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Case Studies

False logbook

A traffic supervisor claimed over $11,000 for work related car expenses, and provided a logbook to substantiate his claim.

However, upon investigation the ATO discovered that the logbook wasn’t printed until the following year – the taxpayer admitted the logbook was fraudulent and it was ruled invalid.

Even though the logbook was invalid, the taxpayer was able to provide other evidence to show that he had travelled at least 5,000 kilometres for work-related purposes, so the ATO used the cents per kilometre method to calculate the taxpayer’s deduction (but his claim was reduced from over $11,000 to under $4,000).

Claiming for home to work travel

A Laboratory Technician claimed $3,300 for work-related car expenses, using the cents per kilometre method for 5,000 kilometres.

However, he advised that his employer did not require him to use his car for work; this claim was based on him needing to get to work.

The ATO advised the taxpayer that home to work travel is a private expense and is not an allowable deduction – his claim was reduced to nil and the ATO applied a penalty for failure to take reasonable care.

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ATO scrutinising car claims this tax time

The ATO has announced that it will be closely examining claims for work-related car expenses this tax time as part of a broader focus on work related expenses.

Assistant Commissioner Kath Anderson said:

“We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed.”

This is no doubt because over 3.75 million people made a work-related car expense claim in 2016/17 (totalling around $8.8 billion), and, each year, around 870,000 people claim the maximum amount under the cents-per-kilometre method.

Ms Anderson said that the ATO’s ability to identify claims that are unusual has improved due to enhancements in technology and data analytics: “Our models are especially useful in identifying people claiming things like home to work travel or trips not required as part of your job . . . simply travelling from home to work is not enough to qualify, no matter how far you live from your workplace.”

Ms Anderson said there are three golden rules for taxpayers to remember to get it right.

“One – you have to have spent the money yourself and can’t have been reimbursed, two – the claim must be directly related to earning your income, and three – you need a record to prove it.”

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Superannuation guarantee amnesty introduced

The Government has introduced legislation to complement the superannuation guarantee (‘SG’) integrity package already before Parliament by introducing a one‑off, twelve month amnesty for historical underpayment of SG.

The Bill incentivises employers to come forward and “do the right thing by their employees” by paying any unpaid superannuation in full, as well as the high rate of nominal interest (but without the penalties for late payment that are normally paid to the Government by such employers).

Employers that do not take advantage of the amnesty will face higher penalties when they are subsequently caught – in general, a minimum 50% on top of the SG Charge they owe.

In addition, throughout the amnesty period the ATO will still continue its usual enforcement activity against employers for those historical obligations they don’t own up to voluntarily.

The amnesty will run for twelve months from 24 May 2018.

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2018 Budget Update Reminder

The Government handed down the 2018/19 Federal Budget on Tuesday 8th May 2018.  Some of the important proposals include:

  • The introduction of the ‘Low and Middle Income Tax Offset’, a temporary non-refundable tax offset of up to $530 p.a. to Australian resident low and middle income taxpayers for the 2019 to 2022 income years.  This offset will apply in addition to the Low Income Tax Offset.
  • Providing tax relief for individual taxpayers by progressively increasing some of the tax brackets (including an increase in the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000 from 1 July 2018), and eventually removing the 37% tax bracket entirely.
  • The $20,000 immediate write-off for small business will be extended by a further 12 months to 30 June 2019 (i.e., for businesses with aggregated annual turnover less than $10 million).
  • From 1 July 2019:

– Increasing the maximum number of allowable members in an SMSF from four to six members;

– Ensuring that unpaid present entitlements (or ‘UPEs’) come within the scope of Division 7A; and

– Denying deductions for expenses associated with holding vacant residential or commercial land.

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Budget Update 2018-2019

Late last night, Scott Morrison (Federal Treasurer), unveiled his highly anticipated Federal Budget for 2018/19. The Budget emphasises on personal tax cuts, investments in road and railway infrastructure, and measures to responsibly repair the budget deficit. Additionally, the Budget addresses changes to Superannuation, business taxation and methods to tackle the Black Economy.

