ATO zones in on hundreds of newly created reserves

ATO deputy commissioner James O’Halloran

As part of its ongoing compliance focus on the use of reserves by SMSFs, the ATO will be paying close attention to reserves that were created in the last financial year totalling $65 million.

ATO deputy commissioner James O’Halloran said the ATO estimated that there are approximately 1,900 SMSFs with reserves with an average value of $192,000.

“Of these funds, 35 per cent or 690 have not previously reported reserves. To date, new reserve amounts equate to approximately $65 million, with the average value of these new reserve amounts equalling $95,000,” he said.

Mr O’Halloran said the ATO is closely scrutinizing any unexplained increase in new reserves, increases in the balances of existing reserves, or allocation of amounts from a reserve directly into the retirement phase.

“Our work in the coming year will focus on examining new or increased reserves in the 2016–17 income year, where the facts and circumstances indicate the reserve was used as a means of circumventing the 2016 reforms,” he said.

“Where SMSFs implement strategies using reserves designed to circumvent restrictions in the super and income tax legislation, thereby weakening the integrity of these measures, we will consider the potential application of the sole-purpose test under section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) and Part IVA of the Income Tax Assessment Act 1936,” he said.

Where an SMSF does have reserves, he said the ATO will be looking to see whether they’re being maintained by a trustee in line with the sole-purpose test.

“Section 62 of SISA requires the trustee of an SMSF to ensure the fund is maintained solely for legislated core or ancillary purposes, most commonly the provision of retirement benefits,” he explained.

Before establishing a reserving strategy, Mr O’Halloran said it was important that SMSF professionals and their clients have carefully reviewed the SMSF’s trust deed to ensure it has the ability to create and manage the limited type of reserves identified as being appropriate in an SMSF.

“In any event, where reserves are kept, the trustee must formulate and put in place a strategy for their prudential management. These must be consistent with the entity’s investment strategy and its ability to discharge its liabilities as and when they fall due as required by paragraph 52B(2)(g) of SISA,” he said.

Miranda Brownlee
27 September 2018
smsfadviser.com

Work-Related Expenses

This year, the Australian Taxation Office is paying close attention to what people are claiming as ‘other’ work-related expense deductions.

The expectations are:-

they spent the money themselves and were not reimbursed
the expense was directly related to earning their income
they have a record to prove it

If an item (e.g. phone) may be for work and private use, the taxpayer can only claim a deduction for the work-related portion.

Taxpayers are not automatically entitled to claim standard deductions, so need to keep records when incurring expenses or able to provide evidence on how they calculated the claim.

Apps for smartphones are available to keep track of deductions, which can then be emailed for inclusion in the income tax returns.

Source: AcctWeb

$20m boost for SME clients looking to exporting

Accountants with SME clients looking for export opportunities have been given a leg up with the launch of a government-funded $20 million program.

The Small and Medium Enterprises (SME) Export Hubs Initiative, announced in the Budget 2018–19, will fund successful applicants to develop local and regional hubs that will help local firms begin to export.

The initiative will provide matched funding from $150,000 to $1.5 million for up to four years from 2018–19 to 2020–21. Matched funding can come from sources other than the Commonwealth, such as state and local governments and industry.

The grant opportunity will support the establishment and operation of SME export hubs in the six growth centre sectors including, advanced manufacturing; cyber security; food and agribusiness; medical technologies and pharmaceuticals; mining equipment, technology and services; and oil, gas and energy resources.

Minister for Industry, Science and Technology Karen Andrews said the grant would help small and medium local businesses cross certain barriers to export.

“Beginning to export can be challenging but there are massive opportunities for Australian firms to take their products, processes and services to big markets in our region and around the world, increasing revenue and creating new jobs,” Ms Andrews said.

“The hubs will help businesses team up with other firms, and through activities such as developing collective brands, [will] take advantage of local infrastructure to boost business operations and position regional businesses to participate in global supply chains.

“We know that this sort of practical assistance can be invaluable for local businesses.”

Interested businesses can apply by 15 October 2018, with selection delivered through a two-stage competitive selection process. You can view the eligibility criteria here.

Jotham Lian
21 September 2018
accountantsdaily.com.au

ATO speaks on risk factors, surveillance triggers for FY19

The ATO has outlined key risk factors, behavioural triggers and paper trails that will draw its attention to your client’s SMSF this financial year.

For the tax office, the SMSF sector has been largely compliant since its birth in the 1990s. However, there are new and ongoing areas marked for surveillance each financial year, which acting assistant commissioner Tara McLachlan ran through earlier this month.

SMSF set-up

The ATO has found some taxpayers continue to see SMSFs as vehicle for early access to their superannuation funds for short-term gain, such as to pay bills or purchase a car. They are often spurred on by promoters who prey on vulnerable pockets of taxpayers.

“These individuals never had any intention of managing their own super and established an SMSF to gain illegal early access to their benefits,” said Ms McLachlan.

