Welcome to the Davenports Practice Update for June 2018
ATO audit targets revealed
According to a recent Australian Financial Review article, the Australian Taxation Office has revealed its audit targets for 2017/18 tax returns and if you work in black and shared economies, cryptocurrencies, home office or property investments you’d better watch out!
The AFR article highlights that the ATO uses sophisticated technologies and a massive amount of data to help identify potential audit targets. The article quotes ATO Assistant Commissioner Kath Anderson, who says that the data collected grows every year. This data allows the ATO to “compare taxpayers to others in similar occupations earning similar incomes to help identify typical deductions’’.
In addition, those people who ‘shop around for tax agents who might be amenable to providing more deductions and bigger claims’ are likely to be the target of ATO’s audits.
The AFR article also highlights the federal government’s commitment to tackling the so-called black economy, such as cryptocurrencies (e.g. bitcoin). These currencies, which are widely used in black economy transactions, are being targeted for tax and are considered property and an asset for capital gains tax.
Again, the ATO’s data collecting and sharing abilities with banks and other government deparments will help it track transactions.
The article again quotes Kath Anderson, who says, ‘‘While many believe cryptocurrency provides anonymity, operating in the digital world leaves electronic footprints,’’ said Ms Anderson. ‘‘We have sophisticated systems that allow us to match data from banks, financial institutions, and online exchanges to follow the money back to the taxpayer.”
Editor: Legitimately reducing your tax – whether you’re an individual or a business – is an acceptable strategy, but we suggest you do not resort to fraudulent or deceitful activity. See our tax saving strategies at the bottom of this month’s Practice Update for tips.
2018 Budget Update
The Government handed down the 2018/19 Federal Budget on Tuesday 8th May 2018. Some of the important proposals include:
- The introduction of the ‘Low and Middle Income Tax Offset’, a temporary non-refundable tax offset of up to $530 p.a. to Australian resident low and middle income taxpayers for the 2019 to 2022 income years. This offset will apply in addition to the Low Income Tax Offset.
- Providing tax relief for individual taxpayers by progressively increasing some of the tax brackets (including an increase in the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000 from 1 July 2018), and eventually removing the 37% tax bracket entirely.
- The $20,000 immediate write-off for small business will be extended by a further 12 months to 30 June 2019 (i.e., for businesses with aggregated annual turnover less than $10 million).
- From 1 July 2019:
- Increasing the maximum number of allowable members in an SMSF from four to six members;
- Ensuring that unpaid present entitlements (or ‘UPEs’) come within the scope of Division 7A; and
- Denying deductions for expenses associated with holding vacant residential or commercial land.
Superannuation guarantee amnesty introduced
The Government has introduced legislation to complement the superannuation guarantee (‘SG’) integrity package already before Parliament by introducing a one‑off, twelve month amnesty for historical underpayment of SG.
The Bill incentivises employers to come forward and “do the right thing by their employees” by paying any unpaid superannuation in full, as well as the high rate of nominal interest (but without the penalties for late payment that are normally paid to the Government by such employers).
Employers that do not take advantage of the amnesty will face higher penalties when they are subsequently caught – in general, a minimum 50% on top of the SG Charge they owe.
In addition, throughout the amnesty period the ATO will still continue its usual enforcement activity against employers for those historical obligations they don’t own up to voluntarily.
The amnesty will run for twelve months from 24 May 2018.
ATO scrutinising car claims this tax time
The ATO has announced that it will be closely examining claims for work-related car expenses this tax time as part of a broader focus on work related expenses.
Assistant Commissioner Kath Anderson said:
“We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed.”
This is no doubt because over 3.75 million people made a work-related car expense claim in 2016/17 (totalling around $8.8 billion), and, each year, around 870,000 people claim the maximum amount under the cents-per-kilometre method.
Ms Anderson said that the ATO’s ability to identify claims that are unusual has improved due to enhancements in technology and data analytics: “Our models are especially useful in identifying people claiming things like home to work travel or trips not required as part of your job . . . simply travelling from home to work is not enough to qualify, no matter how far you live from your workplace.”
