2013 Practical Updates
Spike in email scams
The ATO is warning taxpayers to protect their personal and financial details following a sharp spike in reports of tax-related email scams.
Since June, reports from the public of ‘phishing’ scams have quadrupled from 3,586 to 15,441 compared with the same period last year.
“While the public is reporting scam emails to the ATO in increasing numbers, scammers are also becoming more sophisticated in the way they trick taxpayers into handing over their personal details,” Tax Commissioner Chris Jordan said.
“We advise people to be vigilant of emails that mimic the ATO’s online publications. Think very carefully before clicking on links and attachments in emails or on social networking sites.
“The ATO will never send taxpayers an email asking them to confirm, update or disclose confidential information including your name, date of birth, home address, passwords or credit card details.”
Be careful about property arrangements with family!
The Administrative Appeals Tribunal (AAT) has held that a taxpayer who jointly owned a townhouse with his son (who lived there) was liable for CGT on his share of the property when it was sold.
In April 2002, the taxpayer purchased a townhouse for his adult son to reside in, but he had both of them registered on the title of the property, to “guard against his son acting unwisely”.
His son lived in the townhouse until 2007, when he moved into another house, and in September 2007 the townhouse was sold and the proceeds from the sale were used to reduce the son’s debt to the bank for the second house.
The taxpayer was assessed for the 2008 income year for CGT on 50% of the net capital gain arising from the sale of the townhouse.
Reasons for Decision
The taxpayer claimed that:
- it was never his intention to profit from the sale of the townhouse, and that “he only went on the title to protect his ‘inexperienced’ son of 23 years from doing something ‘silly’ and selling the townhouse on a whim”; and
- he did not receive any of the proceeds of sale of the townhouse (as the entire net amount received went towards reduction of his son’s loan).
- However, the AAT stated that these matters did not alter his liability, as:
- for CGT purposes, a person is treated as having received money if it is applied as he or she directs;
- to be eligible for the ‘main residence exemption’ in respect of his liability for CGT on disposal of his interest in the property, the taxpayer would have had to reside in the townhouse himself; and
- there was no evidence that the taxpayer held his interest in the property ‘on trust’ for his son.
Taxpayer slammed on (lack of) record keeping
The AAT has upheld the application of a 50% penalty to a taxpayer for ‘recklessness’ in claiming deductions that couldn’t be substantiated.
In the 2011/12 tax year, the taxpayer made the following claims for tax deductions in relation to his work as a car salesman:
- work-related car expenses of $23,065;
- work-related clothing and laundry expenses of $645; and
- other work-related expenses, including phone expenses and a car dealer’s licence expense, of $10,605.
Following an audit, these were reduced to nil, $150 and nil, respectively, and the ATO also imposed a penalty of $6,092, being 50% of the tax shortfall of $12,184 (on the basis the taxpayer was ‘reckless’).
Reasons for Decision
The taxpayer claimed that his conduct was unintentional and that the penalty was unfairly imposed on him, being “more severe than would be imposed in a court if he had been convicted of criminal conduct”.
However, it was established during the trial that:
- the taxpayer had not maintained a log book in relation to his claim for car expenses;
- the car dealer’s licence expense was not incurred in the relevant financial year;
- laundry expense records were not maintained (in any event, there was no requirement from his employer to wear specified clothing or shoes, and the taxpayer described his ‘work uniform’ as “merely whatever clothing he happened to be wearing on a particular day”); and
- phone records indicated that the taxpayer had two mobile phones (one used by his wife), that the account included home internet charges and that non-work related international calls were included.
Therefore, the AAT was satisfied that the taxpayer was grossly negligent in claiming the deductions included in his tax return, and that his conduct was more serious than mere failure to take reasonable care, so the 50% penalty was appropriate. For disposals of assets, the time of the CGT event is when the disposal contract is signed.
Where contract and settlement dates cross over
financial years, the capital gain or loss should be declared in the financial
year in which the contract was signed.
Are you sure your ‘independent contractors’ are not ‘employees’?
