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Tax planning or tax avoidance? Do you know the difference? While tax planning is a legitimate and legal way to arrange your financial affairs to keep your tax to a minimum provided you make the arrangements within the intent of the law. Any tax minimisation schemes that are outside the spirit of the law is referred to as tax avoidance and attracts the ATO's attention. The ATO warns individuals to steer clear of tax avoidance schemes involving deliberate exploitation of the tax and super systems which may put them at risk of paying back tax, with interest and penalties. According to the ATO, most people get suckered into these schemes by promoters by promises of tax benefits that aren't legally available. These tax avoidance schemes range from mass-marketed arrangements advertised to the public, to individualised arrangements offered directly to experienced investors, other schemes may also exploit the social/environmental conscience of people or their generosity. As different as these schemes are, the common thread often involves reducing taxable income, increasing deductions, increasing rebates, or entire avoidance of tax or other obligations. The ATO notes that tax avoidance schemes may include complex transactions or distort the way funds are used in order to avoid tax or other obligations. Schemes may also incorrectly classify revenue as capital, exploit concessional tax rates, or inappropriately move funds through several entities including trusts to avoid or minimise tax that would otherwise be payable. Currently, the ATO has its eyes on retirement planning schemes, private company profit extraction, and certain financial products. In relation to retirement planning, it has outlined non-concessional cap manipulation, life interests over commercial property, dividend stripping, some types of limited recourse borrowing arrangements, and personal services income as areas of concern. For private companies, the ATO is concerned with privately owned and wealthy groups with tax or economic performance not comparable to similar business and those with low transparency tax affairs, or unusual/large transactions with could be an indicator for shifting of wealth. Whilst a majority of financial products offered to retail investors do not raise concerns with the ATO, it has flagged a small number of products that promise to provide investors with tax benefits where those benefits may not be available to some or all investors who invest in the product. Additionally, there may be issues concerning whether interest and borrowing costs can be claimed as a tax deduction, transactions involving deferred purchase agreements, and various CGT issues. In some instances, there may be a very fine line between what ATO considers to be tax planning and tax avoidance. To ensure that you're not penalised for entering into potentially illegal schemes unknowingly, if you're unsure, or if something seems too good to be true, it is always prudent to consult a registered professional.

Budget super reforms on the horizon

More super changes are on the way with the release of draft legislation to implement super reforms announced in the 2020-21 Budget including single default account, best financial interests duty, and tackling fund under-performance. The reforms are designed to ensure that the super system deliver better outcomes for members. Under the proposed rules: employers will be required to make contributions on behalf of employees to the employee's existing "stapled" fund in certain circumstances, including where the employee has not chosen a fund. It will apply to employees who started their employment on or after 1 July 2021; trustees of registrable super entities, directors of the corporate trustee of a registrable super entity, and trustees of SMSFs must perform their duties and exercise their powers in the best financial interests of the beneficiaries, which reverses the evidential burden of proof. It may also prohibit certain payments, or prohibit certain payments unless certain conditions are met, regardless of whether the payment is considered to be in the best financial interests of beneficiaries; APRA will conduct an annual performance test for MySuper products, and other products specified in regulations. Trustees of the super entities will be required to give notice to members when a product fails the test. In addition, where a product has failed the performance test in 2 consecutive years, the trustee will be prohibited from accepting new beneficiaries into that product. It is envisaged that APRA may be able to lift the prohibition if circumstances specified in the regulations are satisfied. To allow taxpayers to make more informed decisions and increase transparency, APRA will also be able to rank various super products according to specified metrics including fee levels and investment returns. The results of which will be published on an interactive website by the ATO. These reforms will ensure underperforming super products are held to account. Contact us today if you would like to find out more about how these upcoming super changes will affect you. Remember, these and many other tax and super changes are coming in 2021 and beyond, we can help you stay one step ahead.

