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GUEST OBSERVATION
Self-managed super funds are, and have been, flavour of the month for some time now.
The opportunities SMSFs provide for people to control their retirement incomes can be attractive. Of course, running such a fund has its own costs and the person in control (the trustee) has the onus to ensure the fund performs at an acceptable level.
But there are many rules and regulations that govern SMSFs and they can be a trap for the unwary. A recent Federal Court decision shows what can go wrong.
In the case, the Federal Court imposed civil penalties of $13,000 (plus $5000 in costs) for each of three directors of the corporate trustee of an SMSF in relation to breaches of the superannuation laws involving short-term loans to a related business.
The first respondent, Early Sunshine, was the corporate trustee of the SMSF known as the George MacDonald &amp; Sons Superannuation Scheme No 2. The other three respondents are the directors of Early Sunshine Pty Ltd.
Over a four-year period from 2007 to 2011, the three directors caused the SMSF to make 71 loans to the freight trucking business George MacDonald &amp; Sons of which the respondents were employees, directors and shareholders. The freight trucking business lost its principal customer in 2001 and began to experience significant financial stress in 2007-08 amid the global financial crisis.
Typically, the loans were outstanding for only a few weeks at a time and used to cover the working capital of the business (primarily to pay salaries and wages). A total of $553,568 in loans was made by the SMSF to George MacDonald &amp; Sons.
Each of the 71 separate loans was less than $20,000 (with an average of $7,768). The loans were unsecured and did not bear interest but each loan was ultimately repaid in full. The SMSF also made a $2000 loan to a company controlled by one of the respondents. This loan was unsecured but was repaid on demand with 8.5% interest.
In August 2009, the SMSF's auditor lodged the first of several auditor contravention reports for the relevant years noting breaches of the superannuation law in relation to the loans. The reports recorded breaches of the sole purpose test, the in-house asset rules and the arm's length dealing requirement.
In October 2011, the Tax Office issued the SMSF with a notice of non-compliance. As a result, the SMSF lost its concessional tax treatment and was issued with an assessment of $63,254 for the 2008 year (which it paid in January 2012). In August 2011, the trustee resolved to wind up the SMSF and roll over the members' benefits to an industry fund.
The applicant, as Deputy Commissioner of Taxation (Superannuation), applied to the Federal Court to impose civil penalties. A statement of agreed facts indicated there was no dispute among the parties as to any aspect of the case.
While a maximum civil penalty of $220,000 could apply for each contravention under the relevant superannuation laws, the court imposed a penalty of $13,000 for each director of the trustee of the SMSF, together with $5000 (each) for the Commissioner's costs. The court agreed that the contraventions were "serious" from a regulatory perspective as they involved deliberate, repetitive breaches over a four-year period and put at risk the assets of the fund.
However, the court said it must be remembered that, in the end, the fund did not suffer any loss of capital. The foregone interest income was not significant. In addition, all of the respondents admitted all of the contraventions which were ultimately pressed by the Tax Commissioner and co-operated fully with the Commissioner both at the investigation stage and in the proceeding. Also, the fund has now been wound up and the members’ balances have now been transferred to a public fund which the court noted should ensure they are satisfactorily protected.
The court was also cognizant of the fact that each of the individual respondents had taken full responsibility for their involvement in the contraventions and had expressed remorse and contrition for their conduct.
In the case of multiple contraventions, the court said the pecuniary penalty should reflect the totality of the conduct. Although Early Sunshine was the primary contravener of the superannuation law, the court accepted there was no point imposing a civil penalty on the corporate trustee (which was now dormant). Instead, the court held that the three directors were each liable for a pecuniary penalty of $13,000.
The court initially considered that the penalties proposed by the parties were insufficient. However, after taking into account all of the circumstances, the court ultimately agreed that a penalty of $13,000 (plus $5,000 in costs) for each director was appropriate.
The court reached this conclusion after having regard to the relevant factors and applying the general principles for imposing civil penalties under the superannuation law, as set out in the established cases.
The case is a salutary reminder of the penalties that can apply when SMSFs contravene the laws that govern them. The penalties in this case were significantly lower than the statutory maximum and SMSF trustees can take a lesson from the reasons why the court considered that appropriate.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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thayes-XhNcNKLNWa

Making loans from SMSFs – court imposes $40,000 in penalties: Terry Hayes

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Last year brought the usual proverbial "truckload" of tax and superannuation changes either passed by Federal Parliament or proposed to commence this year. It's difficult to keep up with it all, but below I set out some of the changes that might be of interest to small and medium-sized businesses, including property businesses.
This year's federal election is sure to bring more changes promised.
Significantly, January 1 brought something of a changing of the guard in that a new Tax Commissioner, Chris Jordan, took up his role, and a new chairwoman of the Board of Taxation, Teresa Dyson, commenced. They both have a very busy year ahead of them.
The following tax changes commence, or are expected to commence, during 2013.
