnel senior manager and author of the report, Angie Zigomanis.
“With unemployment in the state already leading the nation at 3.8 per cent in March 2012 and economic and income growth to continue to strengthen, the first stages of a turnaround should appear in 2012/13 before stronger price growth emerges in 2013/14 and 2014/15 as economic growth approaches a peak”, he said.
“If you’re in a position to get into the market, the next 12 months presents a period where buyers will still be in a better negotiating position, after this it will then become more difficult for buyers,” he said.
The report, however, predicts a two-tiered national market with the remaining states and territories lagging behind with only minor growth due to underperforming economies and excess supply.
Property Management – Cheap is Not Always Cheerful
Many agencies are offering cut-price property management fees and some investors are being tempted. But be warned; choosing a property manager based on the lowest fees comes with risks and, for many, may end up being a costly mistake.
Property management is an important part of keeping your investment property safe and secure, so it pays to choose your property manager carefully. But with a number of agencies trying to lure investors with ultra-cheap management rates, some investors are basing their decision on fees alone, which could end up proving costly.
When it comes to property management, as with a lot of things in life, you often get what you pay for. While a very low management rate may seem attractive, most investors soon learn that it costs them more in the long run.
Agencies that offer discount rates usually use these rates as bait to attract new business, then sting investors with many extra and overpriced services. Once you add these additional items into the mix, the cheap rate isn’t so cheap anymore and owners end up paying the same price for a budget agency than they would have with a superior one. Worse still, if owners don’t opt for the extra services, such as regular inspections, the condition of the property may suffer.
Agencies that offer cheap rates have to make many sacrifices to make the business profitable. One area where this is often apparent is in the number of properties serviced by each property manager. Property managers in these agencies are often inundated looking after hundreds of properties and are too busy to properly service any individual property. This leads to high staff turnover.
The other area sacrificed is in staff training. With profitability wafer-thin, these agencies cannot provide their staff with the ongoing training and education needed to keep them up-to-date with legislation and changing market conditions. This too can contribute to higher staff turnover and the staff’s lack of knowledge can leave owners out of pocket.
At the end of the day, it is not feasible to expect a high quality service with all the necessary inclusions for next to nothing. Owners need to ask themselves, are we willing to risk the security and performance of one of our most valuable assets for the sake of potentially saving a couple of hundred dollars a year?
Property Tax Tips: Calculating Depreciation
When you purchase a property, how do you figure out what price you paid for the depreciable items (e.g. carpet, appliances etc)? There are a number of options.
Firstly you can specify it in the contract (for example, the purchase price of $450,000 includes $1,000 for appliances, $3,000 for carpets etc). You cannot dramatically over inflate the figures (e.g. say $20,000 for appliances and $30,000 for carpets) as this will not be accepted. In addition, the seller may have negative tax consequences from including these figures in the contract, so normally prices for depreciable items are not included in the contract. Also, a buyer may not be aware of all the items they can depreciate.
Secondly you can make your own reasonable estimate of the value of the assets included in the purchase price. The ATO says that any reasonable value should reflect the age and condition of the asset (i.e. if the stove was 15 years old, you cannot use a brand new replacement value as the estimate). The difficulty for most people is that they wouldn’t know everything that is available for depreciation and would miss some items if they did it themselves. Also if you are audited you run the risk that your own estimates will be highly scrutinised.
The third and most common option is to obtain an independent valuer to value the items purchased for the purposes of depreciation. The ATO has said they will accept reports from Quantity Surveyors as being satisfactory evidence for valuations. Depreciation is a complicated area and most people need the help of their accountant or a depreciation consultant to claim the correct amounts.
Finance: Getting Past 1 Investment Property
Many people ask us why the average investor doesn’t get past 1 investment property.
Research done some time ago by the Australian Bureau of Statistics shows that most investors only purchase one.
- 93.5 % of people do not own any investment property;
- 4.0% own one investment property;
- 1.49% own 2-4 investment properties; and
- Only 0.1% own 5 or more properties.
In recent years, these figures have changed, but still the vast majority of people do not own a substantial number of investment properties and very few own 5 or more investment properties.
If you understand the mindset and strategy of the average investor, then you will know why.
The average investor will usually put down 20% as a deposit on a property. They decide to start saving for an investment property and this may take many years of saving (we will assume 5 years in this example). In addition, they will also require funds for stamp duty, which can be as high as 5% of the purchase price, and also borrowing expenses, (fees and charges, and stamp duty on the mortgage).
That purchaser will usually pay market value for the property, then rent the property out and wait for capital growth to generate equity. Typical investors don’t understand what drives capital growth and property profits, and they will usually select properties with average capital growth rates.
