Archive for May, 2010

One of the most exciting parts of the Rudd/Swan 2010 budget was the promise to make lodgement of income tax returns easier.

The newspapers covered this in some detail without understanding what they were saying.

I refer to the Australian newspaper of 12^th May where they start their article by stating ‘Kevin Rudd’s budget pitch to working families centres on continued income tax cuts, reducing tax on bank interest and removing the angst and aggravation of completing the annual tax return”

Angst and aggravation? Lets get real. No comment has been made on the fact that you still need to lodge a tax return.

Now there are already millions of Australians who lodge their tax returns online, so this system may help. There are also millions of Australians who have no idea on how to turn on a computer let alone navigate around the various screens. This “NEW” tax system requires the taxpayer to lodge their return electronically that is via computer, talk about angst and aggravation.

Continuing on the same vein, this change, which comes into effect in 3 years, is what Wayne Swan termed the “tick & flick’ system of lodging a tax return. Once you get started you most certainly will want to give it the flick.

Again quoting from the Australian of 12^th May 2010 Wayne said “We have decided to provide taxpayers with the choice of a standard deduction instead of the hassle of shoe boxes full of receipts and the cost of professional assistance” – “This means less time with the Tax pack, more time with loved ones, and for 6.4 million Australians, it also means a bigger tax refund”

Excuse me!

Treasury anticipates that about 66% of those who opt in for 21012/13 will have a taxable income of less than $50,000, dropping to about 60% in 2103-14. Treasury said the change would deliver an average $192.00 in tax savings to taxpayers, amongst other benefits.

Well this has got me totally perplexed. How can a $500 tax deduction @ 31.5% tax generate an average tax refund of $192.00 when 31.5% of $500 is only $157.50, to this we can add back a bit of the low Income Rebate of about $25 we have $182.50 so where is the average $192.00.

Now let’s add some fact to the fiction put forward by Mr Swan, Mr Rudd and treasury. Are you in a union? Average union fees are more than $500.00 so you lose this. Do you buy tools of trade? Sorry these are out. Do you wear protective clothing or a uniform? Sorry purchase or laundry costs for these are out. Do you want your tax refund early, say the end of July. Sorry this can no longer happen. Do you have income protection insurance? This must cost more than $500.00. Another loss!

With the pre-filling report provided by the tax office, the ATO is at the mercy of the employer, who must, by law, forward copies of your group certificates to the ATO by 14^th August each year. The banks etc. will provide details of interest paid to you. Now if your employer does not notify the ATO  of your income details until 14^th August, then there is no way you can use the ATO system before that date.

Oh, and by the way, if the tax office makes a mistake and you use their system which does not include some income, then it is your fault. Penalties may apply to you for understating your income, so be careful.

What is the best solution? Utilise the services of experts, such as the staff at Coulcher’s Personal Accounting & Taxation Services in the heart of Camden.

The tax Office has gone to print in order to assist taxpayers in identifying what is or is not Work Clothing. This is an attempt to guide taxpayers and to take the guess work out of claiming legitimate expenses in tax returns.

Work Uniforms can either be compulsory or non compulsory. If the uniform is compulsory then you may be able to claim for a single item of distinctive clothing such as a jumper, if it is compulsory for you to wear it at work. You cannot claim expenses incurred for non compulsory work uniforms, unless your employer has registered the design with Ausindustry. Check with your employer who should be able to confirm this information for corporate wear at www.ausindustry.gov.au. Shoes, sock and stockings can never form part of a non compulsory work uniform, and neither can a single item such as a jumper.

Generally, you cannot claim a deduction for the cost of purchasing or cleaning a plain uniform or conventional clothing worn at work, even if your employer tells you to wear them, as this is deemed a private expense.

According to the ATO, if you receive an allowance from your employer for clothing, uniforms, laundry or dry cleaning you cannot automatically claim a deduction. Clothing expenses you can claim are related to compulsory uniforms comprising a set of clothing that, when worn, identifies you as an employee of a specific organisation having a strictly enforced policy that makes it compulsory for you to wear the uniform whilst at work.

You may be able to claim a deduction for shoes, socks and stockings where they are an essential part of this distinctive compulsory uniform, the characteristic of which are stated in your employer’s uniform policy.

