Practice Update - July 2008

Please read this update and contact this office if you have any queries

The cash economy – still in ATO's sights

The Commissioner of Taxation has given some insights into how the ATO intends to tackle the cash economy.

Compliance action – Letters

For those that 'need a nudge along', the ATO often provides advisory letters to individual businesses where it's thought they might be involved with the cash economy, and last year:

• sent more than 9,000 letters to people who had applied for an owner/builder’s licence in NSW and Victoria, informing them about tax obligations of the people they were likely to employ; and

• sent 3,000 letters to shopping centre retailers, advising them that the centre owners had provided the ATO with information about their business turnover and rental payments.

Compliance action – data-matching

The ATO is using new strategies, including:

• data matching to identify people whose lifestyles appear conspicuously out of step with their reported income;
• cross matching data from Centrelink, child support agencies and state fair trading agencies; and
• increased use of computer-assisted risk evaluation processes to more accurately identify high risk cash economy participants. They obtain records of purchases of luxury goods like cars and boats, and compare them against income declared by the purchaser.

They are also drilling deeper into areas that seem more prone to cash economy activity – building and construction, the taxi industry, restaurants and cafes and some areas of retailing and transport.

Data matching example

The Commissioner detailed an example of the ATO discovering that taxpayers were hiding income through data matching.
A husband and wife were selected for an audit in February 2008 as the purchase of their $65,000 BMW seemed to be at odds with ATO records indicating net household income of $17,000 p.a.

The ATO examined their funds and expenditure as well as information provided by third parties, and found that the couple had undeclared incomes of $225,000 over four years, which led to income tax and GST adjustments, the imposition of an administrative penalty, and possible criminal prosecution.

Personal super contributions and income tax/SMSF returns Self employed taxpayers are entitled to claim a tax deduction for superannuation contributions if they comply with a number of requirements.

The ATO has advised that, where such taxpayers have made a contribution to their own self managed super fund (SMSF), they need to ensure:

• they have advised their fund in writing of their intent to claim a deduction and the amount they intend to claim;
• they have an acknowledgment from their SMSF that it has received their notice to claim a deduction before lodging their individual tax return; and
• they complete the correct items and labels in their individual tax return, in the fund's income tax return, and when completing their member contribution statement.

Editor: We can obviously assist in getting all of these right. It's important, because the ATO matches the data between individual returns, member contributions statements and fund income tax returns when looking at who it will audit.

Child Care Benefit and Child Care Tax Rebate from 1 July

From 1 July 2008, the Child Care Tax Rebate (CCTR) will increase from 30% to 50% of out-of-pocket costs. The maximum payment will increase from $4,354 to $7,500 per child, and payments will be made quarterly, rather than annually. The first of these payments will be made in October 2008.

Also, from 1 July 2008 there will no longer be a minimum rate of Child Care Benefit (CCB) (before that date, the amount of CCB reduced to a minimum rate, depending on the family’s income, but now it will continue to reduce until the family’s rate is zero).

The income level at which CCB will cut out completely depends upon the number of children in approved care.

For example:

• the rate of CCB a family with one child in approved care receives will be reduced if their combined income is above $111,000 and will cut out completely at around $126,000; or
• the rate of CCB a family with two children in approved care receives will be reduced if their combined income is above $119,000 and cut out completely at around $131,000.

Note that families who no longer receive the minimum CCB will still be eligible for the CCTR.

ATO's Industry benchmarks

The ATO has been developing ‘benchmarks’ or ‘industry norms’ of the relationship between costs and income for various industries, to give people an idea of what range of income can be expected based on the work they do and other costs they incur, and so business operators can compare their performance with the rest of their industry.

Apart from the taxi industry benchmarks brought out a few years ago, the ATO has now produced benchmarks for the following industries:

• floor sanding and polishing;

• roof tiling; and

• painting.

Other benchmarks will be forthcoming for other building trades.

Editor: Since the ATO views 'long term performance outside a benchmark' to be a sign of non-compliance, it's crucial for everyone in these industries to get their heads around these benchmarks. Call our office for more details.

Trustees of SMSFs going overseas

The ATO has reminded trustees of SMSFs that, to receive the tax concessions that super funds are entitled to, a fund must satisfy a residency test.

In general, a fund will still meet the residency test even if the trustees are temporarily outside Australia for up to two years.
However, if the fund stops being a complying fund because it fails the residency test, the market value of the fund’s total assets will basically be taxed at the highest marginal tax rate.

Editor: Obviously, if you are a trustee of your SMSF and are planning on going overseas for a long period, it's best you speak to us ASAP!

Super guarantee 2008/09: Maximum superannuation contribution base

The maximum superannuation contribution base for 2008/09 is $38,180. This is the maximum limit on any individual employee’s earnings base for each quarter of 2008/09.

Editor: That is, the maximum amount of super an employer is required to contribute for a particular employee is 9% of this maximum superannuation contribution base each quarter.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

P r a c t i c e U p d a t e - August 2008

Please read this update and contact this office if you have any queries

Car depreciation limit for 2008/09

The Tax Office has advised that the car depreciation limit for the 2008/09 financial year is $57,180 (up from $57,123 in 2007/08).