<ul>
<li>Medical expenses rebate: legislation still before Parliament proposes that an income test will apply to the rebate for medical expenses from July 1, 2012 i.e. for 2012-13 tax returns. For taxpayers with adjusted taxable income above the Medicare Levy Surcharge thresholds ($84,000 for singles or $168,000 for couples or families in 2012-13), the threshold above which they may claim the net medical expenses tax offset will increase from the current $2,120 to $5,000 and the rate of reimbursement will be reduced from 20% to 10%. The claim threshold will be indexed annually to the CPI. Tax returns for the 2012-13 year (i.e. ending on June 30, 2013) will first reflect the changes.</li>
<li>Mature age worker tax offset: the mature age worker tax offset has been phased out from July 1, 2012 for taxpayers born on or after July 1, 1957. Again, tax returns for the 2012-13 year will first reflect the changes.</li>
</ul>
<h3>Superannuation</h3>
There are lots of changes here, particularly for small and medium-sized businesses that have self-managed super funds (SMSFs) – and it seems from stats just released that SMSFs continue to grow strongly and are now a major component of the superannuation sector holding over 30% of total superannuation assets. SMEs should particularly take note of the following.
<ul>
<li>All employers should note that the compulsory super contribution rate will rise by 0.25% to 9.25% from 1 July 2013 i.e. for the 2013-14 year. This is first phase of the scheduled increase from 9% to reach 12% from 2019-20. There will be increments of 0.25% in the first two years and 0.5% thereafter (i.e. from 2015-16) until the rate reaches 12% (from 2019-20).</li>
<li>SMSFs and related party asset acquisitions and disposals: Draft legislation proposes new rules requiring that a trustee or investment manager of an SMSF could acquire an asset from a related party if the asset is business real property acquired at market value, as determined by a qualified independent valuer. The valuer must also be independent and therefore cannot be a member of the fund or a related party of the fund. It will still be possible to acquire business real property and certain in-house assets (not exceeding 5%) from a related party, provided that the asset is acquired at market value as determined by a qualified independent valuer. However, it will only be possible for an SMSF to acquire a "listed security" from a related party in a way prescribed by regulations (yet to be released as at January 1, 2013). The changes are intended to apply from July 1, 2013.</li>
<li>A new registration regime for approved SMSF auditors applies from January 31, 2013. SMSF auditors are required to apply to ASIC for registration as an "approved SMSF auditor". Auditors can apply for registration from January 31, 2013. All auditors will be required to be registered with ASIC by July 1, 2013 to audit SMSFs after that time. All SMEs that have self-managed super funds should be aware of this requirement concerning auditors of their funds.</li>
<li>SMSF approved auditors: From July 1, 2013, draft regulations propose to require SMSF trustees to appoint an approved auditor no later than 45 days before the due date for lodgment of the fund's annual return. The draft regulations (yet to be finalised) also provide that the prescribed period for which an audit report in respect of an SMSF must be given is 28 days after the trustee of the fund has provided all documents relevant to the preparation of the report to the auditor.</li>
<li>The MySuper application and authorisation process commenced from January 1, 2013. Authorised superannuation entities will be able to offer a MySuper product from July 1, 2013. Employers will be required to make superannuation guarantee contributions (for employees that do not have a chosen fund) to a default fund that offers a MySuper product from January 1, 2014.</li>
<li>A trans-Tasman portability scheme will permit transfers between certain Australian superannuation funds and New Zealand KiwiSaver schemes from July 1, 2013. The proposed scheme will enable Australians and New Zealanders to consolidate their retirement savings in their country of residence when they emigrate and intend to stay indefinitely or permanently in the host country. Currently, Australians and New Zealanders working in Australia cannot take their superannuation with them when they permanently leave Australia. Note that New Zealand-sourced retirement savings from KiwiSaver schemes held in Australian superannuation funds will not be able to be transferred to or held in a self-managed superannuation fund.</li>
</ul>
<h3>Other changes</h3>
<ul>
<li>Private health insurance rebate: From July 1, 2013, the private health insurance rebate will no longer be paid on any lifetime health cover loading applied to the cost of a private health insurance policy for lifetime health cover. Legislation to implement this is still before Parliament, but is expected to pass before June 30, 2013.</li>
<li>The education tax refund has been abolished and replaced by the Schoolkids Bonus from January 1, 2013. For those eligible, the first instalment of the Bonus ($205 per primary student and $410 per secondary student) will be paid by Centrelink or the Department of Veterans' Affairs, directly into their bank accounts between January 9 and 22, 2013 to help with back-to-school expenses. Eligibility requirements for the Bonus are that the student must be undertaking primary or secondary studies and be under 20 years of age, and the parent or carer must be receiving one of several government payments, including Family Tax Benefit Part A or Youth Allowance or Disability Support Pension.</li>
<li>Social Security benefits: From January 1, 2013, the length of time many payments and concession cards can continue while a recipient is temporarily overseas was reduced from 13 weeks to 6 weeks. Payments affected include Pension Supplement, Disability Support Pension, Carer Payment, Wife Pension, or if a person is a Commonwealth Seniors Health Card Holder.</li>
</ul>
This article originally appeared on <a href="https://www.smartcompany.com.au/index.php" target="_blank">SmartCompany</a>. 
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A truckload of superannuation reforms coming for property owners in 2013

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Self-managed super funds (SMSFs), also known as DIY super funds, have been in the news lately regarding their alleged propensity for borrowing to invest in property.
Proponents of both sides of the argument have put forward their case and, needless to say, the sector will continue to come under scrutiny from the regulators, including the ATO and ASIC.
