PERSONAL TAXATION

Personal Tax Rates – Residents

The Government did not make any changes to the currently legislated tax rates for residents that are to apply from 1 July 2012:

• from 1 July 2012, the tax-free threshold will be increased to $18,200 and the first two marginal tax rates will be increased from 15% to 19% and from 30% to 32.5%, respectively; and
• from 1 July 2015, the tax-free threshold will be $19,400 and the second marginal tax rate will be increased from 32.5% to 33%.

The personal income tax rates and thresholds are summarised for resident taxpayers in the tables below:

Work-related Expenses Standard Deduction Dropped

The Government announced that it will not proceed with the 2010–2011 Budget announcement to allow a standard tax deduction for work-related expenses and the cost of managing tax affairs which was due to commence on 1 July 2013. The Government is pursuing other simplification measures such as tripling the tax-free threshold to $18,200 from 1 July 2012.

Interest Income Discount Not to Proceed

The Government announced that it will not proceed with the 2010–2011 Budget announcement for a 50% discount for interest income which was due to commence on 1 July 2013.

The Government said its public consultation process involving key sector groups, industry participants and consumer groups “revealed concerns with the complexity involved in calculating the discount and its overall effectiveness”.

Schoolkids Bonus

In the lead-up to the Budget, the Prime Minister announced that the Government will make a new, no-strings cash payment, called the Schoolkids Bonus, to certain families with children at school. It will replace the current Education Tax Refund and will apply from 1 January 2013. Each year, families will receive the Schoolkids Bonus worth:

• $410 for each child in primary school; and
• $820 for each child in high school.

The Government said the payment will be “automatic and upfront”, which means eligible parents will not need to keep receipts.

Flood Levy – Further Exemptions

The Treasurer confirmed in the Budget that people who suffered flood damage in 2012 will also be made exempt from the flood and cyclone levy that applies for the 2011¬–2012 financial year only. He said that earlier this year, more flooding devastated parts of western Queensland and northern New South Wales.

BUSINESS TAXATION

Company Tax Cut Proposal Shelved

The Treasurer announced that the proposed reduction in the company tax rate to 29% will not proceed. The reason given by the Treasurer was that it had become clear that the proposed tax rate cut would not be approved by Parliament.

The Treasurer added that the savings from not proceeding with the company tax cut will be used to fund other measures, including the loss carry-back arrangement for companies.

Tax Loss Carry-back Regime Confirmed

The Treasurer confirmed the Government will allow businesses to carry-back losses. Mr Swan said the proposed changes would “allow businesses to ‘carry back’ their losses, to offset past profits and get a refund of tax previously paid on that profit”. The carry-back will be available to companies and entities that are taxed like companies.

As part of the loss carry-back, from 1 July 2012 companies will be able to carry back up to $1 million worth of losses to get a refund of tax paid in the previous year. From 1 July 2013, companies will be able to carry back up to $1m worth of losses against tax paid up to two years earlier.

According to the Government, in its first four years the regime “is estimated to provide much-needed assistance to nearly 110,000 companies”.

SUPERANNUATION

Super Contributions Tax Changes

From 1 July 2012, individuals with income greater than $300,000 will have the tax concession on their concessional contributions reduced from 30% to 15% (excluding the Medicare levy). This means that the tax rate on concessional contributions will effectively double from 15% to 30% for very high income earners from 1 July 2012.

Currently, the 15% flat tax on concessional contributions (paid by the receiving superannuation fund) provides high income earners with a significantly larger tax concession than those on lower marginal tax rates. The Minister for Financial Services and Superannuation, Bill Shorten, said a small number of people on high incomes are getting a better tax deal out of super than millions on average incomes.

The proposed reduction in the higher tax concession that is currently available for very high income earners on their concessional contributions will align it more closely with the concession received by average income earners, Mr Shorten said. However, there will still be an effective tax concession of 15% (up to the concessional contributions cap of $25,000) for these high income earners.

Contributions Cap for over 50s

The proposed higher concessional contributions cap for individuals aged 50 and over with superannuation balances below $500,000 will be deferred from 1 July 2012 to 1 July 2014. Accordingly, all taxpayers, regardless of age, will be subject to a concessional contributions cap of $25,000 for the 2012–2013 and 2013–2014 income years.

In 2014–2015, the general cap is expected to increase to $30,000 through indexation, and the higher cap would then commence at $55,000 for eligible taxpayers aged 50 and over.

