Are you taxpayer who has made major capital improvements to a pre-CGT dwelling that is used to derive assessable income?
The Tax Office has released the Capital Gains Tax (CGT) improvement threshold for the 2010-11 year.
- Ensure you meet your CGT obligations when making major capital improvements to a pre-CGT asset.
- Contact us if you require any clarification or advice.
There may be CGT consequences where major capital improvements are made to a pre-CGT dwelling that is used to derive assessable income.
Taxpayers who do not disclose their offshore activities may face significant penalties.
There are various things you should be aware of in the event of an audit or review by the Tax Office.
It is important to maintain adequate tax records to substantiate your income and expenses.
Ensure that the details you disclose in your tax return are complete and correct.
The Tax Office has used a recent Taxpayer Alert to warn taxpayers that it will pay close scrutiny to super fund deeds that seek to avoid excess contributions tax.
The Tax Office has observed arrangements whereby a clause is inserted into a SMSF's trust deed to restrict the trustee from accepting all or part of a contribution if that contribution would cause the member to exceed the relevant contributions cap.
Where the trustee accepts the contribution, the trust deed directs them to hold the amount in a separate trust/reserve, even though it has been received by the fund and has been mixed with the other assets of the fund.
The Tax Office has advised trustees that such arrangements are ineffective and will be treated as superannuation contributions upon which excess contributions tax will apply.
Excess contributions tax is imposed on contributions in excess of the relevant contributions caps.
Salary deferral arrangements have the effect of avoiding tax obligations by lowering the amount of taxable employment income an employee has to report in their tax return for a given financial year.
Under a salary deferral arrangement, an employee and employer enter into an agreement to defer the employee's receipt of an amount of salary or bonus and instead be provided with a loan of an equal or greater amount.
The salary is then paid on a future date, usually in the next financial year, and the payment is used to offset the outstanding loan.
The Tax Determination highlights the Tax Office's view that such schemes will attract the anti- avoidance provisions of Part IVA.
However, the determination will not apply where the loan is a deemed dividend under Division 7A.
Ensure you do not engage in salary deferral schemes aimed at tax avoidance as significant penalties apply.
The Full Federal Court has held that a taxpayer was entitled to a deduction for interest incurred on a loan taken out to acquire units in a hybrid trust.
It's an interesting case because the taxpayer's units entitled him to ordinary income of the trust, but capital gains could be distributed to other beneficiaries on a discretionary basis.
The technical details related to certain standard clauses in the deed (and in most hybrid trust deeds). granting the trustee the power to decide whether amounts received should be considered to be derived on income or capital account.
The Tax Office alleged that power made the deed a discretionary trust, meaning that the taxpayer would not be able to claim interest on the loan he took out to buy the units.
The Court rejected the ATO's assertions and allowed the taxpayer to claim the interest as the power in the deed merely allowed the trustee to allocate amounts between income and capital.
- There are some changes to the Family Tax Benefit [FTB] that were recently announced in the 2009/10 Federal Budget.
- Generally, from July 1, 2009 the FTB will operate as follows:
- The family tax benefit part B primary earner income threshold will remain at $150,000;
- The income threshold for receiving dependency tax offsets will remain at $150,000;
- The baby bonus eligibility threshold will remain at $75,000 family income in the six months following the birth or adoption of a child;
- The higher income free area of family tax benefit part A will remain unchanged;
- The payment rates for family tax benefits (parts A and B) and the baby bonus will continue to be indexed annually.
- The Government also announced its 18 weeks paid parental leave scheme which will begin on January 1, 2011 and will be available to eligible care givers after the birth or adoption of a child.
- Family Tax Benefit B will not be available for the 18 week period of paid parental leave.
Are you a parent who pays or recieves child support ?
Changes to the calculation of adjusted income for Child Support purposes will take effect from July 1, 2009.
- As a result of recent legislative changes, income for the purposes of child support payments will be calculated using a new formula.
- Voluntary salary sacrificed superannuation contributions will now be included in the calculation of child support income.
