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An overview of the ATO’s auditing process


An overview of the ATO's auditing process

With information sharing occurring more than ever these days, not only between the Tax Office and other government departments but also banks, financial institutions, online auction sites such as eBay and more, being targeted for a tax audit is a very real possibility.

Each year the Tax Office writes to tens of thousands of individuals asking them to review their claims, and conducts thousands of reviews or audits. Overstated refunds, for example, were identified in a recent financial year as totalling millions of dollars in extra revenue for the government. And just comparing third-party information with returns (known as data matching) reveals hundreds of thousands of discrepancies, and annually nets the Tax Office extra millions (even hundreds of) every year.

Little wonder then that the Tax Office is keen to maintain the role that auditing has in its revenue raising arsenal.

But being tapped on the shoulder for a tax audit needn't be the game changer that it sounds. First of all, just because the Tax Office gets in contact with you doesn't automatically mean that an audit is taking place. The first contact can be to merely raise the fact that a discrepancy has been noticed, which may have come up due to cross references and data matching (or rather mis-matching).

Further information or verification may be all that is needed, and an honest mistake can be cleared up painlessly (apart from the pain in the hip-pocket) compared to what may happen should you refuse to co-operate at this first stage.

A review by the Tax Office can be looked at as a preliminary step to a possible audit. If the review reveals evidence that something is not quite right, an audit may follow.

As to what flags or triggers the taxman's attention, possibilities include where taxes paid do not tally with economic performance and there is no obvious reason why. Or for a business, when an operation consistently makes losses over a number of years, the Tax Office may wonder why a perpetual loss-maker is kept in existence.

The Tax Office also has a set of "industry benchmarks" that set what it sees as a standard of performance for a particular industry or sector. Should a business stray too far from a benchmark, an alarm bell may be set ringing in a tax officer's ear.

If you have actually got something to confess to, sooner rather than later might be the time to do it. Remember the Tax Office, as the revenue collection agency for the government, has the weight of the law behind it.

It's not just the shortfall in tax that they can extract from you. These tax shortfalls also come with an interest component to account for the fact that the extra amount really should have been paid by the original due date – and this interest bill will just grow the longer that you leave the tax amount unpaid. There are also hefty penalties and fines that you may have to come up with as well, depending on the nature and severity of the breach.

Any voluntary disclosure can reduce the penalties levied against you, and the amount of reduction is spelled out in legislation – done before an audit is started lessens a penalty by 80%, but a disclosure made after it has commenced is restricted to a 20% reduction.

Once initiated, an audit can last for weeks or months, and there have even been examples of audits that lasted for years. It is of course better to avoid the experience altogether if you can. Make each claim and transaction as though the Tax Office will scrutinise your every entry, and if in doubt even consider getting a private ruling before entering into a potentially contentious transaction.

Needless to say, good record-keeping will not only help you meet your tax law obligations, but will also make it easier for you to justify your position in the event of a review or audit.

A tax officer may make a less formal request for documents either in person or by calling, but depending on the extent and scope of the request, you may want to get the request in writing, just to make sure there are no misunderstandings.

Apart from the informal approach however, the Tax Office has the power to access and examine, and copy, documents and information. The law allows tax officers to have full and free access to buildings, books and other papers, to make copies of any document, and to issue notices requiring any person to provide information and documents of which they have custody or control.

However records and documents that are in confidence between, say, you and your solicitor (that are under legal or professional privilege) are not necessarily covered under these powers. But information or documents that are requested but not provided can then not be used to later dispute the resulting outcome.

If you're dealing with particularly sensitive information, you may want to check with this office or your legal adviser regarding whether privilege may apply to those documents.

Tax officers at this stage cannot simply seize all documents, and need to make a reasonable effort to distinguish between relevant and irrelevant information. And the common law privilege against self-incrimination has little sway here.

One statutory constraint is that these powers may only be used to enable the Tax Office to administer the tax law. A tax officer should be able to produce authorisation, and without this does not have to be given documents and can be asked to leave.

If a formal notice of audit is served, you will be required to provide access and reasonable facilities if needed for the tax officer. It is also an offence to not indicate where documents are stored or located, you need to open locks or provide means to do so, provide light and power if required, and give access to electronically stored data.

If you need to consult with your representative you should be given a reasonable time to do so. If you feel a need to tape record conversations or interviews, you are within your rights to do so, with the proviso that the Tax Office will need to be given a copy (and if the recording button is in a tax officer's hand, you can legally ask for a copy as well).

Conclusions made as a result of an audit need to be clearly explained to you, along with the basis for levelling penalties or interest charges. You should also be given the opportunity to explain any circumstances you believe justifies a reduction in penalties, and be told how you can go about having a decision reviewed.

Of course making false or misleading statements, or trying to deceive or mislead a tax officer, can lead to prosecution.

When you have to deal with a natural disaster


When you have to deal with a natural disaster

Now that we are heading into bushfire season, it is perhaps timely to be reminded that as well as the more obvious immediate devastation inflicted on people's property, destructive events such as fires or floods can also mean loss of income for the many affected people. This can come about not only directly, but also in terms of damage done to workplaces, income-earning tools of trade, vehicles and essentials such as computers and other equipment.


The ATO says that if you are affected by natural disaster, such as bushfires, floods or storms, there is generally no need to worry about your tax affairs right away. It says it will give you time to deal with your more immediate problems first.

More time to lodge, pay and respond

The ATO says that your tax obligations can generally be put to one side until you have dealt with the immediate effects of the disaster – whether you are affected yourself or are helping those affected. It can allow more time to settle tax debts, or if you are unable to lodge your return or activity statement, or cannot immediately deal with any other correspondence that may be currently on the table.