TAX ADMINISTRATION

Funding to Target Tax Debts

The Government announced that it will provide $106 million over four years to the ATO to improve the management of outstanding taxation debts and superannuation guarantee charge. The Government said the funding is designed “to allow the ATO to support a greater range of taxpayers in meeting their reporting and payment obligations through contacting them earlier and by providing more targeted assistance”.

GST Compliance Program

The Government is to provide $193.3 million to the ATO in 2014–2015 and 2015–2016 to continue to promote voluntary GST compliance. This extends a 2010–2011 Budget measure by two years. The funding will be directed at detecting fraudulent GST refunds, systematic under-reporting of GST liabilities, failure to lodge GST returns and outstanding GST debts.

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”.

Tax anti-avoidance rules to be tightened

The Government has announced that it will amend the general anti-avoidance provisions in the tax law. First introduced in 1981, the provisions broadly allow the Commissioner to cancel a tax benefit obtained in connection with a scheme subject to some conditions. According to the Government, the changes will ensure the provisions will continue to be effective in countering tax avoidance schemes that are carried out as part of broader commercial transactions. The announcement was made on 1 March 2012 and the Government proposed that the changes would apply to schemes entered into or carried out after that date.

Some commentators have expressed alarm over the Government’s announcement, saying the move will only cause greater uncertainty for businesses when considering key transactions and that it is an overreaction to the Commissioner’s recent court case losses. In particular, the arguments have centred on the announced retrospective start date of 1 March 2012 with little detail on the proposed changes. The Government said it intends to release draft legislation for public consultation before introducing the amendments in Parliament later this year.

Check your small business benchmarks regularly

The ATO has recently updated its small business benchmarks. It has also added two new activity statement benchmark ratios for non-capital purchases and GST-free sales. The ATO uses the benchmarks to identify businesses that it considers may not be reporting some or all of their income. The ATO can also use the benchmarks to quantify income that it considers not reported. According to the ATO, the benchmarks provide the “most accurate predictor of business turnover for each industry”.

It recommended that taxpayers review their relevant business benchmarks regularly.

The ATO has published benchmarks for a wide range of 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 data matching coffee sellers and builders

The ATO has announced data matching programs targeting coffee sellers and hardware store trade account holders as part of its latest compliance activities to tackle the cash economy. The ATO said it has already obtained data from a number of coffee suppliers and a major warehouse chain and from NSW Fair Trading, Queensland Building Services Authority, and the Government of South Australia, Consumer and Business Services. Under the “coffee suppliers” data matching program, the ATO expects to match records of more than 8,000 individuals to ensure they are reporting all their business income. In relation to the “building industry” program, the ATO says around 20,000 individuals will have purchases cross-checked with reported income.

TIP: If you are concerned these data matching programs will affect you, please contact our office.

Private health insurance rebate changes

A package of Bills to means test the 30% private health insurance rebate has made its way through Parliament. The changes will mean the amount of rebate available will depend on an income test for each financial year for individuals and families. The changes will apply from 1 July 2012 and will introduce three new “Private Health Insurance Incentive Tiers”. In conjunction with this, and also from 1 July 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover will increase depending on their level of income.

TIP: Individuals and families should be mindful of the 1 July 2012 start date. Further, some health insurance companies have indicated their intention to increase premiums. Please contact our office for more information.

Note: The thresholds increase annually, based on growth in Average Weekly Ordinary Time Earnings (AWOTE). Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.

Tribunal finds businessman a resident for tax purposes

A businessman has been unsuccessful before the Administrative Appeals Tribunal in arguing that he was not a resident of Australia for tax purposes as he had spent most of his time overseas. The businessman was a director of a company incorporated in NSW and he worked for that company as a sales agent on commission, selling Australian residential property to overseas investors mainly in Indonesia. However, the Tribunal noted, among other things, the businessman’s family home in Australia and confirmed the tax assessments and penalties issued by the Commissioner of Taxation for the 2002, 2003, 2005 and 2006 income years. The Tribunal concluded the businessman had his home, or “settled place of abode”, in Australia and was therefore a resident of Australia for tax purposes.

TIP: A taxpayer’s country of residence and the source of income are important issues. As a general principle, an Australian resident is subject to tax in Australia on income derived from all (worldwide) sources, whereas a foreign resident is only subject to tax in Australia on income from Australian sources. There are a number of tests under the tax law. If an individual passes any of the tests, the individual will be considered a “resident of Australia” for Australian domestic tax purposes.