Ms Anderson said there are three golden rules for taxpayers to remember to get it right.
“One – you have to have spent the money yourself and can’t have been reimbursed, two – the claim must be directly related to earning your income, and three – you need a record to prove it.”
A traffic supervisor claimed over $11,000 for work related car expenses, and provided a logbook to substantiate his claim.
However, upon investigation the ATO discovered that the logbook wasn’t printed until the following year – the taxpayer admitted the logbook was fraudulent and it was ruled invalid.
Even though the logbook was invalid, the taxpayer was able to provide other evidence to show that he had travelled at least 5,000 kilometres for work-related purposes, so the ATO used the cents per kilometre method to calculate the taxpayer’s deduction (but his claim was reduced from over $11,000 to under $4,000).
Claiming for home to work travel
A Laboratory Technician claimed $3,300 for work-related car expenses, using the cents per kilometre method for 5,000 kilometres.
However, he advised that his employer did not require him to use his car for work; this claim was based on him needing to get to work.
The ATO advised the taxpayer that home to work travel is a private expense and is not an allowable deduction – his claim was reduced to nil and the ATO applied a penalty for failure to take reasonable care.
What the super housing measures mean for SMSFs
The ATO has reminded members of SMSFs that they will be able to use their voluntary super contributions to assist with buying their first home, or to make a contribution into their super from the proceeds of the sale of their main residence (under changes passed by Parliament in December 2017).
The First Home Super Saver Scheme
The First Home Super Saver (FHSS) Scheme allows SMSF members to save faster for a first home by using the concessional tax treatment available within super.
From 1 July 2018, SMSF members can apply to release certain voluntary concessional and non-concessional contributions made from 1 July 2017, along with associated earnings to help buy their first home.
Editor: There are various conditions that need to be met in order to take advantage of this measure – contact our office if you would like to know more.
The downsizing measure
SMSF members who are 65 or over and exchange a contract for sale of their main residence on or after 1 July 2018 may be eligible to make a downsizer contribution of up to $300,000 into their super.
This downsizer contribution won’t count towards their contributions caps or total super balance test in the year it’s made.
However, it will count towards the transfer balance cap and be taken into account for determining eligibility for the age pension.
SMSFs must ensure the member’s contribution has satisfied all relevant conditions and completed the downsizer contribution form before accepting a downsizing contribution.
Car limit for 2018/19
The car limit is $57,581 for the 2018/19 income year (unchanged from the previous year). This amount limits depreciation deductions and GST input tax credits.
FBT: Car parking threshold
The car parking threshold for the FBT year commencing 1 April 2018 is $8.83.
This replaces the amount of $8.66 that applied in the previous year commencing 1 April 2017.
2016/17 Individual Tax Return Checklist
- Claims for deductions
- Receipts for deductions
- Car claims and log books
Please review the information below and contact our office if you need assistance.
Tax saving strategies prior to 1 July 2018
A good strategy to reduce tax payable is normally to accelerate any income tax deductions into the current income year, which will reduce overall taxable income in the current year.
The tax rates for resident (adult) individual taxpayers for the 2017/18 income year are as follows:
Common claims made by individuals
The following outlines common types of deductible expenses claimed by individual taxpayers, such as employees and rental property owners, plus some strategies that can be adopted to increase deductions for the 2017/18 income year.
1. Depreciable plant, etc, costing $300 or less
Salary and wage earners and rental property owners will generally be entitled to an immediate deduction if certain income-producing assets costing $300 or less are purchased before 1 July 2018.
Some purchases you may consider include:
- books and trade journals;
- briefcases/luggage or suitcases;
- calculators, electronic organisers;
- electronic tablets;
- stationery; and
- tools of trade.
2. Clothing expenses
Purchase or pay for work-related clothing expenses prior to the end of the income year, such as:
- compulsory (or non-compulsory and registered) uniforms, and occupation specific and protective clothing;
- other expenses associated with such work-related clothing, such as dry cleaning, laundry and repair expenses.