In the first year, the purchaser may only just break even, as the price of the property may rise enough to cover the stamp duty on purchase. In many cases where capital growth is moderate, it may be 2 years before a property has increased enough in value for the purchaser to cover the costs of stamp duty and other settlement and borrowing costs.
In the third year the purchaser finally starts to make some profit. The average investor has waited 7 years from the time of deciding to purchase an investment property to actually generating any profit!
In order to buy another property, the purchaser normally needs to generate another 20% equity. In a moderate growth area, this may take another 5 years or more. They will only be in a position to buy a second investment property 12 years after first making that decision to invest.
In a large percentage of cases, the average investor will get dissatisfied with the returns on the property and not even get to the stage of considering a second property investment. Many will sell within the first 5 years and re-join the ranks of people who own no investment property.
Smart investors understand that there are ways to speed up the process. If you understand how to access your equity to purchase more property and purchase high growth properties, you can build a substantial property portfolio much more quickly than you think.
Property Acquisitions: Stale Property
When a property has been sitting on the market for over a month it begins to go ‘stale’. Once this occurs people will start to think that there may be problems with the property. Eventually the property will be classed as a lemon and it will become more difficult to sell, but it could be a great time to buy.
There are 15 strategies to purchase property below market value. One of these is purchasing stale properties.
In many cases this happens because the owner has listed the property for more than it is worth. Even as the owner drops the price, the perception that there are problems with the property will still remain.
After 3 months on the market the property is now considered stale. The agent would have likely lost enthusiasm and the owner will have become despondent.
The three month mark is a good time for the bargain hunter to get to work. If you have a stale property and a highly motivated vendor, these are the perfect components to get you a property at a significant discount to market value. It’s one of the many methodologies we use to find great properties at good prices.
Finance Newsletter August 2012
Good news for all borrowers – the banks have broken up with the Reserve Bank.
This means if you look around you are likely to find a better rate than you currently have. St George is currently offering rates as low as 6.01% variable for home loans and they will pay you $700 to switch from your current bank..
Use this opportunity to speak with a mortgage broker to ensure your bank is looking after you and that you have the best loan for your circumstances.
Some banks are currently offering great discounts on home and investment loans. Fixed and variable.
You may be able to save interest by fixing your home loan . You may be able to fix for 1-3 years at a lower rate then you currently have. Why wait for variable rates to go down. Switch to a lower rate now.
A great fixed rate is available from Homeloans. You can get a fixed rate of 5.42% 3 years. Compare that with your bank’s current offering? There are many benefits of using a mortgage broker and our services are provided to the borrower free of charge.
Call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au at Mercia Finance for obligation free finance information.
Tax Newsletter August 2012
ATO data-matching programs
The ATO has revealed details of two new data-matching programs aimed at identifying tax non-compliance. These will affect individual taxpayers.
The ATO has advised that it will collect share transaction details from various organisations relating to securities held in ASX-listed entities. The details will be electronically matched with ATO data holdings. Areas of concern for the ATO include incorrect compliance with capital gains tax, income tax and GST obligations. The ATO said around 1.2 million individuals will be affected by the program.
The ATO has also advised that it will request from Centrelink details of individuals who were eligible for Family Tax Benefit Part B for the 2010 to 2013 income years and/or received parental leave pay for the 2010 to 2013 income years. The details will be electronically matched with ATO data holdings to identify incorrect claims for the dependent spouse tax offset. According to the ATO, some 1.3 million individuals will be affected.
Living-away-from-home tax law changes on the way
The Government has introduced into Parliament proposed changes to the tax treatment of living-away-from-home (LAFH) allowances and benefits. The Government said it is reforming the tax concession “by better targeting it at people who are legitimately living away from their actual home in Australia (which they continue to maintain) for an initial period”. Essentially, the Government is restricting access to the concessions.
Employers and employees who may be affected need to take note. The proposed changes are set to take effect on 1 October 2012 (not 1 July 2012, as originally proposed). However, there will be grandfathering provisions to preserve tax concessions for some arrangements that were in place prior to Budget night (8 May 2012).
TIP: As a result of these developments, it will be critical for employers and employees to identify, before the enactment of the legislation, if and how the changes might apply.
Trust beneficiaries: amended assessments were excessive
Two beneficiaries of a family trust, a father and son, have been successful before the Administrative Appeals Tribunal (AAT) in arguing that amended assessments issued to them were excessive.
The family trust owned all the units in a unit trust that operated a fuel distribution business. The Commissioner issued the amended assessments for the 2004 and 2005 income years to increase the taxpayers’ tax liability following the disallowance of a large deduction for payments made by the unit trust to an employee entitlement fund.
