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JUNE 2010

Trusts

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It seems every month, there are issues to consider in relation to the taxation of trusts. This month, the Commissioner has:

• finalised his Ruling on the treatment of unpaid present entitlements to companies;
• issued a draft practice statement which instructs Tax Office staff on how they should deal with matters arising from that ruling; and
• issued a Decision Impact Statement on the much publicised Bamford Decision.

ESV has been following the issues covered in the Ruling since March 2009 and particularly since December 2009 when the Commissioner formalised his stance. All clients with trusts that distribute to companies are affected. For most clients, the impact will be prospective. However, in some instances, we may recommend amending prior year tax returns.

In the Decision Impact Statement on the Bamford Case, the Commissioner questions, among other things, the ability of trustees to direct types of trust income to specific beneficiaries. Again, we are reviewing the validity of the Commissioner’s position and assessing the tax risk to ESV clients. 

Superannuation contributions

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Superannuation Contribution limits have been reduced for the year ended 30 June 2010. The concessional contributions for people under the age of 50 is now $25,000. Arrangements for those of you over the age of 50 continue, but at a reduced level. The contribution is now $50,000 up to 30 June 2012.

As a result of the contribution reduction, the risk of making an excessive contribution has increased. Superannuation Guarantee Payments, for example, may result in excessive contributions. Furthermore, contributions paid by another entity on behalf of the Superannuation fund, such as accounting expenses could result in an excess contribution – a fact highlighted in a recent Tax Ruling on Superannuation Contributions (TR2010/1).

As 30 June 2010 draws near, it is important that you be aware of the contribution limits and if you are likely to exceed those contributions, you should contact us so that an appropriate strategy can be put in place.

Subject to your personal situation, ESV may suggest that:

• depending on the Trust Deed of the Superannuation Fund, there may be an opportunity to return a contribution to a member within 30 days of the trustee becoming aware of the excess contribution; and
• the contribution may be held in reserve for 25 days. Depending on the timing that could result in a situation where the money is held in reserve until, or after 1 July of the calendar year, thereby ensuring the contribution is applied to a future year.

If you have any concerns, you should contact us on this matter.

Tax concessions – Small business

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A business that meets the $2m small business entity (SBE) turnover test, $6m market net asset value (MNAV) test and is in compliance with the active asset test is eligible for small business tax concessions.

If your business falls into this category, you can enjoy a number of tax advantage positions such as Capital Gains Tax relief on the sale of your business with the extra 50 per cent discount on Capital Gains, Active Asset rollovers and up to $1m contributions into superannuation.

Over the last 12 months, however, the landscape has changed for small businesses. Legislative changes have been made and the Australian Taxation Office has reviewed its' interpretive decisions and increased its' audit activities significantly.

The Australian Taxation Office 2009/2010 compliance program identified the following issues for small businesses:

• incorrect application of small business CGT concessions including evidence of market values at the time of CGT event;
• evidence of ownership or assets; and
• tracing ownership interest and distributions to establish connected/affiliated entities.

To be eligible for small business tax concessions there needs to be a ‘Capital Gains Tax Event’. If the small business has a Capital Gain and meets the turnover, market net asset value and active asset tests, it is eligible.

Furthermore, the relevant small business entity test takes into account connected entities, including entities connected with the taxpayer and affiliates of the taxpayer. There are specific issues including the concept of ‘control’ in a company – whether it is at 40 per cent of the voting capital and dividend rights, or in the case of a fixed trust or partnership, 40 per cent of the income or capital rights.

In addition there are provisions relating to discretionary trusts which involve control of the trust. They include:

• whether 40 per cent of the distributions are capital or income; and
• the definition that you are carrying on a ‘business’ and that your annual turnover is less than $2m in ordinary income derived through the ordinary course of business but excludes transactions connected with entities and GST.

As a result of significant legislative changes to partnerships, partners now also have direct access to the concessions.

It is important that before you consider selling your business you speak to us to ensure that you have a proper plan in place and that all issues are considered carefully.

This is of particular importance when it comes to the eligibility criteria and documentation needed to support the application of the small business concessions.   

 

2010/11 personal tax rate changes

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The individual tax rates are changing from 1 July 2010.

If you have payroll software, you will need to ensure that you keep your software up to date so you can download the latest tax rates from your supplier.