The ATO also says that if a business owner is unable to lodge a superannuation guarantee charge (SGC) statement, it can give you more time to lodge, although you will still be liable for the SGC and the nominal interest component will continue to accrue. You may be able to vary the amount of your next instalment if you are liable to pay under the Pay-As-You-Go instalments system.

Early access to your money

If you are expecting a refund from an income tax return or activity statement, the ATO may be able to arrange for your refund to be issued as a priority. In limited circumstances, you may be able to access your superannuation to assist you and your dependants, but special consideration will need to be sought.

Assistance payments

After a natural disaster, it may be the case that you receive assistance from government authorities, charitable institutions, employers, your family, a trade union or other sources. Most one-off assistance payments are tax free, but regular Centrelink payments remain taxable.

Damaged or destroyed property

If your property is damaged or destroyed in a disaster, you may receive an insurance payout if you had appropriate cover. How this is treated for tax purposes depends on the type of property and whether or not the property is income-producing. Repairs to income-producing properties are generally tax deductible in the year you incur them. However, this depends on whether the work you do restores it to its original condition or goes beyond remedying the damage to the point where it is an improvement or a complete replacement. Talk to us for guidance in this regard.

Reconstructing your tax records

If your records have been lost or destroyed - whether you are an individual, in business, or responsible for a self-managed superannuation fund - talk to this office about how we can help. The ATO can also provide assistance to help reconstruct your tax records and make reasonable estimates where necessary.

Fuel tax credits for individuals, businesses and others

Following a disaster, you may need to use taxable fuel (such as diesel or petrol) for generating electricity for domestic purposes; you may then be eligible to claim fuel tax credits. Businesses that are registered for goods and services tax (GST) can claim credits for the fuel tax included in the price of fuel used in eligible business activities to run machinery, plant, equipment and heavy vehicles. Non-profit organisations that are not registered for GST can claim credits for fuel used in operating emergency vehicles or vessels.

Fast help

See the government's website www.disasterassist.gov.au for current disaster assistance and other valuable information. Also ask this office should you require help with lost records, lodging forms, payments, assistance in getting a faster tax return and more.

 

November 2016 Tax Roundup


Calling time out on your business? The tips and traps

When you first went into business, either buying an established enterprise or starting from scratch, probably the last thing on your mind was the day you would close the door for the last time. But it's no use ignoring the inevitable, as one day you will leave the business – whether through pursuing another career, retirement, or even due to health reasons. It's important to know what's involved, and having a succession or exit plan can go a long way to smoothing the transition.

Tax loose ends
The sale of a going concern, as a continuing business, is generally GST free. But if in the process you separately sell "capital assets" (which are usually not intended for sale in the ordinary course of business but kept for the purpose of earning revenue), these will need to be accounted for.

You may be able to claim a deduction for many capital expenditures made in the process of winding-up the business, such as legal costs for terminating employees, or removing fixtures (that aren't depreciating assets) or site rectification costs.

Capital gains tax will come into play of course, but don't forget to account for any capital losses that may be lurking on the books. There are however various tax concessions available for the small business owner (see the details here), and if you are retiring, the profits from the sale of assets may be CGT-free.

If the business is being run from a company structure, getting the money out can also be problematic. You may need to engage a liquidator to get the money out tax effectively.

Retirement exemption on sale of business assets
Your superannuation fund could get a helpful boost if you're selling a small business. If the proceeds of the sale of a business CGT asset are rolled over into a super fund, the capital gain is exempt from CGT – and this "retirement exemption" (one of the small business concessions mentioned above) applies to the gains made on the sales of as many business CGT assets as you like, subject to a total lifetime limit of $500,000.

It's a way of encouraging people to prepare for their own retirement. And if you're at least 55 years old, you don't even need to put the money into a super fund to qualify for the tax exemption.

Taking care of staff
Of course ending a business, or selling it, will affect any staff. If you're selling the whole business as a going concern, staff may be able to keep their jobs, but if you're closing shop employees will need to know of all entitlements and payments owing. There are still legal obligations as an employer, which may include fringe benefits tax, PAYG instalments, compulsory super and perhaps eligible termination payments (ETPs), which are taxed differently to other types of payments made to someone who stops working for a business. There is an ETP calculator available that may help.

Registrations to cancel

Ultimately, as part of the process, you need to cancel your registrations with the ATO when you sell or cease trading. You are required to notify the Australian Business Register within 28 days of ceasing business to close your ABN. You can click here to apply to cancel registrations for the following:

  • Australian business number
  • goods and services tax
  • fuel tax credits
  • luxury car tax
  • pay-as-you-go (PAYG) withholding.

But before cancelling the ABN, it's best to make sure all activity statements are lodged (even if there is "nil" to report) as well as PAYG withholding amounts. GST registration needs to be cancelled 21 days from ceasing trading, and the final activity statement will need to show any sales or purchases for that period (including the sale of the business, if applicable).

Your checklist
Tying off all the loose ends can be a process, and while it may seem impossible to cover absolutely every topic that will need your attention, here is a checklist to tick off (if applicable) when selling or closing your business.

Click here to download a PDF checklist supplied by the ATO.

Top 5 Division 7A watch-out


1/ Transaction caught by Division 7A

Division 7A will arise if transactions fall into the following three categories, for a shareholder or shareholder's associate:

  • certain loans from a private company,
  • certain payments from a private company, and
  • forgiveness of a debt owed to a private company.

Some exceptions and exclusions exist however. These include:

  • payments of loans to other companies,
  • payments or loans that are otherwise assessable,
  • loans made in the ordinary course of business on normal commercial terms,
  • if a loan is repaid in full before the lodgment date, and
  • Division 7A loan agreement is in place in writing before the lodgment date (for example, minimum interest rate, maximum term).

If being caught, a private company is deemed to have paid an assessable unfranked dividend.