Two recent cases have highlighted how important the distinction between ‘independent contractors’ and ’employees’ is:
- in one case, it was held that a plumbing business did not meet its superannuation guarantee obligations in respect of five of its plumbers that it had treated as independent contractors; and
- in a case between a taxi driver and the owner of the taxi, the Fair Work Commission held that the relationship between them was one of employer/employee, and therefore the unfair dismissal laws applied to their relationship.
As a general proposition, an independent contractor provides personal services whilst working in and for his or her own business, whereas an employee provides personal services whilst working in the employer’s business.
Taxi cents per kilometre rates
The current taxi cents per kilometre earnings rate (for the 2012 income year) is $1.27/km (up from $1.24/km for the 2011 income year).
This rate is the average amount of gross income earned by a taxi for the total kilometres travelled by the taxi in a year, including GST.
Taxi operators and drivers can use the rate to:
- compare their performance to the rest of the taxi industry; and
- check that their tax records accurately reflect their income.
The ATO also uses the cents per km rate where taxi operators or drivers do not have proper records.
2013/14 CGT improvement threshold
For the 2013/14 income year, the improvement threshold is $136,884 (up from $134,200 for the 2012/13 income year).
This threshold is used for working out when a capital improvement to a pre-CGT asset is a separate asset and for capital improvements to CGT assets where a rollover may be available.
If you would like advice about superannuation compliance and taxation advice generally, please contact our office.
What does tax look like under a Coalition government?
Now that the Abbott government is settling in, it is worthwhile to look at their promises and the commitments that they made in the run-up to the election.
Here’s a rundown on some of the more important commitments, although many don’t have effective dates:
- Self-education expenses: There will be no $2,000 cap on self-education expense deductibility.
- FBT and cars: The statutory formula method for car fringe benefits will not be abolished.
- Company tax rate to be cut to 28.5% from 1 July 2015.
- No changes to the GST rate before the next election – although a proposed Tax Reform White Paper may cover possible GST reforms.
- Abolish the carbon tax.
- Abolish the mining resource rent tax (MRRT).
- Discontinue the tax loss carry-back measure (linked to the MRRT).
- Discontinue the small business instant asset write-off (currently $6,500).
- Remove accelerated depreciation for motor vehicles for small business (currently $5,000).
- Introduce a 1.5% levy on companies with taxable incomes above $5m to fund a Paid Parental Leave (PPL) Scheme – from 1 July 2015 – and give mothers six month’s leave based on their wage (capped to an annual $150,000 salary) or the national minimum wage (whichever is the greater), plus super.
The superannuation guarantee will increase from 9% to 12%, but will be delayed by 2 years, so that the 12% target is achieved in 2021 rather than 2019.
What the ATO is up to with its FBT Audits
For employers outside the FBT system – the ATO has advised that where compliance work (an audit) is being undertaken primarily on other taxes, ATO staff have been told to look at FBT issues where information held by the ATO indicates an FBT risk.
For example, an employer may have motor vehicles registered in the business name, but no FBT return has been lodged or any employee contributions disclosed.
The ATO says that additional FBT training is being provided to compliance staff in these areas.
FBT: What happens when two employees use the same car?
“What happens when two employees, both using log books, use the same car and get different percentage uses?” Well, you basically take an average of the use between the two employees
For example,XYZ Pty Ltd supplied a car to employee A for the first four months of the 2013 FBT year. During this time, employee A maintained a valid logbook for a continuous 12 week period.
Employee A then left the company and the vehicle was transferred to employee B, another employee of XYZ Pty Ltd.
As employee B’s job role was substantially different, she also maintained a valid logbook to cover her use of the vehicle for a continuous period of 12 weeks.
The employee breakdown and business use percentage as per the logbooks was as follows:
|Employee||Business kms||Total kms||Business %|
Based on the
above, the business use percentage should be calculated on the total number of
business kilometres travelled divided by the total kilometres travelled for the
holding period: i.e., 32,040 + 3,480 = 35,520 divided by 42,000 resulting in a
business use percentage of 84.57% (assuming this reflects the full FBT
year). The following year would use the
58% provided by employee B’s logbook.