There are also schemes in the market which target taxpayers looking to enter the housing market by purchasing a property in their SMSF.

“[Those] schemes operate by pulling on the heartstrings of average Australians struggling to enter the housing market. Retirement savings are targeted by promoting the buying of the property through an SMSF, often with a complicated limited recourse borrowing attached, with no regard to the size of the SMSF or its ability to grow retirement savings,” said Ms McLachlan.

The ATO recently warned professionals and trustees alike of a scam concentrated in Sydney’s western suburbs, targeting those with limited knowledge of the superannuation system to facilitate illegal early access to benefits.

Red flags

There are several factors which could trigger an ATO review in your client’s SMSF registration. They include the behavioural and financial history of each taxpayer, and also the history of their service providers and tax agents.

For the individual, red flags are raised in the ATO’s system where there is bankruptcy, outstanding debts, and whether the taxpayer has links with other problem funds.

As always, the ATO is also concerned by poor lodgment and compliance history, which it heralded on several occasions last financial year during a post-reform clean up.

The ATO is similarly concerned by service providers or tax agents with outstanding debts and a poor lodgment record for its client base. SMSFs associated with these problem professionals are at higher risk of surveillance and compliance activity.

Katarina Taurian
30 August 2018
smsfadviser.com

ATO’s corporate residency guidance cops backlash

The tax office’s new approach to determining whether entities are resident under the central management and control test has drawn flak from industry bodies, noting technical issues with the guidance and disagreeing with the interpretation of the law.

Earlier, Taxation Ruling TR2018/5 was released in its final form, setting the Commissioner of Taxation’s position and the principles governing when a foreign incorporated company will be considered a resident in Australia for tax purposes.

The ruling sets out how to apply the central management and control test of corporate residency, with draft Practical Compliance Guideline PCG 2018/D3 also released to apply the principles set out in the ruling.

However, Chartered Accountants Australia and New Zealand, the Tax Institute, Corporate Tax Association, the Group of 100 and the Business Law Section of the Law Council of Australia have all raised concerns about the draft PCG, with the five bodies banding together to make a submission to the ATO.

Accordingly, the joint bodies disagree with the ATO’s expression of the corporate residency test, noting how it conflates with both the expression in the draft PCG and TR 2018/5.

“The Joint Bodies consider that the test is a two-limb test and that it should be expressed that way in both TR 2018/5 and the Draft PCG.

“The fact that a company has its central management and control in Australia does not necessarily mean it is carrying on business in Australia, although in some factual scenarios it is possible that the very activities of central management and control can be the carrying on of business in Australia.

“The Joint Bodies believe that the interpretation of the corporate residency test adopted by the ATO in both TR 2018/5 and the Draft PCG are incongruous with the policy objectives of the corporate residency test and create uncertainty.”

Further, it notes several technical issues with the draft PCG, including the fact that some foreign incorporated companies may inadvertently meet the residency test, potentially leading to double-taxation if they pay an unfranked dividend.

The joint bodies also note concern over the approach to which the different forms of communication articulated in the draft PCG might ultimate increase red tape and limit business efficiency.

“Distinguishing between video conference, circular resolutions, teleconference and physical presence will tend to create inefficiency and artificiality,” the submission said.

“It may promote situations where an Australian resident director is required to physically travel to the foreign board meeting to avoid central management and control being at least partly in Australia.

“Requiring a minority Australian resident director, or indeed, a number of Australian resident directors to travel overseas to attend board meetings to avoid having a substantial degree of central management and control in Australia is not consistent with a desire to limit ‘red tape’ and to promote business efficiency.”

The joint bodies believe further review of the corporate residency test by the Board of Taxation 12 months after carries “significant merit” and could potentially warrant legislative change.

Jotham Lian
08 August 2018
accountantsdaily.com.au

GST spotlight headed to smaller end of town

With large multinational and public companies put on notice by the ATO over their GST compliance obligations, smaller taxpayers have been warned of “greater frequency and rigour” of reviews heading their way.

Earlier this month, the ATO released their GST review process for large multinational and public companies, highlighting information needed, including structure and business activities, and tax governance and risk management processes.

While the notice was targeted towards larger corporates, the smaller end of town should brace themselves for increased reviews, says Moore Stephens director James Tng.

“In our experience, these GST reviews are not limited to the big end of town – we’re seeing it across the board,” Mr Tng told Accountants Daily.

“The softly, softly approach of probably the first 10 years of GST is over, now they are into tough compliance and making sure you are meeting the tax obligations, hence you are seeing more releases, practice guidance statements and alerts from the tax office.

“Whilst it is not to the same extent [as the large corporate], which is quite exhaustive, it is almost going to them early and letting them review the entire process and system, and we haven't seen that degree of review at the smaller end of town yet, but we are seeing much greater frequency in the rigour and the number of GST reviews.”