 

2/ Interposed entities

The tax law deems a private company to have made a payment or loan to an entity (target entity) for Division 7A purposes if:

  • the private company makes a payment or loan to another entity (interposed entity) that is interposed between the private company and the target entity, and
  • a reasonable person would conclude that the private company made the payment or loan solely, or mainly, as part of an arrangement involving a payment or loan to the target entity, and
  • either

3/ Unpaid present entitlement (UPE)

If a private company (corporate beneficiaries) has an UPE from an associated trust but the trust uses the money for its own purposes, Division 7A will apply. Further, a private company that releases all or part of its UPE is making a payment for Division 7A purposes to the extent that the release represents a financial benefit to an entity.

This issue can be avoided if:

  • the trust fully pays the UPE to the private company before the lodgment day for the trust's income tax return,
  • the parties put a Division 7A loan agreement in place, or
  • a sub-trust arrangement is in place for the sole benefit of the private company.

4/ Distributable surplus

The amount taken to be a dividend is limited to the company's distributable surplus calculated at the end of the year of income. The formula is:

Net assets + Division 7A amounts – Non-commercial loans – Paid up share value – Repayment of non-commercial loans

The distributable surplus does not necessarily equal to retained earnings.

5/ Government's proposed changes to Division 7A

In the May 2016 Budget, the government announced it is proposing to amend Division 7A with effect from July 1, 2018 to include:

  • a self-correction mechanism providing taxpayers whose arrangements have inadvertently trigger Division 7A with the opportunity to voluntarily correct their arrangements without penalty,
  • new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers, and
  • amended rules, with appropriate transitional arrangements, regarding complying Division 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions.

 

Claiming for work travel: Itinerant "flexibility" not so flexible

 

It is generally assumed that there is a degree of flexibility within the tax law over particular work travel claims that arise where the nature of the employment is deemed to be itinerant.

If you do itinerant work (or have shifting places of work) you can claim the cost for driving between workplaces and your home. Note that you cannot count your home as a workplace unless you carry out itinerant work.

The ATO says that the following factors may indicate that you do itinerant work:

  • travel is a fundamental part of your work due to the very nature of your work, not just because it is convenient to you or your employer
  • you have a "web" of work places you travel to throughout the day
  • you continually travel from one work site to another
  • your home is a base of operations – if you start work at home and cannot complete it until you attend at your work site
  • you are often uncertain of the location of your work site
  • your employer provides an allowance in recognition of your need to travel continually between different work sites and you use this allowance to pay for your travel.

Flexible, up to a point

In case the above factors give some impression of allowing for a very wide degree of flexibility, one recent Administrative Appeals Tribunal (AAT) decision adds to the factors to be considered if making claims for home-to-work travel in the case of itinerant work.

A taxpayer (Mr Hill) claimed he was entitled to deductions for certain work-related travel expenses for meals and accommodation on the basis that he was employed in itinerant work.

On the face of it, he seemed to fit the bill. During the year, Hill undertook a number of employment arrangements and engaged in various roles. Each job was in a different location, each were short-term and seasonal in nature, and all were in the mining industry.

Mr and Mrs Hill owned a house, which he asserted was their usual place of residence. However with the exception of one location, he stayed with his wife in a motorhome that they towed to rented caravan sites near each of the locations where he had work. It was found however that they returned home for short periods, sometimes weeks, between each job.

The AAT considered some of the ATO's factors and concluded that the taxpayer was not an itinerant worker, and could not make his claims.

Its reasons included the following:

  • travel was not a fundamental part of the taxpayer's work as it did not arise out of the nature of his employment with each employer. That is, the taxpayer was under no obligation with any employer to work at multiple sites
  • employment duties did not commence at the usual place of residence or at the various caravan parks where he parked his motorhome
  • when he finished the work at each workplace, he returned home for up to three weeks before commencing at another workplace
  • the taxpayer did not have a "web" of workplaces, and the location of each workplace was known to the taxpayer with a large degree of certainty
  • the taxpayer was not required to travel between different workplaces as part of his employment; he would travel between the caravan park where he parked his motorhome and the same workplace for the relevant period of each employment. None of his employers required him to travel from where he was staying to different workplaces
  • none of the employers paid him an allowance for travel such that it may indicate that travel was a fundamental part of his employment.

The AAT further remarked as follows:

  • the taxpayer's duties did not involve him travelling from workplace to workplace as is essential for itinerancy
  • he made a lifestyle choice to work in regional towns and live in his motorhome
  • he was not required to travel to these different locations in the course of his employment. Rather, he chose to travel from his home to undertake work in these locations
  • each work place may be regarded as a regular or fixed place of employment, even if there was some uncertainty about the length of time that he would be employed at each location.

The key message

Over the past few years, the ATO has been setting its sights on incorrectly claimed work-related travel expenses (for example, car expenses, flights and accommodation). This focus is expected to continue, and the ATO has warned that it will pay extra attention to people whose work-related deductions are higher than expected. As can be seen from the above, your clients' entitlement to a deduction for work-related travel expenses will be subject to, will depend on, their individual circumstances.

 

 DASP explained, and where the revised backpacker tax fits

 

Whether you've been on a working visa and have been slogging away bagging bananas in Tully for six months, or decided to quit your city job and move to Peru, your employer has been putting money aside for your superannuation. Among sorting out all your affairs, you're probably also wondering what will happen to your super money when you leave.

The adage of "you can't take it with you when you go" is only half true in this case. It all depends on if you were a permanent, or temporary resident.

If you were a permanent resident
Say you have been a permanent resident of Australia who has moved to another country and wish to take your super with you – sorry, but you'll have to wait. You aren't able to access your Australian superannuation savings until you pass preservation age or retire, no matter where you may be living. There are some exceptions regarding this relating to health and hardship – but it's best to contact your fund to discuss your specific concerns.