For its part, as the main regulator of SMSFs, the Tax Office says it tries to help super fund trustees and the professionals who assist them to <a href="https://www.smartcompany.com.au/big-money/057730-big-money-the-reason-our-superannuation-system-doesn-t-work">understand their obligations</a>(and there are plenty of those!) and comply with these voluntarily.
While the ATO considers that SMSFs “generally operate in a well-run market”, ATO assistant deputy commissioner in charge of superannuation Stuart Forsyth says there are however a number of risk areas it is keeping an eye on. These include:
<ul>
<li>
Trustees and SMSF professionals who fail to understand SMSF obligations
</li>
<li>
Trustees who fail to voluntarily comply with their SMSF obligations, including lodgement of returns
</li>
<li>
Approved SMSF auditors who fail to undertake audits appropriately or fail to report contraventions of the rules to the ATO
</li>
<li>
Trustees who intentionally take inappropriate actions with their SMSFs, such as setting them up for illegal early release or down the track obtaining early access to money in the fund without meeting a condition of release
</li>
<li>
Professionals who promote and assist in the establishment of SMSFs for inappropriate reasons
</li>
</ul>
SMSFs have a myriad of rules to comply with. These include reporting of payments of fund member benefits, appointing an approved auditor, and maintaining the appropriate records. In the current environment, perhaps the most notable requirement is complying with the numerous investment restrictions that the law imposes, for example:
<ul>
<li>
The ‘sole purpose test’ – the law requires an SMSF to be maintained solely for at least one of the legislated core purposes, i.e. the provision of benefits upon retirement, attaining age 65 or death.
</li>
<li>
Trustees of an SMSF are prohibited from intentionally acquiring assets from fund members or a related party (although some limited exceptions apply).
</li>
<li>
An SMSF is generally restricted from having more than 5% of its total assets invested in so-called ‘in-house’ assets – these include a loan to a related party, an investment in a related trust of the fund, and an asset of the fund subject to a lease with a related party.
</li>
</ul>
The law generally prohibits funds from borrowing money, but there is an exception for so-called limited recourse borrowing arrangements (e.g. instalment warrants). Assets acquired with these borrowings must be kept separate from other assets of the fund. Money borrowed under these rules can be used in maintaining or repairing an asset. An SMSF trustee looking to acquire property via a limited recourse borrowing arrangement should obtain independent advice in relation to the borrowing agreement and the establishment of the holding trust structure.
Forsyth said the ATO is planning more comprehensive audits and closer scrutiny of annual returns and auditor contravention reports. He said the annual independent SMSF audit is a critical factor in the ongoing tax concessional treatment of SMSFs, satisfying the government and the community that SMSFs are meeting their obligations.
Forsyth said SMSF trustees should comply, lodge on time and (reflecting the comments made above) ensure that transactions such as limited recourse borrowing arrangements are undertaken with care. Limited recourse borrowing is an area where there are risks of breaches which can be very expensive and may not be easily rectified if professional advice had not been sought, he said.
SMSF fund trustees should check and understand the deed of the fund to ensure they are clear in what it allows and does not allow.
The ATO will review breaches of trustee obligations reported to it by approved SMSF auditors.
Other issues for SMSF trustees to be aware of are that they are now are required to value their fund’s assets at market value. They must also regularly review the fund’s investment strategy, and should consider the needs of insurance for members. The ATO is sure to be checking on these requirements.
One of the main changes affecting SMSF trustees this year has been that, from July 1, 2013, auditors have had to be registered with ASIC to undertake an SMSF audit. Forsyth said that from now on, when an SMSF annual return is lodged with the ATO, the ATO will check that the return has an SMSF auditor number (SAN) on it and that the number has been registered by ASIC. If there is no SAN or the number is not recognised as a registered auditor, the ATO will not accept the lodgment. SMSF trustees need to be particularly careful about this requirement.
From July 1, 2014, large and medium employers (those with more than 20 employees) will start paying super contributions using the new superannuation data and payment standard. SMSFs receiving contributions from these employers will need to receive them using the new standard. This requires being able to receive electronic contribution payments (paid to a nominated bank account) and messages (sent to a nominated electronic address). The ATO intends to publish more detailed information explaining the standard, how it applies to SMSFs and what trustees need to do to comply.
The attractions of SMSFs mean we are seeing continuing strong growth in these types of super funds. The many rules and regulations surrounding the running of these funds however should not be overlooked or underestimated.

<hr>
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" rel="nofollow">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article originally appeared on <a href="https://www.smartcompany.com.au/" target="_parent" rel="nofollow">SmartCompany</a>.
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Beware of the risk areas surrounding self-managed super funds: Terry Hayes

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As it does around this time of year, the ATO recently released its 2012-13 Compliance Program outlining those it intends to target in the coming year. Small and medium-sized enterprises (SMEs) figure prominently.

While much has already been written about the program, it is worth exploring a little more deeply what the ATO will be looking at. It's something of a roadmap for SMEs in the tax compliance cut and thrust.
There are around three million so-called micro enterprises i.e. businesses with an annual turnover of under $2 million or superannuation funds with less than $2 million in assets. They represent a significant part of the taxpaying population, employing 1 in 5 Australian workers.
