2018/2019 Budget – a Stronger Economy, More Jobs

The Federal Treasurer Scott Morrison delivered his third Budget on 8 May 2018.  In the shadows of the Royal Commission into the Australian Banking system and Opposition rhetoric about removing refundable franking credits, Mr Morrison promised tax relief, and to further strengthen Australia’s economy.  That would be achieved via five areas:

  1. Providing tax relief;
  2. Backing businesses to build, particularly Small to Medium Enterprises (SME’s);
  3. Guaranteeing essential services for Australians (Medicare, schools, infrastructure);
  4. Keeping Australia and Australian’s safe by enhancing our border protection;
  5. Living within the Government’s means.

Mr Morrison indicated that the Budget was the strongest Budget since the Howard Government (some ten plus years ago), with a deficit of $18.2B, and would return to a surplus of approximately $2B by 2019/2020, increasing to a $16B surplus by 2022.  This would enable the Government to repay debt, with the aim of reducing Government debt to 3.8% of GDP by 2028/2029.  The fiscal responsibility undertaken by the current government has enabled Australia to maintain is AAA credit rating, one of only 10 countries in the world to have.

We outline below some of the key announcements that will impact taxation and spending.

  1. Personal Tax Rate Cuts
  2. Other Personal Tax Considerations
  3. Business / Entity Taxation
  4. Taxation Compliance
  5. Superannuation (Don’t Worry, There’s Not Much….and They’re Not Too Bad)
  6. Social Security

1. Personal Tax Rate Cuts

The Government announced a seven-year tax plan that would involve:

  • Middle to low income earners
    • a further non-refundable tax offset from 2018/2019 through to 2021-2022, in addition to the current Low Income Tax Offset.
    • This will be as follows:
  • In recognition of wage and inflation growth, removing bracket creep by:
    • Increasing the 32.5% tax threshold from $87,000 to $90,000 from 1 July 2018, with a further increase to $120,000 from 1 July 2022.
    • Increasing the 19% tax threshold from $37,000 to $41,000 from 1 July 2018.
    • Increasing the Low Income Tax Offset from $445 to $645 from 1 July 2022.
  • Abolishing the 37% tax bracket entirely from 1 July 2024, where income between $120,000 to $200,000 will be taxed at 32.5%

The following table shows how the rates and thresholds will phase in over time:

2. Other Personal Tax Considerations

In addition to the above, the following have also been tabled:

  • The Medicare Levy will remain at 2%, and will not need to be increased to 2.5% from 1 July 2019, as previously announced in the 2017/18 Budget, in order to fund the NDIS.
  • Putting in place integrity measures such that minor children can only receive concessional tax treatment on distributions from testamentary trusts on assets that were part of a deceased estate, or the proceeds if those assets are sold. That is, the concessional tax treatment wouldn’t apply where the trust borrowed funds to also invest;
  • Extra funding to enable four data matching programs to continue to be used by the ATO to ensure there is no revenue leakage (particularly for overseas investments held by high net wealth individuals);
  • Higher profile Australians will no longer be able to license their image to another entity to take advantage of differing tax rates. This is a common structure for sportspersons and public profiles engaged for promoting products or brands.

3. Business / Entity Taxation

Tax initiatives that will impact businesses and entities include:

Small Business Entities

  • Extending the instant asset write-off for another year for businesses with aggregated turnover of less than $10M pa up to $20,000 per asset (due to expire on 30 June 2018). This will revert to $1,000 from 1 July 2019.  Although the extension of the instant asset write off is welcome, cashflow or financing is required to permit a business to acquire such an asset.
  • Partners that create, assign or otherwise deal with future rights to partnership income / distributions will be unable to utilise the CGT small business concessions;

Private groups

  • The Government will clarify the operation of Division 7A as it applies to Unpaid Present Entitlements (UPEs), so that UPEs fall within the scope of Division 7A. This means that UPEs will either need to have a complying agreement in place, or be subject to tax as a dividend;
  • However, amendments to Division 7A such as self corrective measures and safe harbours that may benefit taxpayers that were due to commence on 1 July 2018, as announced in the 2016/2017 Budget would be deferred until 1 July 2019, together with the new measures above. As Division 7A is a significant area for private groups, we would hope that the Government introduce draft law for consultation sooner than later, to give private groups more certainty by the proposed 1 July 2019 start date;
  • From 1 July 2019 the Government will put in place some integrity measures to ensure that closely held trusts can’t round-robin distributions, with the outcome that no tax is payable on a distribution;
  • Where vacant land is not genuinely held for the purpose of earning assessable income, deductions with respect to that vacant land (for example, interest on a borrowing) will be disallowed after 1 July 2019. Further, disallowed deductions won’t be able to be carried forward for use in the future, and may be unavailable to add to the assets’ cost base if they would not ordinarily be included in the cost base for CGT purposes. Whilst not intended to impact vacant land used in business, this may impact those taxpayers who hold vacant land to construct rental properties.