Accordingly, Mr Tng believes taxpayers will need to act early in preparation for any impending audits, to save time and costs in dealing with the ATO.

“Accountants need to start to have the conversation early. Clients are great when they come to you early to seek advice, what is important next is to begin structuring and documentation of the structure early – if there is third-party funding or related-party lending involved, documenting that,” said Mr Tng.

“You want to remove the low-hanging fruit where it is an audit situation and there are obvious things you haven't considered, the tax office will be very quick to pick up on low-hanging fruit and pin an audit on that

“We have seen vanilla property investors who might be doing apartment development. In the scheme of things, they are not big numbers, but you are seeing as soon as a refund is triggered, the ATO is asking for information, show us your loan agreements, they want to see what the arrangement is with third parties overseas, so they are starting their compliance activity very early.”

Jotham Lian
29 August 2018
accountantsdaily.com.au

In case you missed it – The company tax Bill that did pass Parliament.

Amidst all the drama in Canberra recently, you could be forgiven for missing an important company tax rate change.

One bill – (Enterprise Tax Plan Base Rate Entities) Bill 2017 actually did get passed by the Senate.

This is an important company and dividend taxation amendment, having both retrospective and prospective impacts.

The lower company tax rate is now dependent on:

having an aggregated turnover less that the requisite threshold (i.e. $25 million in 2017-18 and $50 million in 2018-19 and future years), and
no more than 80% of a corporate’s assessable income for the relevant year is passive income as defined.

Further, maximum franking credits that can be attached to dividends are to be determined by:

assuming the aggregate turnover in the current year is the same as in the previous year; and
applying the corporate tax rate for the current year.

It should not be – but to answer the question what company tax rate will I pay – it depends!!

AcctWeb

What is Bankruptcy?

Bankruptcy is a legal process whereby a person is declared unable to pay their debts.

In all bankruptcies, a trustee in bankruptcy is appointed to administer the bankrupt estate. The trustee may either be the Federal Government Official Trustee, or a private registered trustee.

When someone is declared bankrupt, creditors who do not hold security for their debt (the unsecured creditors), are generally prevented from continuing to seek recovery of their debts.

Creditors cannot begin or continue recovery action during the bankruptcy period or after the person’s discharge from bankruptcy. The bankrupt is released from these debts upon their discharge from bankruptcy.

The bankrupt may choose to continue making repayments to their secured creditors. If they do not, the secured creditors may take possession of their security and sell it.

A bankrupt is generally entitled to retain the following:-

household furniture and personal effects
low value motor vehicles
low value income producing tools of trade
superannuation

At risk of forfeiture would be the share of:-

the family home
investment property
listed shares
business assets

AcctWeb

ATO drills in car-sharing focus this tax time

The tax office has reiterated it will be paying close attention to taxpayers earning income through car-sharing platforms, in line with its focus on the share economy this tax time.

The ATO has warned that the growing popularity of third-party services such as Car Next Door, Carhood or DriveMyCar Rentals has prompted its interest, noting that it will be taking a close look at taxpayers who leave out such income from tax returns.

ATO assistant commissioner Kath Anderson said there is evidence that some taxpayers who are undertaking sharing activities might not understand the taxation implications, similar to its notice to 200,000 taxpayers who facilitate short-term rental properties, earlier this month.

“No matter how little you earn through car sharing, it is important to include it in your tax return. It’s no different to anyone else renting out an asset, like a house or a car park. You must declare the income and you cannot avoid tax by calling it a hobby,” said Ms Anderson.

“Whether you are a digital native or an electronic illiterate, it will be difficult to avoid scrutiny as the ATO has sophisticated systems and data to help identify where sharing platforms are being used to generate income.”

Taxpayers who rent their cars may also be entitled to claim some deductions, including expenses like platform membership fees, availability fees, cleaning fees and car running expenses, in respect to earning the rental income.

H&R Block director of tax communication Mark Chapman earlier told Accountants Daily that the rise and rush to rental platforms may have caught some clients out in terms of declaring such income on their returns.

“It might seem obvious to those of us in the tax business that this income is taxable, but I’ve certainly encountered taxpayers who had no idea that this income needed to go on their tax return – or indeed, that they can also claim tax deductions against the income,” said Mr Chapman.

Jotham Lian
23 August 2018
accountantsdaily.com.au

Superannuation Amnesty – Maybe! Maybe Not!

An amnesty to allow unpaid superannuation to be reported and paid without penalties has hit a big snag.

The amnesty announced in May 2018 lasting for 12 months was concessional in allowing employers to catch-up unpaid compulsory superannuation with reduced penalties.

However, the legislation has not passed and will not be considered until Federal Parliament next meets in mid-August.

If you do want to use the amnesty, be aware it may not become law. And extensive wages details need to be provided proving the calculation of unpaid super – possibly a significant time by your pay office (or yourself).

AcctWeb