What to look for when working with fringe benefits tax

The living-away-from-home (LAFH) rules have been significantly overhauled. While the rules remain in the FBT regime, there is an increased requirement to ensure LAFH payments are properly tracked, categorised and substantiated.

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%. Taxpayers should review contracts for changes to a ”pre-existing commitment”.

The Government has proposed amending the FBT law to remove the concessional FBT treatment for in-house fringe benefits accessed by way of salary-packaging arrangements.

Individuals

For 2012–2013 and later income years, the dependent spouse tax offset will only be available to those born on or before 1 July 1952.

The Government has announced that it will remove the 50% CGT discount for foreign residents on capital gains accrued after 7.30pm (AEST) on 8 May 2012. However, the CGT discount will remain available for capital gains that accrued prior to this time where foreign residents choose to obtain a market valuation of assets as at 8 May 2012.

Duncan Dovico has extensive experience in dealing with SMEs and their specific taxation and accounting needs. Over the years we have provided quality advice to our clients in Melbourne and Sydney. If you found this newsletter helpful, feel free to forward it on to your colleagues.


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2013 Budget: Simplified and Explained

As the end of the financial year draws near, businesses will start to look at how the Federal Government’s budget will affect SMEs. Duncan Dovico’s expert accountants have assembled a simplified expectation of what this year’s budget means for your business, Dean Newman writes.

SOCIAL SECURITY:  Baby bonus to be abolished and replaced

The Treasurer announced that the Government will replace the Baby Bonus from 1 March 2014 with the following arrangements:

Family Tax Benefit Part A (FTB Part A) payments will increase by $2,000, to be paid in the year following the birth or adoption of a first child or each child in multiple births, and $1,000 for second or subsequent children. The additional FTB Part A will be paid as an initial payment of $500, with the remainder paid in seven fortnightly instalments.

Parents who take up Paid Parental Leave (PPL) will not be eligible for the additional FTB Part A component, but will benefit from improved access to PPL as their family expands. As part of this package, parents will be able to count time on Government PPL where it occurs during the work test period for a subsequent child, in the same way that employer-funded parental leave can be counted now.

Family payments: indexation pauses for upper income limits and supplements

The Government will maintain the higher income thresholds for family payments and supplement amounts at their current levels for a further three years until 1 July 2017:

The current upper income test limit of $150,000 for Family Tax Benefit Part B (FTB Part B), the dependency tax offsets, the PPL Scheme and Dad and Partner Pay will be maintained. The FTB Part A upper income-free area will remain at $94,316, plus an additional $3,796 for each child after the first.

FTB supplement amounts will also be maintained at current levels of $726.35 per child per annum for FTB Part A and $354.05 per family per annum for FTB Part B.

The FTB Part A lower income-free threshold (currently $47,815) and the FTB Part B secondary earner income threshold (currently $5,037) will continue to be indexed.

BUSINESS TAXATION: Further extension of monthly pay-as-you-go (PAYG) installments

The Government will extend the requirement to make monthly PAYG income tax instalments to all large entities in the PAYG instalment system, including trusts, superannuation funds, sole traders and large investors.

The Government had already announced that corporate tax entities with turnover of $20 million or more will move to monthly PAYG instalments during a phase-in period between 1 January 2014 and 1 January 2016. The Treasurer has now announced that all other entities in the PAYG instalment system:

  • with turnover of $1 billion or more will move to monthly PAYG instalments from 1 January 2016; and
  • with turnover of $20 million or more will move to monthly PAYG instalments from 1 January 2017.

TAX COMPLIANCE: Preventing “dividend washing” and doubling-up of franking credits

The Treasurer announced that the Government will close a loophole that enables sophisticated investors to engage in “dividend washing” (known as dividend double-dipping). Currently, sophisticated investors can engage in “dividend washing” to effectively trade franking credits. This can result in some shareholders receiving two sets of franking credits for the same parcel of shares.

This is outside the intent of the dividend imputation system. The Government will consult on the development of legislation to prevent this practice.

