Newsletter: August

ATO warning regarding work-related expense claims for 2017

The ATO is increasing attention, scrutiny and education on work-related expenses (WREs) this tax time.

Assistant Commissioner Kath Anderson said: “We have seen claims for clothing and laundry expenses increase around 20% over the last five years.  While this increase isn’t a sign that all of these taxpayers are doing the wrong thing, it is giving us a reason to pay extra attention.”

Ms Anderson said common mistakes the ATO has seen include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

“I heard a story recently about a taxpayer purchasing everyday clothes who was told by the sales assistant that they could claim a deduction for the clothing if they also wore them to work,” Ms Anderson said.

“This is not the case.  You can’t claim a deduction for everyday clothing you bought to wear to work, even if your employer tells you to wear a certain colour or you have a dress code.”

Ms Anderson said it is a myth that taxpayers can claim a standard deduction of $150 without spending money on appropriate clothing or laundry.  While record keeping requirements for laundry expenses are "relaxed" for claims up to this threshold, taxpayers do need to be able to show how they calculated their deduction.

The main message from the ATO was for taxpayers to remember to:

n          Declare all income;

n          Do not claim a deduction unless the money has actually been spent;

n          Do not claim a deduction for private expenses; and

n          Make sure that the appropriate records are kept to prove any claims.

 

GST applies to services or digital products bought from overseas

From 1 July 2017, GST applies to imported services and digital products from overseas, including:

u         digital products such as streaming or downloading of movies, music, apps, games and e-books; and

u         services such as architectural, educational and legal.

Australian GST registered businesses will not be charged GST on their purchases from a non-resident supplier if they:

q         provide their ABN to the non-resident supplier; and

q         state they are registered for GST.

However, if Australians purchase imported services and digital products only for personal use, they should not provide their ABN.

Imposition of GST on 'low-value' foreign supplies

Parliament has passed legislation which applies GST to goods costing $1,000 or less supplied from offshore to Australian consumers from 1 July 2018.

Using a 'vendor collection model', the law will require overseas suppliers and online marketplaces (such as Amazon and eBay) with an Australian GST turnover of $75,000 or more to account for GST on sales of low value goods to consumers in Australia.

The deferred start date gives industry participants additional time to make system changes to implement the measure.

Editor: It should be noted that this is a separate measure to that which applies GST to digital goods and services purchased from offshore websites, as outlined above.

 

New threshold for capital gains withholding

From 1 July 2017, where a foreign resident disposes of Australian real property with a market value of $750,000 or above, the purchaser will be required to withhold 12.5% of the purchase price and pay it to the ATO unless the seller provides a variation (this is referred to as 'foreign resident capital gains withholding').

However, Australian resident vendors who dispose of Australian real property with a market value of $750,000 or above will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds.

Therefore, all transactions involving real property with a market value of $750,000 or above will need the vendor and purchaser to consider if a clearance certificate is required.

 

Action to address super guarantee non-compliance

The Government will seek to legislate to close a loophole that could be used by unscrupulous employers to short‑change employees who choose to make salary sacrificed contributions into their superannuation accounts.

The Government will introduce a Bill into Parliament this year that will ensure an individual’s salary sacrificed contributions do not reduce their employer’s superannuation guarantee obligation.

 

Change to travel expenses for truck drivers

Editor: The ATO has released its latest taxation determination on reasonable travel expenses, and it includes a big change for employee truck drivers.

For the 2017/18 income year, the reasonable amount for travel expenses (excluding accommodation expenses, which must be substantiated with written evidence) of employee truck drivers who have received a travel allowance and who are required to sleep away from home is $55.30 per day (formerly a total of $97.40 per day for the 2016/17 year).

If an employee truck driver wants to claim more than the reasonable amount, the whole claim must be substantiated with written evidence, not just the amount in excess of the reasonable amount.

Editor: The determination includes an example of a truck driver who receives a travel allowance of $40 per day in 2017/18 ($8,000 over the full year for 100 2-day trips), but who spent $14,000 on meals on these trips.

 

In terms of claiming deductions for these expenses, he can either claim $14,000 as a travel expense (if he kept all of his receipts for the food and drink he purchased and consumed when travelling), or just rely on the reasonable amount and claim $11,060 ($55.30 x 200 days) as a travel expense (in which case he will need to be able to show (amongst other things) that he typically spent $55 or more a day on food and drink when making a trip (for example, by reference to diary entries, bank records and receipts that he kept for some of the trips)).