Super rules breached for investment in related entities

In a recent decision, the Administrative Appeals Tribunal affirmed a non-compliance notice issued to a self-managed superannuation fund (SMSF). The Commissioner of Taxation had issued the notice for regulatory breaches in respect of “book entry” loans made via a related party trust. Broadly, the case concerned members of an SMSF who were also directors of the corporate trustee of the fund and other related trusts, including one which operated a family business. The SMSF had invested in a related unit trust which in turn had financial dealings with the family business. The Tribunal confirmed the non-compliance notice after finding there were breaches of the “sole purpose test” and “in-house asset rules” under the superannuation law.

TIP: Broadly, the “sole purpose test” seeks to ensure that superannuation money is set aside and only applied to fund members’ benefits in retirement, whereas the “in-house asset rules” generally restrict an SMSF from having more than 5% of its total assets invested in “in-house assets”. An “in-house asset” can include a loan to, or investment in, a “related party” of the fund. The rules can be complex, so it is important for trustees to carefully consider their investments to avoid falling foul of the rules.

Wrong property valuations can be costly

A few cases recently before the courts have centred on the issue of property valuations. If a valuation of a property is not above board, the ramifications could include a larger tax bill. The Australian Tax Office (ATO) has recently highlighted what it believes to be recurring issues concerning valuations of property in relation to the application of the GST margin scheme provisions. Often, when certain elements of a valuation are outside an acceptable range, the ATO says the ultimate valuation is higher than it should be resulting in a lower margin and less GST payable. One common area of contention is the use of purported comparable sales figures in making a valuation. The ATO has warned that comparable sales must withstand objective scrutiny of their comparability.

ATO to hold refunds pending checks

The government has announced that it will amend the tax law to allow the Tax Commissioner to hold onto refunds pending “verification checks”. Assistant Treasurer Mark Arbib said the legislation would provide the Commissioner with “legislative discretion” to delay refunding certain amounts to taxpayers pending necessary verification of their claims. Interested stakeholders have a very small window of time to comment on the draft legislation which is in response to a recent Full Federal Court decision which required the Commissioner to immediately pay to a taxpayer GST refunds worth around $930,000. The ATO had withheld the money pending the outcome of its audit of the taxpayer’s entitlement to the refunds.

Tricky excess super refund proposal

The government has released for comment draft legislation to implement its proposal to give individuals a once-only option to be refunded excess superannuation concessional contributions up to $10,000 from 1 July 2011. The proposal aims to stem the instances of inadvertent breaches of the caps which result in the “excess contributions tax”. However, there have been criticisms that the $10,000 amount may not be enough. Another concern is the application start date of 1 July 2011. Many commentators have said it should apply from at least the 2009–2010 year when the concessional contribution caps were halved to $25,000 ($50,000 for those over age 50 until 30 June 2012).

TIP: Although the proposed refund may provide some welcome relief in limited situations, it is not without its complexities. Some commentators have indicated that many individuals could still find themselves inadvertently breaching the relevant caps. If you have any questions, please contact our office.

No more deductions with Youth Allowance

The government is expected to introduce legislative amendments soon to prevent deductions against all government assistance payments for individuals from 1 July 2011, following a controversial High Court decision in 2010 (the Anstis decision). In that decision, the High Court had allowed an individual who incurred study expenses in gaining Youth Allowance to deduct the expenses from her assessable income. The government’s proposed legislative amendments will also affect students on Austudy and ABSTUDY.

Personal services income test failed

The Federal Court has recently confirmed an earlier Tribunal decision that the taxpayer had failed the “unrelated clients” test for the purposes of the personal services income (PSI) rules in the tax law in relation to a drafting business he carried on through his private company. However, the Court found the Tribunal had not properly applied the “business premises” test. This issue has been sent back to the Tribunal for re-determination.

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. However, the PSI rules do not apply to individuals or interposed entities carrying on a “personal services business”. It should be noted the ATO has recently advised that it will hold onto some income tax returns to check for PSI where appropriate. Please contact our office for any assistance.

Unfranked dividends from off-market share buy-back

A taxpayer has recently been unsuccessful before the Administrative Appeals Tribunal in arguing that an amended tax assessment was excessive. The amount of tax in question was around $195,000. The Tribunal concluded the amount of $451,600 for unfranked dividends that the taxpayer had received from a selective off-market buy-back of her shares in a company was properly included in her assessable income for the 2009 income year.