The new tax rates starting 1 July 2010 are:


Plus Medicare Levy 1.5 per cent.

Business travel rates

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The Tax Office is soon to release its' 2010/11 travel, accommodation and meal allowance rates.

When claiming travel allowance and overtime meal allowance expenses, the following key points must be remembered:

• The claim must be allowable
A deduction claim cannot exceed the amount actually incurred for work-related purposes. The payment of an allowance does not of itself allow a deduction to be claimed.
• An allowance must be paid
The substantiation exception only applies if the employee is paid an overtime meal allowance or a travel allowance. The allowance must have an identifiable connection with the nature of the expense covered.
• For travel allowance expenses location is important
The employee must sleep away from home.
• The substantiation exception may be applicable
Where the amount claimed is no more than the applicable reasonable amount, substantiation of the claim with written evidence is not required.
• Claims in excess of reasonable amounts may require substantiation
If the amount claimed is more than the reasonable amount, the whole claim must be substantiated with written evidence, not just the excess.
• Reasonable claims may still need verification
In appropriate cases, where the substantiation exception is relied on, the employee may still be required to show: 
    o How they worked out their claim;
    o An entitlement to a deduction (for example that work-related travel was undertaken);
    o A bona fide travel allowance was paid; and
    o If accommodation is claimed, that commercial accommodation was used.
 
The nature and degree of evidence will depend on the circumstances. For example, the circumstances under which the employer pays allowances, the occupation of the employee, and the total amount of allowances received and claimed during the year by the employee.
 
For a detailed listing of the 2009/10 ‘reasonable amounts’ as outlined by the Tax Commissioner go to the Appendix.

Immediate deductions

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When depreciating your assets it is worth considering whether they cost $300 or less. If the asset is $300 or less, and was purchased for a taxable purpose, you may get an immediate deduction for the cost of that asset. Four criteria must be met to make this deduction:

• the asset must cost $300 or less;
• you must have used the asset for producing assessable income that was not income from carrying on a business;
• the asset cannot be part of a set of assets totalling more than $300; and
• the asset cannot be one of a number of identical assets totalling more than $300.

You may also be eligible for this immediate deduction if you held an interest in an asset purchased in the income tax year, and your interest in this asset was less than $300.

For example, if you jointly held a $500 asset with another party, of which you paid 50 per cent – that is $250, you would be able to make an immediate deduction for the $250 providing the tests outlined above were satisfied.

Please contact ESV if you wish to discuss the deduction of assets further.

Henry Report and the 2010 Budget 

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In the wake of the 2010 Federal Budget and the debate on “resource super profits tax”, the Henry Report has disappeared into the ether.

The Report, published in 3 volumes (totalling about 1300 pages), contains 138 recommendations.

The Government responded with their plan for tax reform which deals with less than 50 of the recommendations and is contained in 3 short booklets, a few media releases and fact sheets.

The most contentious recommendation that has been accepted by the Government is to implement a resources rent tax similar to the current petroleum resource rent tax.

The other recommendations accepted by the Government involved changes to superannuation. In fact, the Government included some changes that went beyond the Henry Review recommendations such as increasing the employer Superannuation Contribution Levy from 9% to 12% in staged increments.

Employers will also be required to support employees until they reach 75 years of age.

The Government also accepted a decrease in the company tax rate to 28% with small business being the first to benefit. The Government has also accepted a recommendation to increase the threshold for small businesses to claim an immediate write off for assets acquired from $1,000 to $5,000 and further simplification of depreciation rules for small business.

Significantly, the Government rejected recommendations relating to:

• introducing bequest taxes;
• removing dividend imputation;
• including the family home in means tests;
• introducing land tax on the family home; and
• changes to the alcohol tax.

In rejecting these applications, the Government has said that the recommendations will not be implemented at any stage.

Other Budget changes which will affect clients of ESV include:

Personal tax

A 50% tax discount on savings income.
 
A standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012. This deduction will increase to $1,000 from 1 July 2013. You will still be able to claim higher amounts if you incur and can substantiate them. 

Raising of the medical expenses rebate threshold from $1,500 to $2,000 for the 2010/11 year.

Business tax

The Government will draft Legislation to clarify the treatment for earn-out arrangements.