SIC rates for 2013
The ATO has released the 2013 December quarter rates for the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) as follows:
|GIC annual rate||9.6%|
|GIC daily rate||0.02630137%|
|SIC annual rate||5.6%|
|SIC daily rate||0.01534246%|
Tax is not always fair? What a surprise!
The following three cases are good examples of why you should always get tax advice up-front before entering into financial transactions.
Case 1 is the sad tale of a taxpayer who sold a property, didn’t receive the full proceeds of the sale but still had to pay the taxman the GST, as if they had received the full amount.
In this case, when the purchaser couldn’t come up with the full amount at settlement, the taxpayer entered into a vendor’s finance agreement. Under that agreement, the vendor effectively ‘loaned’ the balance of the purchase price to the purchaser.
As a result, the taxpayer had to pay GST on the full amount.
In the end, the purchaser couldn’t pay the full amount they owed to the vendor. Nonetheless, GST was still payable on the full contract price.
Case 2 involved a taxpayer who deposited $430,000 into his super fund. When the GFC hit, he panicked and withdrew half. Six months later he reconsidered, and redeposited another $100,000.
Now, you’re only allowed to deposit $450,000 in your own contributions in a three year period (if you’re under 65). But he thought that, on a net contribution basis, he was OK given that he had withdrawn about $200K.
Unfortunately, the rules are simple. Don’t contribute more than $450,000.
He did and was slugged excess contributions tax on the extra $80,000 that went into the fund.
Case 3 involved a council worker who claimed that he was also a share trader, not merely a share investor – probably to be able to claim losses on sales of shares.
Even though the taxpayer had turnovers of $934,575 and $385,938 in the years concerned, the AAT member presiding over the case said that while it was more than a hobby, it was not a business.
The taxpayer even maintained an office specifically for the purpose of conducting his share trades and for accounting and tax calculations.
Editor: Quite clearly, this was a “line ball” decision that unfortunately went against the taxpayer. Good advice would have cautioned him to prepare business plans and conduct himself in a more “business-like” way.
Cases 1 and 2 could equally have gone the taxpayers’ way with the right advice.
you would like advice about superannuation compliance and taxation advice
generally, please contact our office.
The Government’s Tax Plans
Some of the tax and superannuation policies the Government have taken to the election include:
- Terminating the fixed carbon price and bring forward the start date of emissions trading to 1 July 2014;
- Targeting the FBT exemption for car fringe benefits to actual business use (i.e., abolishing the ‘statutory formula method’);
- Staged increases to the rate of tobacco excise;
- Giving additional resources to the ATO to address ongoing levels of tax debt and unpaid superannuation; and
- Committing to make no major changes to superannuation tax policy for five-year periods commencing “immediately” (as at 31 July 2013).
Note, however, that the Government has decided to defer the introduction of the $2,000 cap on work-related education expense deductions until 1 July 2015.
The Coalition’s Tax Plans
Some of the tax and superannuation policies the Coalition are taking to the election include:
- Reducing the company tax rate by 1.5% to a new rate of 28.5%;
- Expanding the paid parental leave scheme to provide working women their full salary for six months. They intend to partly fund this by a 1.5% levy to be imposed on businesses with taxable income exceeding $5 million, so their tax rate will effectively remain at 30%;
- Reject Labor’s $1.8 billion FBT “hit on cars”;
- Defer by two years the increase in compulsory employer-funded superannuation;
- Protect the rights of independent contractors and the self-employed, and will not change current laws relating to the treatment of personal services income; and (of course)
- Abolish the carbon tax and mining tax.
Incidentally, the Australian Greens have proposed reducing the company tax rate for small businesses from 30% to 28% from 1 July 2014.
Common errors when applying the CGT concessions
The ATO has noticed some common errors occurring when taxpayers apply the small business CGT concessions, and has offered tips to help avoid those errors.
Satisfy the maximum net asset value test
Just prior to the CGT event, the total net value of the taxpayer’s CGT assets cannot exceed $6 million.