Over the coming year, the ATO says it will focus particularly on the following compliance risks:
<ul>
<li>unrecorded and unreported cash transactions;</li>
<li>employer obligations eg. super;</li>
<li>GST refund integrity and GST evasion;</li>
<li>ensuring businesses are correctly registered in the tax system;</li>
<li>supporting businesses in meeting their lodgment obligations; and</li>
<li>incorrect fuel tax credit claims following implementation of the clean energy measure.</li>
</ul>
The ATO said profiling is used to identify potential tax risks such as businesses operating outside industry or economic benchmarks.
Information matching forms a key part of the ATO's arsenal. It matches information in tax returns and business activity statements (BASs) with details of transactions reported to it by a wide range of third parties, including:
<ul>
<li>payments and grants by other government agencies;</li>
<li>payments by businesses to contractors especially the new building and construction industry reporting system;</li>
<li>income from investments and partnership and trust distributions;</li>
<li>property and share transactions;</li>
<li>cross-border transactions and international funds transfer.</li>
</ul>
<h3>Unrecorded and unreported cash transactions</h3>
The ATO said the plastering and cafe sectors have been selected for more intensive activity for 2012-13. In relation to the plastering sector, the use of cash along with historical weaknesses in tax compliance and high number of information referrals from the public has prompted the increase in ATO activity.
The ATO said it will review both business-to-business and business-to-consumer transactions, comparing information from hardware store accounts against their customers' purchasing records to detect cases where businesses are skimming cash or are outside the system.
In relation to cafes, the ATO said it is expanding its compliance program of comparing information from coffee-supplier trade accounts against their customers' purchasing records to detect cases where cafe businesses are skimming cash or are outside the system.
<h3>Employee vs contractor</h3>
The ATO will continue the compliance program on contractor arrangements. Trying to present an employment relationship as a contract between two businesses by, for example, forcing the worker to supply invoices and quote an ABN, does not in the ATO's view override an underlying relationship of employment. The ATO is concerned this threatens the welfare and entitlements of workers and creates unfair competition for honest employers.
The statistics paint their own picture on this issue. In 2011-12, the ATO conducted approximately 1,100 audits on businesses where it suspected that the business may have incorrectly treated employees as contractors. From the resultant audits, the ATO collected details of approximately 51,000 payments made to around 41,000 contractors, about 18,000 of which were individuals. It found that 48% of businesses that engaged contractors were wrongly treating individuals as contractors.
This is an ongoing major issue for the ATO, and SMEs should also be aware that Fair Work Australia also looks closely at this issue of employee vs contractor.
<h3>Small business benchmarks</h3>
The ATO has developed benchmarks for over 900,000 small businesses in over 100 industries. According to the ATO, approximately 90% of businesses in benchmarked industries fall within a benchmark range.
The benchmarks can be a two-way street. While they are a valuable tool for the ATO to check tax compliance, they can be useful for SMEs too. For example, where a business is reporting significantly more net income than its industry peers, this can alert the business to consider if it has forgotten to claim all of its business tax deductions. It isn't always that simple, but the potential exists for these benchmarks to actually help some SMEs.
On the flip side, where a business is reporting significantly less income than the benchmark range for its industry, the ATO may ask a few questions. However, if the business had good evidence to explain all its income and expenses, the ATO says it will not be subject to tax adjustments.
<h3>Employer obligations</h3>
For the 2012-13 year, the ATO expects to:
<ul>
<li>review the tax affairs of more than 20,000 businesses across all markets to ensure they are reporting the correct amounts of PAYG withholding;</li>
<li>conduct a range of education and assistance activities regarding reporting of payments to contractors in the building and construction industry;</li>
<li>use third-party data to income match taxable government grants and payments with reported amounts in tax returns;</li>
<li>conduct an outbound phone campaign and 500 enterprise reviews with the aim of ensuring that businesses register for PAYG withholding when they take on staff for the first time and register for GST when their turnover exceeds the $75,000 threshold.</li>
</ul>
<h3>GST refund integrity and GST evasion</h3>
With the recent passage of new laws that give the Commissioner a discretion to retain high risk refunds, the ATO may stop a small percentage of BASs for verification where anomalies, discrepancies, unusual behaviour, or change in patterns occurs. It said to minimise the number of businesses having refunds delayed, it may also check some refunds after they have been paid.
In addition, the ATO said it will review 35,000 GST registration applications to ensure that new registrants are legitimate. It will review around 500 serious cases of fraud involving identity theft and groups of entities established with no intention of undertaking an enterprise.
The ATO will monitor and investigate taxpayers who dispose of real property and fail to report the transaction on their BASs or misclassify the transaction for GST purposes.
The ATO said it has recently identified cases of fraud involving groups of entities established with no intention of undertaking an enterprise. Stolen identities were used to falsely register ABNs and make fraudulent refund claims on 1,670 activity statements totalling more than $17.5 million. An additional 600 entities associated with this fraud were detected before lodgement and subjected to enhanced registration check processes preventing additional claims being lodged. The ATO expects to review around 500 of these more serious cases in 2012-13.
<h3>Fuel tax credit claims</h3>
While this does not affect all SMEs, the ATO said incorrect or ineligible fuel tax credit claims continue to be made as a result of taxpayers misunderstanding their entitlements or poor record keeping.
In 2012-13, it will continue to provide claimants with information and assistance. However, in cases of serious breaches, it said it will consider cancellation of registration, prosecution and debt recovery.
Terry Hayes is the editor-in-chief of tax news reporting at <a rel="nofollow" href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.SmartCompany.com.au">SmartCompany</a>. 