Corporates 

In addition to reaffirming their commitment to reduce the corporate tax announced in the 2017/18 Budget, the Government announced the following measures:

  • Overhauling the Research and Development (R&D) tax incentive by introducing an R & D premium above the company’s tax rate, depending on:
    • Their aggregated turnover;
    • The proportion of total expenditure of a business that relates to R&D; and
    • The R&D refundable offset will also be capped at $4M, with any offset that can’t be refunded being able to be carried forward for a future year.
  • Ensuring that digital businesses in Australia pay their fair share of tax (discussion paper to be released at a later date);
  • The thin cap rules will be amended to ensure that entities align the valuation of their assets for thin cap purposes with what is disclosed in their financial statements, whilst also reducing the associate entity threshold from 50% to 10% in a measure to protect the corporate tax base of stapled securities;
  • Managed Investment Trusts (MITs) and Attribution MITs will be prevented from applying the 50% CGT discount at the trust level, to ensure that these entities operated as genuine flow through investment vehicles;
  • Measures announced in the 2017/18 budget to reduce the scope of the Taxation of Financial Arrangements (TOFA) provisions, to reduce compliance costs to taxpayers, has been deferred, in order to allow time for the simplified rules to be designed, to ensure the savings will be realised.

4. Taxation Compliance

To ensure that the collection of taxation revenue occurs efficiently and that everyone is paying their fair share, the Government will provide additional funding to enable the regulators to:

  • Identify, monitor and provide enforcement to those who don’t pay the superannuation or tax for their employees;
  • Disallow tax deductions on salary and wage and contractor payments where the employer has not withheld PAYG;
  • Tackle the black economy;
  • Monitor and disrupt phoenix activity;
  • Ensure that where a business tenders for a Government project, they will have to provide a statement from the ATO that they are compliant with their tax obligations.

5. Superannuation

With the biggest changes to superannuation in a decade announced in the 2015/2016 Budget, and the industry and taxpayers still grappling with the impact, it was comforting to see that changes to superannuation were limited, and introduced to maintain integrity in the system (and also no doubt some Royal Commission findings having an impact):

  • SMSF members able to increase from four to six from 1 July 2019. Now allowing for a SMSF to become a family SMSF. Although that sounds like a good idea, it will then require six directors of the corporate trustee, or six individual trustees, all of who will be required to sign various documents on a regular basis, and may make the administration of an SMSF more cumbersome;
  • It is speculated that such an arrangement may thwart Labor’s dividend imputation policy, where SMSFs would be ineligible to receive a franking credit refund (unless there was a member in receipt of a Government pension). By having more members means that there is the potential for one of those members to be in receipt of a Government pension, or where the excess franking credits could be used to manage the tax liability on superannuation contributions for the six members;
  • Introduce integrity measures to ensure that the ability for a taxpayer to claim a tax deduction for a personal contribution to superannuation is undertaken correctly, by way of further ATO compliance and debt collection activity;
  • An exemption will apply from the work test for individuals who are aged between 65 and 74 who wish to make a contribution to superannuation in the first year that they don’t meet the work test. This will apply where their total superannuation balance is less than $300,000;
  • Many high-income earners with multiple employers are inadvertently breaching their concessional contribution limit (currently $25,000 per taxpayer) due to the superannuation guarantee requirements imposed upon their employers. The Government has announced that they will provide an opt-out for those taxpayers impacted, so that they can nominate that wages from particular employers are not subject to SG.  Although this is a positive measure, it will be important that it is implemented correctly to ensure that taxpayers are not missing out on their superannuation contributions or overall remuneration entitlements;
  • From 1 July 2019 SMSFs with a clean compliance history for the past three years and who lodge in a timely manner will only have to be audited once every three years, delivering cost savings to the SMSF. Consultation will be undertaken to ensure that this is applied correctly and implemented smoothly;
  • A retirement covenant will be introduced into the SIS Act to require superannuation fund trustees to formulate a retirement income policy.

6. Social Security for Older Australians

The Government will introduce a range of measures from 1 July 2019 to enhance the standard of living of older Australians:

  • Increase the Pension Work Bonus from $250 to $300 per fortnight (ie $7,800 a year) and extend the Bonus to self-employed retirees who will be able to earn up to $300 per fortnight without impacting their pension;
  • Provide means test exemptions to encourage retirees to consider lifetime income products to protect against longevity risk. This will also encourage product providers to develop such products; and
  • Enable more senior Australians to access the equity in their homes to increase their incomes by expanding the Pension Loans Scheme to everyone over Age Pension age and the maximum fortnightly income stream will be increased to 150% of the Age Pension rate.