CGT integrity measures for foreign residents

The Government will make changes to the ”principal asset” test in the tax law to ensure that indirect Australian real property interests are taxable if disposed of by a foreign resident. It will also apply a 10% non-final withholding tax to the disposal by foreign residents of certain taxable Australian property.

Funding for data-matching and trust tax compliance

The Government will provide the ATO with

  • $77.8 million over four years to improve compliance by Australian taxpayers by      expanding data-matching with third party information; and
  • $67.9 million over four years for the ATO to undertake compliance activity in relation to trust structures. A trusts taskforce will target the exploitation of trusts to conceal income, mischaracterise transactions, artificially reduce trust income amounts and underpay tax. It will focus on taxpayers “involved in egregious tax avoidance and evasion” involving trusts.

SUPERANNUATION: No further major reforms announced

The Treasurer did not announce any new major superannuation measures in the Budget. This will be a welcome relief for the superannuation industry, which is already suffering from “reform fatigue”.

Several minor superannuation measures were announced, including the announcement that the Government will cease late registrations for the Pension Bonus Scheme from 1 March 2014. All those eligible for the scheme will still have an opportunity to register before 1 March 2014 and receive the bonus.

OTHER CHANGES: HELP discounts to be abolished

The Government will remove the discounts applying to up-front and voluntary payments made under the Higher Education Loan Program (HELP) from 1 January 2014. The discounts to be removed are:

  • the 10% discount available to students electing to pay their student contribution up-front;
  • and the 5% bonus on voluntary payments to the ATO of $500 or more.
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Sink or Swim: How to take advantage of capital gains tax

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

Superannuation

The ATO has reminded taxpayers to consider the superannuation contributions caps and the timing of when contributions are made when planning their tax affairs, in order to avoid excess contributions tax.

Eligible individuals who breach the concessional contributions cap by up to $10,000 will be given a once-only option for the excess contributions to be refunded without penalty. A member of an accumulation fund (or whose benefits include an accumulation interest in a defined benefit fund) may be able to split with their spouse superannuation contributions.

A tax offset of up to $540 is available for a resident taxpayer in respect of eligible contributions made by the taxpayer to a complying superannuation fund or a retirement savings account for the purpose of providing superannuation benefits for the taxpayer’s low-income or non-working resident spouse (including a de facto spouse).

Taxpayers aged 50 years or over should review their transition to retirement pensions and salary-sacrificing arrangements to take into account the reduction in the concessional cap from $50,000 to $25,000 for 2012–2013 and 2013–2014. However, note that the Government proposes to increase the concessional contributions cap to $35,000 for seniors. For eligible individuals, a government low income superannuation contribution of up to $500 will be available.

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5 solid business tips for SMEs

  1. 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.
  2. Loans, payments and debts forgiven by private companies to their shareholders or associates may give rise to unfranked dividends that are assessable to the shareholders or associates. Shareholders and entities should consider repaying loans and payments on time or have appropriate loan agreements in place.
  3. Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
  4. Companies may want to consider consolidating for tax purposes prior to year-end in order 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.
  5. 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.

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.

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 and the actual lodgment date, in order to avoid possible tax implications. Avoid retaining income in a trust because the income may be taxed at 46.5%.

 

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How taxpayers can take advantage of cost saving opportunities

There are many ways in which taxpayers can take advantage of tax planning initiatives to manage their taxable incomes. In order to maximise these opportunities, taxpayers need to start the year-end tax planning process early. Of course, when undertaking tax planning, taxpayers should be cognisant of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide possible tax savings.

Deferring income

  1. Income received in advance of services to be provided will generally not be assessable until the services are provided.
  2. Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June to defer the income.
  3. 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.
  4. Consider whether the criteria for classification as a small business entity are satisfied to access various tax concessions such as the simpler depreciation rules and the simpler trading stock rules.
  5. 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.

Maximising deductions for business taxpayers

Debtors should be reviewed prior to 30 June to identify and to write off any bad debts.

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

Self-managed superannuation funds have called on the Federal Government to stop tinkering with the superannuation system. The government has abandoned plans for substantial changes to superannuation in the mid-year federal budget review, but will it arrive in time to make a difference?


