Archive for June, 2011
The ATO is starting to look more closely at GST compliance and will be implementing a dedicated program over the next 4 years to deal with some specific compliance issues.
The focus will be on: 1: timely lodgement of activity statements; 2: the verification of GST refunds; 3: identifying and dealing with those deliberately avoiding GST and 4: addressing GST debt and those who deliberately use debt as a way of avoiding their tax obligations.
The ATO is continuing to expand its ability to identify non-lodgers and detect businesses that over claim entitlements, deliberately under report or omit income and use cash transactions to hide income.
The methodology used to do this is:
More reminder letters for late lodgers; contact with taxpayers who have two or more outstanding activity statements (something that should have happened a long time ago); increasing the focus on taxpayers who have multiple activity statement obligations; matching sales and high value transactions to activity statements and by using information on assets transactions from the state revenue offices, land titles offices and shares registries; verifying refunds by contacting third parties to substantiate claims. This type of investigation is currently carried out by the ATO but a more aggressive approach has been signalled.
The use of small business bench marks is to be expanded to allow the ATO to identify operators within specific industries that should be paying GST but perhaps are not. Businesses that do not report within pre determined ranges may not be recording or paying tax on all their transactions, especially the cash transactions. The benchmarks will also be used to calculate default assessments where a business provides insufficient or unreliable information or has not met their lodgement requirements. This means that the ATIO will take an educated guess at what has not been declared and determine what would be a “fair” figure for the taxpayer to pay.
The ATO has also identified new risk filters and risk models to detect incorrect or fraudulent refund claims on activity statements. For those “choosing to disregard the law and work outside the tax system”, the ATO warns there will be serious consequences including interest, penalties and potential prosecution.
In 2009/10 there were 1,133 individuals or entities (companies, company directors, trustees and partners) successfully prosecuted for a total of 1,827 breaches of the law for activity statements. Most offences related to non lodgement and failure to provide information.
The ATO will also audit and where appropriate prosecute or refer to the Director of Public Prosecutions taxpayers who:
- Deliberately do not register for GST when they need to;
- Intentionally do not report, or consistently under report their tax obligations;
- Collude with others to evade or avoid tax obligations;
- Intentionally do not pay their tax obligations;
- Try to obtain a refund to which they are not entitled; or
- Persistently and repeatedly exploit bankruptcy.
This is a timely warning to all business people that the ATO is using computers more and more and it is harder for the small business person to “forget” certain transactions. Big Brother is watching and will eventually catch up with the forgetful
In the last article, we mentioned items which may generate a tax deduction such as motor vehicle expenses, protective clothing or specific uniforms, technical literature or magazines, union fees and membership of professional associations, tools of trade, this includes pens and pencils etc if you supply your own, self education expenses and attendance at business related seminars. In fact there was an article in the Financial Review the other day mentioning that ATO is looking at business seminars which are held in exotic locations, and are offered as providing an educational service. This is detailed in taxpayer Alert TA 2011/3. There is one that comes to mind that is held in Whistler Canada each year relating to International Accounting, whereby all sessions are held before 9:00am and after 4:00pm each day. Apparently the skiing is pretty good in that part of the world. The moral behind this story is the same as with all tax stories, be careful because although the tax deduction may be allowable today, the ATO can change its mind and back date the cancellation of the deduction thus creating a tax debt and related penalties.
Tax deductions for employees are limited these days and can be industry specific. One tax planning option is salary sacrifice, whereby a benefit may be derived by paying for something with pre tax dollars. The health industry is one area that has a very generous scheme going whereby they are not subject to fringe benefits tax on pre tax spending up to a predetermined amount. The rest of us have to suffer and pay the 46.5% tax. There are benefits available although not as generous. You can sacrifice part of your salary to Superannuation. This allows you to increase you super fund while at the same time reducing the tax paid on the income foregone by anything from 16.5% to 31.5%.
The benefit here can be increased if you are over 50 as you can access the salary sacrificed once you turn 55 and can actually increase the balance of your super fund whilst maintaining the same take home pay.