You may also claim for a single item of distinctive clothing, such as a jumper, where it is compulsory for you to wear it at work. Generally clothing is distinctive where it has the employer’s logo permanently attached and the clothing is not available to the general public.

If you wear a non compulsory uniform you cannot claim for stockings, short socks or shoes as these items cannot be registered as part of a non compulsory uniform. Your employer can tell you if your uniform or wardrobe is registered. If your employer requires you to wear a distinctive uniform or wardrobe, but does not enforce the wearing of the uniform, the design of the uniform must be registered before you can claim a deduction.

You can claim a deduction for the cost of occupation specific clothing, eg checked pants worn by chefs. The clothing would be specific to your occupation and is not everyday in nature. It is unlikely that a building worker would have occupation specific clothing.

More next week on protective clothing.

Taxpayers can claim deductions for work related expenses (WRE) incurred while performing their job. You can incur a work related expense when you receive a bill or invoice for an expense that you are liable for and must pay or you receive a good or service and pay for it. The fact that you have not yet paid for the goods does not stop you claiming a tax deduction in the year the debt was incurred. WRE’s include travel, protective clothing, laundry, telephone, self education, union fees, reference material, depreciation of tools of trade, income protection insurance, etc.

The basic rules associated with work related expenses are: (a) you must have incurred the expense in the current tax year; (b) you cannot claim an expense that your employer (or any other person) has or will reimburse for you; (c) you must have incurred the expense in the course of earning your assessable income and (d) it must not be private, domestic or capital in nature. For example, for most people, travel to & from work each day is private expenditure and not tax deductible.

You must have written evidence to prove your claims if your total claims exceed $300, the records you keep must prove the total amount, not just the amount over $300.

The $300 limit does not apply to claims for car, meal allowance, award transport payments allowance and travel allowance expenses. There are special written evidence rules for these claims which are explained on the ATO Website. If the amount you are claiming is less than $300.00 you need to be able to show how you arrived at that figure but you do not need written evidence ie receipts, bank statements, etc. The ATO advise that it is best if you retain all receipts so that in the event of you claiming more than the $300.00 you can justify the full claim.

Many taxpayers believe that they are entitled to a tax deduction of $300.00 whether or not they have actually spent anything.  This is totally wrong. The only tax deduction available is one whereby the taxpayer has actually incurred an expense or paid for one. Aligned with this is the fact that the expense must be related to the earning if income.

You can claim to $300 without receipts, but once your total deduction for WRE exceeds $300 you must have receipts for everything you are claiming. So if you pay $400 Union fees and spend $25 on a work related item, you must retain that $25 receipt.

Generally, tax deductions for work related expenses are similar irrespective of the occupation undertaken, whether you are a building worker, teacher, truck driver, nurse, shop assistant or defence force member. No matter what the occupation, you may be able to claim for work related travel, protective clothing or uniforms, reference material, tools of trade, self education expenses and overtime meal allowances. I say ‘you may be able to’ because although you are required to spend money in order to work, the Tax Office does not see that spending as being an integral part of earning your income.

In the coming weeks we will look at specific deductions.

In past articles we have looked at self education expenses but they are always an interesting topic. Any one going to Uni or TAFE, and working at the same time, feels that they are entitled to a tax deduction for their education expenses. The sad case is that in most instances there is no tax deduction.

I read an interesting article on this subject and felt it appropriate to share it with you to help clarify a few points. The article concerned a Uni student studying to become a Pharmacist. The taxpayer was working part time as an assistant chemist whilst attending Uni.

Decided cases on deductibility of self education expenses revolve around full time employees who undertake a course of study. Where you have a full time student undertaking part time work it is difficult to make the nexus between the course of study and the employment. The study must be related to “current income earning activities”.

The principles enunciated in the various tax cases suggest that self-education expenses are only deductible where the study is ancillary to current employment,  and not the other way round. Comment by a learned Judge, Windeyer J in Federal Commissioner of Taxation v Finn (1961) 106 CLR 60 at page 70 said that “ a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling”. As a full time student you cannot argue that you are engaged in a “profession or calling’, particularly if you need completion of the course being undertaken in order to enter that profession.