INDIVIDUALS

  • A three-step, seven-year plan will be implemented to introduce a low and middle income tax (LMITO) offset to provide relief from bracket creep and to remove the 37% personal income tax bracket.
  • The LMITO will be introduced as a non-refundable tax offset of up to $530 to resident low and middle income taxpayers from 2018/19 to 2021/22.
  • The Medicare Levy low-income threshold will increase for the 2017/18 income year for singles, families, seniors and pensioners.
  • The increase in the Medicare Levy from 2% to 2.5% of taxable income as proposed in the 2017/18 Budget will not be implemented.
  • No changes to rules around work-related deductions.

 

BUSINESS INCOME TAX

  • Major changes to the R&D tax incentive will commence for income years starting 1 July 2018. A maximum cash refund will apply for some entities.
  • The $20,000 instant (capital) asset write-off deduction for small businesses will be extended by another year to 30 June 2019.
  • Amendments to Div 7A will reinforce the unpaid present entitlements (UPE) rules from 1 July 2019. This date is also the start date of targeted amendments to Div 7A.
  • Deductions will be denied for expenses associated with holding vacant land not genuinely used to earn assessable income.
  • From 1 July 2019, payments to employees and contractors are no longer deductible where the amounts paid did not have PAYG withheld, despite the PAYG withholding requirements applying to these payments.
  • Tax exempt entities that become taxable after 8 May 2018 will not be able to claim tax deductions that arise on the repayment of the principal of a concessional loan.
  • The 50% capital gains discount for managed investment trusts (MITs) and attribution MITs (AMITs) will be removed at the trust level.
  • The concessional tax rates for the income of minors from testamentary trusts will not be available for trust assets unrelated to the deceased estate.

 

SUPERANNUATION

  • The maximum number of allowable members in SMSFs and small APRA funds will be increased to six members from 1 July 2019.
  • The annual audit requirement for SMSFs with a history of good compliance will be changed to a three yearly requirement.
  • Individuals who have multiple employers and whose income exceeds $263,157 will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018.
  • Effective from 1 July 2018, individuals must confirm in their income tax returns that they have complied with the “notice of intent” requirements in relation to their personal superannuation contributions.
  • For people aged 65-74 with superannuation balances below $300,000, an exemption from the work test for voluntary contributions to superannuation will apply for the first year that they do not meet the work test requirements. This will be introduced from 1 July 2019.
  • Insurance arrangements for certain superannuation members (e.g. young people and low-income earners) will be changed from being a default framework to being offered on an opt-in basis.
  • Passive fees charged by superannuation funds on accounts with balances below $6,000 will be capped at 3% annually, and exit fees on all superannuation accounts will be banned.

 

TACKLING THE BLACK ECONOMY

  • A package will be introduced to reform the corporations and tax laws to deter and disrupt illegal phoenix activity and black economy activity.
  • The taxable payments reporting system for payments made to contractors will expand to include road freight transport, security services, and computer system design industries, effective from 1 July 2019.
  • From 1 July 2019, business seeking to tender for Australian government contracts above $4 million (including GST) will need to provide a statement of compliance with their tax obligations.
  • From 1 July 2019, businesses can no longer receive cash payments for goods and services above $10,000.

 

OTHER MATTERS

  • The luxury car tax on cars re-imported into Australia following a refurbishment overseas, will be removed from 1 January 2019.
  • Measures will be introduced to combat illicit tobacco in Australia, including collecting tobacco duties and taxes upon importation.
  • Customs tariffs will be removed from placebos and clinical trial kits that are imported into Australia, effective from 1 July 2018.
  • Access to refunds of indirect taxes, including GST, fuel and alcohol taxes under the Indirect Tax Concession Scheme has been extended.
  • There are no changes to negative gearing, dividend imputation/franking and GST.
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New FBT rates for the 2018/19 FBT year

Editor: The ATO has released Taxation Determinations setting out the following rates for the FBT year commencing on 1 April 2018.

 

FBT:  Benchmark interest rate

The benchmark interest rate for the 2018/19 FBT year is 5.20% p.a., which is used to calculate the taxable value of:

  • a loan fringe benefit; and
  • a car fringe benefit where an employer chooses to value the benefit using the operating cost method.

Example

On 1 April 2018, an employer lends an employee $50,000 for five years at an interest rate of 5% p.a., with interest being charged and paid 6 monthly, and no principal repaid until the end of the loan.

The actual interest payable by the employee for the current year is $2,500 ($50,000 × 5%).  The notional interest, with a 5.20% benchmark rate, is $2,600.