- Compulsory superannuation contributions, such as employer contributions made under superannuation guarantee requirements, will continue to be disregarded in the computation of child support income.
- In addition, net losses from financial investments will now be added to a parent's adjusted taxable income for child support purposes.
- The changes will take effect from July 1, 2009 and will affect child support assessments for the periods after July 1, 2010
Are you taxpayer who works overseas for part of the year or the employer of such a worked ?
- Previously, foreign employment income earned by an Australian resident was exempt from tax provided the taxpayer worked as an employee or officeholder in a foreign country for a continuous period of 91 days or more and the foreign income was subject to tax in the foreign country.
- From July 1, 2009, the foreign employment income exemption will only be available if the foreign service is directly attributable to any of the following:
- The delivery of Australia's overseas aid program by the individual's employer; or
- The activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; or
- The activities of the individual's employer being a prescribed institution that is exempt from Australian income tax; or
- The individual's deployment outside Australia by an Australian Government (or an authority thereof) as a member of a disciplined force; or
- An activity of a kind specified in the regulations.
- As a result of the recent changes, employees who were previously exempt from the PAYG Withholding rules will now be subject to these rules regardless of whether they are working for Australian or foreign employers.
- Generally, the Australian tax amount to be withheld is the residual balance after subtracting the Australian dollar equivalent of the foreign tax withheld and paid in the foreign country from the amount which would normally be withheld in Australia on the Australian dollar equivalent of the foreign employment income.
- This ensures that the withholding from payments made to individuals employed in a foreign country closely estimates the Australian income tax payable on the relevant foreign employment income.
- From July 1, 2009 the foreign earned income exemption has been withdrawn and new rules for PAYG Withholding on foreign employment income now apply.
Income averaging for special occupations. (published 18/02/1010)
Are you an artist, composer, writer/inventor, performer, production associate or sportsperson?
Certain special professionals may be eligible to average their income over several years if they fall under certain occupations to combat fluctuations.
Be aware of your eligibility to use the averaging concession.
Contact us if you require any clarification or advice.
- A taxpayer is considered a special professional if they are engaged in specified occupations including:
• Artists;
• Composers;
• Writers;
• Inventors;
• Performers;
• Production Associates; or
• Sportspersons.
- These special professionals are eligible to use income averaging if:
• They are an Australian resident; and
• Satisfy the first year requirements in either the current income year or an earlier income year.
- The first year requirement stipulates that the first year in which the special professional can apply the averaging concession is the first in which they have a taxable income of at least $2,500 from that profession.
- An ATO publication gives detailed guidance in relation to claiming the income averaging concession. Click here for a copy or visit the Tax Office website at www.ato.gov.au
You must satisfy certain criteria in order to make use of the income averaging concession for special professionals.
FBT exempt car benefits or are you an employer who provides car benefits to your employees ? (published 21/01/2010)
The Tax Office has released the latest list of vehicles that may be exempt from Fringe Benefits Tax [FBT].
Be aware of the motor vehicles that are eligible for the FBT car benefit exemption.
Contact us if you require any clarification or advice.
- Generally, motor vehicles provided to employees or their associates are subject to FBT if they are used or are available for private use.
- Each year the ATO publishes a comprehensive but not exhaustive list of motor vehicles which may be eligible for an exemption from FBT.
- The ATO stresses that vehicles that are included in the listing are not automatically exempt from FBT, but rather depend on whether the eligibility criteria for the exemption are met.
- To be eligible for the exemption, an employee's private use of a taxi, panel van, utility or other commercial vehicle must be limited to:
a. Travel between home and work;
b. Incidental travel in the course of ordinary duties of employment; or
c. Where the private use is minor, infrequent and irregular.
- In most cases, panel vans, utility vehicles and other commercial vehicles would be eligible for this exemption.
- Click here for the latest list of eligible exempt motor vehicles, or visit the Tax Office website at www.ato.gov.au
Remember some motor vehicles fall in the category of exempt car fringe benefits.
