Archive for March, 2010

Amazing isn’t it, whenever the Government gets itself into a bind it looks to taxing the rich, whoever they are. We are now looking at the aging population, of which we are all a part and what a drain on the economy they will be in 20, 30 or 40 years time, or so the experts tell us. Should we believe them? They did miss the financial crises after all.

I think the main problem here is not so much the aging population but the welfare society that prospers under certain conditions. Rather than address this problem, the solution is to tax the so called wealthy. Well with the average house price now over $600,000 every householder can now be deemed wealthy.

In 1998-99 there were only 810,468 taxpayers with an income of $57,857 or more.

In 2004-05 there were 1,100,266 taxpayers earning more than $70,000 and 7,796,359 earning less than this. Almost 2m taxpayers earned less than $21.600.

In 2005-06 there were 571,367 taxpayers earning more than $95,000 and1,153,914 tax payers earning between $63,000 and $95,000.

As at November 2007, the average wages in Australia was $57,324, with males averaging $60,954 and females averaging $50,996.

For 2006 -07 there were 234,495 earning more than $150,000  and 1,065,080 earning between $75,000 and $150,000. Now you may fit into one of these categories and I am sure you do not feel wealthy.

The following has been reprinted dozens of times and apparently originated in Canada.

The article uses an example of 10 men who get together on a regular basis for dinner. If the bill was $100, and it was split the way British Columbian’s pay their taxes (broadly the way we do in Australia) the bill would be split this way:

The first four men would pay nothing, the fifth would pay $1, the sixth $3, the seventh $7, the eight $12, the ninth $18 ant the tenth, the richest, would pay $59.

Some may view this as perfectly fair, the rich paying by far the most because they can “afford it”. Consider what happens with a tax cut.

In the article, the restaurant owner opts to reduce their bill since they are such good customers. The bill is reduced by $20. The first four are unaffected and still eat free, but how do we divvy up the $20 amongst the other six.

The owner suggests it would be fair to reduce each person’s bill by roughly the same percentage and comes up with this: the fifth man now pays nothing; the sixth has to pay $2; the seventh $5; the eight $9; the ninth $12 and the tenth $52.

After the meal, they begin to compare their savings.” I only got a dollar out of the $20”’ says the sixth man, pointing to the 10th man, “and he got $7”.

“Yeah,” says the fifth man . “I also only got a dollar. It’s unfair that he got seven times more.

“Wait as minute!’ yell the first four men in unison. “We didn’t get anything at all. The system exploits the poor”.

The nine men surround the tenth and beat him up. The next night he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. The bill was $72 yet the contributions added to only $28. They were $44 short .

There are two important points to be learned here, Yes, the people who pay the highest taxes get the most benefit from a reduction, but tax them too much and they might not show up and then the lower income earners would have to make up the shortfall.

A recent Federal Court decision in Antsis v The Commissioner of Taxation was an unexpected win for the taxpayer and a loss for the Tax Office.

The taxpayer was a full time student completing a teaching degree. During the 2005-06 tax year the taxpayer derived assessable income of $14,946 working as a part time sales assistant and $3,622 from Youth Allowance. The taxpayer claimed expenses of $1,170 consisting of travel, administration fees, stationery and depreciation of a computer.

In order to be eligible for the Youth Allowance the taxpayer was required to satisfy certain conditions, which were: (a) The person must be enrolled in a course at an educational institution; (b) must be studying at least 75% of the normal full time program, and (c) must be making progress towards completing the course. It was also mentioned that no income was derived from working as a teacher.

At the hearing, the applicant was represented by her father, Mr M Antsis, a legal practitioner. Mr Antsis argued, in essence, that the applicant had expended money on her education in order to ensure that she continued to make satisfactory progress towards completing her teaching course and remained eligible to receive assessable income in the form of Youth Allowance. Therefore, it was submitted, the applicant was entitled to a tax deduction pursuant to s 8-1 of the Income Tax Assessment Act.

The Commissioner of Taxation argued that:” – the expenditure incurred by the taxpayer was not “relevant and incidental to” the receipt of the Youth Allowance income; – the primary motive of the taxpayer in undertaking study activities was to gain employment in the future as a teacher; – the expenditure was incurred by the taxpayer at a “point too soon” to the derivation of assessable income as a qualified teacher and – as the youth allowance was a fixed payment from the Government, the expenditure incurred by the taxpayer could not be seen as being incurred with the prospect of increasing the income earning capacity of the taxpayer or to improve or maintain the taxpayer’s skill and knowledge.”