For local subsidiaries of overseas parents, the Interest withholding tax rate will be reduced on off-shore borrowings from 10% to 7.5% in 2013/14 and to 5% in 2014/15.

The Government announced that it will introduce a new taxation regime for Managed Investment Trusts.

The eligibility requirements for film tax offsets will be reduced from 1 July 2010 so that :

• the current requirement under the Location Offset for productions valued between $15m and $50m to spend a minimum of 70% of their production budgets in Australia will be removed; and
• the Post, Digital and Visual Effects Production (PDV) offset threshold will be reduced from $5m to $500,000.

GST

Reforms will made to the provisions affecting GST on financial supplies and to the GST margin scheme.
 
Subject to agreement with the States, the Government will make changes to the application of GST to cross-border transactions, with effect from 1 July 2012.

The proposals should, in the Government’s view, significantly reduce the number of non-residents who are unnecessarily drawn into Australia’s GST system through:

• limiting the connected with Australia provisions;
• expanding the compulsory reverse charge provision;
• extending the GST-free rules for cross-border supplies; and
• removing the need for some non-residents to register.
 

Commercialisation Australia – Assistance for Australian business

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Commercialisation Australia is an initiative that was announced as part of the 2009-10 Federal Budget. It was designed to overhaul the way the Australian Government assists innovative ideas in getting to market with a focus on business.

The program has initial funding of close to $200m through to 2013 with on-going annual support each year thereafter.

Eligible businesses can access a suite of tailored assistance measures including:

• Skills and Knowledge
Providing up to $50,000 for specialist advice and services aimed at innovators who know their idea is viable but are unsure of what to do next. Applicants need to match the grant 80:20, with the applicant funding 20 per cent.
• Experienced Executives
Providing funding for up to $100,000 per year for two years to assist small businesses engage executive staff with appropriate management skills and experience that the business owner may need. Funding for this component needs to be matched by the applicant 50:50.
• Proof of Concept Grants
Funding from $50,000 to $250,000, matched 50:50 by the applicant, to test the business model or idea’s commercial viability. The support is provided with the requirement that this testing is completed within 12 months.
• Early Stage Commercialisation
Providing an applicant with between $250,000 and $2m to undertake activities focused on enabling a new product, idea or service to be developed such that it can be taken to the market. The grant needs to be matched 50:50 by the applicant and is repayable on the success of the commercialisation project.

The assistance measures are not exclusive and applicants can apply for any or all at varying stages throughout their business and product life cycle.

As noted above, the Government has placed an emphasis on encouraging responsibility and participation throughout the process and underpins the program with support and mentoring. The application process is based on merit with eligibility criteria applicable.

ESV can support you through the application process and will assist you with some of the eligibility criteria. For more detailed information and fact sheets contact us or visit www.commercialisationaustralia.gov.au.

 

Making the most of Government grants to employ apprentices 

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The Treasurer announced in the 2010 Federal Budget, an extension to the ‘Apprentice Kickstart’ program with the aim to help 22,500 youths find employment.

Under the ‘Apprentice Kickstart program 2’ which commenced on 12 May 2010, eligible employers will be entitled to employ an Australian apprentice 19 years and under undertaking a Certificate III or IV level qualification in a skills shortage trade occupation.

To be an eligible employer you must have fewer than 200 employees.

The incentives available include $3,350 paid as $850 at the three month mark and $2,500 paid at the end of nine months. This is in addition to the standard grant of $4,000.  The program ends on 12 November 2010.

There are also Federal Government support programs available for adult workers who are aged 25 or over at 1 January 2010.
 
A payment to either the employer or the apprentice, of $150 per week, up to a maximum of $7,800 per annum, is available in the first year. Furthermore $100 per week, up to a maximum of $5,200 per annum, is available in the second year for those adult workers who upgrade their skills through an Australian Apprenticeship at Certificate III or IV level in an occupation listed on the National Skills Needs list.
 
Further information about Australian Apprenticeships can be obtained from http://www.australianapprenticeships.gov.au.

 

Employee share schemes 

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Last year, the Government learnt an important lesson on releasing legislation without consulting beforehand. It was savaged in respect of changes to employee share scheme. When legislation was finally enacted, it was acknowledged that there were a number of issues left in abeyance that required consideration. The Government commissioned the Board of Taxation to respond to those issues and those findings have now been released.