TIP: Off-market share buy-backs can give rise to deemed dividends. In the above case, the Tribunal held the consideration for the buy-back was a “deemed dividend” that was assessable to the taxpayer under the tax law in the year in which the buy-back occurred. The rules to determine the deemed dividend in these situations can be complex. In addition, special rules may apply to determine a capital gain tax (CGT) liability. In the above case, it was determined that there was no CGT as the shares were acquired before the commencement of the CGT provisions (that is, they were “pre-CGT shares”).

Tribunal highlights responsibility of SMSF trustee

A recent matter before the Administrative Appeals Tribunal has highlighted the importance of what it means to be a trustee of a self-managed super fund (SMSF). The case involved a trustee of an SMSF along with her husband. In 2006, some $3,460,000 was removed from the SMSF and transferred to an overseas bank account of the husband. The Commissioner issued a non-complying notice to the taxpayer along with an income tax and penalty assessment. Among other things, the taxpayer argued she had no knowledge of her husband’s acts as co-trustee and that the SMSF was entitled to a deduction for the misappropriated funds. However, the Tribunal affirmed the non-complying status of the SMSF and held there was no deduction available in this case. It also affirmed the 75% shortfall penalty. The taxpayer has appealed to the Federal Court against the decision.

Super contributions caps – more tinkering of rules

Due to deteriorating global economic and financial conditions, the Government late last year announced its decision to “pause” the indexation of the general superannuation concessional contributions cap for one year in 2013–14, so that it will remain at $25,000. Indexation of the cap will be deferred until 2014–15, when it is expected to rise to $30,000. The Government said this will also result in a pause in the indexation of the concessional contributions cap for individuals aged 50 and over and the non-concessional contributions cap.

TIP: Contributions above the annual contributions caps are subject to excess contributions tax levied on the individual. Different annual contributions caps apply depending on your age and whether your contributions are classified as “concessional” or “non-concessional”.

Tax discount for interest income deferred

The Government has announced its decision to defer the start date of the 50% tax discount for interest income for individuals for 12 months. The proposal is now expected to commence on 1 July 2013. Under the proposal, the discount would apply on up to $500 (increasing to $1,000 the following year) of interest earned on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products.

ATO eye on education tax refund claims

The Australian Tax Office (ATO) has commenced a data-matching program in which it will request and collect from Centrelink the names and addresses of taxpayers eligible for the Family Tax Benefit Part A. The program will cover the 2009, 2010 and 2011 financial years. It is expected the records of approximately two million individuals will be matched. The aim of the data-matching program is to identify potential non-compliance with taxation obligations in relation to taxpayers claiming the education tax refund.

TIP: The education tax refund helps eligible families and independent students meet the cost of primary and secondary school education. There are eligibility requirements as well as limits on how much you can claim. If your expenses exceed your refund limit for the year, any excess can go towards your following year’s refund claim, as long as you are still eligible.

Pleasure craft and the “wealthy”

In another example of the increasing use of data-matching, the ATO has advised that it will collect information from marine insurance companies relating to the ownership of pleasurecraft. The collection of data aims to identify individuals who have insured a pleasurecraft worth $25,000 or more. The ATO said the information, in addition to other indicators of wealth, will assist it to identify high net worth taxpayers who should be reviewed under its “highly wealthy individuals” or “wealthy Australians” programs. The ATO considers someone to be highly wealthy if he or she, together with associates, effectively controls $30 million or more in net wealth.

Court denies franking credits linked to “debt-like” securities

The majority of the Full Federal Court has confirmed that an anti-avoidance rule under the tax law applied to cancel franking credits that arose to an individual taxpayer from distributions paid on “debt-like” securities he had subscribed for in an Australian bank. The securities were Perpetual Exchangeable Resaleable Listed Securities V (PERLS V securities) issued by the Commonwealth Bank. The individual involved in the case is a representative taxpayer of some 33,000 investors. The taxpayer has sought an appeal against the decision in the High Court.

ATO valuation blocks CGT small business concessions

A taxpayer has been unsuccessful before the Administrative Appeals Tribunal in a case concerning a property sold in 2005 and a claim for the small business capital gains tax (CGT) concessions. The Tribunal held the taxpayer was not eligible for the concessions as it failed the (then) $5 million “maximum net asset value” test. The matter turned on the valuations relied upon by the taxpayer and the Commissioner in valuing the property. The Tribunal preferred the Commissioner’s valuations despite having concerns with various aspects, including assumptions made.

TIP: Small businesses can access a range of tax concessions to reduce CGT on the sale of certain assets if certain conditions are met. One of the conditions is that the taxpayer must satisfy the “maximum net asset value” test. To pass the test, the net value of all the CGT assets of taxpayer (including affiliates and connected entities) must not exceed $6 million (previously $5 million). The rules can be complex, so please contact our office for more information.

