Massive change to treatment of FBT on car fringe benefits
Editor: The government has decided to bring forward the commencement of the carbon emissions trading scheme to 1 July 2014, and as part of this they have announced other changes, including to the FBT treatment of car fringe benefits.
Of course, whether or not these changes actually become law (despite the announced start dates) depends on the government passing the legislation, which depends on them getting re-elected…
The government intends to ensure the FBT “exemption” for cars is targeted to actual business use, rather than including personal use, by removing the statutory formula method for both salary-sacrificed and employer-provided cars for new contracts entered into after 16 July 2013, with effect from 1 April 2014.
All car fringe benefits for new leases (i.e., those entered into after 16 July 2013) will be calculated using the operating cost (i.e., log book) method from 1 April 2014, which is based on the actual business use of the car.
Existing contracts materially varied after 16 July 2013 will also fall under the new arrangements, but existing contracts that are not varied will continue to have access to the existing statutory rate throughout the contract.
This reform will not affect:
employers who provide a work car to employees for occasional private use (for example, weekend travel) and use the operating cost method.
The ATO is reminding contractors in the building and construction industry (or ‘BCI’) to take extra care with their returns this year.
Also, businesses in the building and construction industry are now required to report to the ATO the total amount they paid to each contractor for any building and construction services in 2012/13 on a ‘Taxable payments annual report’.
Taxable payments annual reports are ordinarily required to be lodged by 21 July, but the ATO has provided a concession for taxpayers lodging via a tax agent – tax agents have until 25 August to submit the report (for this year only).
Editor: If you are in the BCI and have paid contractors, we can help you work out your lodgement obligations.
Since this new reporting regime makes it easier for the ATO to cross check the returns of contractors in the industry (whether they work for a large building company or in a smaller domestic operation), it is important that they include all income in their tax returns.
Car depreciation limit for 2013/14
The ATO has advised that the car depreciation limit for the 2013/14 financial year is $57,466 (unchanged from the 2012/13 year).
Reasonable Overtime Meal Allowance Amounts – 2013/14
The reasonable amount for overtime meal allowance expenses, where an allowance is paid under an award, order, determination, industrial agreement or a Commonwealth, State or Territory law, is $27.70 per meal for 2013/14.
An overtime meal allowance (being an allowance paid for food and drink in connection with overtime worked) which does not exceed the reasonable amount does not need to be shown on the payment summary, and the employee may not need to show it on their tax return if it has been fully spent on deductible expenses.
ATO’s 2013 Compliance ProgramAs usual, the ATO has released its annual Compliance Program, and following are some of the main ‘highlights’ that will attract their attention in the coming year, including:
The ATO has also advised that they investigate every time an employee tells them that their employer has not paid their superannuation guarantee entitlement. The ATO will also specifically audit employers in the cafes and restaurants, carpentry services, and real estate services industries, due to these industries presenting a higher risk of employers not complying with their superannuation guarantee obligations.
In addition, more than 640 million transactions are reported to the ATO annually from sources such as banks, share registries, employers, merchants, states and territories and other government departments, and the ATO uses this information to detect people trying to avoid their tax and superannuation obligations.
CGT: Keep the right records
The ATO has reminded taxpayers that they should keep all records of purchases or acquisitions of assets that may be subject to CGT, and records relating to their sale or disposal, including details of the nature of the act, transaction, event or circumstance, how it resulted in a capital gain or loss, the date it occurred, and the parties involved.
The records used to work out the amount of the capital gain or capital loss should also be kept, which may include:
ATO warns investors about tax avoidance schemes
The ATO’s Commissioner, Chris Jordan, has warned investors about new and complex tax avoidance schemes being marketed as people get ready to lodge their 2013 tax returns, saying: “Tax avoidance schemes are no longer the blatant too-good-to-be-true offers seen in the past.”
Many modern tax avoidance schemes are complex structures that are difficult for even experienced investors to identify, and many are marketed via social media or glossy promotional brochures, with offers of exclusivity and the stamp of approval from so-called experts.
In one case, promoters offered an arrangement for people to purchase “emissions” units generated through offshore carbon reduction activities (the scheme involved offshore arrangements with people claiming more than they paid).