What Next?

There have been a number a new initiatives announced combined with amendments to the current law.  As always, the devil is often in the detail, and also whether any of the above changes are in fact passed through Parliament.  Given the current back-log of legislation, some of the timing above may not be achievable.  We will await the release of the law for some of the above measures to ascertain their full impact, and what may be required in order to comply with any new requirements, or be eligible for any new concessions / offsets.

In the meantime, if you have any questions about the above, please contact Michelle Saunders, Marissa Bechta or Jemma Sanderson on 08 6311 6900.

In The Xpress Lane – March 2018 Quarterly Update

 

A quarterly tax update

Cooper Partners summary of the top 5 hot-button issues during the last quarter  —  a super quick way to stay current on the “need to know” tax developments that are relevant to you.

In this quarter’s “In the Xpress Lane” we have something of interest for everyone:

  1. Single Touch Payroll
  2. GST on sale of new residential dwellings or newly subdivided land
  3. Junior Exploration Incentive Bill passes
  4. Coalition v Labor on tax policy
  5. CGT changes for non-residents main residence

Single Touch Payroll

Single Touch Payroll (‘STP’) takes effect 1 July 2018 – this is a new way of interacting with the ATO.

STP aligns employer reporting obligations with payroll processes – as an employer, you will now report automatically through your payroll software, PAYG withholding and superannuation contribution details, to the ATO each time you pay employees.

1 April 2018 is a key date where all employers need to undertake a headcount. If you have 20 or more employees as at 1 April 2018, you must use STP from 1 July 2018.

Headcount is not on a FTE basis. It includes full time, part time, casuals, paid or unpaid leave, workers in Australia or overseas.

If you have 20 or more employees you are considered a ‘substantial employer’ and therefore must use STP from 1 July 2018, even if headcount falls below 20. If this was to occur, you can apply to the ATO for an exemption from the system.

However note, that there is a Bill currently before Parliament to include all employers from 1 July 2019, in any event.

Take away points:

  • Check your payroll systems to ensure they are STP compliant
  • Stocktake the number of employees at 1 April 2018 and keep this record
  • The ATO will now know in real time whether you are paying PAYG withholding and superannuation on time.

GST on sale of new residential dwellings

Integrity reforms will apply from 1 July 2018 to purchasers of new residential dwellings (being dwellings not previously sold as residential premises) or newly subdivided land, where the purchaser will now be obliged to pay GST directly to the ATO as part of the settlement process.

New rules will apply even where the purchaser buys under the margin scheme. Although the vendor only has a GST obligation on the margin, the purchaser is required to pay the GST amount on the full purchase price to the ATO. Where the Margin Scheme applies the amount to pay to the ATO will be 7% of the purchase price rather than 1/11th.

Vendors and suppliers will be required to provide written notice to the purchaser, prior to settlement, advising them whether the sale is subject to GST withholding and whether the margin scheme applies.

Where GST withholding is applicable, the notice must include the developer’s name and ABN as well as the GST amount to pay to the ATO. Where GST is not applicable, such as the sale of existing residential premises, the notice will only need to state that withholding is not required.

The vendor under these circumstances would apply to the ATO to obtain a refund of any excess GST remitted by the purchaser on settlement.

As is apparent, the obligations have now been pushed on to the purchaser under these circumstances.

Take away points:

  • Purchasers of new residential property and newly subdivided land be aware on any new acquisitions post 1 July 2018 and your obligations whilst the industry gets across these new measures.
  • Land developers be aware of the cashflow impact to you particularly if you were relying on the margin scheme to determine your GST obligations.

Junior Exploration Incentive Bill Passes

On 28 March 2018 the Junior Minerals Exploration Incentive Bill 2017 was legislated.

This Bill replaces the Exploration Development Incentive (EDI) and enables junior exploration companies undertaking Greenfield minerals exploration to distribute their tax losses as a refundable tax offset to private investors who have purchased newly issued shares. Additional franking credits apply to corporate investors.

This measure will no doubt increase the attraction for potential investors in greenfield mineral exploration projects and go towards increasing greenfield exploration in Australia.

What is different:

  • Limited to investors that purchase newly issued shares;
  • Tax offsets can be claimed a year earlier;
  • The incentive is allocated between eligible exploration cpmpanies on a first come first served basis, but subject to a 5% cap of the total credits per applicant;
  • The number of credits issued are capped at a lower level than under EDI;
  • Unused credits in the first three years of the project can now be rolled over by the explorer; and
  • An application is required before any funds are raised.