GST treatment of new residential premises

The Government has recently introduced legislative amendments into Parliament which aim to clarify the GST treatment of new residential premises. Broadly, the proposed amendments to the GST law aim to ensure that sales or long-term leases of new residential premises by a registered entity are “taxable supplies”, and that sales or long-term leases of other residential premises are “input taxed supplies”. The amendments follow a court decision which had held that a developer’s sales of newly constructed residential premises (constructed under a “development lease” arrangement) were input taxed supplies under the GST law. The Government said the outcome of the case was contrary to the policy intent of the GST legislation.

TIP: The ATO has identified common GST errors concerning property transactions. Mistakes can often be made in working out when new residential premises are actually “new” and therefore taxable. Please contact our office if you have any questions.

Director penalty notice regime under review

The Government intends to introduce tax law changes this year to expand the current director penalty notice regime. The changes aim to tackle fraudulent phoenix activity that caused a loss of revenue and a loss of employee superannuation entitlements. Phoenix activity is the practice of individuals incorporating a company, incurring debts in the entity and then liquidating it in order to avoid repaying those debts. Following the liquidation of one company, the directors of the company simply incorporate a new company and repeat the process all over again. The Government had attempted to introduce legislation last year but agreed to a parliamentary committee’s recommendation to consult further on the proposed amendments. A concern raised during the committee’s consultation was that honest company directors could potentially be caught by the proposed changes.

Small business benchmarks under microscope

The Inspector-General of Taxation, Ali Noroozi, has advised that he will review the Australian Tax Office’s use of small business performance benchmarks. The benchmarks produced by the Australian Tax Office (ATO) are used to identify taxpayers who may not be declaring all of their income and who may be involved in the cash economy. Mr Noroozi said he will investigate whether the benchmarks are an appropriate tool for identifying underreporting of income.

There has been growing concern among tax advisers about the use of benchmarks. The Inspector-General said he will also consider whether the ATO’s expectations of small business in relation to record keeping are clearly communicated and reasonable. The investigation is expected to commence later this year.

Carbon tax scheme to commence on 1 July 2012

The Government’s controversial carbon tax scheme has passed Parliament and will commence on 1 July 2012. From that date, the country’s biggest polluters will be required to pay $23 for each tonne of carbon pollution released into the atmosphere. As part of the scheme, tax cuts to assist households and support measures for businesses to assist them in adapting to the new carbon tax will also be implemented.

TIP: Although the carbon tax scheme will not commence until next year, businesses should consider putting some serious thought into how they may be affected, both directly and indirectly, by the scheme. Please contact our office for any assistance.

Uncertainty with private rulings system

In a recent case, the Full Federal Court unanimously affirmed assessments issued by the Commissioner to a taxpayer, a sports club, even though the assessments were inconsistent with a private ruling issued to the club. In 2004 the club had received a private ruling stating it was exempt from income tax for the 2003 to 2010 income years. However, the Commissioner in 2006 claimed the facts of the club’s situation had changed and withdrew the ruling. The club claimed it should be afforded with protection under the tax law. However, the Court disagreed.

TIP: According to some commentators, the court’s decision could cause taxpayers to lose confidence in the private rulings system. If you have any questions, please contact our office.

Taxpayer entitled to prompt GST refund, says Court

An exporter of mobile phone goods has been successful before the Federal Court in a case concerning GST refunds. The Federal Court ordered that the Commissioner comply with the GST and tax law and immediately pay the exporter the net amount notified in its GST returns for various tax periods covering January to May 2011. The ATO had alleged that the refunds claimed were unsubstantiated and were fraudulent. It refused to pay the amounts until an audit had concluded. However, the Court did not agree that in the circumstances the law allowed the withholding of a payment pending an investigation by the Commissioner. The Full Federal Court later also dismissed the Commissioner’s appeal against the decision.

CGT test includes commission liability after CGT event

In a recent decision, the majority of the Full Federal Court held that for the purposes of accessing the small business capital gains tax (CGT) concessions, a real estate agent commission incurred on the sale of a hotel business could be included as a liability for the purposes of the maximum net asset value test. This was the case even though the taxpayer was invoiced for the commission after entering the contract of disposal.