“If you are getting back more money than you put in with no risk, and if no real goods or services are being provided, it is likely to be a tax avoidance scheme and could lead to significant tax penalties”.
GIC and SIC rates for September 2013 quarter
For the September 2013 quarter, the GIC (General Interest Charge) rate is 9.82% (0.02690411% daily compounding rate). The SIC (Shortfall Interest Charge) rate is 5.82% (0.01594520% daily compounding rate).
Medicare Levy increase becomes law
The DisabilityCare Australia legislation that provides for a half a percentage point increase in the Medicare levy has passed the Parliament and become law.
The legislation will increase the Medicare levy from 1.5% to 2% of taxable income from 1 July 2014.
Editor: This will have a flow-on effect to other tax rates than implicitly incorporate the Medicare levy, such as FBT, the family trust distribution tax rate and the excess non-concessional contributions tax rate, all of which increase to 47% from 1 July 2014.
The ATO’s recent compliance operations have uncovered evidence of increased manipulation of trusts as vehicles that can be at the centre of tax avoidance or evasion arrangements.
The ATO will target those people that exploit trusts to conceal information, mischaracterise transactions, and artificially deal with trust income to avoid or reduce tax.
Which trusts will be looked at?
The Trusts Taskforce is intended to target higher risk taxpayers and is not targeting ordinary trust arrangements and tax planning associated with genuine business or family dealings.
They will undertake compliance activity to target known tax scheme promoters, individuals and businesses who participate in such arrangements.
In the most serious cases, criminal sanctions will be pursued in collaboration with law enforcement authorities (e.g., through Project Wickenby and collaboration with overseas authorities).
Super funds keep pension exemption after death
The government has made amendments to “provide tax certainty for deceased estates in situations where a person has died while in receipt of a superannuation income stream”.
Broadly, a superannuation fund is entitled to a tax exemption for income that supports the payment of superannuation income stream benefits (i.e., superannuation pensions).
Under the amendments, where a complying superannuation fund member was receiving a superannuation income stream immediately before their death, the superannuation fund will continue to be entitled to the earnings tax exemption in the period from the member’s death until their benefits are cashed:
subject to the benefits being cashed as soon as practicable.
The level of the exemption would be no greater than it was before the member’s death (allowing for investment earnings after the member’s death).
Simpler depreciation rules for business
The ATO has reminded small businesses with turnover of less than $2 million (i.e., small business entities or ‘SBEs’) that the depreciation rules for business assets are now simpler from the 2012/13 income year onwards.
Assets costing less than $6,500
Assets costing $6,500 or more
Depreciating assets that cost $6,500 or more (regardless of their effective life) are now added to the general small business pool and deducted at a single rate of 30%.
Newly acquired assets are deducted at 15% (half the pool rate) for the first income year.
Small businesses that purchase a vehicle can now also claim an additional deduction of up to $5,000 in the income year it is purchased, effectively bringing forward the depreciation deduction to earlier in the vehicle’s life.
Where the vehicle is used exclusively for business and has not been written off immediately under the instant asset write-off, the cost of the motor vehicle is added to the general small business pool and the deduction in the first year is made of up of $5,000 plus 15% of the vehicle’s remaining value.
An SBE purchased a motor vehicle on 29 June 2013 for $20,000 which is used exclusively in their business. Under the new rules, the deduction in the first income year will be $7,250, being $5,000 plus 15% of the $15,000 remaining value.
Under the old rules the deduction would have been $3,000 in the first year (i.e., 15% of $20,000).
The ATO on work related expenses
With $18 billion in work-related expenses (WREs) being claimed each year, the ATO says that it will focus on occupations with a pattern of large or rising claims, as well as claims which do not fit the pattern for a particular occupation.
What’s new this year?
This year the ATO is writing to around 218,000 people employed in the following occupations:
Travel to work claims
Many building construction labourers drive a vehicle to work each day.