Example

On 9 July 2008 a taxpayer purchases a motor vehicle for $65,000 wholly for use in carrying on their business.

In working out the vehicle's depreciation for the 2008/09 income year, its cost will effectively be reduced to $57,180.

Note: This amount is also the luxury car tax threshold. The Government announced in the Budget that the luxury car tax rate would increase to 33% from 1 July 2008, but has not yet been able to get the legislation passed.

Choice of super: Funds must offer life insurance

The Tax Office is reminding employers that, from 1 July 2008, employernominated super funds must offer minimum levels of life insurance death cover to members.

An employer-nominated super fund is the fund that an employer chooses to pay an employee's super guarantee contributions to if the employee does not choose a fund (i.e., the default fund).

Editor: If you are unsure, we can help you check that your default fund is a complying fund and offers the minimum insurance cover.

Insurance requirements

Employer-nominated super funds must offer minimum life insurance for members:

• at a premium of at least $0.50 per week for those aged under 56; with at least the level of insurance cover shown in the following table; or
• at least at a level of cover equivalent to the following table if the contributions are made to a defined benefit fund on behalf of a defined benefit member.

Age Range Minimum level of life insurance cover

0 to 19 Nil
20 to 34 $50,000
Age Range Minimum level of life
insurance cover
35 to 39 $35,000
40 to 44 $20,000
45 to 49 $14,000
50 to 55 $7,000
56 + Nil

If an employer's nominated super fund does not offer minimum life insurance for members, employers may need to arrange insurance either with another super fund or with an insurance provider.

Note: As usual, there are exceptions, such as where the employer is making contributions under a federal award, or is unable to obtain insurance from the fund normally used by the employer in respect of a particular employee due to the employee's health, occupation or hours worked.

Low income tax offset: Six of one, half a dozen of the other From 1 July 2008, the maximum low income tax offset increases from $750 to $1,200.

Editor: The low income tax offset is available in full to taxpayers earning less than $30,000 p.a., and then reduces after that until taxable income reaches $60,000, when it phases out.

However, the Government has made a regulation specifying that employees will be entitled to the benefit of half of the offset (i.e., up to $600) in calculating the tax regularly withheld from their salary/wage.

Such employees will receive the remainder of the tax offset when they lodge their return.

Editor: Although this means that eligible employees will have earlier access to this money, it will also mean that their refund at the end of the year may not be as large as they expected.

Education Tax Offset now available

Parents are being advised to 'keep their receipts' for education expenses in light of the commencement of the Education Tax Offset from 1 July 2008.

How much can be claimed?

Eligible families (generally parents entitled to Family Tax Benefit (FTB) Part A) will be able to claim a 50% tax offset every year (in their tax return) for key education expenses up to:

• $750 for each child undertaking primary studies (i.e., maximum refund of $375 per child, per year); and
• $1,500 for each child undertaking secondary studies (i.e., maximum refund of $750 per child, per year).

What items are covered?

Eligible expenses include:

• laptops, home computers and associated costs;
• printers;
• home internet connections;
• education software;
• trade tools for use at school;
• school text books; and
• stationery.

Minor benefits exemption may apply to benefit provided every year Editor: The provision of a 'minor benefit' (which must be less than $300) to an employee or their associate can be exempt from fringe benefits tax (FBT) if it meets the relevant criteria. One of those criteria requires a consideration of the infrequency and irregularity of the provision of associated, identical or similar benefits.

The ATO recently confirmed that the provision of a Christmas party to employees and their associates every year would still be considered 'infrequent and irregular', and may, therefore, be exempt from FBT.

It has now confirmed that the same rationale can apply to the provision of other benefits. That is, the fact that a benefit is provided only once each year, but in more than one year, does not mean that the benefit cannot be considered as a minor benefit.

For example, an employer may not need to pay any FBT when it provides each of its employees with a reimbursement of $295 p.a. towards a local gym membership.

However, this would not be the case if the gym membership was included in an employee's salary package under a salary sacrifice arrangement.

New small business tax calendar tool

The ATO has developed a new free computer tool called 'Your small business tax calendar' (Tax Calendar), to help small businesses (i.e., generally businesses with turnovers of less than $2 million) plan and manage their tax obligations.

It automatically builds a 12-month schedule tailored to small business taxpayers' lodgment and payment needs, and can be personalised and updated depending on their business structure and reporting obligations.

Importantly, it can provide reminders when a lodgment or payment is due, and businesses can print out a one-page summary of their tax obligations and due dates for the year to use as a yearly planner.

Editor: If you are interested in this tool and would like help installing and utilising it, please contact this office.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

P r a c t i c e U p d a t e - September 2008

Please read this update and contact this office if you have any queries

ATO's Compliance Program: 2008/09

The Tax Commissioner, Michael D’Ascenzo, has released the ATO's Compliance program for 2008/09, which lets the community know where they will focus their attention and the action they will take in the coming year, "so people know which areas of risk they should avoid".