 

Car depreciation limit for 2017/18

The car limit for the 2017/18 income year is $57,581 (the same as the previous year).  This amount limits depreciation deductions and GST input tax credits.

Example

In July 2017, Laura buys a car to which the car limit applies for $60,000 to use in carrying on her business.    As Laura started to hold the car in the 2017/18 financial year, in working out the car’s depreciation for the 2017/18 income year, the cost of the car is reduced to $57,581.

 

Div.7A benchmark interest rate

The benchmark interest rate for 2017/18, for the purposes of the deemed dividend provisions of Div.7A, is 5.30% (down from 5.40% for 2016/17).

Newsletter: July

Removal of the Temporary Budget Repair Levy from the 2017/18 income year

The 2% Temporary Budget Repair Levy (or ‘TBRL’), which has applied to individuals with a taxable income exceeding $180,000 since 1 July 2014, is repealed with effect from 1 July 2017. 

Up until 30 June 2017, including the TBRL and the Medicare Levy, individuals earning more than $180,000 faced a marginal tax rate of 49%.

With the benefit of the removal of the 2% TBRL, from 1 July 2017, individuals with a taxable income exceeding $180,000 face a marginal tax rate of 47% (including the Medicare Levy). 

Editor: Don’t forget to add another 1.5% for the Medicare Levy Surcharge for certain individuals that don’t have Private Health Insurance.

 

Simpler BAS is coming soon

The ATO is reducing the amount of information needed to be included in the business activity statement (or ‘BAS’) to simplify GST reporting.

From 1 July 2017, Simpler BAS will be the default GST reporting method for small businesses with a GST turnover of less than $10 million.

In relation to GST, small businesses will only need to report:

G1 - Total sales

1A - GST on sales

1B - GST on purchases.

This will not change a business’ reporting cycle, record keeping requirements, or the way a business reports other taxes on its BAS.

Simpler BAS is intended to make it easier for businesses to lodge their BAS.  It should also reduce the time spent on form-filling and making changes that don't impact the final GST amount.

The ATO will automatically transition eligible small business' GST reporting methods to Simpler BAS from 1 July 2017.

Small businesses can choose whether to change their GST accounting software settings to reduce the number of GST tax classification codes.

Editor:  Call our office if you need help with the transition to Simpler BAS or to decide whether your business will use reduced or detailed GST tax code settings in its GST accounting software.

 

Changes to the foreign resident withholding regime for sales of Australian real estate

Since 1 July 2016, where a foreign resident has disposed of real estate located in Australia, the purchaser has had to withhold 10% of the purchase price upon settlement and remit this amount to the ATO, where the market value of the property was $2,000,000 or greater. 

As a result of another 2017/18 Budget Night announcement becoming law, in relation to acquisitions of real estate that occur on or after 1 July 2017, the withholding rate has increased to 12.5% and the market value of the real estate, below which there is no need to withhold, has been reduced to $750,000. 

Editor:  Unfortunately, even if a sale of real estate with a market value of $750,000 was to take place between two siblings on or after 1 July 2017 (both of whom have been Australian residents for 50 plus years), withholding must occur unless the vendor obtains a ‘clearance certificate’ from the ATO – despite the two siblings clearly knowing the residency status of each other!

These changes highlight the need to obtain clearance certificates where the vendor is an Australian resident and the real estate is worth $750,000 or more - not a high exemption threshold given the sky-rocketing values of Australian real estate!  If you are buying or selling real estate worth $750,000 or more (including a residential property, i.e., home) please call our office to see if a clearance certificate is needed.

Change to deductions for personal super contributions

Up until 30 June 2017, an individual (mainly those who are self-employed) could claim a deduction for personal super contributions where they meet certain conditions. One of these conditions is that less than 10% of their income is from salary and wages.  This was known as the “10% test”.

From 1 July 2017, the 10% test has been removed.  This means most people under 75 years old will be able to claim a tax deduction for personal super contributions (including those aged 65 to 74 who meet the work test).

Editor: Call our office if you need assistance in relation to the application of the work test for a client that is aged 65 to 74.