3. Self education expenses
Consider prepaying the following self education items before the end of the income year:
- course fees (but not HECS-HELP fees), student union fees, and tutorial fees;
- interest on borrowings used to pay for any deductible self education expenses.
Also bring forward purchases of stationery and text books (i.e., those which are not required to be depreciated).
4. Other work-related expenses
Employees can prepay any of the following expenses prior to 1 July 2018:
- union fees;
- subscriptions to trade, professional or business associations;
- magazine and professional journal subscriptions;
- seminars and conferences;
- income protection insurance (excluding death and total/permanent disability).
Note: When prepaying any of the expenses above before 1 July 2018, ensure that any services being paid for are to be provided within a 12 month period that ends before 1 July 2019. Otherwise, the deductions must generally be claimed proportionately over the period of the prepayment.
We will need you to bring information to assist us in preparing your income tax return.
Please check the following and bring along payment summaries, statements, accounts, receipts, etc., to help us prepare your return.
- payment summaries for salary and wages;
- lump sum and termination payments;
- government pensions and allowances;
- other pensions and/or annuities;
- allowances (e.g., entertainment, car, tools);
- interest, rent and dividends;
- distributions from partnerships or trusts;
- details of any assets sold that were either used for income earning purposes or which may be caught by capital gains tax (CGT).
Expenses/Deductions (in addition to those mentioned above):
- award transport allowance claims;
- bank and government charges on deposits of income, and deductible expenditure;
- bridge/road tolls (travelling on business);
- car parking (when travelling on business);
- conventions, conferences and seminars;
- depreciation of library, tools, business equipment (incl. portion of home computer);
- gifts or donations;
- home office running expenses:
- cooling and heating
- depreciation of office furniture
- telephone and internet;
- interest and dividend deductions:
- account keeping fees
- ongoing management fees
- interest on borrowings to acquire shares
- advice relating to changing investments (but not setting them up);
- interest on loans to purchase equipment or income-earning investments;
- motor vehicle expenses (business/work related);
- overtime meal allowances;
- rental property expenses – including:
- advertising expenses
- council/water rates
- land tax
- legal expenses/management fees
- genuine repairs and maintenance
- telephone expenses
- travelling to inspect property;
- superannuation contributions;
- sun protection items;
- tax agent fees;
- telephone expenses (business);
- tools of trade.
2017/18 Year-end Checklist for Business
Many of our business clients like to review their tax position at the end of the income year and evaluate any year-end strategies that may be available to legitimately reduce their tax. Traditionally, year-end tax planning for small businesses is based around two simple concepts – i.e., accelerating business deductions and deferring income.
However, Small Business Entities (‘SBEs’) have greater access to year-end tax planning due to particular concessions that only apply to them (the SBE system replaced the previous Simplified Tax System (‘STS’) on 1 July 2007). Taxpayers that qualify as an SBE can generally pick and choose which of the concessions they wish to use each year (although see below regarding the simplified depreciation rules). The basic requirement to be eligible for most of the SBE concessions for the year ending 30 June 2018 is that the business taxpayer’s annual turnover (including that of some related entities) is less than $10 million.
The following are a number of areas that may be considered for all business taxpayers.
Maximising deductions for non-SBE taxpayers
Non-SBE business taxpayers should endeavour to maximise deductions by adopting one or more of the following strategies:
- Prepayment strategies;
- Accelerating expenditure; and
- Accrued expenditure.
Prepayment strategies – non-SBE
Any part of an expense prepayment relating to the period up to 30 June is generally deductible.
In addition, non-SBE taxpayers may generally claim the following prepayments in full:
- expenditure under $1,000;
- expenditure made under a ‘contract of service’ (e.g., salary and wages); or
- expenditure required to be incurred under law.
Note: Prepayments can be a little confusing, so before you commit to making a payment please feel free to call us with any queries or assistance if required.