A taxpayer has been successful in convincing the AAT that there were “special circumstances” that warranted the setting aside of his excess contributions tax assessment. As a result, the AAT ordered that superannuation contributions paid by the taxpayer’s employer in early July 2009 be reallocated to the previous financial year.

The AAT was satisfied that there were “special circumstances” in this case. Among various factors noted by the AAT was an agreement between the taxpayer and his employer, requiring the employer to cease making contributions to a particular fund from 1 July 2009. The AAT was of the view that payments made by the employer into that fund in July 2009 were in fact intended for the 2008–2009 financial year.

TIP: The Commissioner may only exercise his discretion to reallocate or disregard excess contributions if “special circumstances” exist and the making of such a determination is consistent with the objective of the superannuation regime, ie that individuals build their superannuation gradually over their lifetimes.

TIP: The Government has recently amended the law to allow a limited, once-only refund option for excess concessional contributions of up to $10,000. The new refund option is only available for excess concessional contributions in respect of the 2011–2012 or later years, and only for the first year. The refund option provides some relief, but is not without conditions and limitations.

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Bakery finds itself on the wrong side of ATO benchmarks

In a recent decision, the Administrative Appeals Tribunal (AAT) affirmed an amended assessment issued to a bakery business for undeclared income and incorrectly calculated GST.

Among the factors considered by the AAT was the fact that the taxpayer’s costs were 58% of reported sales income, which was considerably higher than the 32% to 40% range identified by the Commissioner of Taxation as the benchmark for costs in bakeries and hot bread shops.

TIP: The ATO publishes small business performance benchmarks that it uses to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. There are benchmarks for over 900,000 small businesses in over 100 industries.

The ATO says approximately 90% of businesses in benchmarked industries fall within a benchmark range. This means around 800,000 businesses are likely to be competing on a level playing field with their peers. Reporting greater net income than industry peers could be a sign that a business has forgotten to claim a relevant business deduction. However, reporting significantly lower income than industry peers would attract ATO attention.

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ATO focus on small businesses and wealthy individuals

The ATO has launched a public online resource that spells out its tax compliance approach to small businesses and wealthy individuals. The new resource is available on the ATO website at www.ato.gov.au/smecompliance.

This online resource contains information on how the ATO conducts itself in compliance activities and the tax risks that may attract its attention. It also explains that the ATO can, through powerful data-mining techniques, obtain an indicative view of a “private group” of entities that is under the control of an individual and their associates.

Key tax risks that may attract ATO attention include:

  • tax performance that varies substantially from business performance;
  • inconsistencies in activity statements or spikes in refund claims;
  • large, one-off or unusual transactions;
  • tax and economic performance that varies significantly from similar businesses in the same industry;
  • unexplained losses;
  • tax outcomes inconsistent with the intent of tax law;
  • lifestyles not supported by after-tax income;
  • treating private assets as business assets;
  • not disclosing offshore dealings with overseas entities, especially low-tax jurisdictions and tax havens that allow banking secrecy;
  • using complex structures and intra-group transactions to minimise tax;
  • poor governance and risk-management systems;
  • distortions and inconsistencies in market valuations and apportionments; and
  • business performance that falls outside small business benchmarks (for businesses with turnover of up to $15 million).

    TIP: The ATO’s main tool for detecting non-compliance is matching information reported to it by taxpayers and third parties, such as financial institutions both in Australia and overseas. The ATO says its matching capabilities have grown strongly over the years. This financial year, the ATO expects to match over 600 million transactions.

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New company loss carry-back regime

The Government intends to introduce a company loss carry-back regime and has released draft legislation for public consultation.

Under the proposal, which will have effect from 1 July 2012, companies will be able to carry back up to $1 million worth of losses to obtain a refund of tax paid in the previous year. From 1 July 2013, companies will be able to carry back up to $1 million worth of losses against tax paid up to two years earlier.

The regime is proposed to be available only to “corporate tax entities” as currently defined under the tax law. The Government has said that restricting loss carry-back to those companies that have recently paid tax would target the measure to companies that have had a history of being profitable, and would improve companies’ cash flow by allowing access to losses in a more timely manner.

 

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