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Small businesses under ATO compliance microscope: Terry Hayes

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GUEST OBSERVATION
A company claiming to carry on a land development business in Victoria has been unsuccessful before the Administrative Appeals Tribunal (AAT) in claiming GST input tax credits (ITCs) for acquisitions it had made.
The case illustrates the need for proper documentation in making tax claims and also, in this particular matter, the need for something more than just an intention to conduct a business in order to be able to <a href="https://www.smartcompany.com.au/finance/tax/43664-over-claimed-gst-credits-good-intentions-just-don-t-cut-it" target="_blank">claim GST input tax credits</a>.
The taxpayer company was registered for GST in August 2010. It claimed it had purchased property in Victoria for land development and subdivision. For the periods 1 October 2010 to 31 March 2011, the company claimed a total of $226,128 in ITCs for what are known as creditable acquisitions; however, throughout the period, no sales were reported.
Following an audit by the ATO, the commissioner found the company was not carrying on an enterprise for the purposes of the GST Act, was not entitled to ABN and GST registration, was not entitled to the ITCs, and was liable to an administrative penalty at the rate of 50% for "recklessness". Before the AAT, the taxpayer clarified it was only seeking to claim $1128 in ITCs for the tax period ended 31 October 2010.
The company had the burden of proving its case, that the commissioner's assessments were excessive and that the commissioner's decision to cancel its GST and ABN registration should not have been made or should have been made differently.
The AAT held the taxpayer had not discharged the burden of proof that, on the balance of probabilities, the ITCs claimed for the periods 1 October 2010 to 31 March 2011 for $226,128 should be allowed. Although the taxpayer had subsequently claimed to have withdrawn some of the BASs leaving only its ITC claim for $1128 for the tax period ended 31 October 2010, the AAT said the taxpayer was not entitled to the claim because of its finding that the taxpayer was not carrying on an enterprise at that time, which meant there were no acquisition for a creditable purpose and therefore no creditable acquisition.
A key issue was the lack of documentation proving that the taxpayer was indeed the owner of the land it claimed to have purchased. Among other things, the AAT concluded the taxpayer did not have the funds required to purchase the land. It further noted the taxpayer "has never become the registered proprietor of that land". It said that until such time as the land was in fact conveyed to the taxpayer, "it could not possibly have commenced an enterprise involving the subdivision of that land".
The AAT said that the carrying on of an enterprise may encompass a wide range of activities or even a single activity at any point in time between the commencement and termination of the enterprise. The tribunal then examined the company's purported land development project in some detail.
The AAT said while the company may have had the intention to carry out a business of land development and subdivision, the steps it took in obtaining a planning permit and a market valuation could not "properly be described as being steps taken in the course of commencement of an enterprise".
In the AAT's view, until such time as the company acquired the right to deal with the land in such a way that subdivision and sale could occur, it was "artificial to suggest it was conducting the enterprise involving the subdivision and sale of land". The steps taken were clearly precursors or preparatory to the possible commencement of business, whether that be subdivision of the land or a quick sale to a syndicate of buyers, the AAT said.
The tribunal was critical of the <a href="https://www.smartcompany.com.au/finance/tax/29844-tax-experts-warn-documentation-critical-after-property-investor-loses-attempt-to-split-tax-burden" target="_blank">level of documentation provided by the company</a>. It said the documents provided were unsatisfactory. Some were incomplete, some were simply absent and some appeared to be inconsistent with statements made to the ATO in the course of discussions following assessment. The purchase price of the land in question was just over $2 million. However, the AAT said there was not in evidence an executed contract, nor was there any objective evidence that the parties had agreed to enter into this contract.
Accordingly, it held the company was not carrying on an enterprise in accordance with the GST Act at the relevant times, and therefore, it was not entitled to the ITCs for the claimed expenditure in any of the months in question.
The AAT also affirmed the company was not entitled to ABN and GST registration, again, because it was not carrying on an enterprise at the relevant times. It also affirmed the penalty decision and refused remission of the penalty in the circumstances as it found the company was reckless in lodging the ITC claims.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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Intention to carry on a business not enough for GST claim: Terry Hayes

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GUEST OBSERVATION
The Australian Tax Office (ATO) says it continues to see a number of taxpayers understating rental income and over-claiming rental deductions.
With the surge in real estate sales, especially residential real estate, and an emphasis on investment properties, the ATO has not surprisingly taken a close interest in the <a href="https://www.smartcompany.com.au/finance/tax/43478-ato-targets-work-expenses-rental-properties-and-more" target="_blank">expense claims people make concerning their rental properties</a>.
Rental properties have been on the ATO radar, it seems, forever. The issues haven't greatly changed, but it seems taxpayers are still getting it wrong. Quite why this is the case is something of a mystery.
The ATO is now sending what it says are "re-designed" letters to taxpayers regarding reviews of rental, legal and/or borrowing expense claims. In those letters, the ATO says it will provide information on specific expense claims it is reviewing. It says the letters identify:
<ul>
<li>the relevant tax return label where the expense is claimed and the amounts in question; 
</li>
<li>the proposed ATO adjustments; 
</li>
<li>what to do if there is a disagreement about what has been claimed; and 
</li>
<li>where to find relevant information on the ATO website.</li>
</ul>
The ATO says it has also refined its case selection processes to minimise the likelihood of incorrectly selecting commercial properties.