Is a Capital Gains Tax Shake-up Looming? (published 19/01/2010)
In a bid to encourage long-term investment in Australia, there may be major changes to the taxation treatment of capital gains in the foreseeable future.
Be aware that the final Henry Tax Review report has not yet been released.
Contact us if you require any clarification or advice.
- As the public awaits the release of the final Henry Tax Review report, there is growing speculation that one of the recommendations will be to make changes to the current Capital Gains Tax [CGT] system.
- In its preliminary report, the Henry Tax Review recommended that the Federal Government engage in an overhaul of CGT concessions for investors and small business as the system is currently too complicated and does not encourage long term investment.
- It has been proposed that the 50% capital gains discount for assets held for greater than 12 months should be scrapped and a new system created.
- Various proposals for alternative systems that encourage long term investment include the introduction of a standard flat rate on capital gains, reintroduction of indexation to tackle the impacts of inflation on capital returns and increasing the holding period for eligibility for CGT discounts.
- For more information on the progress of the Henry Tax Review, visit the Treasury website at www.treasury.gov.au
The final report on the Henry Tax Review is yet to be released to the public.
Are you a taxpayer nearing retiring age ? (published 18/01/2010)
The Henry Tax Review has recommended changes to the current age pension means testing system in order to promote fairness for all pensioners.
Consider the recommendations made by the Henry Tax Review and how they may affect you.
Contact us if you require any clarification or advice.
1. Adjustments to the current means testing for the age pension have been recommended by the recently concluded Henry Tax Review.
2. Currently, a person's eligibility for the age pension is determined by applying an income test and assets test, with any age pensions calculated using the method which results in the lowest pension.
3. The review has highlighted a number of flaws in the current means testing system which result in unequal treatment of pensioners with similar levels of private means.
4. For example, by applying the current income test, pensioners with income generating assets get a lower pension than pensioners with the same level of assets which do not generate income.
5. The review has recommended introducing a single means test which should:
• Ensure effective and fair assessment of an individual's retirement savings;
• Be more neutral in the treatment of different forms of retirement savings;
• Provide appropriate incentives for people to effectively use their retirement savings; and
• Ensure availability of incentives for older Australian who wish to continue to undertake paid employment.
6. For more information, visit the Treasury website at http://www.treasury.gov.au
Remember the Henry Tax Review's recommendations are only proposals which will be considered by the Government.
Beware of Claiming Deductions Against Family Trust Income! (published 19/01/2010)
Are you a beneficiary in receipt of distributions from a discretionary trust?
The Tax Office has issued a reminder to taxpayers that deductions can only be claimed against distributions from discretionary trusts in very limited circumstances.
Ensure you maintain adequate records to support your deductions.
Contact us if you require any clarification or advice.
- Throughout January and February 2010, the Tax Office will be sending correspondence to selected taxpayers who have claimed deductions against income from discretionary trusts.
- These letters will highlight the Tax Office's position on claiming these deductions and request that taxpayers provide details supporting their claims.
- The Tax Office has advised that deductions can only be claimed against distributions from discretionary trusts if the beneficiary can prove that they were presently entitled to the income when the expense was incurred.
- Taxpayers who receive the letters have an opportunity to make a voluntary disclosure if their claims were made in error.
Remember ensure you keep adequate records if you are claiming any deductions against discretionary trust distributions.
Are you a dentist ? The following are the general dental practice arrangements. (published 19/01/2010).
The Tax Office has released a fact sheet to explain its views on dental practice service trust arrangements.
Be aware of the fact sheet issued by the Tax Office.
Contact us if you require any clarification or advice.
- Many dentists operate through a service trust arrangement whereby the dentist creates a service entity to render a suite of administrative dental practice services while the dentist focuses solely on treating patients.
- The service entity is responsible for employing staff and provides a range of other services including:
• Assistance to the dentist;
• Billing and collection;
• Employee and supplier payments;
• Maintaining patient records and office systems;
• Marketing;
• Legal and regulatory obligations; and
• General administration
- Generally, the service entity also provides the premises, furniture and fittings as well as any plant and equipment used in the course of business.