Data-matching program: online selling

Online sellers beware, the ATO has extended its current data-matching program for another 4 years to ensure that businesses and individuals are correctly meeting their registration, lodgment and tax obligations. The current program will affect most sellers on eBay Australia and New Zealand as well as Amazon. It is expected that around 20,000 to 30,000 account records will be obtained each financial year and matched with ATO data holdings to identify compliance issues. Compliance outcomes including taxpayer audits and voluntary disclosures are expected. Previously, the online selling data-matching program obtained its data from eBay Australia and New Zealand Pty Ltd and Amazon Commercial Services Pty Ltd and it is expected that the current program will obtain data from the same providers. The ATO estimates that details of around 20,000 to 30,000 account records will be obtained each financial year and that around half of that number will relate to individual sellers. Records obtained each year will be electronically matched with ATO data holdings to identify and address a number of taxation risks including: According to the ATO, insights obtained from the program will be used to inform treatment strategies to improve voluntary compliance through education on taxation obligations. It will also be used to increase understanding of the behaviours and compliance profile of individuals and businesses that sell goods or services via online selling platforms. While the data will not be used to directly initiate automated compliance activity, where high risk activity or compliance issues are identified, the ATO will commence compliance action. In previous years, the ATO used the online selling data-matching program to identify discrepancies between online sales and information declared in the sellers' tax returns. It was then used to deliver compliance outcomes for income tax and GST using taxpayer audits, voluntary disclosures and lodgments. It is envisaged that the current program will work in a similar way. If you are an online seller and are not sure whether you've crossed the threshold from a hobby to a business, we can help. We can also ensure that you have proper records to support your tax positions should the ATO come knocking. Contact us today for expert help.

Illegal phoenixing: ATO retaining refunds

A new administrative approach has been released by the ATO in relation to the exercise of the Commissioner's discretion to retain tax refunds where a taxpayer has an outstanding notification. Previously, the ATO was able to retain refunds where a taxpayer has an outstanding notification in relation to BASs or PRRT (petroleum resource rent tax), but this power has been extended to encompass all outstanding notifications in an effort by the government to combat illegal phoenixing. According to the ATO, in deciding whether a refund should be retained, consideration of seriousness of the taxpayer's behaviour ought to be weighed against potentially adverse consequences for the taxpayer. It notes some of the indicators of high-risk behaviour by taxpayers include poor past and current compliance with tax and super obligations, bankruptcies or insolvencies, tax-related penalties and sanctions, and participation in or promotion of aggressive tax planning arrangements, schemes, fraud or evasion and criminal activity. Other circumstances where the Commissioner may consider retaining a refund include instances where phoenix behaviour has been displayed by the taxpayer, its associates or controllers. The ATO outlines features of phoenixing as involving cyclically establishing, abandoning or deregistering companies to avoid legal and financial obligations, insolvencies, stripping assets from a company and transfer of assets at an undervaluation. If the ATO suspects phoenixing or where a taxpayer has been identified as high risk, the Commissioner has the power to retain the refund until the taxpayer has given the outstanding notification or an assessment of the amount is made, whichever happens first. The ATO notes that while it is not required by law, it will send written communication explaining that the refund has been retained, the amount retained, and the outstanding notifications required to be lodged. The ATO notes the communication will also explain to the taxpayer why retaining the refund was considered necessary and the reasons why the decision has been made. Additionally, the actions that the taxpayer can take to prevent their refunds from being retained in the future will be outlined. If you're affected by the Commissioner retaining your refund, remember the decision is externally reviewable, and where the Commissioner makes an assessment of the underlying amount, you are able to object to the assessment. Individuals that can demonstrate that the retention of the refund will cause serious financial hardship (ie being unable to afford the basic necessities of life), may be refunded the retained amount. Non-individuals may also apply for the retained amount to be refunded if they can show that the inability to give the outstanding notification by the original due date was directly caused by circumstances beyond their control.
In an effort to increase economic security for women in the event of divorce, the government had previously proposed to introduce a measure to improve the visibility of superannuation assets in family law proceedings. Currently, getting full visibility of superannuation assets in family law matters when one party does not cooperate can become complex, time-consuming and costly. It usually requires parties to go on "fishing expeditions" using subpoenas and other formal court processes with no guarantee of success. The logic for the government introducing this measure is that superannuation is often the most significant asset in the property pool of separated couples, however, the super balances of women nearing retirement are 42% lower than those of men. In addition, it is estimated around 60% of women suffer some form of financial hardship within 12 months of separation. This hardship can also be perpetuated by a lack of financial disclosure by a former partner, which can result in women receiving a smaller share of property than they would be entitled to. Practically, to implement the measure, the government has proposed to provide $3.3m to the ATO to develop an electronic information sharing mechanism between the ATO and the Family Law Court in each State to allow super assets held by relevant parties during family law proceedings to be identified swiftly and more accurately. To enable that to happen, current secrecy provisions will be changed to allow ATO to provide this information. For example, consider the situation where a couple (A and B) has decided to end their partnership and are now seeking orders in the Family Law Courts to decide their property. If A has multiple superannuation accounts and only discloses the details of one of the accounts and refuses to provide further information despite repeated requests. B will be forced to apply to various superannuation funds and subpoenaing A's employment records to obtain the necessary information which will be costly and time-consuming. After the measure becomes law, the Court will be able to seek this information directly from the ATO through the electronic information sharing system without the need for all the extra work from B. While the measure was originally scheduled to be operative by July 2020, it has since been delayed by the government's focus on COVID economic stimulus and the complexity involved in the mishmash of different family law jurisdictions in each state. However, according to the Minister for Superannuation and Financial Services, Senator Jane Hume, the government remains committed to the measure and the legislative amendments required to implement this measure would be introduced by mid-2021. This means that the proposal is not likely to be operative until July 2021 as the earliest.