Common errors with rental expense claims
Some of the common errors the ATO has identified include claiming as a legal and/or borrowing expense:
<ul>
<li>stamp duty on the transfer of property; 
</li>
<li>legal fees in relation to family divorce proceedings; 
</li>
<li>borrowing expenses in a single year, instead of being spread over five years as the law requires. The five years runs from the date of the borrowing; 
</li>
<li>borrowing expenses for personal loan protection insurance for injury, illness and loss of income; 
</li>
<li>interest expenses incorrectly claimed at the borrowing expense label on the tax return; 
</li>
<li>renovation costs as repairs and maintenance instead of being attributed to the capital cost of the property. This area causes confusion for many in determining for a start what is a repair versus what is a renovation. Structural improvements are unlikely to repairs e.g. remodelling a bathroom or kitchen; 
</li>
<li>solicitors fees for purchase of the property; and 
</li>
<li>some expenses as legal instead of sundry expenses. For example, fire levy expenses and lease fees.</li>
</ul>
The ATO says it continues to see a number of taxpayers understating rental income and over-claiming rental deductions. The ATO says it will be expanding its focus to investigate issues such as the incorrect:
<ul>
<li>apportionment of income and expenses based on ownership holdings; 
</li>
<li>claiming of expenses for vacant land; 
</li>
<li>apportionment of expenses for holiday homes. This may be done on the basis of the actual number of days the property is let at a commercial rent, although this will depend on the particular circumstances; 
</li>
<li>claiming of interest expenses for private borrowings.</li>
</ul>
It's also important to remember that expenses incurred in respect of an empty rental property will only be deductible if the property is available for rent and there are active and bona fide attempts to let the property. This means that expenses incurred will not be deductible for any period during which the property owner does not actively seek to find a tenant. This is a common issue.
There are many rental property expenses that are tax deductible e.g. council and water rates, building insurance premiums, real estate agent management fees, advertising costs, travel costs to inspect the property, etc.  However, as the Tax Office has clearly found, there are a number of areas where mistakes are being made. Rental property owners should take note of these.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" target="_blank">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
Thomson Reuters <a href="https://www.propertyobserver.com.au/https://www.thomsonreuters.com.au/the-australian-tax-handbook-tax-return-edition-2014/productdetail/121906" target="_blank">Australian Tax Handbook 2014 – Tax Return Edition</a> provides information on claiming all kinds of tax deductions, including the rules relating to claiming rental properties and work-related expenses.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
 
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Rental property owners in ATO's sights: What you can and can't claim

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GUEST OBSERVATION
The capital gains tax laws are voluminous and complicated. But they also contain benefits for taxpayers.
Legislation introduced in federal Parliament last week – the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 – will amend the tax law to ensure that CGT exemption is available in respect of compensation or damages received by:
<ul>
<li>a trustee (other than a trustee of a complying super fund) for a wrong or injury a beneficiary suffers in their occupation, or a wrong, injury or illness a beneficiary or their relative suffers personally - and a beneficiary that subsequently receives a distribution that is attributable to such compensation or damages from the trustee; 
</li>
<li>a taxpayer for a policy of insurance on the life of an individual or an annuity instrument if the taxpayer is the original owner of the policy or instrument; and 
</li>
<li>a trustee of a complying super fund for a policy of insurance for an individual's illness or injury.</li>
</ul>
The government said it was intended that trustees or beneficiaries who receive compensation or damages in respect of certain events (such as an injury an individual suffers at work) or in respect of certain policies of insurance (such as illness, injury or death) not be subject to CGT.
However, the express wording of the relevant provisions in the tax law had created uncertainty about this treatment. It was also intended that insurance policies held by complying superannuation funds for injuries and illnesses suffered by an individual not be subject to CGT. So the legislation now introduced seeks to implement those original intentions.
Under the proposed changes, a capital gain or loss made by a trustee in relation to compensation or damages for any wrong or injury a beneficiary of the trust suffers in their occupation, or any wrong, injury or illness a beneficiary of the trust or their relative suffers personally, will be disregarded. Further, a capital gain or loss made by a beneficiary will also be disregarded if the trustee of a trust then distributes money, property or other CGT assets to the beneficiary attributable to the compensation or damages received by the trustee.
Take the following example.
Robert is the beneficiary of ABC trust, which was established after Robert fell off a roof whilst working for Roofing Inc and suffered serious injuries. Patrick, as trustee of ABC trust, seeks compensation on behalf of Robert from Roofing Inc's insurance company, and receives compensation for the accident.
Under the proposed law, the capital gain made by Patrick in relation to the compensation received will be disregarded.
Assume Robert recovers from his injuries, but requires substantial further medical and other support. Patrick, as trustee of ABC trust, distributes the compensation to Robert to assist in paying his hospital bills. Any capital gain made by Robert in relation to the compensation received will be disregarded.
The bill also proposes that a capital gain or capital loss made from a CGT event happening to an interest in a policy of insurance on the life of an individual or an annuity instrument is disregarded by the original owner of the policy or instrument.
Another example will help explain this.
