Tax Office announces compliance focus areas

The Commissioner of Taxation has released the Australian Taxation Office’s compliance program for the 2011–12 financial year. Under the program, the Australian Taxation Office (ATO) plans to enhance its tax fraud detection and management strategies, concentrate on sham contracting arrangements and continue its extensive data matching and risk profiling activities. The ATO said it also aims to reduce phoenix arrangements through audits of directors, focus on those who fail to report some or all cash transactions and check employers’ super guarantee payments.

TIP: The ATO’s compliance program is wide-reaching covering individuals to large businesses. Please contact our office for further information.

Trust streaming: extension to record beneficiaries’ entitlements

Following a High Court decision last year – known as the Bamford decision – legislation has been formally enacted to provide certainty to trusts in relation to the streaming of capital gains and franked distributions (including any attached franking credits) to specific beneficiaries as an interim measure. However, as the legislation was finalised so close to the end of the income year, the ATO has decided to extend the time allowed for trustees to record a beneficiary’s entitlement to a franked distribution for the purpose of the new legislation for the 2010–11 income year only. The extension ends on 31 August 2011.

TIP: The trust streaming changes are technical. Please contact our office for any assistance.

Car fringe benefit taxation changes

Legislative changes to simplify the method for determining the taxable value of car fringe benefits has been formally implemented. Broadly, the changes introduce a flat 20% rate to replace the previous method which, according to the Government, encouraged people to drive their vehicles further than they needed to in order to obtain a larger tax concession.

Dependent spouse offset finishes for under 40s

From 1 July 2011, taxpayers will no longer be entitled to the dependent spouse tax offset in respect of a dependent spouse born on or after 1 July 1971, following the enactment of tax law changes. However, the changes include some exceptions – for example, dependent spouses who are carers, invalid or permanently unable to work. 

Low income taxpayer offset ends for most minors

From 1 July 2011, the ability of minors (children under 18 years of age) to access the low income tax offset to reduce tax payable on their unearned income (dividends, interest and rent) has been removed. The Government said the tax law amendments are designed to discourage income splitting between adults and children.

Building contractors face reporting proposal

The Government is seeking to introduce a reporting regime for payments made to contractors in the building and construction industry. The proposal will require businesses in the building and construction industry to report annually to the ATO payments they have made to contractors in the industry. The regime is proposed to commence on 1 July 2012. According to the Government, the proposal will support greater compliance in areas such as GST, record-keeping requirements, and the personal services income rules.

TIP: The proposal indicates a closer scrutiny of the industry by the authorities. The Government also indicated that its proposal could later be applied to other industries.

Unpaid directors’ fee schemes and private companies on ATO radar

The ATO has warned taxpayers of an arrangement where a private company claims a deduction for unpaid directors’ fees. Under the arrangement, a private company makes a resolution before 30 June in relation to amounts payable to directors that reflect that the company is irrevocably committed to the payment. The company claims a deduction for the payment, but the actual payment is never made. The Commissioner of Taxation said he was concerned that some companies may be using the arrangement to claim amounts that were never intended to be fully paid out.

ATO reminds employers of superannuation obligations

The ATO has recently revealed some common superannuation mistakes made by employers. They include paying insufficient superannuation contributions for employees, missing the quarterly payment cut-off dates (ie 28 October, 28 January, 28 April, 28 July), and not understanding that in some circumstances superannuation should be paid for contractors, even if the contractor provides an Australian Business Number.

TIP: The ATO has been selecting various industries on which to focus its compliance activities. This year, in its compliance program, the ATO intends to target the following industries in relation to superannuation guarantee obligations: cafes and restaurants; real estate services; carpentry services; computer system design and related services; and accommodation.

Tribunal denies deduction for interest on loans made to trust

In a recent case, the Administrative Appeals Tribunal confirmed that husband and wife taxpayers were not entitled to a deduction for interest on loans made to a discretionary trust which ran their building business, or a deduction for interest on their investment properties which they made available to the trust to provide accommodation for building contractors. The taxpayers argued they had certain agreements in place with the trust which made them entitled to distributions of trust income, so accordingly, the deductions were permissible. However, the Tribunal disagreed and found there was an insufficient connection between the interest expenditure and claimed trust income.

Personal services income rules applies to taxpayer

The Administrative Appeals Tribunal has confirmed that the personal services income (PSI) rules under the taxation law applied to a taxpayer who provided his services as a draftsperson through his private company. Accordingly, over $67,000 was included as personal income in the years in question. The Tribunal also held the taxpayer did not meet either the “unrelated clients” test or the “business premises” test to relieve him of his personal liability. 

TIP: Many consultants and contractors operate as a sole trader or through a company, partnership or trust. In many cases, the income received for the work they do may be classified as PSI if certain tests are not passed. It should be noted that the PSI rules limit the deductions that an individual may claim against PSI.  Please contact our office for any assistance.

