The ATO has highlighted a number of areas that it will focus on in its compliance activities this year. These include:

• incorrect claims for work-related expenses. In particular, the ATO says it will focus on claims made by plumbers, IT managers and defence force personnel. Taxpayers must keep written records for all their work-related expenses if their claims total more than $300;
• unrecorded and unreported cash transactions in the café and plastering industries. Note, the ATO is stepping up its use of third party information, such as information from suppliers, to identify under-reporting of income;
• incorrectly treating employees as contractors, particularly in the construction industry. In addition, the ATO notes that from 1 July 2012, businesses that make payments to contractors in the building and construction industry are required to report the payments to the ATO each year;
• treatment of private company profits, particularly in relation to loan arrangements; and
• superannuation obligations of employers, with a focus on cafés and restaurants, real estate businesses and carpentry businesses in home building or construction.

NOTE: 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.

The Government’s Business Tax Working Group has recently released a discussion paper highlighting a number of possible ways in which a company tax rate cut could be funded from within the business tax system.

According to the Working Group, a comprehensive tax base that contains minimal special exemptions and deductions for certain investments can result in a more productive mix of different investment options and a broader tax base that will generate greater revenue to fund a lower company tax rate. Public consultation closes on 21 September 2012.

A recent case before the Administrative Appeals Tribunal (AAT) has demonstrated the need for great care when structuring arrangements to ensure a taxpayer’s eligibility for the small business capital gains tax (CGT) concessions.

The Tribunal held that the taxpayer had not passed the “maximum net asset value” test for the purposes of the CGT small business concessions in respect of a capital gain made on selling shares to his family trust. The taxpayer was a director and shareholder of a series of interlocking companies. The issue turned on whether a bank loan to the family trust was a liability that could be taken into account in applying the “maximum net asset value” test. However, the Tribunal held the loan could not be taken into account for various reasons.

TIP: One of the conditions for accessing the CGT small business concessions is that the taxpayer (other than those who qualify as small business entities) must satisfy the “maximum net asset value” test. To pass this test, the net value of all the CGT assets of taxpayer (including affiliates and connected entities) must not exceed $6 million (previously $5 million).

The rules are complex. The AAT decision highlights the importance of careful planning when structuring transactions. Please contact our office if you have any questions.

Income testing of the 30% private health insurance rebate starts on 1 July 2012. Essentially, singles earning over $84,000 per annum and families earning over $168,000 per annum will receive a reduced rebate that is less than the current 30% rebate. 

The ATO says that it will calculate a taxpayer’s private health insurance rebate entitlement after they have lodged their income tax return for the 2012-2013 year. If a taxpayer has claimed too much of the rebate, the ATO says it will “recover the amount” as a tax liability by adding the amount to the tax bill. However, if the full entitlement was not claimed, the ATO says it will credit the amount to the taxpayer as a refundable tax offset. 

The Government has reintroduced legislation into Parliament to extend the director penalty regime. This will, among other things, make directors personally liable for their company’s unpaid superannuation guarantee amounts.

The changes also aim to ensure that directors cannot discharge their director penalties by placing their company into administration or liquidation while PAYG withholding or superannuation guarantee remains unpaid and unreported for three months after the due date.

The changes also propose a new “PAYG withholding non-compliance tax” that arises when a company has failed to pay amounts withheld to the Commissioner of Taxation. This tax will be levied on directors or associates of directors, provided certain criteria are met.

In 2011 the Government withdrew its original legislation from Parliament following calls for more consultation after a Parliamentary committee noted that innocent directors could be caught by the proposed rules.

Directors and those considering becoming a director (or those who might be considered an associate of a director) should take note of the changes. Please contact our office if you have any questions.

During July it is important to ensure all year end reconciliations are performed and the required documents lodged with the ATO, Workcover and other bodies as required.
Reconciliations that may need to be performed include, but are not necessarily limited to:

• Bank accounts, including a review of all outstanding cheques
• Credit cards
• Accounts receivable, including a write off of any bad debts
• Stock on hand
• Payroll
• PAYG Withholding
• Workcover
• Superannuation
• Loan accounts
• Asset registers, including a review and write off of obsolete equipment

We can assist with the reconciliation process, including reconciliation calculations, preparation of reports and lodgment of documents. Please contact the office if you require assistance.

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

At this time of the year you are likely to receive updates from your Accounting Software provider.  Software should be updated to the current version to ensure compatibility with the version we have on our systems.

Also, software providers will provide updated tax tables in respect of PAYG Withholding from salaries and wages shortly.  Be sure to process your last payroll functions for the financial year before installing the tax tables updates.

Now is also a good time to review your record keeping systems and consider the implementation of software where you are not currently utilising a product.  We support various software products and can assist in your decision.

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.

• Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the benchmark rule.
• Loans, payments and debt forgiveness by private companies to their shareholders and associates should be repaid by the earlier of the due date for lodgment of the company’s return for the year or the actual lodgment date. Alternatively, appropriate loan agreements should be in place.
• Minimum loans payments required under appropriate loan agreements in respect of loans by private companies to their shareholders and associates should be made by the due date and before 30 June.
• Companies may want to consider consolidating for tax purposes prior to year end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
• Companies should carefully consider whether any deductions are available for any carry forward tax losses, including analysing the continuity of ownership and same business tests.