Before the AAT, the taxpayers effectively argued that the assessments were excessive because the taxpayers, as beneficiaries, were not presently entitled to the income from the family trust in the years in question (except to the extent that they might be entitled as two of the 46 default beneficiaries of the trust). The AAT found in the taxpayers’ favour.
TIP: Some commentators have noted that this case highlights the need for trustees to consider documenting distribution minutes by 30 June. The issues in the case are complex. If you have any questions, please contact our office.
SMSF notice of non-compliance set aside
The husband and wife trustees of a self managed superannuation fund (SMSF) have had a “notice of non-compliance” that was issued by the Commissioner of Taxation set aside by the AAT. This was despite regulatory breaches involving loans to a related-party company.
Between the years 2004 to 2007, the SMSF loaned money to a property development company of which the trustees were the directors. The loans were partially repaid. The trustees provided an undertaking to the Commissioner that the loans would be repaid by September 2009. However, the loans were not repaid by that time because the taxpayers did not want to sell the properties in a fire sale during the global financial crisis.
The Commissioner issued a “notice of non-compliance”, making the fund non-complying and removing the concessional tax treatment enjoyed by complying funds.
While the AAT found that the contraventions of the superannuation rules were “serious”, it set aside the notice of non-compliance. It noted, among other things, the fact that the loans were eventually paid (albeit late), the poor health of one of the trustees and the significant tax consequences that would affect the trustees given their age (who were aged 65).
Excess super contributions: Commissioner’s discretion refused
In a number of recent decisions, the AAT has affirmed the Commissioner’s refusal to reallocate excess superannuation contributions received by superannuation funds to an earlier financial year, and has therefore affirmed the excess contributions tax assessments made in those cases.
In one decision, the AAT found that the taxpayer had tried to stay under the relevant contribution cap, but had simply “miscalculated” and that the law had been correctly applied by the Commissioner.
In two other cases, the AAT held that contributions that were made by way of electronic funds transfer and BPAY just before (or on) 30 June, but that were received by the relevant fund on 1 July (ie in the next financial year), were not situations that amounted to “special circumstances” that would warrant the Commissioner’s discretion to reallocate the excess contributions to another financial year.
However, in one recent decision, the taxpayer was successful in convincing the AAT that there were “special circumstances” to warrant the Commissioner’s discretion. Among other things, the AAT found that the taxpayer had missed the relevant deadline for contributions for the relevant year as a result of “misunderstanding” the rules.
TIP: The above cases mainly involve contributions for the 2008–2009 financial year (and earlier). The Government has recently amended the law to allow a limited, once-only refund option for excess concessional contributions of up to $10,000.
The new refund option is only available for excess concessional contributions in respect of the 2011–2012 or later years, and only for the first year. The refund option provides some relief, but is not without conditions and limitations.
TIP: The Commissioner may only exercise his discretion to reallocate or disregard excess contributions if “special circumstances” exist and the making of a determination is consistent with the objective of the superannuation regime that individuals gradually build their super over their lifetimes.
Division 7A benchmark interest rate
The ATO has advised that, for the income year that commenced on 1 July 2012, the benchmark interest rate to be used in calculating the interest component on the repayment of a private company loan received by a shareholder (or the associate of a shareholder) is 7.05%.
Reasonable travel and meal allowance amounts
The ATO has announced the amounts the Commissioner considers are “reasonable” for the 2012–2013 income year in relation to claims made for:
- overtime meal allowance expenses;
- domestic travel allowance expenses;
- travel allowance expenses for employee truck drivers; and
- overseas travel allowance expenses.
Car depreciation limit and luxury car tax threshold
The ATO has released the following limits and thresholds for the 2012–2013 income year:
- car depreciation limit – $57,466;
- luxury car tax threshold – $59,133; and
- fuel efficient car limit – $75,375.
Finance Newsletter July 2012
Good news for all borrowers – the banks have broken up with the Reserve Bank.
This means if you look around you are likely to find a better rate than you currently have. AMP is currently offering 5.90% variable for home loans.
Use this opportunity to speak with a mortgage broker to ensure your bank is looking after you and that you have the best loan for your circumstances.
Some banks are currently offering great discounts on home and investment loans. Fixed and variable.
You may be able to save by interest by fixing your home loan . You may be able to fix for 1-3 years at a lower rate then you currently have. Why wait for rates to go down. Switch to a lower rate now.
A great fixed rate is available from Citibank. You can get a fixed rate of 5.79% 2 years. Compare that with your bank’s current offering? There are many benefits of using a mortgage broker and our services are provided to the borrower free of charge.
Call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au at Mercia Finance for obligation free finance information.