TIP: Small businesses can access a range of tax concessions to reduce CGT on the sale of certain assets if certain conditions are met. One of the conditions is that the taxpayer must satisfy the “maximum net asset value” test. To pass the test, the net value of all the CGT assets of the taxpayer (including affiliates and connected entities) must not exceed $6 million. Debts owed to the taxpayer are included as CGT assets for the purpose of the test. The rules can be complex: please contact our office for more information.

Personal services income rules apply, finds Tribunal

The Administrative Appeals Tribunal has recently held that the personal services income (PSI) rules applied to an IT professional to include in his assessable income amounts derived by his company through the provision of his IT expertise to a small number of clients from the same company group. The Tribunal also held the company was not a “personal services business”.

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. However, the PSI rules do not apply to individuals or interposed entities carrying on a “personal services business”. It should be noted that the PSI rules remain a tax compliance risk area for the ATO. Please contact our office for any assistance.

Tax changes for small businesses introduced

The Government has introduced legislation into Parliament which proposes to increase the small business instant asset write-off threshold from $1,000 to $6,500, and create a single depreciation pool to write-off assets at a rate of 30% (15% in the first year). The changes are proposed to commence from the 2012–2013 year; however, their formal enactment would first require the commencement of the Government’s carbon tax scheme (which will start on 1 July 2012) and the proposed Minerals Resource Rent Tax (MRRT). The changes also propose to allow an immediate write-off of up to $5,000 for motor vehicles from the 2012–2013 income year. The Assistant Treasurer, Bill Shorten, said under the changes small businesses would benefit from improved cash flow and reduced compliance costs.

Superannuation guarantee to be increased to 12%

Legislation has been introduced into Parliament which proposes to increase the superannuation guarantee (SG) rate from 9% to 12%, phasing in from 1 July 2013. The Government also announced that it would abolish the age limit for which employers no longer need to provide superannuation guarantee.

TIP: If the SG age limit is to be abolished, then from 1 July 2013, employers will be required to make SG contributions for employees regardless of an employee’s age.

Business tax losses under Tax Forum spotlight

The treatment of business tax losses will be reviewed by a business tax reform working group announced by the Treasurer at the Tax Forum held in October 2011. It is understood the first priority of the working group is to identify options for losses and how the Government would fund them. “We need to consider things like loss carry back, uplifting losses, and what happens to the value of losses when business change composition or ownership”, said Treasurer Wayne Swan. It is expected that the working group will deliver its initial report in November 2011 and a final report to the Government by March 2012, before the next budget.

Tax Office views on SMSFs, real property and borrowing rules

The Australian Tax Office (ATO) has recently issued a draft ruling which concerns self-managed superannuation funds (SMSFs), real property and the application of certain borrowing rules under the superannuation law. The draft ruling outlines where money borrowed under a limited recourse borrowing arrangement (LRBA) can be applied in maintaining or repairing (but not improving) a single acquirable asset.

TIP: While the draft ruling provides some welcome clarification on the ATO’s views on key aspects of the LRBA provisions, it only covers a few pieces of the LRBA puzzle. The rules can be complex and the penalties can be severe for getting it wrong. If you have any questions, please contact our office.

Tax law changes to tackle phoenix activities

The Government has recently introduced legislation in Parliament which aims to deter company directors from engaging in phoenix activities. Phoenix activities involve the deliberate liquidation of a company to avoid paying tax liabilities and employee superannuation. The business then “rises” again and continues operations controlled by the same person, but under another corporate entity and free of debts. The legislation also aims to encourage director compliance with tax and superannuation obligations.

The proposed tax law changes will make directors personally liable for their company’s failure to pay the employees’ superannuation guarantee amounts. The changes will also allow the ATO to pursue directors without issuing a “director penalty notice” where the company’s pay as you go (PAYG) withholding or superannuation guarantee liability remains unpaid and unreported three months after the due day. In addition, the Government proposes to deny directors (and their associates) entitlement to PAYG withholding credits (through the imposition of a new tax) where the company they are involved in has failed to remit PAYG withholding amounts.

TIP: It is proposed that the changes commence once the legislation is formally enacted. However, there are special transitional provisions which can cover amounts that are due to the ATO or a superannuation fund at the time the legislation enters into force. Directors should ensure their company’s tax risk management policies and systems are up-to-date. Please contact our office if you have any questions.

Small business depreciation rule changes on the horizon

The Government has sought comments on draft legislation which proposes to make various tax law changes concerning the small business depreciation rules that apply to small business entities. The changes are subject to the passage of the mining tax legislation as well as the carbon tax legislation in Parliament. However, should these taxes be successfully implemented, the proposed changes could improve cash flow and reduce compliance costs for small businesses. The proposed changes include increasing the instant asset write-off threshold from $1,000 to $6,500, and simplifying the current depreciation pooling arrangements to allow small businesses to depreciate some assets more quickly. The changes are proposed to apply from the 2012–2013 income year.