ATO post-COVID expectations for businesses

In a recent speech, ATO's Second Commissioner of Client Engagement, Jeremy Hirschhorn, outlined the expectations of businesses during the COVID era and warns against using loopholes to obtain benefits from government stimulus packages. He noted that while companies are largely compliant with 92.5% voluntary compliance at lodgment and 96.3% after compliance activity, the ATO is seeking to increase the percentages to 96% and 98% respectively. According to the ATO, those businesses accessing government stimulus packages should not only follow tax law, but also the spirit of the law. It notes for example although there was nothing explicit in the stimulus measure rules that prevented companies from paying executive bonuses or paying shareholders while accessing these benefits, it urged companies to "consider the optics" of such a move. In addition, the ATO notes that the other measures encouraging businesses to invest, including the immediate deduction for assets and carry back losses should only be used by businesses for the purposes which they were introduced. Businesses are discouraged from entering into artificial mechanisms to take advantage of the measures. For example, structured transactions where the plant and equipment are not actually used in the business, intellectual property migration with no change in real activity, asset swaps with related parties etc. Similarly, loss carry back should not be used to artificially shift profits (and losses) around company groups. Further, companies with complicated tax situations that find themselves under audit, are encouraged by the ATO to "[O]pen communication, engagement and transparency [which] creates space for the parties to work better together to resolve differences and even in circumstances where resolution is not achieved, refine and narrow the issue in dispute". The ATO encourages corporate taxpayers to use information published by the ATO to compare their performance against those of their peers in relation to income tax. It also urges those taxpayers to use its GST analytic tool which allows businesses to reconcile financial statements to BASs thus identifying and testing appropriateness of variations or differences, as well as its GST best practice governance guide. For businesses unsure of the certainty of their material tax positions, the ATO encourages obtaining assurance commensurate with importance. For example, if the tax position the business has taken is a key piece of the corporate infrastructure, then a private binding ruling should be sought. Mr Hirschhorn notes that it is "an unambiguously bad idea to rely on non-detection by the ATO". Businesses have been entrusted by the government with leading economic recovery with a range of stimulus measures, according to the ATO, and with it comes increased expectations around corporate behaviour including tax. Ultimately, it says a tax system is about underpinning a country's social contract, by collecting the revenue that funds its program and services.

