ATTRACTING THE ATO’s ATTENTION
The ATO have reiterated the list of behaviours that attract their attention. These activities include:
- Tax or economic performance which is not comparable to similar businesses
- Low transparency of tax affairs
- Large, one-off or unusual transactions, including transfer or shifting of wealth
- A history of aggressive tax planning
- Lifestyle not supported by after-tax income, and
- Accessing business assets for tax-free private use.
NEW SMALL BUSINESS BENCHMARKS
The ATO has updated their small business benchmarks with the latest data from the 2015/16 financial year. If a client is outside the average benchmark range, the ATO recommends that practitioners:
- check that the records the client provided are complete and accurate; and
- ensure their business industry code still represents their main type of work.
In addition to helping businesses see if they are performing within their industry average, the benchmarks are one of the tools the ATO uses to identify businesses that may be a higher risk.
ASIC WARNS AGAINST CUTTING CORNERS ON DEATH NOMINATIONS
The Australian Securities and Investments Commission (ASIC) is putting the financial advice sector on notice about meeting requirements for witnessing signatures, after finding issue with advisers failing to correctly witness binding death nomination forms for superannuation benefits.
Binding death nomination forms are an important part of estate planning – in the event of a person’s death, they direct the trustee of the person’s superannuation fund to pay the person’s superannuation and insurance benefits (if any) in accordance with their wishes.
ASIC has become aware of a widespread practice among financial advisers of:
- witnessing or having staff members witness client signatures on binding death nomination forms without being in the presence of the signatory; and
- forms being backdated.
Each of these practises fails to comply with the law and may lead to the nominations being invalid and rejected. The trustee may then choose to exercise its discretion in a manner other than in accordance with the account holder’s nomination, causing delays and uncertainty about the payment of the death benefit.
Australian financial services licensees and advisers have a professional and legal obligation to comply with the law. Taking short cuts which result in important forms being invalidated and thereby jeopardising the account holder’s wishes does not meet the minimum advice and conduct standards expected by ASIC.
ATO’s FOCUS ON WORK-RELATED EXPENSES
This year, the ATO is paying close attention to what people are claiming as ‘other’ work-related expense deductions.
Before including claims for work-related expenses at label D5 this year, the ATO asks that practitioners make sure clients can show:
- they spent the money themselves and were not reimbursed;
- the expense was directly related to earning their income; and
- they have a record to prove it.
If the expense is for work and private use, the clients can only claim a deduction for the work-related portion.
Also, clients are not automatically entitled to claim standard deductions, but need to be able to show how they worked out their claims, so the ATO asks practitioners to remind clients to keep records when incurring expenses or be able to provide evidence on how they calculated their claim.
Clients can keep track of their deductions using the myDeductions tool in the ATO app, then email their data to their tax agent for inclusion in their tax returns.
REMOVAL OF MAIN RESIDENCE EXEMPTION FOR FOREIGNERS
The government has introduced a bill to remove the entitlement to the main residence exemption for foreign residents.
Foreign residents will generally be excluded from claiming the CGT main residence exemption from 9 May 2017 (i.e., when the measure was announced as part of the 2017/18 Federal Budget).
However, foreign residents who held property on budget night will remain entitled to claim the exemption where the property is sold by 30 June 2019.
The bill also contains measures to:
- clarify when certain shares and trust interests are considered Taxable Australian Property and therefore subject to CGT;
- create a reconciliation mechanism for developers disposing of near-new dwellings to foreign persons; and
- introduce an additional 10% discount for taxpayers disposing of affordable housing.
BORROWING FROM YOUR COMPANY
I borrowed $500 000 from my private company to buy a property in January 2018. I have repaid the company some of these funds, but my accountant tells me I may have to repay the whole loan over seven years. Is this correct?
Your Accountant is correct.
Loans (including money that is just taken with no intention of repayment) made by a private company to their shareholders or associates (e.g. spouses, relatives, companies that the shareholder or associate controls etc.) are governed by Division 7A of the Tax Act. Even if the money was borrowed for the purpose of purchasing a property which would derive income and that income would therefore be subject to tax in the shareholder’s own hands, the ATO still considers that the loan may be subject to Division 7A.
A loan to a shareholder can be considered an unfranked dividend assessable to the shareholder unless it qualifies as an excluded loan. If it is not an excluded loan, then to avoid the amount being assessable to you personally as an unfranked dividend, you will need to have a complying Division 7A loan agreement put in place by the private company’s tax return lodgement due date (which could be as late as May 2019).
To be clear, no minimum repayment or interest is required in the year in which the payment is made – only that the loan agreement be put in place. In subsequent years, annual repayments of principal and interest are required by the end of the financial year to prevent a deemed dividend arising in a later income year.
The loan agreement does not need to be in a prescribed form. However, it should as a minimum identify the parties and set out the terms of the loan (i.e. the amount, the requirement to repay, the applicable interest rate, the term of the loan etc.). It should also be signed and dated by both parties. When drafting an agreement, input from your accountant is recommended.
The interest rate on the loan for each year after the year in which the loan was made must be greater than or equal to the ATO benchmark interest rate for each year (currently 5.3% for 2017/2018). The maximum term for a loan is 7 years. However, where the loan is secured by a mortgage over real property, the maximum term is 25 years. In this case, the whole of the loan must be secured by a registered mortgage over the real property. At the time the loan is first made, the market value of the property (less liabilities secured over the property in priority to the loan) must be at least 110% of the amount of the loan.
INSTANT ASSET WRITE-OFF
For the benefit of those planning their capex for the year ahead, the ATO issued a Media Release on 2nd January 2018 reminding businesses that these are the final remaining months of the $20 000 instant asset write-off.
For Small Business Entities (SBE’s with a turnover of less than $10 million including any connected or affiliated entities) the write-off threshold is $20 000. Where an asset costs less than this, a deduction for the full cost of the asset can be claimed in the year in which the asset is purchased and installed ready for use in your business. 2017/2018 is the final year of the $20 000 write-off. From 1 July 2018, the threshold is set to revert to $1 000. To claim the write off in 2017/2018, an SBE must have:
- acquired the asset in 2016/2017 or 2017/2018, and
- have it installed and ready for use in your business between 1 July 2017 and 30 June 2018.
The threshold is applied on an asset-by-asset basis. Even where the assets purchased are identical or form part of a set, each is entitled to its own $20 000 threshold. Where a bulk purchase is made, you should ensure that tax invoices separately itemise each asset that is purchased or at least the quantity of assets where they are identical.
Having determined that a business is eligible, the asset itself must be eligible for the write-off. All depreciable assets (including second-hand assets) used in a business are eligible for the $20 000 write-off – including motor vehicles, furniture, computer equipment, machinery etc.
Financed assets are also eligible. Assets that are the subject of a commercial loan, chattel mortgage or hire purchase would all qualify. Assets that are the subject of a lease however do not qualify for the write-off because the ownership of the asset under a lease remains with the finance company.
CLAIMING INTEREST ON A LOAN TO PAY A TAX BILL
I recently received a large tax bill from the ATO after lodging my tax return and have taken out a loan to service the bill. Can I claim a deduction for the interest incurred?
A deduction is allowed for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business to gain or produce assessable income, except where the outgoings are of a capital, private or domestic nature.
Accordingly, for an individual not in business, the interest will not be deductible. Rather, it is considered a private expense, as it is not related to producing assessable income. However, interest incurred on monies borrowed to pay income tax will be deductible where a taxpayer is carrying on a business. This general principle applies to sole-traders as well as companies/trusts etc.