Following arguments by both sides, Justice Ryan, of the Full Federal Court, agreed that there was a nexus between the Youth Allowance income and the self-education expenditure:

“The outlay of fees to enrol in a course to qualify for Youth Allowance and incurring other expenses to satisfy the activity test and so preserve the qualification is not akin to the travelling expenses discussed in cases like Lunney. The claimed expenses in this case were not outlaid to put the applicant in a position to receive Youth Allowance, rather, they were incurred as a necessary incident of pursuing a particular course of study.”

Later in the judgement, Justice Ryan went on to conclude:

“The derivation on income in the form of Youth Allowance is one of the alternative ways in which the occasion of the outgoing is to be found in what is productive of the assessable income.”

In regard to the taxpayer’s motivation to studying and incurring expenditure, the taxpayer conceded that the primary purpose for undertaking the course was to become a teacher. However. The taxpayer stated that while the primary purpose of undertaking study was not to gain Youth Allowance, the primary purpose of the self education expenditure was to meet the satisfactory progress requirement. Mr Antsis went on to argue that the connection of the expenditure to future teaching income does not deny the fact that the expenditure was also relevant to gaining the youth allowance, which itself represented a form of assessable income.

Following on from this Justice Ryan concluded that “The taxpayer’s ultimate purpose or motive in undertaking their course was to acquire a qualification leading to future employment as a Teacher is irrelevant to the characterisation of the expenditure. It is sufficient to say that the expenditure was incurred as a necessary incident of deriving Youth Allowance.

Full facts of the case can be found on the ATO Website at www.ato.gov.au, Antsis v Federal Commissioner of Taxation 2009 ATC 20-098

The FBT year runs from 1st April to 31^st March. Rumour has it that when this tax was introduced it was so regressive that it had to be an April Fools joke. Unfortunately after some 24 years it is still with us. Thank you Mr. Keating.

A fringe benefit is when you receive a benefit from your employer and have not paid tax on that benefit. The ATO believes it to be unfair that you get something they do not, so they tax you, at the top marginal rate.  Most times the employer pays this tax but if you are self employed, you must pay. There are dozens of fringe benefits, including expense payment benefits, airline transport fringe benefits, living away from home allowance fringe benefit, entertainment fringe benefit, property fringe benefit, housing benefit and so the list goes on. Employees in the Health industry or employees of charitable organisations have it easy where fringe benefits are concerned as special rules apply to them and they get exemptions from paying the FBT up to a certain amount.

The most common fringe benefit is the use of a company motor vehicle and this is what applies to most self employed people whose business is conducted through a family company.

This tax is too complex to cover in the 500 words that will appear here but as the tax applies from 1^st April there are certain things that must be done so as to meet legislative requirements.

With motor vehicles, the tax can be applied in several ways, it can be on distance travelled, ignoring the business/ private use of the vehicle, it can be on a percentage basis, identifying how much business use the vehicle gets as opposed to private use or it can be based on a simple 12.5% calculation of the cost base of the vehicle.

With any of these methods of calculation, the distance the car has travelled during the year must be identified. To do this an odometer reading should be taken. This information should be forwarded to your employer and the appropriate declaration signed. If you are self employed, and use a car (sedan) in your business you should forward the number to your accountant. The FBT act defines whether the motor vehicle is a car or not. If your motor vehicle is not a car then you may not be liable for FBT. The ATO web site identifies motor vehicles that are not cars and provided they are designed to carry a load of one tone or more,  more than 8 passengers or if having a load capacity of less than one tone they are not designed for the principal purpose of carrying passengers, then they are exempt from FBT.

The important point here is if your company has sedans on its books, it must prepare a Fringe Benefits Tax return. So what you need to do is go outside, get the odometer reading, send it to your accountant and ask him/her, what is the next step. If the response is a dumb look, then you need to change accountants.

For more on FBT refer to our website at www.coulcher.com.au/taxnews

Last week we started to look at the claiming of travel expenses associated with travel to and from work. This week we further examine this area.

‘Web’ of work places – employee has no fixed place of work

An employee may earn income by performing his or her duties at several work sites. The location of those sites may make it necessary to travel to the various sites. If an employee performs work at a single site and then moves to other sites on a regular basis, it would be considered that a ‘web’ of work places exists.