Trust Streaming – Certainty

Almost Here

The Government has introduced legislation to provide certainty to trusts in relation to the streaming of capital gains and franked distributions (including any attached franking credits) to specific beneficiaries as an interim measure following a High Court decision last year – known as the Bamford decision – which had cast doubt in this area.

TIP: The changes are technical and are proposed to apply to the current year (ie the year from 1 July 2010 to 30 June 2011). This does not give a lot of time for trusts affected to respond. Please contact our office for any assistance.

Car Fringe Benefit Taxation about
to Change

A Bill has been introduced into Parliament to simplify the method for determining the taxable value of car fringe benefits. Broadly, the change will introduce a flat 20% rate to replace the current method which, according to the Government, encourages people to drive their vehicles further than they need to in order to obtain a larger tax concession.

TIP: The changes affect salary-sacrificed or
employer-provided vehicles. If you think the changes affect you, please call our office.

Dependent Spouse Offset on the Chopping Board

The Government will soon put in place changes so that taxpayers will not be entitled to the dependent spouse tax offset in respect of a dependent spouse born on or after 1 July 1971. The change is proposed to take effect from 1 July 2011. This means taxpayers with a dependent spouse aged less than 40 years will no longer be eligible for the offset from 1 July 2011. However, some exceptions will be available – for example, dependent spouses who are carers, invalid or permanently unable to work.

TIP: Note that the maximum offset is $2,355 for
2011-2012.

SMSF Non-complying Status Affirmed, Despite Tragic Circumstances

In a recent case, the Administrative Appeals Tribunal affirmed the decision of the Commissioner of Taxation that a self-managed superannuation fund (SMSF) be treated as a non-complying fund, despite acknowledging the tragic circumstances surrounding the case. The fund was created in April 2002 and its members included a husband, wife and their adult son. The Tribunal noted the son had a “drug addiction and took almost all of the money from the fund and spent it or gave it away”. Although noting the circumstances of the family, the Tribunal was unable to exercise a discretion to treat the fund as a complying fund under the superannuation law.

Goods Taken from Stock for
Private Use

The Tax Office has updated the amounts the Commissioner will accept for 2010-2011 as estimates of the value of goods taken from trading stock for private use by taxpayers in certain specified industries. For example, for a takeaway food shop, the Commissioner will accept $2,970 (excluding GST) for each adult (or child over 16 years of age). Note that the Tax Office intends to adjust the values annually.

Travel and Study Scams on Tax Office Radar

The Tax Office has issued a warning to taxpayers to steer clear of dodgy arrangements which involve claiming holiday travel expenses as work-related or self-education expenses. The Commissioner said he was concerned that some people are getting involved in arrangements to deliberately claim inflated deductions which they are not entitled to, particularly in relation to overseas travel. If the claim is legitimate, the Tax Office says taxpayers need to correctly apportion their expenses to the extent they are connected to their income-earning activities and are not private or domestic in nature.

Low-income Taxpayer Offset to End for Most Minors

A Bill has been introduced which contains changes to implement the Government’s 2011-2012 Budget announcement to restrict access by minors (children under 18 years of age) to the low income tax offset. Under the changes, the ability of minors to access the offset to reduce tax payable on their unearned income (dividends, interest and rent) will be removed from
1 July 2011. The Government said the changes are designed to discourage income splitting between adults and children.

TIP: Income earned by minors from work will still be eligible for the full benefit of the offset. Unearned income of minors who are orphans or disabled, as well as compensation payments and inheritances received by minors, will not be affected by this measure.

Commissioner’s Claim to Recover GST Refunded Not Out of Time

A taxpayer has been unsuccessful before the Administrative Appeals Tribunal in arguing that the Commissioner’s claim to recover an amount of GST refunded was ineffective. The taxpayer had argued that the claim was made outside of the four-year time limit under the tax law. However, the Tribunal found the time limit did not apply in the circumstances of
the case.

GST and Tax Invoice Requirements

The Tax Office has issued a draft GST ruling which replaces an earlier ruling in relation to the minimum information requirements for a tax invoice and the circumstances of when a document can be deemed a tax invoice even when it does not meet all of the requirements. The draft ruling also sets out the application of the low value threshold for transactions for which a tax invoice is not required. Note the
draft ruling maintains the same outcomes as the
earlier ruling.

Deductibility for Private Pilot’s Licence Cost Denied for a Solicitor

A solicitor has been unsuccessful before the Administrative Appeals Tribunal in claiming a deduction for expenses he incurred in converting his New Zealand private pilot’s licence to an Australian one. The solicitor had hoped to take on aviation matters for local clients. However, the Tribunal was of the view that there was not a sufficient connection between the expenses claimed and the income earned as a solicitor.

TIP: Tax time 2011 is just around the corner. As usual, the Tax Office will be paying close attention to large deductions claimed by individuals in their 2011 tax returns.