If you were a temporary resident
Each year in Australia, millions of dollars in unclaimed super is left behind by temporary residents who don't realise they are able to claim their contributions when they leave. Temporary residents 
who permanently leave Australia are entitled to receive the super money that has been put aside by their employer. This is known as a Departing Australia Superannuation Payment – or DASP.

If you leave the country and haven't claimed your superannuation at least six months before you leave, it goes to the ATO. After that, you'll need to approach the ATO, which will repay it after taxes are taken out.

DASP payments are not considered part of an individual's assessable income; however, the DASP payment will be subject to the normal rates of DASP withholding tax. The tax-free component of super payments lives up to it's name - that is, zero tax.

The taxed element is the amount of the taxable component of the super lump sum that represents the return of amounts that have been subject to tax in the fund, for example, taxable contributions and fund earnings. The tax rate for the taxed element is currently 38%.

The untaxed element is the amount of the taxable component of the super lump sum that represents amounts, other than the tax-free component, that have not been subject to tax in a fund. This usually occurs because the super lump sum is sourced at least in part from a scheme that is not subject to tax. The tax rate for the untaxed element is currently 47%.

You can apply for your DASP online here.

The backpacker fly in the DASP ointment

The announcement of the "backpacker tax" before the last federal election caused something of a stir, as the proposal would have hit working holidaymakers with a 32.5% tax on earnings (from the first dollar of income) plus a 35% tax on employer super contributions when they left the country.

But the government has now decided (pending a Senate committee review) that the proposed 32.5% tax rate will revert to 19% from January 1, 2017. This will still be applied from the first dollar.

Also in the revised backpacker package however is an increase in the tax rate applied to super payments when they leave Australia. This is proposed to apply at 95%. To rub salt into this wound, the departure tax (passenger movement charge) is also proposed to go up by $5.

 

How to get an Australian business number (ABN)


It's not mandatory for a business to have an Australian business number (ABN), but there are a few good reasons why you should. Foremost among them will be that without one, your business will probably feel a whole lot poorer than it should.How to get an Australian business number

Other businesses that deal with you are legally bound to withhold tax from any payments they make to you if your business does not quote an ABN on invoices – and they must withhold it at a rate of 47%.

Having an ABN also gives your business the ability to claim back goods and services tax (GST) credits, claim fuel tax credits you quality for, register to use the pay-as-you-go withholding system, be able to offer fringe benefits to employees, and just generally make dealing with other businesses much smoother.

Where to register
To get an ABN, you can apply online for free at the Australian Business Register, but before you do you need to determine if you are indeed entitled to an ABN. There is an online entitlement checklist here to help you decide if you are entitled. 
The Australian Business Register is also the central collection point for basic information about every business with an ABN. Separate registrations are needed for GST, PAYG and so on, as well as business name registration.

If your turnover is more than $75,000 a year (before GST), you are required to register for GST, and to do that you need an ABN. (Taxi and Uber drivers, by the way, need to be in the GST system no matter what their annual turnover.)

Entities, not businesses
Every business that applies only needs one ABN (whether sole trader, partnership, company or trust) but can then run as many enterprises as they like from that single ABN as long as these operations are conducted under the same entity structure – one business can operate for example a furniture shop, a separate curtain outlet and an online fabric supply outlet. But if any of these operations are run by a different business entity, a separate ABN will be needed for it.

You will also need an ABN to register a website domain name with an extension that ends in ".au", if your business intends to have an online presence.

If you choose a company structure for your business, the first registration undertaken will probably be with the Australian Securities and Investments Commission, which will issue you with an Australian Company Number (ACN). You need this when registering for an ABN (and the ABN will actually be the business's ACN plus two digits at the beginning). You don't need to show both numbers on invoices or stationery, just your ABN.

 

New fleet "safe harbour" approach for car fringe benefits


The ATO has announced that, after consultation and collaboration with business taxpayers and industry representatives, it has developed what it calls a "safe harbour" mechanism for calculating car fringe benefits under the operating cost method.

In ATO parlance, a safe harbour is a guideline that allows taxpayers to make use of a simplified and efficient way to calculate their tax obligations where certain conditions are met.

In this case, the ATO has come up with a streamlined approach to working out the business use percentage of car fringe benefits for fleets of 20 cars or more, which it says will be applicable from the 2017 FBT year onwards (from April 1, 2017).

"The new approach reduces the record-keeping burden for your business clients," it says, adding that it allows taxpayers "to use an 'average business use percentage' when using the operating cost method".

How does it work?

Business taxpayers can access the safe harbour and use this new simplified approach if:

  • they are an employer with a fleet of 20 or more "tool of trade" cars
  • the vehicles are not part of salary packaging arrangements, and employees cannot elect to receive cash instead
  • the cars have a GST-inclusive value of less than the luxury car tax limit in the year acquired
  • employees are mandated to maintain logbooks and there are valid logbooks for at least 75% of the cars in the logbook year.

 After all of the above is in place, an employer can use the logbooks to calculate the fleet's average business use percentage.

The ATO says this simplified record-keeping approach can be applied for a period of five years in respect of the fleet (including replacement and new cars) provided the fleet remains at 20 cars or more.

The last condition is subject to there being no material and substantial changes in circumstances. An example of such a change would be a relocation of the employer's depot that would substantially alter the business use percentage of the fleet.

The ATO developed the new safe harbour method after taking on board relevant feedback from practitioners and business taxpayers which showed that compliance with record-keeping requirements of the operating cost method can be difficult and time-consuming for employers with larger fleets.

See the relevant ATO practical compliance guideline for more details.