Eligibility rules

An individual can claim a deduction for personal super contributions made on or after 1 July 2017 if:

  •          A contribution is made to a complying super fund or a retirement savings account that is not a Commonwealth public sector superannuation scheme in which an individual has a defined benefit interest or a Constitutionally Protected Fund;
  •          The age restrictions are met;
  •          The fund member notifies their fund in writing of the amount they intend to claim as a deduction; and
  •          The fund acknowledges the notice of intent to claim a deduction in writing.

Concessional contributions cap

Broadly speaking, contributions to super that are deductible to an employer or an individual, count towards an individual’s 'concessional contributions cap'. 

The contributions claimed by an individual as a deduction will count towards their concessional contributions cap, which for the year commencing 1 July 2017 is $25,000, regardless of age.  If an individual’s cap is exceeded, they will have to pay extra tax.

Editor:  Call our office to discuss the eligibility criteria and tax consequences of claiming a tax deduction for a personal contribution to super for the year commencing 1 July 2017.

Newsletter: May

Company tax cuts pass the Senate with amendments

Editor: After a marathon few days of extended sittings (the last before the Federal Budget in May), the Government finally managed to get its company tax cuts through the Senate, but it was not without compromise.

The following outlines the final changes to the law, as passed by the Senate, including a recap of which of the original proposals remained intact and also which ones were changed.

Changes to the franking of dividends

Prior to this income year, companies that paid tax on their taxable income at 28.5% could still pass on franking credits to their shareholders at a rate of 30%, subject to there being available franking credits.

However, with effect from 1 July 2016 (i.e., this income year), the maximum franking credit that can be allocated to a frankable distribution paid by a company will be based on the tax rate that is applicable to the company. 

Editor: Please contact this office if you would like to know how these changes will affect your business specifically.

Costs of travelling in relation to the preparation of tax returns

The ATO has released a Taxation Determination confirming that the costs of travelling to have a tax return prepared by a “recognised tax adviser” are deductible. 

In particular, a taxpayer can claim a deduction for the cost of managing their tax affairs. 

However, apportionment may be required to the extent that the travel relates to another non-incidental purpose.

Example – Full travel expenses deductible

Maisie and John, who are partners in a sheep station business located near Broken Hill, travel to Adelaide for the sole purpose of meeting with their tax agent to finalise the preparation of their partnership tax return. 

They stay overnight at a hotel, meet with their tax agent the next day and fly back to Broken Hill that night. 

The full cost of the trip, including taxi fares, meals and accommodation, is deductible.

Example – Apportionment required

Julian is a sole trader who carries on an art gallery business in Oatlands.

He travels to Hobart for two days to attend a friend's birthday party and to meet his tax agent to prepare his tax return, staying one night at a hotel.

Because the travel was undertaken equally for the preparation of his tax return and a private purpose, Julian must reasonably apportion these costs.

In the circumstances, it is reasonable that half of the total costs of travelling to Hobart, accommodation, meals, and any other incidental costs are deductible.

Editor: Although the ATO's Determination directly considers the treatment of travel costs associated with the preparation of an income tax return, the analysis should also apply where a taxpayer is travelling to see their tax agent in relation to the preparation of a BAS, or another tax related matter.

 

 

Newsletter: April

Reduction in FBT rate from 1 April 2017

In conjunction with the introduction of the temporary budget repair levy (of 2%, payable by high income earners), the FBT rate was also increased from 47% to 49% for the 2016 and 2017 FBT years.

However, the FBT rate will revert back to 47% from 1 April 2017.

Editor: This means there will be a discrepancy between the FBT rate and the effective income tax rate for high income earners from 1 April 2017 until 30 June 2017.

This means that any such high-income earners that genuinely and effectively salary sacrifice relevant fringe benefits (e.g., expense payment fringe benefits, such as school fees or residential rent) during that period, so long as their employer is happy to assist, could basically reduce the tax payable on that income by 2%.

Lump sum payments received by healthcare practitioners

The ATO must be concerned about healthcare practitioners receiving lump sums and treating them as capital payments, as they have released a detailed fact sheet setting out what they expect to see in such situations.

If a healthcare practitioner (such as a doctor, dentist, physical therapist, radiologist or pharmacist) gets a lump sum payment from a healthcare centre operator, according to the ATO "it's probably not a capital gain.  It's more likely to be ordinary income".

Specifically, the lump sum will typically be ordinary income of the practitioner for providing services to their patients from the healthcare centre.