Other key recommendations of the Board were:

• to require valuation of both traded and untraded securities to be in accordance with the ordinary meaning of market value;
• that the ordinary meaning of market value approach be supplemented with specific ATO developed guidance on acceptable valuation methodologies for valuing listed and unlisted securities; and
• to use the current statutory valuation tables to value an unlisted right as a 'safe harbour' valuation methodology and that the ATO develop an on-line calculator to assist taxpayers to apply these tables.

Appendix: Business Travel Rates 2009-10 

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Travel Claims Within Australia 2009-10

The reasonable amounts for daily travel allowance expenses, according to salary levels and destinations, for the 2009-10 income year are shown in Tables 1 to 6 as follows.

 

Table 3: Employee's annual salary - $166,501 and above
Place	Accomm . $	Food and drink $ B'fast 26.00 Lunch 37.00 Dinner 63.00	Incidentals $	Total $
Adelaide	209	126.00	23.55	358.55
Brisbane	236	126.00	23.55	380.55
Canberra	230	126.00	23.55	379.35
Darwin	265	126.00	23.55	414.15
Hobart	195	126.00	23.55	344.55
Melbourne	265	126.00	23.55	414.55
Perth	275	126.00	23.55	424.55
Sydney	265	126.00	23.55	414.55
Country centres	$190, or the relevant amount in Table 4 if higher	126.00	23.55	Variable - see Table 4 if applicable

Table 4: High cost country centres - accommodation expenses
Country centre	$	Country centre	$
Ballarat (VIC)	118.50	Horsham (VIC)	113.00
Bendigo (VIC)	122.00	Jabiru (NT)	198.00
Bright (VIC)	110.50	Kalgoorlie (WA)	130.50
Broome (WA)	207.00	Karratha (WA)	285.00
Bunbury (WA)	120.00	Kununurra (WA)	157.50
Burnie (TAS)	125.00	Launceston (TAS)	115.50
Cairns (QLD)	123.00	Mackay (QLD)	132.50
Carnarvon (WA)	146.30	Maitland (NSW)	108.00
Christmas Island (WA)	122.50	Mount Isa (QLD)	158.50
Cocos (Keeling) Islands	110.00	Newcastle (NSW)	127.50
Dampier (WA)	174.40	Newman (WA)	170.00
Derby (WA)	181.50	Norfolk Island	119.50
Devonport (TAS)	128.50	Port Hedland (WA)	270.00
Emerald (QLD)	113.00	Port Macquarie (NSW)	115.00
Esperance (WA)	115.00	Thursday Island (QLD)	180.00
Exmouth (WA)	190.00	Townsville (QLD)	124.00
Geelong (VIC)	121.00	Wagga Wagga (NSW)	117.50
Geraldton (WA)	129.50	Warrnambool (VIC)	113.00
Gladstone (QLD)	118.50	Weipa (QLD)	138.00
Gold Coast (QLD)	135.00	Wilpena-Pound (SA)	135.00
Halls Creek (WA)	147.50	Wonthaggi (VIC)	122.00
Hervey Bay (QLD)	119.00	Yulara (NT)	331.00
Horn Island (QLD)	159.00

Table 5: Tier 2 country centres
Country centre	Country centre
Albany (WA)	Mount Gambier (SA)
Alice Springs (NT)	Naracoorte (SA)
Bairnsdale (VIC)	Port Augusta (SA)
Bathurst (NSW)	Port Lincoln (SA)
Bordertown (SA)	Portland (VIC)
Broken Hill (NSW)	Renmark (SA)
Castlemaine (VIC)	Roma (QLD)
Ceduna (SA)	Orange (NSW)
Dalby (QLD)	Seymour (VIC)
Dubbo (NSW)	Swan Hill (VIC)
Echuca (VIC)	Whyalla (SA)
Kadina (SA)	Wollongong (NSW)
Innisfail (QLD)

 

Reasonable travel allowance expense claims for employee truck drivers

Amounts claimed up to the food and drink component only of the reasonable domestic daily travel allowance amounts for 'other country centres' are considered to be reasonable for meal expenses of employee truck drivers who have received a travel allowance and who are required to sleep away from home. For the 2009-10 income year, the relevant amounts are:

Table 6: Employee truck drivers
Salary range	Food and drink
$93,600 and below	B'fast	Lunch	Dinner
	$19.95	$22.80	$39.30
	$82.05 per day
$93,601 and above	B'fast	Lunch	Dinner
	$22.30	$22.80	$44.40
	$89.50 per day

 

Travel Claims Overseas 2009-10

If a country is not listed in Table 1 below, use the reasonable amount in Table 2 for Cost Group 1. For an explanation of Cost Groups see the table below.
 