October 2016 Tax Roundup


Backpacker tax: Government backs down

The Federal Government has responded to pressure and dropped its plan to introduce a 32.5% tax on backpacker workers. Instead, working holidaymakers will be taxed at a lower rate of 19%, starting January 1, 2017. They will still be charged from the first dollar earned.
Under the original $540 million proposal in the May 2015 budget, non-residents with working visas such as working holidaymakers were going to be subjected to a 32.5 cent in the dollar tax rate between income levels of zero and $80,000 from January 1.
This compared with a zero tax rate between $0 and $18,200 for residents, 19 cents for income between $18,201 and $37,000 and ordinary marginal rates above that.
The government had expected to recoup $500 million from the higher tax rate. It will now increase the passenger levy by $5 to cover the change. The passenger levy – or passenger movement charge – is currently $55 and will therefore increase to $60. The new rate will apply from July 1, 2017. The government will also increase the tax on working holiday makers' superannuation payments when they leave Australia to 95%.
The government will also reduce the visa application charge for working holiday makers by $50 to $390. It will also be making some changes to the 417/462 visas to improve the supply of working holiday makers and to improve its attractiveness, as a visa, for people to come on holiday to Australia. This will include two things – the first is to extend the age of eligibility from 30 to 35, and to change the same employer test to say that someone can work for the same employer for 12 months, but no more than six months in the one location.
The tourism sector will get a boost to market jobs to backpackers, with $10 million promised to Tourism Australia to promote the nation to potential working holiday makers. And it is understood legislation will be required to enact the new tax arrangements, therefore the changes still require passage through Parliament.
To generate more accurate data and boost integrity of the scheme by preventing exploitation of working holiday makers, their employers will be required to undertake a once-off registration with the ATO. Employers who do not register will be required to withhold tax at the 32.5% rate. Working holiday makers will be made aware of registered employers via the publication of a list on the ABN Lookup.

ATO not doing the best on revenue collection, says national auditor

The Australian National Audit Office (ANAO) has released a report which indicates that while the ATO may have indicated that hundreds of millions of dollars in tax revenue was being taken in, the actual amount may have been overstated. 

The new report by the ANAO found that the ATO had on at least one occasion over a five-year period "overstated" revenue raised from its data matching activities by $368.7 million. Its report also noted other cases where revenue may have been distorted.

"The ATO's monitoring of revenue and expenses associated with compliance measures could be improved. It has not had methodologies in place to accurately calculate additional revenue and expenses for all measures when introduced and does not have a comprehensive set of performance indicators."

The report highlights, for example, that the ATO had been using an outdated assumption of "base" levels of revenue. "The base levels of revenue that the ATO has been using to estimate aggregate level compliance revenue (that is, for all compliance activity) have been based on an unreliable estimate of business-as-usual revenue - a flat 'base' level of revenue for income tax and GST, which has not been adjusted since 2010-11."

The ATO maintains that it has indeed met or exceeded revenue targets. "The main conclusion drawn by the ANAO from the review is that it is unclear whether the ATO met the revenue commitments arising from compliance measures over the period 2010-11 to 2014-15," wrote acting second commissioner Alison Lendon in response to the report. "The ATO does not agree with this conclusion, with one exception where we know we have not met our commitment."

The ANAO is critical of the methodologies and assumptions that underpin the ATO's figures. "Inaccurate attribution undermines the assurance to government that the agreed amount of additional revenue is actually being raised and that the additional resources provided are used as agreed," the report says.

The ANAO calls on the ATO to develop better ways of measuring and reporting revenue, and include penalties and interest in its revenue models. It also considers that indirect revenue needs to be accounted for in a more timely manner, and that delays in collecting tax revenue (the time from when a tax assessment made and when that tax is collected) may also have an influence on final outcomes.


Fuel tax credits for heavy vehicles just got a little easier to understand

 

The ATO says it has listened to complaints about providing clarity in regard to fuel tax credits, and so has developed and issued new information (and updated a ruling) to make it easier to work out fuel tax credit entitlements for your clients.

Updated guidance

Part of its efforts are in the form of updated guidance documents, which can help determine your clients' fuel tax credit entitlements for fuel used in heavy vehicles.

  1. A new practical compliance guideline (PCG 2016/11) details the methods you can use to apportion fuel used in heavy vehicles to power auxiliary equipment. There are percentages you can apply so you won't need to do complex calculations or sample testing when you work out your clients' claims.
  2. And a new fuel tax determination (FTD 2016/1) explains that the fuel tax credit rate is reduced by the road user charge for heavy vehicles idling on a public road, or powering air conditioning for the main cabin when travelling on a public road.

Public roads

The ATO has also clarified the meaning of a "public road" in fuel tax ruling FTR 2008/1 (paragraphs 121-127). A public road is a road available for use by members of the public.

It says tax practitioners should use the:

  • "heavy vehicle for travelling on public roads" rate for travel on toll roads, bus lanes and busways, and
  • "all other business uses" rate for travel on forestry, mining access and agricultural property roads, as these are examples of roads not considered public.
If tax practitioners have not used the correct rate when calculating fuel tax credits for their clients, the ATO says that an adjustment will need to be made to their activity statement.

 



September 2016 Tax Roundup

Internal tax documents released - a peek into court interpretations

The ATO has released on its legal database a series of what until recently have been internal ATO documents.

The release of these documents in an initiative that the ATO has labelled "iNOW!" (a contraction of "interpretation now") and is, according to assistant commissioner Gordon Brysland, "a reinvention initiative to drive awareness on what is happening on the statutory interpretation front".

"iNOW! began as a way to address the need – recognised by top judges – for those working with legislation to get better at reading it," Brysland says. "Yet, stand-alone interpretation courses are still not taught in universities and, of course, reading statutes is not just the playground of the legally trained.

"Instead, people pick up the skills by osmosis, by default, or not at all. iNOW! aims to fill this gap for both lawyers and non-lawyers," he says. "We try to avoid focusing on niche issues and complication at the expense of practical guidance. Too easily this can lead to a mindset of 'nothing is certain' or 'anything goes'. Both attitudes tend to distract the fundamental search for what parliament meant by the words it used."

