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.

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.

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.

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.

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.

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.

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.

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.

ATO targets disclosure of foreign sources of income

Following recent compliance activities that have been conducted, the ATO says many Australian resident taxpayers may not be aware of their Australian taxation obligations in relation to their worldwide income. The ATO has reminded taxpayers to correctly report foreign sources of income when required. Examples of foreign sources of income can include:

• interest accrued in an offshore bank account;
• income derived from a foreign investment (eg dividend or rental income);
• income from an asset that has been inherited from an overseas source;
• a foreign pension or annuity; and
• foreign trust income.

The ATO has announced that for taxpayers who make full voluntary disclosure of their foreign source income, any applicable penalties may be reduced by 80%.

Investment loan interest payment arrangements

The ATO has released a Taxation Determination that provides the Commissioner’s views in respect of certain “investment loan interest payment arrangements”. According to the Commissioner, the general anti-avoidance provisions in the tax law can apply to deny a deduction for some, or all, of the interest expenses incurred in respect of these arrangements.

The type of arrangements discussed in the Determination broadly involve outstanding loans on a residential home, an investment property and a line of credit. The ATO says a key feature of these arrangements is the use of the line of credit to pay the interest on the investment loan. This results in all (or most) of the interest on the investment loan being, in effect, capitalised. That is, the payment of the investment loan interest is deferred.

According to the ATO, the deferral has the economic effect of allowing the taxpayer to repay the home loan at a faster rate than would otherwise be possible.

ATO reporting requirements for builders and contractors

The Government has introduced regulations that require certain businesses in the building and construction industry to report annually to the ATO details of payments made to contractors in the industry.

The new requirements essentially mean that purchasers must report certain transactions for which they have been issued an invoice. The reporting requirements will commence on 1 July 2012.

Deduction for property expenses denied

In a recent decision, the Administrative Appeals Tribunal (AAT) denied a taxpayer’s claim for a deduction for various expenses incurred in buying, renovating and selling properties.

Among various issues, the AAT noted that the taxpayer was unable to produce documentary evidence in relation to stamp duty, legal expenses, renovations, wages and director fees, interest and legal expenses.

TIP: All documents supporting deductions must be kept for five years from the due date or actual date of lodgment of the return for the year to which the expense relates, whichever is the later.

If an objection, a review or appeal arising from an objection, or a request for an amendment of an assessment, is outstanding when the five-year period ends, records must be kept until the matter is resolved.

Pitfalls of “late” super payment

A taxpayer has been unsuccessful before the AAT in arguing that the Commissioner should exercise his discretion and reallocate excess super contributions to a previous financial year.

The taxpayer had used an electronic funds transfer on 30 June 2007 to transfer the funds, but they were not credited to the super fund’s account by the bank until 2 July 2007, thereby pushing the transfer into the next financial year. The excess concessional contributions for the 2008 financial year amounted to almost $54,000 and the Commissioner imposed excess contributions tax of around $17,000.

In rejecting the taxpayer’s arguments, the AAT noted the Commissioner’s practice to deem contributions as having been made “when the funds are credited to the superannuation provider’s account”.

The AAT also disagreed that there were “special circumstances” that would allow the Commissioner to exercise his discretion. It noted that the taxpayer was in the same situation as every other taxpayer and that it was incumbent upon the taxpayer to ensure that the electronic funds transfer was effective and completed at the right time.

TIP: Amounts contributed and counted in the “wrong” financial year, causing an investor to exceed the relevant superannuation contributions cap, could lead to an excess contributions tax bill. Investors should consider planning any extra contributions early and should not leave transfers to the “last minute”. Note that this year, 30 June 2012 falls on a Saturday.

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 object of the superannuation law. Please contact our office for more information.

Doctor found to be a share trader

In a recent decision, the AAT held that a medical doctor was engaged in a share trading business not only in relation to listed shares she acquired, but also in relation to units she acquired in a listed aged care property trust that she had purchased from her family trust (albeit, for more than their market value at the time). Moreover, it was these units that generated an unrealised loss of over $1 million and which, as a result, enabled to her to reduce her other taxable income for the year ended 30 June 2009 below nil.

In arriving at its decision that the taxpayer was carrying on a share trading business, the AAT took into account the following factors:

• the nature of the activities and whether they have the purpose of profit-making;
• the complexity and magnitude of the undertaking;
• an intention to engage in trade regularly, routinely or systematically;
• operating in a business-like manner and the degree of sophistication involved;
• whether any profit/loss is regarded as arising from a discernible pattern of trading; and
• the volume of the taxpayer’s operations and the amount of capital employed by her.

TIP: If the taxpayer is a share trader, losses may be deductible against other income. If the taxpayer is not carrying on a business of share trading, capital losses can only be applied to reduce capital gains.