Therefore, the taxable value of the loan fringe benefit is $100 (i.e., $2,600 – $2,500).

FBT: Cents per kilometre basis

The rates to be applied where the cents per kilometre basis is used for the 2018/19 FBT year in respect of the private use of a vehicle (other than a car) are:

Engine capacity Rate per kilometre
0 – 2,500cc 54 cents
Over 2,500cc 65 cents
Motorcycles 16 cents

 

FBT: Record keeping exemption threshold

The small business record keeping exemption threshold for the 2018/19 FBT year is $8,552.

Editor: The ATO has also released Taxation Determinations setting out the indexation factors to value non-remote housing, and the amounts the ATO considers reasonable for food and drink expenses incurred by employees receiving a living-away-from-home allowance (LAFHA) fringe benefit, for the FBT year commencing on 1 April 2018.

 

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Employee denied deductions for work-related expenses

An employee photographer has been denied deductions for travel expenses (when travelling with his family), and other purported work related expenses.

The AAT held that the travel expenses were primarily incurred for the purposes of a family trip or holiday and were therefore non-deductible, as they were private and domestic in nature.

Also, in relation to the taxpayer’s reliance on bank statements in the absence of invoices and receipts, the AAT observed that “evidence of the mere transfer of funds, be it by way of bank transfer or by any other means, is not sufficiently informative of the actual character of an expense”, so the other disputed expenses could not be claimed as allowable deductions.

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Get ready for Single Touch Payroll

Single Touch Payroll (or ‘STP’) is mandatory for ‘substantial employers’ (being those with 20 or more employees) from 1 July 2018.

All employers are required to count the number of employees on their payroll on 1 April 2018 to find out if they are a substantial employer (note that this can be done after 1 April, but they need to count the employees who were on their payroll on 1 April).

They must count each employee (not the full time equivalent), including full-time, part-time and casual employees, as well as those employees based overseas or absent or on leave (paid or unpaid).

Employers that are part of a company group must include the total number of employees employed by all member companies of the wholly-owned group.

However, employers don’t have to include the following in the headcount:

  • any employees who ceased work before 1 April;
  • casual employees who did not work in March;
  • independent contractors;
  • staff provided by a third-party labour hire organisation;
  • company directors or office holders; or
  • religious practitioners.

Note that, although directors, office holders and religious practitioners are not included in the headcount, if the employer starts reporting through STP, the payment information of these individuals will need to be reported (because the payments are subject to withholding and are currently reported in the Individual non-business payment summary).

Employers don’t need to send the ATO the headcount information, but they may want to keep a copy for their own records.

Once an employer becomes a substantial employer, they will need to continue reporting through STP even if their employee numbers drop to 19 or less (unless they apply for and are granted an exemption).

Editor: Please contact our office if you need any assistance regarding the new STP regime.

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Continued ATO focus on holiday home rentals

The ATO has recently advised that they are “setting their sights on the large number of mistakes, errors and false claims made by rental property owners who use their own property for personal holidays”.

While it confirms that the private use of holiday homes by friends and family is entirely legitimate, the ATO states that such use reduces a taxpayer’s ability to earn income from the property, and therefore impacts on (i.e., reduces) the amount of claimable deductions.

As a result, the ATO has reminded holiday home owners that:

  • They can only claim deductions for a holiday home with respect to periods it is genuinely available for rent.
  • They cannot place unreasonable conditions on prospective tenants/renters, set rental rates above market value, or fail to advertise a holiday home in a manner that targets people who would be interested in it and still claim that the property was genuinely available for rent.
  • Where a property is rented to friends or relatives at ‘mates rates’, they can only claim deductions for expenses up to the amount of the income received.
  • Property owners whose claims are disproportionate to the income received can expect greater scrutiny from the ATO.
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GST withholding measures now law

Legislation has been passed to “clamp down” on GST evasion in the property development sector.

From 1 July 2018, purchasers of new residential premises and new residential subdivisions will generally be required to withhold the GST on the purchase price at settlement and pay it directly to the ATO.

Property developers will also need to give written notification to purchasers regarding whether or not they need to withhold.

The new obligations are primarily aimed at ending the practice of some developers collecting GST on new properties before dissolving their business prior to remitting such tax to the ATO.