The documents (or "episodes" as the ATO calls them) are the brainchild of the ATO's Tax Counsel Network, and have been released with an aim to raise awareness about what courts are saying about statutory interpretation.

The monthly series began more than a year ago, and the ATO says it has now made them public in response to growing external interest. Until now, they have been filed under "miscellaneous papers" in the ATO's legal database.

Brysland says an additional aim is to draw attention to key principles, expressed in easily digestible chunks, "and to provide 'iTips' on how they may be applied". The documents comment briefly on various cases (not necessarily tax cases) and indicate why they are important.

The documents are not public rulings or legal advice, and are not binding on the ATO. The episodes released already are listed below:

  • Episode 1 (Hierarchy & harmony, Impractical obligations, Legislative intention, Statutory definitions)
  • Episode 2 (Importance of the text, Act 'always speaking', Constructional choices, Use of dictionaries)
  • Episode 3 (Singular & plural, Same word, same meaning?, Interpretation of DTAs, Black letter approaches)
  • Episode 4 (Text context text, Changes in language, Use of regulations, Deeming provisions)
  • Episode 5 (Composite expressions, Status of notes, Adding words, Refresher course)
  • Episode 6 (Importance of policy, Preconceived policy, Generalised policy, Sources of policy)
  • Episode 7 (Validity, Retrospectivity, Uncertainty, Inconvenience)
  • Episode 8 (Re-enactment, Similar phrases, Fundamental rights, Exclusive codes)
  • Episode 9 (Legislative scheme, Delegated legislation, Judgment words, Incurable defects)
  • Episode 10 (Meaning of 'person', 'as amended from time to time', Meaning of 'Australia', 'means X and includes Y')
  • Episode 11 (Statutory definitions, Taking advantage of own wrong, Beneficial legislation, Commanding the impossible)
  • Episode 12 (Same word, same meaning?, Objects and long-title, Terms in another Act, When 'may' means 'must')
  • Episode 13 (Back to basics, Principle of legality, Punctuation, Delegated legislation)
  • Episode 14 (Status of tax laws, Tax retrospectivity, Context and ambiguity, General & special provisions)

To get further episodes in the future (they are released monthly), go to the ATO's legal database page, search for "iNOW", and bookmark that page.

 Centrelink to data match details with ATO records

The Department of Human Services, which overseas Centrelink, has issued a notice of a data matching project that will enable it to compare income data it has on-hand with tax return data that has already been reported to the ATO.

Labelled by DHS the "Non employment income data matching project", the initiative will "assist the department to identify social welfare recipients who may not have disclosed income and assets".

DHS says the data it receives from the ATO will be electronically matched with certain internal departmental records to identify non-compliance with income or other reporting obligations.

The department expects to match each of the approximately seven million unique records held in its Centrelink database. Based on non-compliance criteria, the department anticipates it will examine approximately 20,000 records in the first phase of the project.

The department will use its "customer" information in the context of the income data project to:

·         verify the information reported to it

·         identify social welfare recipients who may not have disclosed income

·         match and validate tax return and the pay-as-you-go data from the ATO

·         identify discrepancies in the income declared to the department, and

·         consider whether the department will initiate relevant compliance action (including debt recovery or a referral to the Director of Public Prosecutions).

The sorts of people who may be affected by this data matching project will include welfare recipients who have lodged a tax return with the ATO during the period 2011 to 2014. DHS stipulates in its notice that the standards for data matching activities avow to protect the privacy of individuals.

 Deductibility of training course fees provided to employees

Running a successful small business sometimes requires an upskilled team. If you need your employees to grow their expertise in a particular area, spotting them for short-courses can be a worthwhile endeavour.

When providing staff these courses, the following questions can be considered by employers from a tax viewpoint.

Can I claim a deduction for course or education fees provided?
Yes. As general rule, a deduction is available for the full costs incurred in providing education to employees (such as course fees, travel costs and so on). What businesses tend to forget however is to consider possible FBT implications (see below).

Is the provision of education also subject to FBT?
Yes. Paying for your employee's work-related course fees would generally constitute a fringe benefit and be subject to FBT. However the rules within the FBT legislation allows for a full or partial reduction of FBT payable on the benefit provided that the "otherwise deductible" rule is met.

Simply put, the otherwise deductible rule assumes that if the employee had hypothetically incurred the expense, they would have been able to claim a deduction for the expense themselves.

It follows that if the otherwise deductible rule could apply, the employer can reduce their FBT liability to the extent that the hypothetical deduction would have been allowed to the employee.

Certain membership fees and subscriptions paid by an employer are specifically exempt from FBT (such as a subscription to a trade or professional journal). Any FBT expense, however, can be deductible to the business.

When is an education expense considered to be hypothetically deductible to the employee?
This will depend on the type of course or education undertaken by the employee.

The ATO has provided guidance in working out whether course or education fees incurred is deductible to an employee (see here for more).

Generally, the course must have a sufficient connection to an employee's current employment and:

  • maintain or improve the specific skills or knowledge the employee requires in current employment, or
  • result in, or possibly result in an increase to, income from current employment.

Employees generally cannot claim a deduction for an education expense if it doesn't have a sufficient connection to their employment, even if:

  • it might be generally related to it, or
  • it enables the employee to get new employment.

In most cases, employers will provide for education costs that are beneficial to their business, and so the otherwise deductible rule should apply such that no FBT is payable.

What is Australia's "tax gap", and how is it measured?

Every year, the ATO measures its revenue and compares that total against the amount of revenue it expected to make. Often, the two numbers are different. The ATO has labelled that discrepancy the "tax gap".