If they can prove they have had to carry bulky equipment then this travel becomes a deductible expense, as long as:
The Government handed down the 2013/14 Budget on 14 May 2013. Most of the tax and superannuation measures had already been previously announced, but a few of the new measures include the following:
• The government will defer the personal income tax cuts that were to commence from 1 July 2015 (i.e. by raising the tax-free threshold from $18,200 to $19,400);
• From 1 July 2014, the government will increase the Medicare levy by 0.5% from 1.5% to 2% to provide funding for DisabilityCare Australia (i.e., the national disability insurance scheme);
• From 1 July 2014, the non-primary production threshold for farm management deposits (FMDs) will be increased from $65,000 to $100,000 (i.e., this means that primary producers will be able to claim deductions for FMDs where their non-primary production income does not exceed $100,000);
• From 1 March 2014, the Baby Bonus will no longer be available. Instead, families eligible for Family Tax Benefit (FTB) Part A will receive an additional loading on their family payments when they have a new baby (if they are not accessing the Government’s Paid Parental Leave scheme), totalling $2,000 for the first child (and all multiple births) and $1,000 for subsequent children; and
• The government will phase out the net medical expenses tax offset, although there will be transitional arrangements for those currently claiming the offset.
According to the ATO, with many SMSF trustees entering into limited recourse borrowing arrangements (LRBAs), it appears there is still some uncertainty with respect to associated taxation issues.
Editor: SMSFs are generally prohibited from borrowing, but since 2007 there has been an exception where an SMSF borrows on a limited recourse basis to acquire a specific asset, and very strict conditions are met.
One of these conditions is that the asset is not held in the name of the SMSF, but is instead held under a separate trust (e.g., a ‘holding trust).
A trustee of an SMSF who enters into a LRBA for the purpose of purchasing an asset will be treated as the owner of the asset for income tax purposes, meaning the SMSF will be assessed on the income earned on the underlying asset (such as rental income) and will be able to claim any relevant deductions.
In addition, it is the SMSF which should account for any relevant GST amounts on income and expenses associated with the LRBA.
Therefore, where the LRBA is set up appropriately, there will be no need for the holding trust to lodge an annual return with the ATO.
The ATO also warns that SMSFs entering into LRBAs need to do so carefully, because an arrangement that does not meet all the requirements would contravene the borrowing prohibition and place the compliance status of the fund at risk.
From 1 July 2013, the super guarantee rate is going up from 9% to 9.25% (and the rate will increase gradually over 7 years to 12% by 2019).
Also, from 1 July 2013, the upper age limit for paying super for an employee has been removed, meaning that there will no longer be a maximum age for super guarantee eligibility.
Employers with eligible employees aged 70 years or older will need to make super contributions to their super funds from 1 July 2013.
Super funds will also be allowed to start providing a new type of super account called ‘MySuper’ from
1 July 2013, which will replace existing default accounts offered by super funds (a default fund account is one chosen by an employer for an employee who does not choose their own super fund).
Therefore, it may be a good idea for employers to check with their current default fund to find out whether they will be offering a MySuper account.
The luxury car tax threshold for the 2013/14 financial year has been indexed to $60,316 (up from $59,133 for the 2012/13 year) and is used to determine if luxury car tax is payable.
The fuel-efficient car limit for the 2013/14 financial
year is $75,375 (unchanged from the 2012/13 year).
The car parking threshold for the FBT year commencing on 1 April 2013 is $8.03 (up from
$7.83 for the year commencing 1 April 2012).
Editor: Two of the conditions that must be met before car parking facilities provided by an employer to an employee will be subject to FBT is that a commercial car parking station is located within a
1 km radius of the employer-provided car park, and that the lowest fee charged by the operator of that car park is more than the car parking threshold.
Editor: The ATO has advised that it is undertaking the following data matching programs to identify non-compliance with lodgment, payment and correct reporting obligations under taxation law.
The ATO is requesting and collecting the user identification name and number, name, address, telephone numbers, date of birth, email address, registration date, number of monthly sales, value of monthly sales, the IP address, and bank account details of approximately 11,000 sellers who have sales of $20,000 and greater, in the 2010/11 income year through various online selling websites.
Editor: The Government has also conducted a successful pilot program (that will become a permanent part of the Government’s compliance system) that found some people were claiming social security payments while running a successful online business – the pilot, which matched Centrelink records against 15,000 eBay users, identified more than $800,000 in debts.
The ATO will request and collect names and addresses of employer entities from state and territory WorkCover sources for the 2011, 2012 and 2013 financial years.
The total number of records Australia-wide is estimated to be 942,000, of which approximately
103,000 will be individuals who are employers.