- The service trust charges the dentist a service fee which could equate to up to 60% of the dentists gross fees.
- As an industry trend, the Tax Office accepts that service fees charged by service entities are generally between 40% - 60% of the dentist's gross receipts from patients.
- However, where the dentist provides greater input into the administration of the practice, the Tax Office assumes that the service fee should naturally be lower.
- Generally, service fees greater than the 40% - 60% benchmark greatly increase the probability of an audit being conducted by the Tax Office.
- Click here for a copy of the fact sheet or visit the ATO website at www.ato.gov.au.
Remember ensure you are aware of the Tax Office's benchmark rates for dental practice service arrangements.
Are you the owner of a small business? (published 19/01/2010)
The Federal Government has recently released draft legislation to apply an income test for eligibility for the Entrepreneur's Tax Offset (ETO).
Be aware of the Entrepreneur's Tax Offset.
Contact us if you require any clarification or advice.
- The ETO is an offset that allows a reduction of up to 25% of the income tax liability attributable to a business in the simplified tax system with an annual turnover of $75,000 or less.
- The Federal Government will apply an income test as part of the eligibility criteria for the ETO to better target the offset to legitimate small businesses.
- The income test will restrict access to the offset by individuals with high alternative household income.
- Under the proposed income test, the tax offset amount will be reduced once a taxpayer's non-business income exceeds:
• $70,000 for singles; and
• $120,000 for families.
- For more information on the Entrepreneurs' Tax Offset, visit the ATO website at www.ato.gov.au
Remember ensure you are aware of the operation of the Entrepreneur's Tax Offset.
Reimbursement of Expenses under Salary Sacrifice Arrangements. (published 29/01/2010).
Are you an employee ? The Tax Office has released a guide addressing the tax treatment of situations where an employer makes a payment to an employee as reimbursement for expenses that have not been incurred by the employee.
Be aware of the tax treatment of reimbursements for salary sacrificed expenses.
Contact us if you require any clarification or advice.
- Generally, salary sacrifice or salary packaging is an arrangement whereby the employee foregoes part of their future entitlement to salary in return for a benefit provided by the employer. There is no restriction on the types of benefits that can be sacrificed.
- Salary sacrifice may include an expense payment fringe benefit whereby the employee incurs and pays for an expense and the employer reimburses the employee for the incurred expense.
- If an employee mistakenly claims a reimbursement for an expense they have not incurred, the payment should be returned to the employer. These returned payments may, at the end of the salary sacrifice arrangement accounting period, be cashed out and included as assessable salary and wages to the employee.
- Where a taxpayer falsely claims a reimbursement of expenses that they have not actually incurred, the amount received is treated as assessable income and must be included in the employee's tax return.
Remember ensure you are aware of the tax treatment of reimbursements received under a salary sacrifice arrangement.
Sham Mortgage Arrangements - A Tax Office Warning. (published 29/01/2010)
The Tax Office is warning taxpayers about sham arrangements promoted as 'mortgage management plans'.
- In a recent taxpayer alert, the Tax Office has warned the public against sham arrangements that promise to help home owners repay their home loans sooner.
- Generally, under the shams, taxpayers refinance their homes and establish an investment loan to fund the purchase of shares in a bogus company.
- The schemes promise to help taxpayers claim tax deductions and offer big financial returns.
- The Tax Office warns that while this may seem attractive, taxpayers will face close scrutiny.
- Taxpayers involved in such schemes are urged to make voluntary disclosures before they are contacted for a Tax Office audit.
- These tax evasion schemes may offer big financial returns but the Tax Office warns that the consequences if they are caught can be very severe.
- For more information visit the Tax Office website at www.ato.gov.au
Ensure that you are aware of, and do not participate in, such shams.
Tax Office Warning on R&D Schemes (published 29/01/2009)
Are you a company director ?