The ATO's projected revenue total is based on the amount of tax "theoretically payable" in a given year, assuming every taxpayer complies fully. The actual amount of tax collected is always much less, and the ATO says this is mostly due to a host of innocuous factors like administration expenses and employer obligations. Sometimes, though, less-than-efficient practices increase the gap.

Tax gaps also help the ATO to locate its administrative revenue leaks, and work on fixing them. According to the regulator, all estimates have multiple goals, including:

  • measuring the types and levels of tax revenue losses from non-compliance, providing a view of the overall effectiveness of the tax system over time;
  • supporting efficiency in the allocation of resources; and
  • supporting perceptions of fairness and transparency in the tax administration's efforts.

How is the tax gap actually created?
The ATO says tax gaps are made, at least in part, by "unintentional, careless or deliberate taxpayer actions that result in under-reporting of their tax obligations". It says that as a result, it collects less revenue that would otherwise have been the case. But some taxpayers overpay – and the gap estimates "net off" overpayments and underpayments.

What are some recent gaps found?
In the 2014-15 financial year (the 2015-16 year isn't fully accounted for yet), the ATO measured a series of tax areas and found sizeable gaps.

For example, it measured gaps for GST, luxury car tax and wine equalisation tax. In its measurements, it included a "voluntary compliance ratio" (VCR), which complements the gap number by measuring the proportion of taxpayers fully compliant with "all four pillars of compliance".

These four pillars include:

  • being correctly registered,
  • reporting on time,
  • paying on time, and
  • reporting the correct amount.

 

Net gap $

Net gap % of revenue

Gross gap %

VCR (equivalent to % of theoretical revenue)

GST

2.7 billion

4.9

10.6

84

Luxury car tax (LCT)*

15 million

3.3

4.8

92

Wine equalisation tax (WET)*

35 million

3.3

3.9

N/A

*estimate, not taking into account LCT refunds or WET producer rebates

How reliable are the gap measurements?
The ATO says tax gap estimates are best viewed as a trend over time, taking into account a considerable error margin. The "absolute dollar gap," for instance, "should only ever be seen as a guide".

"Given this imprecision in measurement, the International Monetary Fund recognises that tax gap estimates generally should not be used mechanically as performance indicators," it says.

The ATO also concedes tax gap measurements will never help it achieve full tax law compliance, which means it will be virtually impossible to close all gaps. Tax gap estimates are part of a host of assessment processes designed to encourage compliance and build confidence in the system.

Ultimately, the data is there for you to use.

Capital gains tax record keeping tool

The ATO's capital gains tax (CGT) record keeping tool allows you to record and save your asset and CGT event details, and helps us calculate your capital gains or losses.

For assets with a CGT event date, the tool works out your net capital gain or loss amount for the year by applying the CGT calculation method that gives you the best result (in other words, the smallest net capital gain).

You can print a copy of the calculation results for your records and to give us access, and the ATO says anyone using the tool can choose to remain anonymous.

Information you may need:

  • asset purchase/acquisition costs
  • expense records (such as legal fees, stamp duty, advertising, brokerage)
  • borrowing expenses (such as loan application and mortgage discharge fees)
  • records of any repairs, maintenance and improvement costs.

If you change or add any details relating to an income year for which you've already lodged a tax return, you may need us to amend that return for you. You can access the CGT tool direct here.



August 2016 Tax Roundup

New areas and items covered by Tax Time 2016 pre-filling service

 

The ATO advices that use of the pre-filling service will ensure that information provided is cross-checked with data that it already holds. This is one way to help ensure the accuracy of returns. But there are also new areas and items covered by Tax Time 2016 pre-filling service.

The ATO advices that the pre-filling service for Tax Time 2016 includes the following updates:

·         removal of taxpayer gender information

·         more statement-of-distribution data reported from partnerships

·         consolidation of capital gains fields and new transfer of trust income data from managed funds

·         new foreign source investment income data

·         exploration credits reported by companies as dividends will display as tax offsets

·         removal of Medicare benefit tax statement due to the net medical expense tax offset phase-out

·         removal of account holding type and employee identifier for employee shares schemes, and new messages for some employees with overseas employment periods

·         changes to ATO interest due to simplified data capture

·         closing stock will be included in prior-year individual tax return data

·         myDeductions data that your clients upload will be accessible in your Standard Business Reporting-enabled software, through the Practitioner lodgment service

·         data availability for your ATO clients

·         improved display of information.

Also remember that the pre-filling service only reflects the information received by the ATO at the date a request for the data is made. It says it expects most pre-filling information to be available by mid August.

 

 

Cash economy: The Taxman has his own idea about "living expenses"

 

The ramifications of Australia's "cash economy" is a pebble in the ATO's shoe that it is constantly looking to dislodge. And the taxman has his own idea about what constitutes "living expenses".

One of the tools that it has developed to achieve this is a set of guidelines looking at an average taxpayer's household expenses. The ATO has made these guidelines available to the public to allow taxpayers to:

·         assess their potential for being selected for an audit

·         work out if they need to make adjustments to their expenditure and record keeping.

The ATO says its guide "explains the importance we place on examining taxpayers' household expenditure when seeking to identify unreported cash income in the course of reviews or audits".

There are two case study guides that the ATO has published: A "concise" sample (view it here) and a "comprehensive" sample (view this here). Scroll up to read the example taxpayer case studies these guides are based on.

The ATO has also provided sample worksheets for personal living expenses (see below to download). These have been developed from feedback from the wider taxpaying population, and detail the type of information the ATO looks for when examining average household expenditure. Of course the ATO says that in the course of an audit it may seek even more detail.

There is a sample "concise personal living expenses worksheet" (download a copy here), which shows an overview of household incomings and outgoings. There is also a "comprehensive personal living expenses worksheet" (here's the link to download this), which provides a more in-depth analysis.