FBT rates and thresholds for

2012–13

The ATO has announced important FBT rates and thresholds for the 2012–13 FBT year (which commenced on 1 April 2012).

Some of the key rates and thresholds include:

• The benchmark interest rate is 7.40% pa (down from 7.80% pa for the 2011–12 FBT year).
• The record-keeping exemption threshold is $7,642 (up from $7,391 for the 2011–12 FBT year).

Car expenses – rates per km for 2011–12

The Government has announced the “cents per kilometre” rates for calculating tax deductions for car expenses for the 2011–12 income year. Note that these are unchanged from 2010–11 and are as follows:

• Small car (non-rotary engine up to 1600cc, or rotary engine up to 800cc): 63c/km.
• Medium car (non-rotary engine 1601 to 2600cc, or rotary engine 801 to 1300cc): 74c/km.
• Large car (non-rotary engine 2601cc and above, or rotary engine 1301cc and above): 75c/km.

Tax planning

Simply put, tax planning is the arrangement of a taxpayer’s affairs so as to comply with the tax law at the lowest possible cost. This involves objectively assessing and actively managing tax risk. Common tax planning techniques include deferring the derivation of assessable income and applying techniques to bring forward deductions.

Deferring income

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

Maximising deductions

Business taxpayers

• Debtors should be reviewed prior to 30 June so that any bad debts can be identified and written-off.
• A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
• Review trading stock for obsolete stock for which a deduction is available.

Non-business taxpayers

• Outgoings incurred for managed investment schemes may be deductible.
• Assets costing $300 or less may qualify for an immediate deduction, subject to certain conditions.
• A deduction for personal superannuation contributions is available where the 10% rule is satisfied.

Capital gains tax

• A taxpayer may consider crystallising any unrealised capital gains and losses in order to improve his or her overall tax position for an income year.

Small business entities

• From 2012–13, the small business instant asset write-off threshold will be increased from $1,000 to $6,500.
• Consider whether the requirements to be classified as a small business entity are satisfied to access various tax concessions, such as the simpler depreciation rules and the simpler trading stock rules.
• Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.

Companies

• Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the benchmark rule.
• Loans, payments and debt forgiveness by private companies to their shareholders and associates should be repaid by the earlier of the due date for lodgment of the company’s return for the year or the actual lodgment date. Alternatively, appropriate loan agreements should be in place.
• Companies may want to consider consolidating for tax purposes prior to year end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
• Companies should carefully consider whether any deductions are available for any carry forward tax losses, including analysing the continuity of ownership and same business tests.

Trusts

• Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
• Avoid retaining income in a trust because the income may be taxed at 46.5%.
• If a trust has an unpaid present entitlement to a corporate beneficiary, consideration should be given to paying out the entitlement by the earlier of the due date for the lodgment of the trust’s income tax return for the year or the actual lodgment date to avoid possible tax implications.
• Trustees should consider whether a family trust election (FTE) is required to ensure any losses or bad debts incurred by the company will be deductible and to ensure that franking credits will be available to beneficiaries.

Personal services income

• Individuals operating personal services businesses should ensure that they satisfy the relevant test to be excluded from the Personal Services Income regime or seek a determination from the Commissioner.  

FBT – car fringe benefits

• The four rates used in the statutory formula method for determining the taxable value of car fringe benefits are being replaced with a single statutory rate of 20% for fringe benefits provided after 10 May 2011. Taxpayers should review contracts for changes to a “pre-existing commitment”.

Superannuation

• The ATO has reminded taxpayers to consider the superannuation contributions caps when planning tax affairs to avoid excess contributions tax.
• The Government has proposed that eligible individuals who breach the concessional contributions cap by up to $10,000 will be allowed a once-only option for the excess contributions to be refunded without penalty.
• The Government has proposed to temporarily “pause” the indexation of the superannuation concessional contributions cap so that it will remain fixed at $25,000 up to and including the 2013–14 financial year.
• For eligible individuals, a government low-income superannuation contribution of up to $500 may be available from 1 July 2012.
• A member of an accumulation fund (or a member whose benefits include an accumulation interest in a defined benefit fund) may be able to split superannuation contributions with his or her spouse.

Individuals

• Individual taxpayers with a taxable income exceeding $50,000 in 2011–12 will have to pay an additional levy known as the temporary flood and cyclone reconstruction levy, unless they fall within an exempt class of individuals.
• The Government is phasing out the dependent spouse tax offset. For 2011–12, the offset will only be available to those born on or before 1 July 1971.
• The Government has proposed that from 1 July 2012, living-away-from-home allowances will be taxed to the recipient as assessable income rather than to the employer under the FBT rules.
• The Government has introduced legislation to extend the Paid Parental Leave scheme by introducing a two-week “dad and partner pay”.