Fred holds a life insurance policy from an insurance company. Fred passes away and his wife Jane, as executor of his estate, receives $200,000 from the insurance company in respect of the policy. Jane, as executor of Fred's estate pays $50,000 to Alice, a beneficiary of Fred's estate. The payment to Alice is attributable to the amount received by Fred's estate in respect of the life insurance policy.
Any capital gain made by Alice, as a beneficiary of Fred's estate, will be disregarded.
The amendments will apply retrospectively in relation to CGT events happening in the 2005-06 and later income years i.e. generally from 1 July 2005. Accordingly, the tax law has also been amended to ensure that taxpayers are given sufficient time to seek an amendment to previous assessments (as the amendment period will otherwise have expired in some cases), if required in these circumstances.
The government says the amendments are consistent with the administrative practice of the Commissioner of Taxation and ensure that taxpayers that could have benefited by relying on the Commissioner’s administrative practice are not disadvantaged by the changes.
The bill will not be debated until after Parliament resumes in February 2015, but the changes are welcome.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" target="_blank">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
Thomson Reuters <a href="https://www.propertyobserver.com.au/https://www.thomsonreuters.com.au/the-australian-tax-handbook-tax-return-edition-2014/productdetail/121906" target="_blank">Australian Tax Handbook 2014 – Tax Return Edition</a> provides information on claiming all kinds of tax deductions, including the rules relating to claiming rental properties and work-related expenses.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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How CGT changes to exemptions on compensation or damages could benefit taxpayers 

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GUEST OBSERVATION
The Australian Tax Office regularly flags tax compliance issues it has under the microscope.
But don't think if an issue is not on that list, the ATO is not looking at it. The ATO's administration of the tax system doesn't work that way.
Take <a href="https://www.smartcompany.com.au/finance/tax/32726-ato-rules-for-tax-deductions-for-work-related-expenses-in-australia">work-related tax deductions</a>, a big ticket item in the deduction stakes.
Tax deductions claimed for work-related expenses are a "tax 101" item. The vast majority of taxpayers claim them – in fact, in 2011-12, some 8.5 million individual taxpayers claimed some work-related expenses. The claims have steadily increased over recent years. In 2009-10, they totalled $17.1 billion, while in 2011-12, they were $19.3 billion, a $2 billion increase over two years. Those expenses represent a significant cost to the revenue so it is not surprising the ATO has a particular focus on them as part of its compliance activities. And there are specific rules surrounding claiming such expenses.
This year, the ATO says it is using extensive data analysis to identify areas requiring attention across all work-related expense claims, regardless of occupation. However, the ATO says it is paying particular attention to work-related expense claims relating to:
<ul>
<li>overnight travel;</li>
<li>transporting bulky tools and equipment – the recent Ford AAT case on this issue  involving a train guard transporting equipment essential to his work from his home to work highlighted the kinds of issues involved in making such claims. The taxpayer lost the case essentially because his employer provided a secure locker at his work place for the equipment, so he did not need to transport it to and from work;</li>
<li>the work-related use of computers, phones or other electronic devices.</li>
</ul>
Last year, the ATO paid particular attention to high work-related expenses claims made by: (i) building and construction labourers, construction supervisors and project managers; and (ii) sales and marketing managers.
Specific rules in the tax law specify the written evidence that an individual must obtain to substantiate deductible work-related expenses.
The ATO stresses that taxpayers claiming work-related expense deductions need to satisfy several basic requirements:
<ul>
<li>they must have spent the money;</li>
<li>the expense must be related to their job;</li>
<li>they must have a record to prove it.</li>
</ul>
If that seems like "stating the bleeding obvious", ask yourself why the ATO feels it necessary to remind taxpayers about it.
Rental property deductions
The current hot property market also has the ATO's attention. The ATO says it is increasing its focus on rental property deductions. It says common errors made by rental property owners include:
<ul>
<li>claiming rental deductions for properties not genuinely available for rent;</li>
<li>incorrectly claiming deductions for properties only available for rent part of the year such as a holiday home;</li>
<li>incorrectly claiming structural improvement costs as repairs when they are capital works deductions, such as re-modelling a bathroom or building a pergola; and</li>
<li>overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.</li>
</ul>
Story continues on page 2. Please click below.
<hr class="system-pagebreak">
Data-matching programs
In its drive to enforce tax compliance, the ATO's use of data-matching programs is ever-expanding, as I have mentioned before.
Offshore bank accounts
Most recently, the ATO has announced it will request and collect account details of bank customers from various financial institutions (see below) to identify Australian resident taxpayers with offshore bank accounts which may evidence undeclared income and/or gains for the years ended 30 June 2012 to 2015. The financial institutions concerned include:
<ul>
<li>Australia and New Zealand Banking Group Limited</li>
<li>Bank of China (Australia) Limited</li>
<li>Bank of China Limited</li>
<li>Credit Suisse AG</li>
<li>Deutsche Bank Aktiengessellschaft</li>
<li>HSBC Bank Australia Limited</li>
<li>Hongkong and Shanghai Banking Corporation Limited</li>
<li>Investec Bank (Australia) Limited</li>
<li>Macquarie Bank Limited</li>
<li>Rabobank Australia Limited</li>
<li>Rabobank Nederland</li>
<li>UBS AG</li>
<li>Citibank, N.A.</li>
<li>Citigroup Pty Limited</li>
</ul>
The program is designed to help the ATO identify Australian resident taxpayers who may be outside the tax system and increase transparency of the worldwide dealings of Australian resident taxpayers. The program will also assist the ATO to build an understanding of taxpayer behaviour in international dealings, develop compliance profiles and improve fraud detection models. The ATO estimates that approximately 50,000 offshore records will be obtained under the program.