A deduction may be allowable for the cost of transport between home and work if an employee’s home is a base of operations or the transport expenses are attributable to carrying bulky equipment. While this applies irrespective of itinerancy, the following factors are often present in itinerant employment:

-The element of uncertainty of location is generally another distinct characteristic of itinerant employment. Unlike an ordinary worker who makes the daily journey to his or her regular place of work, the itinerant worker often cannot be certain of the location of their work sites.  - ‘Uncertainty’ in this context, relates only to uncertainty of location, and not to uncertainty of employment. A deduction is not allowable for transport or travel expenses incurred in obtaining new employment. This is because the expenditure is incurred in getting, not in doing, work as an employee.

Example: Hal is a fruit picker who travels around with the view of finding work. When he finds work, he will stay in that location until the work is completed, and then move on in search of other jobs in the industry. Hal is not engaged in itinerant employment and his traveling and transport costs are not an allowable deduction because the expenses are incurred too early to be regarded as being in the course of carrying out the duties of his employment.

This can be contrasted with a worker who has a fixed place of employment and is aware of the location of the work place.

Uncertainty of location is a feature that is generally found in itinerant work. However, instances may arise where an employee’s work may be itinerant although the degree of uncertainty is minimal or non-existent. An itinerant worker may have several work sites to be attended each day. The sites may be the same but as travel is involved in moving between each work site the taxpayer can be deemed an itinerant worker.

The mere receipt of telephone calls from an employment agency or an employer is not sufficient to allow the home to be classed as a base of operations.

In Genys ‘ case the taxpayer was contacted by the nursing agency when work was available. The taxpayer argued that her work instructions were received from the agency over her home telephone – the only method of contacting the taxpayer and thus the home constituted a work base. The Court held that the taxpayer’s duties did not commence at the time of receipt of the phone calls but upon arrival at the relevant hospital.

Further information is available on the ATO Web site, I thank the ATO for their assistance in preparing this information.

This is the first of a two part story on the claiming a tax deduction for travel expenses. Further information is available on the ATO Web site, I thank the ATO for their assistance in preparing this information.

There have been a number of cases considered by the Courts, Boards of Review and Administrative Appeals Tribunal where deductions for transport expenses were allowed on the basis of the taxpayers’ ‘shifting places of work’. ‘Shifting places of work’ is another term for itinerancy. In these cases the obligation to incur the transport expenses arose from the nature of the taxpayers’ work, such that they were considered to be traveling in the performance of their duties from the moment of leaving home. The following characteristics have emerged from these cases as being indicators of itinerancy:

-travel is a fundamental part of the employee’s work; - the existence of a ‘web’ of work places in the employee’s regular employment, that is, the employee has no fixed place of work; - the employee continually travels from one work site to another, that is an employee must regularly work at more than one work site before returning to his or her usual place of residence; – other factors that may indicate itinerancy (to a lesser degree) include: - the employee has a degree of uncertainty of location in his or her employment (that is, no long term plan and no regular pattern exists); – the employee’s home constitutes a base of operations; – the employee has to carry bulky equipment from home to different work sites and – the employer provides an allowance in recognition of the employee’s need to travel continually between different work sites.

Whilst the above characteristics are not exhaustive, they provide guidelines for determining whether an employee’s work is itinerant. It is considered that no single factor on its own is necessarily decisive.

It should be noted that a deduction is generally not allowable for the cost of transport between home and the normal work place. However, as mentioned, a deduction is allowable for the cost of traveling between home and work if an employee’s work is itinerant.

Example: Mary is employed as a plumber’s labourer and is dispatched to several sites each day. Mary usually travels directly from home to a different site each day to start work. As her duties require her to travel between sites on a regular basis, travel is an inherent part of her employment. Mary’s employment is regarded as itinerant.

Example: Joe is also employed as a plumber’s labourer, but normally works at a single site. Joe is temporarily assigned other duties for three months that require him to travel between several sites on a daily basis. As travel is not an inherent feature of Joe’s regular duties his usual employment is not itinerant. However, his employment would be considered itinerant for the three months he undertakes the temporary assignment.

It is only if the job requires a taxpayer to travel that the expenses of that travel can be deducted, i.e. if he is traveling on his work, as distinct from traveling to his work. But for this doctrine to apply, the taxpayer must be required by the nature of the job itself to do the work of the job in two places: the mere fact that he may choose to do part of it in a place separate from that where the job is objectively located is not enough.’

More next week…