Standard deduction for work expenses next year

Public consultation has closed on the Government’s draft legislation which proposes to provide individual taxpayers with a standard tax deduction to cover work-related expenses and the cost of managing their tax affairs. The standard deduction proposed is $500 for 2012–2013, increasing to $1,000 for 2013–2014 and thereafter. Taxpayers whose claims exceed the proposed standard deduction will still be allowed to make those claims provided receipts are kept. However, the Government has noted the deduction is dependent on the implementation of the mining tax legislation (which is yet to be introduced).

Partnership not ended, so director still liable, says Court

A businessman has been unsuccessful in appealing to the NSW Court of Appeal against an earlier District Court decision which had held that, as a director of a company, he was liable to pay monies to the ATO that were withheld from employees’ wages. Under the tax law, a director of a company could face a tax penalty if amounts withheld from employee’s wages are not paid to the ATO.

Broadly, the director was part of a partnership operating a café/bar restaurant with another partner. However, the Court heard the relationship between the partners had deteriorated. The director argued the partnership had terminated, so therefore there could be no withholding by his company. However, the Court found it was the director’s involvement in the management of the partnership that had actually ended, not the partnership itself.

Dutch retiree took reasonable care, finds Tribunal

In a recent decision, the Administrative Appeals Tribunal held that a retiree had not failed to take reasonable care when he omitted foreign early retirement fund payments from the Netherlands from his 2003 to 2006 income tax returns. Among various factors, the Tribunal accepted the retiree’s evidence that he had sought and received oral advice from the ATO in 2002 which was contrary to later advice contained in a “private binding ruling” issue by the ATO in 2005. The Tribunal also took into account in making its findings that the retiree had limited English and did not understand and was confused by the ruling.

Super guarantee charge is a valid tax, says High Court

A market research company has been unsuccessful in its constitutional challenge in the High Court against the validity of the superannuation guarantee charge. The High Court had unanimously held the charge to be valid tax. In doing so, the High Court also affirmed an earlier Tribunal’s finding that market research interviewers were “employees” of the company for superannuation guarantee purposes, and not independent contractors.

Cash economy still on ATO’s radar

The ATO has maintained a focus on its compliance activities in relation to small business performance benchmarking and the cash economy. In a recent speech, the Commissioner of Taxation said businesses outside the relevant benchmarks are subject to ATO review and/or audit. Where businesses do not have adequate records to substantiate their performance, the Commissioner said the ATO will make a default assessment using the relevant small business benchmark.

The ATO uses a variety of tools to help it identify potential cash economy activities which include:

• collecting and comparing significant amounts of information from a number of sources, including banks, other government agencies such as Centrelink, and industry suppliers. The ATO can even collect information about purchases of major items such as cars and property; and
• comparing the performances of businesses against other similar businesses in the industry. The ATO currently has over 100 small business benchmarks for this purpose. The benchmarks are used to identify businesses that may be avoiding their tax obligations.

TIP: Undertaking a review of business records may help to identify whether you are at risk of review by the ATO. According to the ATO, taxpayers may be given concessional treatment in relation to penalties and interest, should they make a voluntary disclosure of a mistake.

Don’t take the bait on tax avoidance schemes

The ATO has recently identified a number of tax avoidance schemes which it says are a risk to small businesses. These include:

• complex arrangements involving trusts to provide loans to individuals;
• abusive labour hire schemes;
• claims by companies for a deduction for unpaid directors fees; and
• avoidance of fringe benefits tax.

TIP: Not all tax avoidance schemes are obvious and many can look legitimate. Only on close examination do higher risk features start to appear. Please contact our office if you have any questions.

Capital gains tax bills for failing test

The Administrative Appeals Tribunal has recently handed down two separate decisions concerning capital gains tax (CGT) concessions for small businesses. The tax law offers a range of tax concessions for small businesses that have made a capital gain on a “CGT asset” that has been used in the business. The concessions can reduce, eliminate or roll-over a capital gain. However, the concessions are only available if certain tests are met. The main issue before the Tribunal was whether the taxpayers satisfied the “maximum net asset value” test. The test would be satisfied if, just before the “CGT event”, the value of the assets of the taxpayers and their connected entities did not exceed $5 million.