Country	Cost Group	Country	Cost Group
Albania	2	Estonia	3
Algeria	4	Ethiopia	1
Angola	6	Fiji	2
Antigua and Barbuda	4	Finland	5
Argentina	2	France	6
Austria	5	Gabon	6
Azerbaijan	5	Gambia	3
Bahamas	6	Georgia	3
Bahrain	3	Germany	5
Bangladesh	2	Ghana	2
Barbados	5	Gibraltar	3
Belgium	4	Greece	4
Bermuda	5	Guatemala	2
Bolivia	1	Guyana	2
Bosnia	2	Hungary	3
Brazil	4	Iceland	5
Brunei	2	India	4
Bulgaria	3	Indonesia	3
Burkina Faso	3	Iran	1

 

Country	Cost Group	Country	Cost Group
Cambodia	2	Irish Republic	5
Cameroon	4	Israel	4
Canada	4	Italy	5
Chile	2	Jamaica	3
China (includes Macau & Hong Kong)	4	Japan	6
Colombia	3	Jordan	4
Congo Democratic Republic	3	Kazakhstan	3
Cook Islands	3	Kenya	3
Costa Rica	2	Korea Republic	4
Cote D'Ivoire	4	Kuwait	4
Croatia	3	Laos	2
Cuba	3	Latvia	3
Cyprus	4	Lebanon	3
Czech Republic	4	Libya	3
Denmark	6	Lithuania	3
Dominican Republic	3	Luxembourg	4
East Timor	2	Macedonia	2
Ecuador	2	Malawi	2
Egypt	3	Malaysia	2
El Salvador	2	Mali	3
Eritrea	2	Malta	4
Mauritius	2	Senegal	3
Mexico	2	Serbia	2
Monaco	6	Sierra Leone	4
Morocco	3	Singapore	4
Mozambique	2	Slovakia	4
Myanmar	4	Slovenia	3
Namibia	2	Solomon Islands	2
Nepal	2	South Africa	1
Netherlands	5	Spain	4
New Caledonia	5	Sri Lanka	2
New Zealand	3	Sudan	4
Nicaragua	2	Surinam	3
Nigeria	4	Sweden	4
Norway	6	Switzerland	5
Oman	4	Syria	3
Pakistan	2	Taiwan	3
Panama	3	Tanzania	2
Papua New Guinea	3	Thailand	3
Paraguay	1	Tonga	2
Peru	3	Trinidad and Tobago	4
Philippines	2	Tunisia	2
Poland	3	Turkey	4
Portugal	4	Uganda	2
Puerto Rico	4	Ukraine	3
Qatar	4	United Arab Emirates	5
Romania	3	United Kingdom	5
Russia	5	United States of America	4
Rwanda	3	Uruguay	2
Saint Lucia	3	Vanuatu	3
Saint Vincent	3	Venezuela	5
Samoa	3	Vietnam	2
Saudi Arabia	3	Zambia	2

Table 2: Reasonable amounts by cost groups

 

Cost Group	Salary $93,600 and below			Salary $93,601 to $166,500			Salary $166,501 and above
	Meals	Incidentals	Total	Meals	Incidentals	Total	Meals	Incidentals	Total
1	$65	$25	$90	$90	$25	$115	$115	$30	$145
2	$85	$30	$115	$120	$35	$155	$150	$40	$190
3	$120	$35	$155	$150	$40	$190	$180	$45	$225
4	$155	$35	$190	$185	$45	$230	$215	$50	$265
5	$185	$40	$225	$225	$50	$275	$265	$60	$325
6	$215	$45	$260	$270	$50	$320	$310	$60	$370

 

 

 

 

The information in this newsletter is quite general in nature and anyone intending to apply it practically to their own circumstances should seek professional advice to verify it’s individual applicability. 

If you have any queries regarding the information contained in this
update please contact us.

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