The other big salary sacrifice area is motor vehicle whereby you can save money by salary sacrificing the acquisition of a motor vehicle. This allows you to pay for a new car out of pre tax dollars and, depending on the various variables, can save hundreds of dollars per year on what it would have cost you to run the same car in after tax dollars.
As an employee the only other options available to you to reduce your tax, and end up with something of value, is to look at negative gearing. As stated previously, I believe tax deductions are overrated and there is no point in spending money just to get a tax deduction. The concept behind negative gearing is that you borrow to buy an income producing asset. Now, the most popular method of negative gearing is the purchase of an investment property, which is pretty expensive, so why not start small. You can negative gear into shares. This allows you to borrow a smaller sum, buy your shares and start that million dollar portfolio. The interest on the loan is tax deductable whilst the income from the shares by way of dividend is usually fully franked, that is it is an after tax payment, so there may be no extra tax paid by you on that income. There is also the possibility of capital growth in the shares creating a win-win situation.
These options cannot be created at the last minute to generate a tax deduction so if you go down this path today, you will derive the benefit next year.
If you have any questions on any of this please call me at the office on 4655 8494.
Last week we started our expose on Year End Tax Planning. It seems that in June each year we get all these newspaper articles advising us on how to reduce our tax bill. For the salary & wage earner this is almost impossible to achieve if you leave it to the last minute. The best way to save on tax is to take a pre-active approach, implement a plan in July and follow that plan all year.
We have clients coming every year who acknowledge that they are aware of the records they needed to keep and promise to do better next year. So what approach needs to be taken, and can we do anything in the next 8 weeks. At this time of year we need to assess what we have done during the course of the past 12 months to see if there is any way we can generate a tax refund when we have our tax return prepared.
It is my belief that tax deductions are over rated. Why would you give someone $100 just so you could get a refund of $30 (or less). The best thing to do about a tax deduction is to look at what you are spending and if you can turn that spend into a tax deduction then all the better.
Depending upon your occupation, you can claim such items as tools of trade, purchase and maintenance of protective clothing, cleaning of that protective clothing, union fees, membership of professional bodies, subscription to professional journals, education expenses related to maintaining job skills whereby the education may be a refresher course related to a specific part of the job. In my industry my staff and I attend regular tax schools whereby we are brought up to date on changes to tax rules, tax forms etc. It may be that you need to be aware of changes to occupational health & safety rules etc so you pay to attend updates on this subject. The cost of the course is tax deductible as is the cost of travel and if the course is in another city then the cost of overnight accommodation and meals may also a tax deduction.
Other self education may be deductible if it is relevant to the earning of your wages and is relevant to your current duties. Education to get a promotion or another job is not tax deductible. The cost of uniforms is usually a tax deduction but if you work for a fashion shop and the boss expects you to buy clothes from that shop then the purchase of the clothes is not a tax deduction. If your job requires you to travel or work outside, then the purchase of a good pair of sunglasses and perhaps some sunscreen may be allowable.
If you travel between job sites on a daily basis or the place of work changes from day to day or week to week then the cost of travel may be a tax deduction. With any of the claims for travel you must ensure that you keep accurate records. If you use a motor vehicle then document the odometer reading at the start and finish of each journey. It is amazing how many people rip themselves off by not keeping accurate records. If you go to TAFE as an apprentice, log the distance travelled, this is a tax deduction. The trip from home to TAFE and return is a tax deduction. The distance will not vary so measure it once and you have that measurement for all time. Also with TAFE students, keep a record of what you spend on books, stationery etc. It all adds up.
See part two for more…….
Will you get a refund this year or will you owe?
Over the next few articles I will give a bit of advice on how to maximize that refund without undue stress being placed on you. I believe that tax deductions are over rated and spending money just to get a refund is a silly idea. The best bet is to try and make that spending tax deductible, so please ensure that all work related receipts are kept, this is the easy way to maximize your deductions.. First off we have a couple of suggestions that apply to someone who does not have a job.