The ATO states that by comparing annual household funds and expenditure, taxpayers and their tax agents can assess if their declared income will be deemed enough to support their actual lifestyle.

 Fuel tax credit rate changes (from July 1).

The ATO advises that on July 1, 2016, fuel tax credit rates for heavy vehicles that use taxable fuel such as diesel or petrol, and travel on public roads, increased to 13.6 cents per litre due to a decrease in the road user charge.

Biodiesel and fuel ethanol manufactured in Australia changed due to excise duty rates taking effect for biofuels.

See here for all the latest fuel rates.

The ATO says eligible business owners will need to apply the correct rate when they calculate the fuel tax credit claim on business activity statements.

Fuel tax credit rates are indexed twice a year in line with the consumer price index. This occurs in February and August.

 

Simplified fuel tax credits

 

The ATO also reminds business principals that if they claim less than $10,000 in fuel tax credits each year, they can now choose simpler ways to keep records and calculate claims.

For the BAS period ending March 31, 2016 and onwards, you can:

You can choose to use either or both of these methods that best suits your needs and can change them at any time. The ATO says a business does not need to register or advise it that you are using these methods.

It also advises that there are a range of documents that can be used to substantiate claims (which need to be kept for five years). Accepted documents can include:

·         contractor statements

·         financial institution business credit/debit account statement

·         financial institution personal credit/debit account statement

·         point-of-sale docket

·         fuel supplier statement or invoice.

Also see:

 

Feeling financial strain? Could really do with that tax refund?

If you're going through a bit of a hard time financially, but have your fingers crossed for a tax refund this year, the ATO may be able to push your refund payment along.

Applying to have your refund processed as a priority because of serious financial hardship could see it get through the taxation system within seven working days, if everything goes smoothly, says the ATO.

It does mention however that turnaround times may be affected if you have liabilities with other government agencies such as Centrelink or the Child Support Agency, or it could take longer if more than one year's return is involved.

 

 

What is serious financial hardship?
The ATO says a person is considered to be in serious hardship when they are unable to provide for themselves, their family or other dependants with regard to:

·         food

·         accommodation

·         clothing

·         medical treatment

·         education, and

·         other basic necessities.

Factors contributing to serious hardship generally include family tragedy, financial misfortune, serious illness, impacts of natural disasters, and other serious or difficult circumstances.

What you need to apply
To apply, see this ATO web page to find out more. You will need your tax file number on hand, but also some documents that will prove your case. These can include:

·         eviction notice

·         disconnection notice

·         notice of legal action

·         letter from a charitable organisation

·         bank notice (eg, overdraft call)

·         medical bills

·         letter from a doctor or legal practitioner

·         final notice from a school

·         funeral expenses, and

·         repossession notice.

Businesses can provide:

·         current bank notice

·         bank notices, eg overdraft call

·         eviction notice

·         disconnection notice

·         repossession notice

·         notice of impending legal action

·         staff pay records

·         contract payment schedules

·         legal documents.

The ATO says that it takes many factors into account when assessing your claim for serious financial hardship, and that providing one or more of the pieces of evidence listed above may not necessarily result in you being granted serious financial hardship status.

 

Got a carry-forward tax loss burning a hole in your business' pocket?

 

Business owners would be well advised to not get too creative if you've thought how handy it would be to absorb a business loss as a tax deduction for a future income year.

The tax law has measures in place to ensure such deductions are limited to those businesses that are legitimately eligible - such as the continuity of ownership and the same business tests. But there is another "integrity" measure that may result in a denial of a claim for losses that business owners should keep in mind.

The ATO has the discretion to disallow the deduction of a tax loss if, during the relevant income year, the business attempting to make such a claim earned assessable income (or realised a capital gain) that would not have been derivedhad the loss been unavailable as a deduction (our emphasis, and see more details here).

There is some balance to the rules in that the Commissioner of Taxation is "prevented" from disallowing the deduction should "continuing shareholders" stand to benefit from the relevant income. However there is still a fair amount of discretion left to the Commissioner in how the business loss rules are applied (see more here).

In other words (and of course circumstances of the business or businesses involved will have an influence), a business can mitigate the risk that the ATO will exercise this discretion to disallow a tax loss deduction by making sure that either (or preferably both) of the following contentions are supported:

  • that the business would have derived the income or realised the capital gain regardless of the tax loss being available
  • that continuing shareholders will benefit from the above in a fair and reasonable manner with regard to their rights and interests.

Tax professional advice is recommended if a business would like to pursue these type of tax deductions.


Using the small business benchmarks

 

The ATO has a database of "small business benchmarks" against which it compares lodged information. But business owners can also benefit by using the small business benchmarks to compare their own performance.

It says the small business benchmarks:

  • are calculated from income tax returns and activity statements from more than 1.3 million small businesses and are verified as being statistically valid by an independent organisation
  • account for businesses with different turnover ranges (up to $15 million) across more than 100 industries, and
  • are published as a range to recognise the variations that occur between businesses due to factors such as location and the businesses circumstances.

Anecdotally however, many tax practitioners do not consider these ranges to be realistic enough.

A large deviation from benchmark data (particularly if it is in the taxpayer's favour, for example comparatively high operating costs) is prima facie more likely to attract ATO review.

The current benchmark information relates to 2013-14. This is the latest available data, and was released on June 24, 2016.

See this ATO web page for benchmarks A to Z (by industry type). The ATO says the small business benchmarks are financial ratios to help compare a business's performance against others in the same industry. It also uses them as a guide on industry trends to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. Interested business owners can see this page to check how their own business is performing in relation to the ATO's benchmarks.

Note also that the ATO app for smartphones (from Google Play, the Windows Phone Store or the Apple App Store) has a Business performance check tool. Business operators or their advisers can use the tool to check their business's 2015-16 financial performance against already available benchmark data.

 

 




 


 


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