Taxable government grants and payments
In another data-matching program, the ATO will also acquire details of entities receiving taxable grants and payments from various Federal, State and Territory and Local Government departments, agencies and authorities. The program is designed to enable the ATO to:
<ul>
<li>identify and test the correct taxation reporting by recipients of taxable Government grants and payments from agencies across the Federal, State and Local levels of government; and</li>
<li>identify areas that require improved educational and compliance strategies to encourage voluntary compliance for recipients of Government payments and grants.</li>
</ul>
Records matched under the program will exceed 5,000 individuals throughout Australia.
Music royalty payments
The ATO will acquire details of entities collecting and distributing music royalty payments for the 2011, 2012 and 2013 financial years from the following sources:
<ul>
<li>Australasian Performing Right Association (APRA) and APRA New Zealand Limited;</li>
<li>Australasian Mechanical Copyright Owners Society (AMCOS) and AMCOS New Zealand Limited.</li>
</ul>
Among other things, the ATO aims to detect instances of potential non-compliance, especially with omitted income and alienation of personal services income. The ATO also aims to develop a profile of the industry, including any risks and trends of non-compliance with taxation and superannuation obligations, and tailor educational strategies specifically for participants in the music industry. It is estimated that records for more than 15,000 entities will be obtained, of which most will be individuals.
Building sector – phoenix operators
And just to finish off, the security regulator ASIC says its surveillance program aimed at weeding out illegal phoenix operators has been widened to look at the<a href="https://www.smartcompany.com.au/legal/43425-asic-and-ato-cracking-down-on-phoenix-companies-in-construction-industry"> use of false statutory declarations in the building and construction sector</a>. The campaign follows feedback from small businesses, industry bodies and other government agencies about the use of false statutory declarations in the sector to falsely claim payments for work.
"There is concern that some company officers of larger companies have falsely declared that they have paid small businesses contracted to work on commercial and residential projects when this is not the case", ASIC Commissioner Greg Tanzer said.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" target="_blank">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
Thomson Reuters <a href="https://www.propertyobserver.com.au/https://www.thomsonreuters.com.au/the-australian-tax-handbook-tax-return-edition-2014/productdetail/121906" target="_blank">Australian Tax Handbook 2014 – Tax Return Edition</a> provides information on claiming all kinds of tax deductions, including the rules relating to claiming rental properties and work-related expenses.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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ATO targets work expenses, rental properties and more

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GUEST OBSERVATION
Husband and wives often regard themselves as jointly owning the assets each possesses. "What's mine is yours" and vice versa. In a happy relationship, that's all well and good, but unfortunately, the tax law can intervene to take some of the shine off such scenarios.
In a recent case before the Administrative Appeal Tribunal (AAT), a husband inherited 200 Telstra shares and 1,315 Commonwealth Bank shares from his father's estate. He transferred the shares into the names of himself and his wife to reflect his wife – who he considered at all times as a joint owner of the shares – as an owner of these shares.
However, the transfer of the shares to joint names produced a capital gain of over $19,000 which was included in his tax return for the 2013 tax year. Under the tax law, the share transfer caused a "CGT event" to occur.
The AAT confirmed the husband was liable for CGT (capital gains tax) on the transaction. It did so on the basis of finding that the taxpayer had disposed of a 50% interest in his shares and that this triggered CGT event A1. After the transfer, the husband and wife were treated by the system of taxing capital gains as each owned a 50% share of each of those shares, and before the transfer the husband was recognised as the sole owner of those shares. As a result, the husband was assessable on the capital gain made on the transfer.
The husband argued he and his wife regarded themselves as joint owners of all that they collectively owned. He believed from the outset that, in equity and morally, the shares transferred were owned "jointly". He also claimed he did not make any capital gain because he had not received anything and if he knew he would be subject to tax on the transfer, he would not have transferred the shares. All a very neat logical argument, but unfortunately the tax law does not operate that way.
The tribunal said it might well be, "and in some cases understandably so", that partners to a marriage or a marriage-like relationship regard his or her assets as "our assets". And it might also be the case for family law purposes, regarding the practical effect of ownership of assets by individual partners to those relationships.
But the AAT said Australian income tax law does not recognise these sorts of joint asset ownership arrangements. The transfer of the shares fell squarely within the terms of CGT event A1 (a disposal of an asset) and shares were clearly a CGT asset.
The tax law as applied to the facts in this case could only result in the outcome found by the AAT.
However, the AAT took the opportunity to issue a salutary caution: "Unless there is reason to do otherwise, partners to a marriage or marriage-like relationship who hold the assumption that his or her assets are our assets, would be well advised to continue with that assumption, without taking the step of formalising any joint ownership arrangements, as there will be a taxing point if they do if the transferred assets have increased in value".
To a seasoned tax practitioner, this might be Tax 101, but it is not difficult to appreciate that the views held by the husband and wife in this case, unversed in the ways of the tax law, might indeed be held by many in the community. In this case, their tax agent properly ascertained the situation and correctly lodged the tax returns.   
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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Terry Hayes

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