SMSF asset valuations: COVID-19 concessions

One of the many responsibilities of being a trustee for an SMSF is preparing financial statements and accounts for the SMSF every year. As a part of this reporting process, the trustee is also required to ensure that the fund's assets contained in the report is at market value as per the various superannuation regulations. According to the ATO, when valuing real property that represents a significant portion of the fund's value, it is prudent for the trustee to use a qualified independent external valuer. Although an external valuation is not required each year, if the trustee believes that the current valuation has become materially inaccurate, or the property has become affected by external events (ie natural disaster, COVID etc), a new valuation should be obtained. Real estate agent appraisals stating what the property is likely to sell for based on sales in the areas, without listing details of those sales is not considered to be sufficient and appropriate on its own. Documentation that the ATO considers to be acceptable evidence for substantiating the market value of real property other than an independent external valuation include: independent appraisals from a real estate agent (kerb side); contract of sale if the purchase is recent and no events have occurred to the property that could materially impact its value since the purchase; recent comparable sales results; rates notice (if consistent with other evidence on valuation); and net income yield of commercial properties (not sufficient evidence on their own and only appropriate where the tenants are unrelated). SMSF trustees are then required to provide these objective and supportable evidence to their auditor. Where an auditor deems there not to be sufficient or appropriate evidence to enable them to form an opinion of whether the asset was valued at market value, they must modify their audit report and consider whether an Auditor/actuary contravention report (ACR) should be lodged. Due to the COVID-19 impacts on the 2020 and 2021 financial years, the ATO has provided a concession for trustees of SMSFs in relation to valuation evidence. It notes that where a trustee has difficulty obtaining valuation evidence, auditors should still consider modifying Part B of the audit report and lodge an ACR if necessary. In addition, auditors should provide reasons on the ACR as to why the trustee was unable to obtain the appropriate evidence. Once the auditor lodges their report, the ATO will then determine whether the difficulty in obtaining evidence was due to the impacts of COVID-19. If it is satisfied that COVID-19 was the cause, then the contravention will not result in penalties, and the trustee will receive a letter to ensure that they comply with the valuation guidelines for the next audit. Otherwise, penalties may apply.
The Government has released details of what it calls its "JobMaker" hiring scheme. It will take the form of a payment to employers for each new job they create over the next 12 months. It is estimated that the scheme will cost $4 billion and support about 450,000 employees. So it could help a lot of businesses and there is quite a bit of money up for grabs – up to $200 for each "new" employee each week! It is available for eligible individuals who commence work between 7 October 2020 and 6 October 2021. Note the use of the term "eligible" – there are certain conditions that must be met before an employer can receive the payment. First up, the employee must be aged between 16 and 35 years at the time they start work. One crucial thing to note is that the payment rate is higher for those aged 16 to 29 years than it is for those aged 30 to 35 years. Further, each employee must work an average of 20 hours a week for the JobMaker period (a rolling 3-month period). There are other important conditions to be met. For example, the new employee must, for 4 out of the 12 weeks preceding the employment start date, have received either the parenting payment, the youth allowance or the JobSeeker payment. In other words, individuals must have come from having had recent government support to employment. Hence, people who are changing employers, eg switching from one full time job to another, will not be eligible. The type of employer who can benefit from the scheme is pretty broad. It is open to those who are carrying on a business at the time they elect to participate in the scheme. The employer must already have an ABN and be registered to withhold PAYG. The ATO has flagged that the requisite information will be provided through the Single Touch Payroll system, so if you are not using STP, then you cannot participate in the scheme. To participate in the scheme, employers must be up to date with their tax return and BAS lodgments. Employers must also have an overall headcount increase as a result of taking on more employees. This is measured by comparing the employee count in the JobMaker period to the number of employees on the books at 30 September 2020 (this reference point will change over time). In addition, employers must have what is termed a "payroll increase" in the JobMaker period. This is worked out by comparing the total payroll in a JobMaker period to the payroll for the period that ended immediately before 6 October 2020 (and, again, this will change over time). This test is designed to stop employers cutting the wages of existing staff so as to access JobMaker.
The Department of Education, Skills and Employment (DESE) has commenced a new data matching program with the ATO in relation to the Supporting Apprentices and Trainees (SAT) measure. The objective of the program is to confirm that an employer is eligible to receive the SAT subsidy and validate information provided by the employer. It also seeks to confirm that employers are not claiming both the SAT and JobKeeper at the same time for the same employee. To be eligible under SAT, an apprentice must have been in an Australian Apprenticeship with a small business as at 1 March 2020. The program has since been expanded to include medium-sized businesses who had an apprentice in place on 1 July 2020. Employers of any size who re-engage an eligible out of trade apprentice are also eligible to claim the SAT wage subsidy. Eligible employers under SAT can apply for a wage subsidy of 50% of the apprentices' or trainees' wage paid until 31 March 2021. It is estimated that data relating to around 117,000 apprentices and trainees and more than 70,000 employers will be transferred between DESE and the ATO. While the first data-matching activity is intended to be conducted as soon as possible, it is expected the program will be ongoing with data transfer to occur at regular intervals as required over the life of the measure. DESE will first provide the ATO with information relating to employers and apprentices that have been extracted from their systems. The ATO will then match that information against their own data holdings and provide information on employers that claimed eligibility for SAT as a small business or claimed the SAT wage subsidy and the JobKeeper at the same time for the same individual. To avoid mistakes, the ATO will be using sophisticated identity matching techniques which uses multiple details to obtain an identity match (eg name, address, date of birth). Additional manual processes may also be undertaken where a high confidence identity match does not occur. This involves an ATO officer reviewing and comparing third party data identity elements against ATO information on a one-on-one basis, seeking sufficient common indicators to allow confirmation (or not) of an individual's or business' identity. DESE will then use the information sourced from the ATO to verify its own data holding, and a manual process will be undertaken by a DESE officer to compare the information. All discrepancies and anomalies will be dealt with on a case-by-case basis. In instances where the DESE detects a discrepancy or an anomaly that requires verification, it will contact the business and provide them with an opportunity to verify the accuracy of the information on which the eligibility was based. According to the DESE, businesses will be given at least 28 days to respond and individual circumstances, if any, will be taken into consideration.