The ATO will focus on (among other things):

• income tax;
• tax havens;
• dodgy tax schemes;
• wealthy individuals; and
• the cash economy.

Their priorities for individual taxpayers include:

• a focus on capital gains from the sale of property, shares and other assets;
• expanding their review of the activities of senior executives and directors; and
• monitoring work-related expense claims, particularly out-of-pattern claims for selfeducation, car and travel expenses.

More industry benchmarks, data matching, and cash economy audits

The Commissioner also advised that the ATO will:

• work with more industries to develop benchmarks (these benchmarks allow taxpayers to compare their performance to the rest of their industry and check that their tax records reflect their business practices);
• increase their data matching to more effectively identify and target people who may have under-reported income or over-claimed expenses; and
• undertake more than 5,000 cash economy audits or reviews.

Resident minors' 2008/09 tax-free threshold

The increase in the low-income tax offset to $1,200 in 2008/09 (from $750 in 2007/08) effectively means that minors (i.e., persons under the age of 18) can receive $2,666 tax-free in the 2008/09 year (e.g., distributions from discretionary trusts).

The table below shows that, without the offset, once a minor's income exceeds $1,308, the entire amount of 'unearned income' is taxed at 45%. Note that this does not apply to some receipts, e.g., salary and wages.

However, applying the low-income tax offset of $1,200 means that no income tax will be payable unless the minor's taxable income exceeds $2,666, i.e., $1,200 divided by 0.45 = $2,666.66

2008/09 Resident Minors' Rates of Tax

Unearned Income (Div.6AA)
Div.6AA Income
$
Tax payable
$
0 – 416 Nil
417 – 1,307 66% of excess over $416
1,308+ 45% of the entire amount

'In-house' computer software – four year effective life

Editor: The Government announced in the Budget that it would be increasing the period over which taxpayers write off depreciable in-house software for tax purposes from 2.5 years to 4 years.

Although the legislation implementing this change has only recently become law, the new effective life applies to software that the taxpayer acquired under a contract entered into on or after 7:30 pm on 13 May 2008, or which the taxpayer otherwise started developing or holding on or after that time.

Expenditure on 'in-house computer software' is a taxpayer's expenditure on acquiring, developing or having someone else develop computer software which is mainly used by the taxpayer.

This could include off-the-shelf software acquired for use by the taxpayer.

Expenditure on 'in-house computer software' will continue to be depreciated on a straight line basis.

Self Managed Super Funds (SMSFs): Investment rules

The ATO has recently released two rulings, which consider some of the important investment rules that set out how the ATO expects SMSF trustees will use superannuation money.

Editor: Because the superannuation laws allow for very concessional tax treatment of money invested in a superannuation environment, there are very strict rules about what trustees can and can't do.

Two of these investment rules are:

• The 'sole purpose test' (i.e., basically, the SMSF must be run solely to provide benefits on members retirement or death); and
• The prohibition on SMSFs using fund resources to provide financial assistance to a member, or a relative of a member.

The rulings provide a number of examples regarding these two investment rules, three of which are reproduced below.

Example 1 – Separately negotiated benefit: more than an incidental benefit An SMSF trustee invests in a non-related company that owns a block of holiday apartments at a popular tourist destination

The members of the SMSF holiday in this area every year and prior to making the investment owned a separate holiday house nearby.

The trustee, when undertaking the investment, negotiated for members of the SMSF to be able to stay at the apartments for free. This is not a standard feature of the investment.

In return, the SMSF was required to accept a reduction in dividends payable by the company.

The members of the SMSF sell their holiday house immediately after the SMSF makes the holiday apartment investment.

The separate negotiation of the benefit, which materially affects the return on the SMSF's investment, demonstrates that the benefit is purposeful and not incidental.

The facts reveal that the SMSF is being maintained for a purpose of providing benefits other than those specified by the superannuation law and, therefore, indicate a contravention of the sole purpose test.

Example 2 – Selling an asset for less than market value

Robert is a trustee and member of an SMSF. The SMSF's portfolio of assets includes a block of land located in an inner city suburb where land values have risen significantly in recent years.

Robert sells the asset to his son for $210,000. Two months prior to the sale, the block of land was independently valued at $300,000.

The sale of the land by Robert to his son for less than market value contravenes the prohibition on SMSFs providing financial assistance to a relative of a member (Editor: And probably the sole purpose test, as well).

Example 3 – Purchase of an asset by an SMSF for greater than market value

Andrew is a member and trustee of an SMSF. Andrew needs to raise $100,000 for personal reasons.

He owns a block of land that qualifies as business real property and has been independently appraised as having a market value of $80,000.

As trustee of the SMSF, Andrew agrees for the SMSF to purchase the land for $100,000.

The purchase of the land by Andrew as trustee of the SMSF for greater than its market value is the giving of financial assistance to himself (a member) and therefore contravenes the superannuation law.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

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