Importantly, the mere fact the payment is a one-off lump sum, or expressed to be principally consideration for the restraint imposed, for the goodwill or for the other terms or conditions, does not define it as having the character of a capital receipt.

Editor: If you think this may affect you, we can help you work out what you need to do.

Tax officers "hit the streets" to "help small businesses"

The ATO is visiting more than 400 businesses across Perth and Canberra this month as part of a campaign to "help small businesses stay on top of their tax affairs".

Assistant Commissioner Tom Wheeler said: “Our officers will be visiting restaurants and cafés, hair and beauty and other small businesses in Perth and Canberra to make sure their registration details are up to date.  These industries are on our radar because they have ready access to cash, and this is a major risk indicator.”

“We then work to protect honest businesses from unfair competition by taking action against those who do the wrong thing.”

The industries they are visiting have some of the highest rates of concerns reported to the ATO from across the country.

Planned changes to GST on low value imported goods

From 1 July 2017, overseas clients with an Australian turnover of $75,000 or more will need to register for, collect and pay GST on goods up to $1,000 that they sell to consumers in Australia.

If Australian clients are registered for GST and buy low value imported goods for their business from overseas, they will need to supply their ABN at the time of purchase so they won't be charged GST.

If the Australian business is not registered for GST, they will be treated as a consumer and unable to recover the GST charged by the overseas business.

Company disallowed $25 million of carried forward tax losses

A lack of supporting evidence has led to a company failing to prove it was entitled to claim deductions for tax losses (totalling $25 million) the company incurred for a property development, most notably during the 1990 to 1995 income years. 

The company then claimed these tax losses as deductions on its income tax returns for the 1996 to 2003 income years.

The ATO disallowed the deductions because the company was unable to satisfy either of the tests that companies must satisfy to successfully claim losses incurred in prior years (being the 'Continuity of Ownership Test' and the 'Same Business Test’), and the AAT agreed with the ATO. 

This was basically because the shares in the company could not be traced to the same shareholders that owned shares in some of the loss years.  Further, there were periods of uncertain ownership positions during the relevant timeframe, which meant the AAT could not conclude a 'continuity of ownership' had been established in some cases.  Also, the business has changed in the 1996 income year from property development to investing in units in a trust. 

Editor: It is important to remember that the burden of proving an ATO assessment is excessive rests with the taxpayer. 

Although this burden may prove difficult in cases such as this (i.e., the first claimed loss year was 1990), the AAT noted that a taxpayer has the obligation to make good its case on some “satisfactory basis other than speculation, guesswork or corner-cutting”.

Super changes may require action by 30 June 2017!

Due to the introduction of the new 'transfer balance cap' from 1 July 2017, super fund members with pension balances (in 'retirement phase') exceeding $1.6 million will need to partially commute one or more of their pensions to avoid the imposition of excess transfer balance tax. 

In addition, members in receipt of a transition to retirement income stream ('TRIS') will lose the pension exemption from 1 July 2017.

This means that the future disposal of any assets currently supporting such pensions will potentially generate a higher taxable capital gain (even though the disposal of the asset prior to 1 July 2017 could be fully or partially tax-free, depending on whether the asset is a segregated or unsegregated asset).

Fortunately, to avoid funds selling off assets before 1 July 2017, transitional provisions have been introduced to allow super funds to apply CGT relief in certain situations. 

Although the choice to apply the CGT relief can be made up until the day the super fund is required to lodge its 2017 tax return, in many cases, action must be taken on or before 30 June 2017 for the fund to even be eligible to make that choice. 

In particular, funds calculating exempt pension income using the segregated assets method will generally need at least a partial commutation of the pension.

Editor: Please contact our office if you need any information regarding the super reforms, including what needs to be done to obtain CGT relief (if necessary), whether a TRIS should be commuted to accumulation phase or continued into the 2018 year, and how the new contribution rules will affect contributions in both the current and future years.

Working holiday makers – 2017 early lodgers

The ATO has advised that the recent change to tax for working holiday makers means there are extra steps tax agents need to take when preparing an early 2017 income tax return for these clients.

Editor: We will obviously be able to help you this.  Basically, we will need to provide the ATO with a schedule separately identifying income earned up to 31 December, and then from 1 January onwards, to ensure the correct tax rates are applied (along with any deductions associated with the income period).