How to claim your work at home expenses

There are a lot more of us working from than ever before. So, can you claim all or some of the additional costs off your tax? There are 3 options for claiming working from home expenses. The question of whether it's all or some depends on the method chosen. First, employees working from home can calculate the deduction by using a fixed rate. This is set at 80 cents for each hour worked at home – the ATO calls this the "shortcut method". It was introduced as a result of the large number of people working from home due to COVID-19. Second, prior to the shortcut method being announced, the fixed rate was 52 cents for each hour worked at home. This can still be used. The third option is where all the actual costs are recorded and apportioned on the basis of the work-related proportion. It for largely used by people who have a home office, eg a doctor's consulting rooms within a private residence – so we won't focus on it now. However, please contact us if you think it may apply to you. The 80-cent rate is simple and easy. To qualify, a taxpayer must be working from home and must incur additional running expenses. For example, if a home computer had only ever been used for private purposes and is now being used to fulfil employment duties or in running a business, it would be an additional running expense. The ATO states that minimal tasks such as occasionally checking email or taking calls while at home will not qualify as working from home. The work must be "substantive ". The 80-cent rate covers all additional running expenses, including electricity and gas, cleaning, phone and internet. If this method is used, no other work from home expenses can be claimed. Taxpayers do not need to have a dedicated area to use the 80-cent rate. So, you can put the computer on the kitchen table, work away and claim the deduction. However, taxpayers will need to keep a record of the hours they have worked at home, which can be in the form of a diary (or timesheets, rosters etc). The 52-cent rate method also applies to what the ATO terms "running costs". It is 52 cents for each hour worked at home and is intended to cover the expenses such as electricity and gas, and the cost of repairs to home office equipment, furniture and furnishings. However, it is more important to know what the 52-cent rate does not cover. It excludes things like phone and internet, computer consumables and stationery and depreciation for items like phones, computers and laptops. If you want to claim for these expenses (like a new laptop), then you need to calculate their work-related use separately. This requires diaries, receipts, detailed phone accounts etc, but can give you a bigger deduction. To use the 52-cent rate, taxpayers must have a "dedicated work area", such as a home office.

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