This includes the net value of the CGT assets of any entity that is ‘connected with’ the taxpayer, is an ‘affiliate’ of the taxpayer, or who is connected with the taxpayer’s affiliates.
Determine the market value of a business or asset
Where the market value is required, accepted valuation principles should be applied.
Use the contract date, not settlement date
The CGT event occurs at the time the contract is entered into, not at the settlement date. For disposals of assets, the time of the CGT event is when the disposal contract is signed.
Where contract and settlement dates cross over financial years, the capital gain or loss should be declared in the financial year in which the contract was signed.
When a superannuation pension commences and ceases
The ATO has published a Ruling about “starting and stopping a new superannuation income stream” (i.e., a superannuation pension).
The Ruling applies to complying superannuation funds (including SMSFs) which commence an ‘account-based pension’, including a ‘transition to retirement pension’, and focuses on when a pension commences and when it ceases and, consequently, when a pension is payable.
These concepts are relevant to determining the income tax consequences for both the superannuation fund (including the availability of the pension exemption) and the member in relation to superannuation income stream benefits paid.
The ATO states there has been a lot of interest as to when a pension ceases,and the most common circumstances for a pension ceasing are summarised as follows:
- When all pension capital is exhausted;
- There has been a failure to comply with the superannuation pension rules (Editor: Note that there are limited circumstances where the Commissioner may apply his powers of general administration to nonetheless allow the pension to still continue);
- The pension is fully commuted (i.e., when a member, or beneficiary of a deceased member, chooses to exchange all of their pension entitlements for a lump sum); or
- The member has died – A pension ceases as soon as the member in receipt of the pension dies, unless a dependant beneficiary is automatically entitled to a reversionary pension.
Recent amendments to the tax law, applicable to the 2012/13 income year and later income years, ensure that where a member was receiving a pension immediately before their death, the fund will continue to be entitled to the pension exemption from the time of the member’s death until their benefits are cashed, provided the relevant requirements are met (e.g., the benefits must be cashed ‘as soon as is practicable’ following the death of the member).
Segregation of pension assets
The ATO has also recently released a document setting out their views on what a super fund needs to do to ‘segregate’ its pension assets and, therefore, ensure that income from those assets is exempt from tax, without the need to obtain an actuarial certificate.
Although the document is only a ‘draft determination’, it provides very practical guidance.
For example, it states that a superannuation fund will often require two separate bank accounts in order to maintain one of them as a segregated bank account.
That is, to properly segregate the bank account so that the fund won’t need an actuarial certificate, a separate bank account will need to be held for the sole purpose of paying the pension, and another bank account may need to be held for other or general purposes.
you would like advice about superannuation compliance and taxation advice
generally, please contact our office.
The Government handed down the 2013/14 Budget on 14 May 2013. Most of the tax and superannuation measures had already been previously announced, but a few of the new measures include the following:
- The government will defer the personal income tax cuts that were to commence from 1 July 2015 (i.e., by raising the tax-free threshold from $18,200 to $19,400);
- From 1 July 2014, the government will increase the Medicare levy by 0.5% from 1.5% to 2% to provide funding for DisabilityCare Australia (i.e., the national disability insurance scheme);
- From 1 July 2014, the non-primary production threshold for farm management deposits (FMDs) will be increased from $65,000 to $100,000 (i.e., this means that primary producers will be able to claim deductions for FMDs where their non-primary production income does not exceed $100,000);
- From 1 March 2014, the Baby Bonus will no longer be available. Instead, families eligible for Family Tax Benefit (FTB) Part A will receive an additional loading on their family payments when they have a new baby (if they are not accessing the Government’s Paid Parental Leave scheme), totalling $2,000 for the first child (and all multiple births) and $1,000 for subsequent children; and
- The government will phase out the net medical expenses tax offset, although there will be transitional arrangements for those currently claiming the offset.
Limited recourse borrowing arrangements by SMSFs
According to the ATO, with many SMSF trustees entering into limited recourse borrowing arrangements (LRBAs), it appears there is still some uncertainty with respect to associated taxation issues.
