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OCTOBER 2009
Excess contributions to super funds
Changes to the amounts that can be contributed to superannuation funds came into effect on 1 July 2009. Any contribution amount that exceeds a cap amount is subject to extra tax. The cap amount and how much extra tax a taxpayer is required to pay once they exceed the cap depend on whether the contributions are concessional or non-concessional.
The concessional contributions cap has been reduced to $25,000 for contributions made in the 2009–10 financial years. The transitional concessional contributions cap which has been reduced to $50,000, is for those aged 50 years or older and is available until 30 June 2012.
The non-concessional contributions cap remains at $150,000 in 2009–10.
The tax on excess concessional contribution amounts is 31.5% of the excess amount. For non-concessional amounts, which come from income that has already been taxed and for which no deduction is available, is taxed at 46.5%.
Errors could easily be made by employers paying too much or paying amounts in inappropriate accounting periods. If you have inadvertently(or for any reason) exceeded your contribution caps in the 2009-10 year, please contact ESV as a matter of urgency.
Shareholder loans clarification
In the last Federal Budget, the Government announced that it would expand the scope of the shareholder loan provisions. Those provisions can deem loans, payments and forgiveness arrangements between private companies and their shareholders (and associates of shareholders) to be dividends.
The proposed Budget changes expand the definition of the term “payment” to include use of company assets such as real estate, cars and boats which are used for free, or at less than their arm's length value.
That change had the potential to tax the use of private company assets such as farmland on which a business is run, hotel furniture used by hotel operators and residences on farms and in hotels. Similar problems were encountered when fringe benefits tax was introduced.
The Assistant Treasurer has now advised that the proposed provisions will be amended to introduce:
- an 'otherwise deductible' rule for certain payments – so that any 'business use' assets that are provided to a shareholder under a right-to-use or a licence (but not a lease of real property) will be disregarded from the amount of a 'payment' made to shareholders;
- a 'residence exemption' for certain payments - any residence that is an integral part of the business real property and is owned by a private company but is lived in under a right to use or a licence as part of the carrying on the business will be disregarded.
The shareholder loan provisions will also be changed to ensure that corporate limited partnerships cannot be used to circumvent the shareholder loan provisions. Other technical amendments will also be made.
ATO targets trusts
The financial press, particularly the Australian Financial Review, have recently run a number of stories along the lines of the ATO targeting the wealthy and conducting a trust blitz.
The story broke with the Financial Review claiming to have obtained a confidential consultation paper which “wants to tax certain trust distributions to a company as a loan”. They also quoted Deputy Commissioner Mike Konza as saying that “trust funds may have been diverted for personal use, for example through the purchase of yachts”.
Konza actually alluded to this in a speech to the Tax Institute of Australia in February this year. The issue is whether an unpaid entitlement to a corporate beneficiary can convert to a loan which can then be taxed as a dividend under the shareholder loan provisions. At this stage, ESV is of the opinion that the ATO case is valid only where taxpayers have consciously converted the entitlement to a loan. We will, of course, continue to monitor this situation.
When a client of ESV recently received a refund cheque for $30,000 less than the amount that we had estimated, Greg Wilkins, a senior manager at ESV decided to get on the phone and find out how the ATO had come up with an answer so widely different to our calculation.
The answer was difficult to track down because he had to find someone at the ATO who understood how their computers were programmed to arrive at their estimate of the tax. As suspected, it related to the tax on the excessive component of an employment termination payment.
After some debate, Greg convinced the ATO that their method of calculation was inappropriate and they agreed to issue a cheque for the difference. This resulted in our client receiving his refund months faster than if a formal objection had been lodged. Hopefully, it has lead to the ATO changing the program used to calculate the tax liability of individual taxpayers. This is a good example of what we mean by proactive service.
Employees v independent contractors
We have looked at the distinction between employees and independent contractors for our clients over the years. A mistake in the way you classify someone working for you can have income tax, superannuation and workers compensation implications.
On this issue, a recent AAT decision has held that casual market research interviewers were employees for Superannuation Guarantee purposes.
While acknowledging that the line between an employee and an independent contractor was not sharply drawn, the AAT arrived at its decision because:
- the interviewers were controlled with precision and with regular checks on performance.
- the interviewers had very little control over the content of the interviews. Interviewers were told how to ask questions, whether they were closed or open, what words to emphasise and how to record the answers. Essentially, they were not engaged for a result or a product but rather for their labour in following the specific steps.
- the interviewers carried identification cards that showed that they were doing the task for the taxpayer.