• The Government is phasing out the dependent spouse tax offset. For 2011-12, the offset will only be available to those born on or before 1 July 1971.
• The Government has proposed that from 1 July 2012, living-away-from-home allowances will be taxed to the recipient as assessable income rather than to the employer under the FBT rules.
• The Government has introduced legislation to extend the Paid Parental Leave scheme by introducing a two-week “dad and partner pay”.
• Individual taxpayers with a taxable income exceeding $50,000 in 2011-12 will have to pay an additional levy known as the temporary flood and cyclone reconstruction levy, unless they fall within an exempt class of individuals.
• Is your Will up to date? A regular review of your will will ensure it stays current and appropriate to your circumstances.

• In the lead up to 30 June 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 review trust income and prepare resolutions in respect of the distribution of trust income for the current financial year.
• Avoid retaining income in a trust because the income may be taxed at 46.5%.
• If a trust has an unpaid present entitlement to a corporate beneficiary, consideration should be given to paying out the entitlement by the earlier of the due date for the lodgment of the trust’s income tax return for the year or the actual lodgment date to avoid possible tax implications.
• Trustees should consider whether a family trust election (FTE) is required to ensure any losses or bad debts incurred by the company will be deductible and to ensure that franking credits will be available to beneficiaries.

• From 2012-13, the small business instant asset write-off threshold will be increased from $1,000 to $6,500.
• Consider whether the requirements to be classified as a small business entity are satisfied to access various tax concessions, such as the simpler depreciation rules and the simpler trading stock rules.
• Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.

• The ATO has reminded taxpayers to consider the superannuation contributions caps when planning tax affairs to avoid excess contributions tax.
• The Government has proposed that eligible individuals who breach the concessional contributions cap by up to $10,000 will be allowed a once-only option for the excess contributions to be refunded without penalty.
• The Government has proposed to temporarily “pause” the indexation of the superannuation concessional contributions cap so that it will remain fixed at $25,000 up to and including the 2013-14 financial year.
• For eligible individuals, a government low-income superannuation contribution of up to $500 may be available from 1 July 2012.
• A member of an accumulation fund (or a member whose benefits include an accumulation interest in a defined benefit fund) may be able to split superannuation contributions with his or her spouse.
• Trustees should ensure that minimum pension payment requirements have been met.

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

• Income received in advance of services to be provided will generally not be assessable until the services are provided.
• Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June to defer the income.
• A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If the disposal of an asset will result in assessable income, a taxpayer may want to consider postponing the disposal to the following income year.

Business taxpayers

• Debtors should be reviewed prior to 30 June so that any bad debts can be identified and written-off.
• A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
• Review trading stock for obsolete stock for which a deduction is available.

Non-business taxpayers

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

Simply put, tax planning is the arrangement of a taxpayer’s affairs so as to comply with the tax law at the lowest possible cost. This involves objectively assessing and actively managing tax risk. Common tax planning techniques include deferring the derivation of assessable income and applying techniques to bring forward deductions.

As another financial year draws to a close we are moving into the sharp end of the tax planning season.

Tax is a major headwind to any investment and everyone has the right to minimise the amount of tax they pay through legal tax planning arrangements. Indeed the after-tax return is the critical measure for any investment.

But sometimes the desire to reduce tax can blind people to the risks – both investment and legal – that certain tax schemes, sophisticated and otherwise, carry with them.

In recent years the collapse of a number of high-profile agribusiness and financing schemes have painfully served to alert people to the dangers of committing to tax schemes that promise upfront tax benefits and potential investment returns that ultimately never materialised.

This year the Australian Tax Office has produced a plain language guide – Understanding tax-effective investments – on what to look out for among some of the more common types of tax schemes that the ATO has encountered that have caught out both individual investors and businesses.

For individuals it covers a range of schemes from “mortgage management” arrangements where the promoter offers a way to create tax deductions equivalent to your home loan interest payments by refinancing your home loan, through to traps with scholarship trusts and education funding programs, and on to illegal early release super arrangements.

One of the lessons from the ATO booklet is that not all these schemes fall into the obviously “too good to be true” category. Some are sophisticated trust structures with all the hallmarks of “expert” opinions.

These type of arrangements provide an interesting backdrop to the overhaul of the financial planning licensing and remuneration regime being proposed by the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten.

One of the challenges as an investor is being able to separate the tax scheme “promoter” from “adviser”. Participating accountants, lawyers and advisers have been generously remunerated for their support of tax schemes in the past – following the collapse of some agribusiness schemes, commission payments of between 10 and 15 per cent were revealed.

That is precisely the type of conflicted payment structure the government is aiming to outlaw with its ban on commission payments and volume-based incentives within the Future of Financial Advice reforms.

However, while that may provide a new world order for mainstream licensed financial planners it may not prevent the unscrupulous and unlicensed types from operating in the shadows between the accounting and financial planning worlds – indeed most mainstream financial planning businesses were advising clients to avoid those type of schemes.

A key question investors should ask themselves is if the tax deduction was not there would the investment still stack up on its own merits?

The ATO suggests the alarm bells should be going off with arrangements that:

Offer zero risk guarantees
Do not have a prospectus or product disclosure statement
Refer you to a specific adviser or expert
Ask you to maintain secrecy to protect the arrangement from rival firms and discourage you from getting independent advice.
Any of those points ought to have the alarm bells ringing loudly but the last point is perhaps the most telling. If someone is trying to get you to sign up for an investment but really does not want you getting your own independent advice that should be a signal to walk away – fast.

Robin Bowerman
Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.