Accelerating expenditure – non-SBE
This is where a business taxpayer brings forward expenditure on regular, on-going deductible items. Business taxpayers are generally entitled to deductions on an ‘incurred basis’. Therefore, there is generally no requirement for the expense to be paid by 30 June 2018 (as long as the expense has genuinely been ‘incurred’, it will generally be deductible).
The following may act as a checklist of possible accelerated expenditure:
- Depreciating assets costing $100 or less can be written off in the year of purchase.
- Depreciating assets costing less than $1,000 can be allocated to a low value pool and depreciated at 18.75% (which is half of the full rate of 37.5%) in their first year regardless of the date of purchase.
- Repairs – repairs to office premises, equipment, cars or other business items.
- Consumables/spare parts.
- Client gifts.
- Fringe benefits – any benefits to be provided, such as property benefits, could be purchased and provided prior to 1 July 2018.
- Superannuation – contributions to a complying superannuation fund, to the extent contributions are actually made (i.e., they cannot be accrued but must be paid by 30 June).
Accrued expenditure – non-SBE
Non-SBE taxpayers (and some SBE taxpayers) are entitled to a deduction for expenses incurred as at 30 June 2018, even if they have not yet been paid.
The following expenses may be accrued:
- Salary or wages and bonuses – the accrued expense for the days that employees have worked but have not been paid as at 30 June 2018.
- Interest – any accrued interest outstanding on a business loan that has not been paid as at 30 June 2018.
- Commercial bills – the discount applicable to the period up to 30 June 2018, where the term of the bill extends past 30 June.
- Commissions – where employees or other external parties are owed commission payments.
- Fringe benefits tax (FBT) – if an FBT instalment is due for the June 2018 quarter, for example, but not payable until July, it can be accrued and claimed as a tax deduction in the 2018 income year.
- Directors’ fees – where a company is definitively committed to the payment of a director’s fee as at 30 June 2018, it can be claimed as a tax deduction.
Maximising deductions for SBE taxpayers
Deductions can be maximised for SBE business taxpayers by accelerating expenditure and prepaying deductible business expenses. Former STS taxpayers who have continued to use the STS cash method since before 1 July 2005 cannot accrue expenses, but other SBE taxpayers on an accruals basis can accrue expenses (see above regarding accruing expenditure).
Accelerating expenditure – SBE
All SBE taxpayers can choose to write-off depreciable assets costing less than $20,000 in the year of purchase*. Also, assets costing $20,000 or more are allocated to an SBE general pool and depreciated at 15% (which is half the full rate of 30%) in their first year. Therefore, where appropriate, SBE business taxpayers should consider purchasing/installing these items by 30 June 2018.
It should be noted that SBE taxpayers choosing to use the SBE depreciation rules are effectively ‘locked in’ to using those rules for all of their depreciable assets.
Further note, former STS taxpayers who have continued to use the STS cash method since before 1 July 2005 and who qualify as an SBE are generally only entitled to deductions if they have paid the amount by 30 June.
(*) The small instant asset write-off threshold has been temporarily increased to ‘less than $20,000’, for assets acquired and installed ready for use between 7.30 pm (AEST) 12 May 2015 and 30 June 2018. On 8 May 2018 the Government announced it intends to extend this date to 30 June 2019.
Prepayment strategies – SBE
SBE taxpayers making prepayments before 1 July 2018 can choose to claim a full deduction in the year of payment where they cover a period of no more than 12 months (ending before 1 July 2019). Otherwise, the prepayment rules are the same as for non-SBE taxpayers.
The kinds of expenses that may be prepaid include:
- Rent on business premises or equipment.
- Lease payments on business items such as cars and office equipment.
- Interest – check with your financier to determine if it’s possible to prepay up to 12 months interest in advance.
- Business trips.
- Training courses that run on or after 1 July 2018.
- Business subscriptions.
This is some of the information we will need you to bring to help us prepare your income tax return:
- Stocktake details as at 30 June.
- Debtors listing (including a list of bad debts written off) as at 30 June. Note: In order to claim a deduction, the debt must be written off on or before 30 June.
- Creditors listing as at 30 June.