There is an easy tax refund available to a select few. If your partner, Spouse, better half, etc does not have a full time job or is a stay at home type and earns less than $10,800 then a contribution of $3,000 to their Superannuation fund may entitle you to a refund of $540.00. The Tax Act allows for a tax offset, that is a reduction in tax payable, for superannuation contributions made to a complying superannuation fund for a low income or non-working spouse. The maximum rebate is $540.00, based on 18% of maximum rebateable contributions of $3,000. So a contribution of $1,000 gets a rebate of $180.00. The maximum contribution reduces by $1.00 for every $1.00 the spouses income is above $10,800. The rebate reduces to NIL for incomes of $13,800 and above. The beauty of this contribution is that the amount paid to the Super fund is not taxed in the fund, either on the way in or on the way out. The rebate is a tax free ‘gift’ for trying to do the right thing by your spouse. It should be noted that the spouse’s income is assessable income plus reportable fringe benefits.
The other Superannuation benefit is the co-contribution. I have been spruiking this for years but it has not been grabbed with the vigor it should be. If your income is less than $61,920 then by putting some of your after tax hard earned dollars into Super the Tax Office will match your contribution dollar for dollar. If you work and your income is less than $31,920 then for every after tax dollar you put into Super, the taxpayer will stump up another dollar for you to a maximum of $1,000.00 so get in for your share before it all ceases.
The other good tax planning strategy for the stay at home Mum (now that may be politically incorrect but it will do for today), applies to the families that have children at school and receive Centrelink benefit part A. Please ensure that you keep a record of all you spend on exercise books, text books, pens, pencils, computer stationery, printer cartridges, internet connection costs, new computers and educational computer software. The taxpayer will give you “cash back” of up to half the amount you spend. The refund can be up to $390.00 for a primary school student and $779 for a secondary school student, and you do not have to have paid any tax to get the money. So start looking for those receipts now, the cash can be in your account by the end of July if you get in early.
More to come in the next few articles….
In this weeks article I will revisit two topics discussed last year. These topics show just how tangled a web the tax laws are and how difficult it can be for an Accountant to give an expected ‘black and white’ answer to what the taxpayer sees as a simple question. This also illustrates why it is a good idea to discuss your tax affairs with an expert.
The first case involved GST and looked at a food item. Certain ingredients were mixed together to form a dough. The dough was rolled into lengths about 20cm long (8 inches in the old language), was baked and was called Breadsticks. Fair enough, no GST. The same dough was then rolled into lengths, cut into smaller pieces, flattened into snack size pieces and was called ‘Italian flat bread’. Damn, this is no longer food, it is a cracker and therefore GST applies. Why, because the GST act states that ‘food that is, or consists principally of biscuits, cookies, crackers, pretzels, cones or wafers’ is not GST free. The ATO has thus generated a new income stream. This problem is also encountered by Publicans when they buy juice. Orange juice has no GST yet Cranberry juice does attract GST. Why? Only the politicians who designed the system know this and they aren’t talking.
The second case involved the Daughter of a Tax Office employee. This has had a good write up in the Financial Review and revolved around the recipient of Youth Allowance to study full time. One of the interesting facts here is that the ATO employee was a solicitor and actually had the ATO fund the case as a Test Case. The ATO lost and had to pay legal fees for both sides.
The case involved a taxpayer who 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.
The court agreed that there was a direct nexus between the receiving of the allowance and the course of study. The student/taxpayer won.
Since then the ATO has reviewed a lot of tax returns lodged by recipients of this type of allowance and has issued additional refunds. Now comes the crunch. By allowing deductions against the allowance, which is taxable in the hands of the recipients, the Government is losing tax income. This, according to Treasury is no good, so what do they intend to do?
The Government is now looking at changing the law so that future claims of a tax deduction against Government Allowances cannot be made. The small problem generated here is that the ATO can implement legislation by press release, This happens when they say that the law is going to change, then when the law does change it can effectively be backdated to the date of the news release. In the interim, if a tax advised has suggested a certain course of action, and the law is subsequently changed in line with the press release then the as adviser can be in strife.
So what we have here is that on the one hand the ATO won in dealing with GST, all good. On the other hand the ATO lost in dealing with education expenses, not good, so change the law thus allowing the ATO to win.