The Tax Office has issued a warning on investment schemes that try to take advantage of the Research & Development (R&D) tax offset.
Be aware of the warning from the Tax Office.
Contact us if you require any clarification or advice.
- The Tax Office regularly publishes taxpayer alerts to warn taxpayers about risky practices.
- The Tax Office is currently focusing on investment schemes that abuse the Research & Development (R&D) tax offset.
- Generally, the arrangements involve companies structuring contracts with a registered research agency to provide R&D services.
- According to the Tax Office, the agreement appears to be a prepayment for research services up to 13 months in advance.
- However, such expenditure may not be tax deductible and the Tax Office warns that it will be taking strong action against the schemes and its promoters.
- The Tax Office is currently investigating about 70 entities involved in the arrangements and is encouraging them to make a voluntary disclosure where necessary.
- Taxpayers who make a voluntary disclosure are entitled to a reduction in any penalties that may apply.
Remember that you are entitled to the R&D Tax Offset before making a claim.
Rental Properties & Deductions for Travel Expenses (published 18/02/2010).
Are you the owner of a rental property ?
The Tax Office has issued guidance to owners of rental properties to explain which travel expenses they can claim and some of the mistakes that are commonly made.
Review your rental property travel deductions to ensure they are allowable.
Contact us if you require any clarification or advice.
- Rental property owners are entitled to claim travel expenses to rental properties if the purpose is for:
• Preparing the property for tenants;
• Inspecting the property;
• Making repairs to the property;
• Collecting rent; and
• Visiting the agent to discuss the rental property.
- Taxpayers cannot however claim:
• Travel in relation to private use of the property;
• Travel to carry out maintenance when the property is not available for rent; and
• Travel to carry out initial repairs before the property is rented out for the first time.
- Common mistakes the Tax Office guidance addresses include:
• Claiming expenses for travel incidental to the main purpose of the journey;
• Claiming private trips; and
• Failing to substantiate claims.
Remember ensure you review your rental property travel deductions.
A Teachers' Guide to Claiming Work Related Expenses. (published 18/02/2010)
Are you a teacher ?
The Tax Office has released a guide to assist teachers in determining which types of expenses they are entitled to claim as a tax deduction.
Be aware of the deductions you can claim against your income from teaching.
Contact us if you require any clarification or advice.
- Taxpayers are generally entitled to claim deductions for work related expenses provided they:
• Are incurred in gaining assessable income;
• Are not private in nature; and
• Can be substantiated.
- A new guide issued by the Tax Office highlights which types of expenses can be claimed by those in the teaching profession, including record keeping requirements to support those claims.
- Generally, the guide addresses the following work related expenses:
• Travel Expenses - may only be claimed if they are additional to normal trips between work and home. These include trips where students are transported.
• Home office expenses - may only be claimed to the extent that they are used for business purposes. Any private usage of home office assets must be apportioned in working out the claim for a deduction.
- The guide further looks at other deductions that teachers may be able to claim including:
• Overnight/ overseas travel;
• Uniform and Laundry;
• Self education;
• Union fees and subscriptions; and
• Seminars and workshops.
Remember expenses must be apportioned to exclude the portion relating to private use.
TFN Withholding Requirements for Trusts. (published 19/02/2010)
Are you the beneficiary of a trust ?
The Assistant Treasurer has released draft legislation to ensure taxpayers receiving distributions from trusts pay their fair share of tax.
You should understand how the proposed changes will affect you.
Contact us if you require any clarification or advice.
- Closely held trusts, including family trusts, may soon be subject to new TFN withholding requirements.
- Under the recently released draft legislation, trustees will be required to withhold tax on any distributions made to beneficiaries who do not provide their tax file number.
- Trust beneficiaries where the parent trust is subject to the trustee beneficiary reporting rules will be excluded from the measure.
- Quarterly requirements for trustees to report and remit amounts withheld will also be removed and a simpler reporting framework will be introduced.
Remember these changes are still being investigated by the government.