The Tax Office views are set out in Taxation Ruling TR 98/9. All 25 pages of the ruling can be viewed on the ATO website.

It is important to remember that each case is viewed on its merits and to make a blanket judgement may mean that a valid tax deduction is lost. A good example, also found on the ATO website is ATO Interpretive Decision ID 2002/517 which looks at the tax deductibility of driving lessons.

The question raised in this case was: Is the taxpayer, an apprentice mechanic, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for self-education expenses in respect of a Heavy Vehicle Driver training course? The result in this case, Yes, as there is a clear relationship between the course and the taxpayer’s existing duties.

The facts in the case were:  The taxpayer was an apprentice mechanic who road tests heavy vehicles before and after repairs on the employer’s premises. Road testing is an essential part of the taxpayer’s normal duties. The taxpayer attended a Heavy Vehicle Driver training course and gained a Heavy Vehicle licence at his own expense. The course was conducted by a Heavy Vehicle Driver training school. The course has allowed the taxpayer to perform their duties more safely and with a higher level of skill. The course may also give the taxpayer increased opportunity for pay increases and promotion.

The ATO found that the Heavy Vehicle Driver training course will clearly result in improved efficiency in the performance of the taxpayer’s existing duties and enhance his income earning capacity. Thus, a clear connection can be found between the cost of the course and the gaining of the taxpayer’s assessable income. There is even a case whereby training to get a pilots licence was tax deducible. So remember, when in doubt, ask the experts.

Thanks to the Financial Review and Marsha Jacobs

The Australian Taxation Office has lost a goods and services tax case that will affect the taxation of optical frames, some leases, university board, health insurance plans and anything else that comprises several components, where one component attracts GST and another part doesn’t.

The Administrative Appeals Tribunal has ruled that Luxottica which owns OPSM Laubman & Pank and Sunglass Hut, was entitled to a $132,670 GST refund after finding that customers should only be charged GST for the price of the frames and lenses together.

The so called “mixed supply” issue – how a product is comprised of a GST attracting component, and a non GST attracting component, is treated, has been very contentious.

Significantly, the AAT also found that Luxottica did not need to pass on the refund to consumers, a shift from previous practice in this area.

In the Luxottica case, the company was offering discounted frames as long as customers also purchased lenses for the frames.

The tribunal agreed with the company’s view that its GST liability should be based on the discounted price of the frames, rejecting the ATO’s argument that the discount must be apportioned between the frames and the lenses.

While the sum of the money isn’t significant, accountants and lawyers said the case was very important, and that principles of the case would apply in any situation where there was a mixed supply of something taxable and something GST-free.

Examples include leases over premises that include commercial and residential components -  the commercial component attracts GST, the residential component doesn’t; students boarding at university; where accommodation is GST free, but meals aren’t; and health insurance plans that include gym memberships that attract GST but the insurance doesn’t.

KPMG tax partner Lachlan Wolfers said the case was a significant precedent and that the AAT ruled that as long as a commercial agreement was entered into between two parties, then the GST applied in the way that the parties agreed.

My Wolfers said the case would provide an incentive for mixed supply product suppliers to dissect the price of their products and “provided the component subject to GST is not an artificial or contrived price, the ATO will be bound.”

He said as a general rule, the cost of a GST component shouldn’t be less than the cost of supplying the product to the provider.

Deloitte Lawyers partner Michael Patane, who acted for Luxottica on the case, said there had been a long running battle with the ATO in relation to GST refunds.

“The case is important because of the tribunal’s practical approach to the interpretation of refunds and they reiterated that the legislation should not be given expansive interpretation as the ATO has increasingly been doing,” Mr Patane said.

He said the wider implication of the case was that where there were sound commercial reasons for discounting non-taxable components of supply, the ATO had to allow it.

Balazs Lazanas & Welch partner Gina Lazanas said the case had a pleasing outcome for one of the most contentious matters in GST litigation. “This is what the GST space has been waiting for – guidance on the characterisation of supply. The case has implications for anything that bundles goods and services with taxable and non – taxable parts,” she said.

Who said tax was simple.