- the interviewers were reimbursed for their expenses meaning that they invested very little in the process.
- the fact that an interviewer might reject an assignment or not be available to accept it from time to time did not change the employer employee relationship when the interviewer did choose to accept the assignment.
The Commissioner has now finalised the Ruling on the application of the trading stock provisions to trade incentives. The Ruling is directed at both buyers and sellers and is important for taxpayers who calculate their own PAYG instalment payments based on an instalment rate. It also has implications for the valuation of trading stock for tax purposes.
Buyers
Not surprisingly, the Ruling concludes that trade incentives that relate directly to the purchase of trading stock, so as to reduce the purchase price, are treated as a reduction in the cost of the trading stock.
However, where an incentive is subject to a condition that has not been satisfied when the stock is purchased, it is taken as not relating directly to the purchase of trading stock and instead of reducing the cost of the trading stock, is taken up as ordinary income of the buyer.
Sometimes a seller will provide a trade incentive that rewards a buyer for carrying out promotional activities. These incentives also do not reduce the cost of the trading stock for the buyer and are taken up as income.
Where the trade incentive is dependant on the buyer conducting promotion activities in the future and where the buyer is required to repay some or all of the trade incentive where the activities are not performed, the trade incentive is derived by the buyer when the activities are performed.
Seller
For sellers, the opposite applies. Trade incentives that relate directly to the sale of trading stock, so as to reduce the sale price, are treated as a reduction of the sale proceeds.
Where conditions apply that are not satisfied when the sale is made, the sale proceeds are not reduced except where the seller is virtually certain that the condition will be satisfied, such as a settlement discount that is always taken or a volume rebate for which the threshold is always met.
Trade incentives that reward a buyer for carrying out promotional activities do not reduce the selling price and the proceeds of disposal for the seller. The seller can deduct the amount of the trade incentive as a business expense when it is incurred.
CGT 'Trust Cloning' exception
The Assistant Treasurer has released draft legislation leading to the abolition of what is known as the capital gains tax (CGT) "trust cloning exception".
Background
Normally, CGT is triggered when an asset is transferred into a trust.
However, under the current law, CGT is not triggered if an asset is transferred between trusts and the beneficiaries and terms of both trusts are the same.
This arrangement is known as the "trust cloning exception" and, according to the Government, was used primarily by high wealth individuals as a succession-planning tool, allowing effective control of assets to be passed between trusts, frequently within a family group, without triggering CGT.
The Government announced in late 2008 that it would remove this exception with effect from 1 November 2008.
Although the legislation contains the removal of the trust cloning exception, it also contains an important new provision that will allow for a limited CGT roll-over for the transfer of assets between fixed trusts.
The legislation will still allow these types of eligible trusts to restructure businesses or investment funds when they need to without immediate CGT consequences.
The Commissioner of Taxation has advised that identity theft is a particular problem that can take years to put right.
For this reason, tax file numbers (or TFNs) must be kept safe.
Only certain people can ask for a taxpayer's TFN, including the Tax Office, Centrelink, their super fund, bank or financial institution, and their employer (once they have started working for them).
If anyone is asked for their TFN through an email, phone call or suspicious door knocker, they should not offer any information and should call our office immediately.
While the Tax Office does send emails or SMSs promoting new services or alerting to due dates, it does not send emails requesting a taxpayer confirm, update or disclose confidential details such as their name, date of birth, address, passwords or credit card and bank account details.
Even if the communication is legitimate, we strongly recommend that all communications with the Tax Office should pass through your tax advisor.
Support the ESV Team in the Sydney to Gong Challenge
On the 1st of November this year, a few very special ESV-ians’ will be going on a challenge & facing them, a 90km pedal from Sydney to Wollongong!!!!!
Riding for the MS Society, each rider in the Sydney to the Gong Bike Ride is dedicated and committed to fundraising a minimum of $200, which is easy to reach with your help and support.
All fundraising efforts in the MS Sydney to the Gong Bike Ride are vital to MS Australia and the people/families living with MS. It enables MS Australia to continue their research into the nature, causes, treatment, diagnosis and management of the disease, and to apply results of worldwide research towards programs of treatment, prevention and cure.
The target for MS is $2.5 million this year with last year almost $2.1 million being directly fundraised by riders on the Gong Ride.
The ESV Team consists of 5 budding cyclists:
Timothy Valtwies
If you would like to support the team, please click on the above hyperlinked names.
Otherwise, donate directly to the ESV Team at http://register.gongride.org.au/?Team+ESV .
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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 do not hesitate to contact us.
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