Note: SMSFs are generally prohibited from borrowing, but since 2007 there has been an exception where an SMSF borrows on a limited recourse basis to acquire a specific asset, and very strict conditions are met.
One of these conditions is that the asset is not held in the name of the SMSF, but is instead held under a separate trust (e.g., a ‘holding trust).
A trustee of an SMSF who enters into a LRBA for the purpose of purchasing an asset will be treated as the owner of the asset for income tax purposes, meaning the SMSF will be assessed on the income earned on the underlying asset (such as rental income) and will be able to claim any relevant deductions.
In addition, it is the SMSF which should account for any relevant GST amounts on income and expenses associated with the LRBA.
Therefore, where the LRBA is set up appropriately, there will be no need for the holding trust to lodge an annual return with the ATO.
The ATO also warns that SMSFs entering into LRBAs need to do so carefully, because an arrangement that does not meet all the requirements would contravene the borrowing prohibition and place the compliance status of the fund at risk.
Superannuation changes for employers from 1 July 2013
From 1 July 2013, the super guarantee rate is going up from 9% to 9.25% (and the rate will increase gradually over 7 years to 12% by 2019).
Also, from 1 July 2013, the upper age limit for paying super for an employee has been removed, meaning that there will no longer be a maximum age for super guarantee eligibility.
Employers with eligible employees aged 70 years or older will need to make super contributions to their super funds from 1 July 2013.
Super funds will also be allowed to start providing a new type of super account called ‘MySuper’ from 1 July 2013, which will replace existing default accounts offered by super funds (a default fund account is one chosen by an employer for an employee who does not choose their own super fund).
Therefore, it may be a good idea for employers to check with their current default fund to find out whether they will be offering a MySuper account.
Record keeping for small business CGT concessions
The ATO has issued a reminder that taxpayers should keep good records to help them determine if they are eligible to claim the small business CGT concessions, including evidence of:
- carrying on a business, including calculation of turnover (to demonstrate eligibility for the ‘small business entity’ (SBE) test);
- the market value of relevant assets just before the CGT event (to demonstrate eligibility for the $6 million maximum net asset value test);
- how capital losses have been calculated and carried forward to later years; and
- relevant trust deeds, trust minutes, company constitution and any other relevant documents.
ATO Data Matching Programs
Editor: The ATO has advised that it is undertaking the following data matching programs to identify non-compliance with lodgment, payment and correct reporting obligations under taxation law.
Online Selling Data Matching Program
The ATO is requesting and collecting the user identification name and number, name, address, telephone numbers, date of birth, email address, registration date, number of monthly sales, value of monthly sales, the IP address, and bank account details of approximately 11,000 sellers who have sales of $20,000 and greater, in the 2010/11 income year through various online selling websites.
Editor: The Government has also conducted a successful pilot program (that will become a permanent part of the Government’s compliance system) that found some people were claiming social security payments while running a successful online business – the pilot, which matched Centrelink records against 15,000 eBay users, identified more than $800,000 in debts.
WorkCover Data Matching Program
The ATO will request and collect names and addresses of employer entities from state and territory WorkCover sources for the 2011, 2012 and 2013 financial years.
The total number of records Australia-wide is estimated to be 942,000, of which approximately 103,000 will be individuals who are employers.
The ATO may also disclose information about employers that may not be meeting their obligations under workers compensation laws if requested by the relevant WorkCover authorities.
Luxury Car Tax limit for 2013/14
The luxury car tax threshold for the 2013/14 financial year has been indexed to $60,316 (up from $59,133 for the 2012/13 year) and is used to determine if luxury car tax is payable.
The fuel-efficient car limit for the 2013/14 financial year is $75,375 (unchanged from the 2012/13 year).
Car parking threshold: 2013/14
The car parking threshold for the FBT year commencing on 1 April 2013 is $8.03 (up from $7.83 for the year commencing 1 April 2012).
Editor: Two of the conditions that must be met before car parking facilities provided by an employer to an employee will be subject to FBT is that a commercial car parking station is located within a 1 km radius of the employer-provided car park, and that the lowest fee charged by the operator of that car park is more than the car parking threshold.
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