The ATO may also disclose information about employers that may not be meeting their obligations under workers compensation laws if requested by the relevant WorkCover authorities.
Proposed changes to superannuation
Editor: Apparently in order to neutralise mounting speculation that superannuation was under threat in the upcoming Budget, the Government took the unusual step of comprehensively outlining its intentions when it comes to superannuation reform generally.
The Government has announced that it plans to make the following changes to the superannuation laws (in addition to other changes already made, such as the progressive increase in the superannuation guarantee rate from 9% to 12%):
Self-education expenses next on the chopping block!
The Government has announced that it will “better target work related self-education expense deductions” by introducing an annual cap on deductions for such expenses from 1 July 2014 of $2,000 a person. Education expenses include formal qualifications and associated tuition fees, textbooks, stationery and travel expenses and also conferences, seminars and self-organised study tours. However, employers that provide education and training to their employees will continue to have this excluded from any liability for fringe benefits tax (FBT) unless an employee salary sacrifices to obtain these benefits.
Editor: Although the Government states that they are targeting people making large claims for expenses such as first class airfares, five star accommodation and expensive courses, the introduction of a $2,000 annual deduction cap seems like a very blunt instrument to tackle such claims.
Our tax agent association is taking up the fight to ensure that ‘regular’ claims are not affected.
Taxpayer slammed by ‘benchmarking’ audit
Editor: In a recent case, the AAT has affirmed the ATO’s ability to use industry benchmarks to amend taxpayers’ returns where their record keeping is found to be insufficient and lacking.
Facts of the Case
The taxpayer carried on a florist business in a suburb of Perth and her 2008 income tax return reported a cost of goods sold (COGS) of $259,982 and “Total business income” of $313,971.
In September 2010, the ATO advised that the COGS for the florist business represented 83% of her reported business income, which was outside the ATO’s COGS industry benchmark percentage range of between 44% and 54%.
In the same letter, the ATO requested that she provide it with evidence that she was correctly recording and reporting her business income for the florist, including various specific records, and an explanation as to why her business was reporting outside the benchmarks for her industry.
The taxpayer provided deposit slips and bank statements for the period, but was only able to supply:
The ATO advised the taxpayer that, as she had forwarded only partial ‘Z summaries’ of her till tapes and failed to reconcile her cash takings, it had applied the COGS benchmarks for the florist industry, increasing the income of the florist business by more than 50%.
This resulted in a shortfall of income tax of $57,389 and a shortfall of GST of $16,745. The ATO also applied penalties of 50% on top of these shortfalls.
The Decision by the AAT
Very little further evidence was provided to the hearing and neither the taxpayer nor any other witnesses appeared.
Based on the evidence before it, the AAT decided that, in the circumstances, it was open to the ATO to apply the COGS small industry benchmark range (of 44% to 54%) for the florist industry and increase the income of the florist business for the 2008 year therefore, increasing the taxpayer’s income tax and GST liabilities in respect of that year.
Editor: The ATO provides specific guidance about the types of records they expect to see from businesses that use cash registers (i.e., they accept that the rolls of tape may be discarded after one month provided that the person has reconciled the “Z-totals” with actual cash sales and bankings for that period).
Cars still on ATO’s FBT radar
The ATO has been reviewing car fringe benefits and using third-party data, has identified and contacted 5,000 employers who may have an unreported FBT liability.
Some outcomes of this review are:
The ATO plans to contact another 10,000 employers by letter in 2013, and has reminded employers that:
FBT: Benchmark interest rate
The benchmark interest rate for the 2013/14 FBT year is 6.45% p.a. (down from 7.40%), which is used to calculate the taxable value of:
FBT: Cents per kilometre basis
The rates to be applied where the cents per kilometre basis is used in respect of the private use of a vehicle (other than a car) for the 2013/14 FBT year, commencing 1 April 2013, are:
Rate per kilometre
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Returns with refunds will need bank account details
According to the ATO, the fastest, most secure way to receive a tax refund is to have it paid directly into a nominated Australian bank account using electronic funds transfer (EFT). From 1 July 2013, individual tax returns will generally require bank account details, including BSB and account number, to be entered, where a refund is expected. Joint accounts and trust accounts will be acceptable.