Broadly, the Tribunal held the taxpayers did not meet the then “maximum net asset value” test in order to qualify for the concessions. The taxpayers did not satisfy the onus of proving that the “maximum net asset value” of the assets of the taxpayers and their connected entities were less than $5 million. In the first case, the Tribunal denied the taxpayer the concessions with respect to the sale of a marina for $8.9 million. In the second case, the Tribunal also refused the taxpayer the concessions in respect of a gain he made on selling two $1 shares in a company for $4.9 million.

TIP: There have been changes to the relevant rules. For example, the amount for the “maximum net asset value” test increased to $6 million. If you have any questions please contact our office.

Share trading business existed, says Tribunal

In an unusual decision, the Administrative Appeals Tribunal held a taxpayer was not a passive investor in relation to share trading activities and was carrying on a business of share trading for the year ended 30 June 2008. The taxpayer was a chief executive of a services company and traded shares in his own name on the share market. The Commissioner argued the taxpayer was not conducting a share trading business as he did not have a formal business plan and did not sell many shares during the relevant period. The taxpayer argued that the only reason he did not sell much of his portfolio during the period was due to the global financial crisis.

Taxpayer loses excess super contributions tax appeal

A taxpayer has been unsuccessful before the Federal Court in appealing against a decision of the Administrative Appeals Tribunal. The Tribunal had affirmed a superannuation excess non-concessional contributions tax assessment of $86,867 against her for breaching the $1 million non-concessional contributions cap during the transitional period to 30 June 2007 (which existed at the time). The taxpayer had argued that a $355,000 payment from her personal superannuation fund in June 2007 was received by her in a capacity as trustee before being on-paid to her new superannuation fund and therefore should be treated as a roll-over superannuation benefit. However, the Court broadly agreed with the findings made by the Tribunal.

TIP: As part of the 2011–2012 Budget, the Government proposed that eligible individuals be given a once-only option to have excess concessional contributions up to $10,000 refunded and assessed at their marginal tax rate for the financial year in which the contribution was made. The refund option is proposed to only apply for the first year in which the concessional contributions cap is breached, commencing from 2011–2012. If you have any questions please contact our office.

SMSFs warned on improper lending of money

The ATO says it is concerned that some self-managed superannuation fund (SMSF) trustees are lending money on favourable terms from their SMSFs to people who provide advice or assist in the running in the fund. It warns that this arrangement may lead to the loss of the complying status of the fund and concessional tax rates. The ATO says trustees should ensure that loan terms comply with the law and fit their investment strategy.

TIP: Decisions to lend money from an SMSF should be backed by the appropriate documentation such as an appropriate loan agreement. If you have any questions please contact our office.

The current scam directs people to a fake website that looks exactly like the ATO equivalent. The site records your information, including your credit card number.

This scam is similar to other scams that ask for your details, including your credit card number or personal bank account details. People who are tricked into disclosing these details then have their accounts raided. The best defence against these types of scams is simply to delete the email. Generally, organisations such as the ATO, you bank and other financial institutions will never ask for financial details via an email, so if you are asked to provide this type of information you should be suspicious.

If you do receive an email and you are unsure, phone the organisation in question. It pays to be cautious in these situations.

The ATO has revealed it will use extra funding from the Federal Government to increase its efforts to catch small businesses operating a cash-based transaction system inappropriately. As well as extra resources that the increased funding provides, the ATO has also improved its data matching abilities to help identify businesses that might be doing the wrong thing.

The ATO’s second commissioner Bruce Quigley says he expects around 26,000 small businesses that mainly operate in cash to be audited over the next year.

Other targets of the ATO for the 2010/11 financial year have been revealed. They are:

• Trusts used by small to medium business enterprises
• Shareholder loans
• Small businesses that have received BAS refund claims
• Employers who aren’t meeting obligations to make tax and superannuation payments for employees
• Companies with a turnover of $100 to $250 million
• Small businesses that claim losses
• Fringe benefits tax, particularly in the area of motor vehicles
• Capital asset sales
• Wealthy taxpayers, particularly those operating in private groups and executives earning in excess of $1 million a year

In better news for small businesses, the ATO has decided to extend the Small Business Assistance Package until the end of the 2010/11 financial year. The package allows small businesses with a turnover of less than $2 million a year to access 1-year interest free payment arrangements and defer activity statement payments.

Here to help

If you are concerned you might be targeted by the ATO or want to know more about the Small Business Assistance Package, contact Davenports. As with all financial matters, it is better to act early and be prepared rather than address issues at the last minute.