SMSF update from the ATO
Editor: In a recent speech, Alison Lendon, Deputy Commissioner Superannuation, spoke to a number of issues that affect super funds and their trustees and advisers. The following are excerpts:
Applying to the ATO for advice
If trustees of superannuation funds want a written explanation of the ATO’s view on how the super laws apply to their SMSF, they can apply for ‘SMSF
specific advice’. While this advice isn’t legally binding, it will provide certainty to trustees about the application of the super laws to their fund, and the fact that trustees acted in accordance with the advice would be an important factor in their favour.
Editor: We can assist with this application process.
The most common topics the ATO is asked about for specific advice are:
Related party transfers
From 1 July this year, new legislation will broaden the types of assets currently prohibited from being acquired from a related party, but will also provide more transparent exceptions whereby acquisitions will be permissible. By way of example, the acquisition of ‘business real property’ will be prohibited unless acquired at market value as determined by a qualified independent valuer.
Similarly, listed securities acquired from a related party will also be prohibited unless they are acquired in a way that is prescribed under the regulations. The legislation will also introduce a prohibition on the disposal of SMSF assets to a related party, unless similar exceptions are satisfied.
Changes to the SMSF Levy
The government recently announced that it will reform the supervisory levy arrangements for SMSFs by:
Date of disposal occurred when Heads of Agreement signed
Editor: In what seems a surprising result, the Administrative Appeals Tribunal (AAT) has held that the date of disposal of an asset for CGT purposes was the date the Heads of Agreement was signed, not when the contract was signed four months later.
The Facts of the Case
The taxpayer had an interest in a business in Melbourne which he decided to sell in 2008. The taxpayer, his partner, and the purchaser executed a Heads of Agreement on 7 August 2008, which commenced by stating: “The Vendor agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor, the Vendors interest in the … business described in the First Schedule below on the terms and conditions set out in such schedule” A deposit of $20,000 was payable on the signing of the Heads of Agreement and a further $20,000 (described as the balance of the deposit) was to be paid on the signing of the formal contract. The Contract of Sale of Business was provided to the purchaser’s lawyers on 9 December 2008, and appeared to have been executed by the purchaser on 17 December 2008. The date was crucial to the taxpayer because, if the earlier date applied, he would not be entitled to access the CGT small business concessions, as he did not satisfy the ‘maximum net asset value test’* just before that date. (*) The threshold for this test is currently $6 million. On the basis the disposal occurred in December 2008, the taxpayer claimed the small business active asset exemption and the small business retirement exemption to reduce the net capital gain of $704,129 to zero, but the ATO did not accept this.
The AAT’s Decision
The AAT Member stated that the question was whether the Heads of Agreement was a legally binding document between the vendors and the purchaser which bound the parties to the disposal and acquisition of the business in question. “In my opinion,” he said, “the Heads of Agreement document in this matter leaves little room for doubt that the parties to that document had agreed to the sale and purchase of the business in question.” “At this point, it is worthwhile noting that the Heads of Agreement document makes it very clear that the vendors and the purchaser had agreed to the sale of the business as the document expressly states that to be the case. . .” “I have found that the Heads of Agreement was legally binding on the parties upon its execution. Furthermore, by that agreement, the parties agreed to the sale and purchase of the business. In other words, I have found that the disposal of the taxpayer’s CGT asset comprising his interest in the business occurred on 7 August 2008.”
Car expense per km rates – 2012/13
The car expense per kilometre rates have been set for the 2012/13 year. They are the same as the 2011/12 rates.
Type of Car Engine Capacity – non-rotary Engine Capacity – rotary KM rate (Cents)
Small 0-1,600 0-800 63
Medium 1,601-2,600 801-1,300 74
Large 2,600+ 1,300+ 75
ETP cap amount for 2013/14
Editor: The ATO has recently provided updated rates and thresholds for the 2013/14 income year for superannuation and related payments.
For life benefit and death benefit termination payments, the amount up to the ETP cap amount (which will be $180,000 in 2013/14, up from $175,000 in 2012/13) is generally taxed at a concessional rate. The amount in excess of the ETP cap amount is taxed at the top marginal rate.
Editor: Incidentally, the superannuation ‘low rate cap’ will also be $180,000 in 2013/14.