It is envisaged that the new incentive will involve more administration and complexity for junior explorers. Time will tell whether the new approach will present an improvement on the previous EDI scheme.

Coalition v Labor on tax policy

The next Federal election is looming to be one of the most important elections when it comes to alternative tax policies.

The following summarises the current state of play:

No doubt we will see further differences in tax policy being announced over the coming months making for some interesting discussion and planning in the run up to the next Federal election.

CGT changes for non-residents main residences

There is currently a Bill before the senate that if passed through the full passage of Parliament will remove the CGT exemption for foreign residents on their main residencies.

Currently foreign residents enjoy the same concession on their main residence as do individuals who are residents of Australia for taxation purposes.

However, it is likely this exclusion will be removed for foreign residents who enter into sale contracts after 9 May 2017. The exemption will continue to apply if the main residence was held before 9 May 2017 and sold before 30 June 2019.

Expats can still benefit from the main residence exemption provided they sell their home before becoming a non-resident or wait until they re-establish Australian residency.

Under current drafting there is no obligation to appropriate the capital gain between resident and non-resident periods.

If an owner is a non-resident at date of sale the entire exemption is removed.  The 50% discount may be available on gains accruing pre non-residency in these circumstances.

Take away points:

  • If you are planning to be a non-resident due to a change in circumstances including overseas employment you need to carefully consider these new rules as to whether you keep your investment or sell before becoming a non-resident.
  • The main residence exemption is already complex, now compounded by throwing a change in residency into the mix with no regard to the owner’s previous residency status.
  • We envisage the largest group impacted is Australians moving overseas for which their tax residency for Australian tax purposes may change.

If you wish to discuss any of the above in further detail, please contact Michelle Saunders or Marissa Bechta on (08) 6311 6900.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
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Fringe Benefits Tax – Our top 5 for FBT in 2018

As we approach the end of another FBT year on 31 March 2018, employers should be gearing up for this season’s reporting obligations.

To help keep you up to date and not left out on the fringe, we present to you our top five issues to keep you in the know in 2018.

1.     New 2018 FBT rates and gross-up rates

Following the removal of the Temporary Budget Levy, the FBT rate has reverted back to 47% for the 2018 FBT year onwards. The associated Type 1 and Type 2 gross-up rates have also reduced.

Other important rates and thresholds that have been updated for the year ending 31 March 2018 include:

  • Car parking threshold: $8.66
  • Statutory benchmark interest rate: 5.25%
  • Reasonable food and drink amounts for employees living away from home (per week):
    • $247 for one adult;
    • $371 for two adults; and
    • $495 for two adults and two children
  • Reportable fringe benefits threshold: Taxable value exceeding $2,000 (i.e. grossed-up value of $3,773).

The 2018 FBT lodgement due date is 21 May 2018, however, Cooper Partners as tax agent can access an extended lodgement date of 25 June 2018. Regardless of which lodgement date applies, the FBT payment due date is 28 May 2018.

Where employers are registered for FBT and the FBT payable is nil, we recommend that employers still lodge an FBT return to commence the three year amendment period (which is otherwise unlimited if a notice for non-lodgement is submitted).

2.     Travel related benefits – new ATO guidance

The ATO has recently set out its view on travel related benefits provided to employees in Draft Taxation Ruling TR 2017/D6. While this ruling has not been finalised, it is expected that once finalised it will apply to both previous and future years. With the withdrawal of previous rulings on this issue, employers should consider the impact of the draft ruling in the 2018 FBT year and whether, in light of the changes, employee travel is in performing the employee’s work activities (and therefore not subject to FBT).

Some of the key observations of the new ruling include:

  • Travel benefits such as flights, accommodation and meals are subject to FBT unless it can be shown that the benefits are  ‘otherwise deductible’;
  • The previous 21 day rule of thumb for distinguishing travelling for work versus living away from home has been withdrawn with no new replacement safe harbour time period;
  • New concepts of ‘special demands travel’ and ‘co-existing work locations travel’ with key factors such as the remoteness of the work location and the requirement to move continuously between changing work locations;
  • Scenarios have been provided to illustrate when travel related benefits are deductible for income tax purposes and therefore whether subject to FBT.

In determining whether transport expenses relate to travel undertaken in performing an employee’s work activities, the following factors should be considered:

  1. whether the work activities require the employee to undertake the travel;
  2. whether the employee is paid, directly or indirectly, to undertake the travel;
  3. whether the employee is subject to the direction and control of their employer for the period of the travel; and
  4. whether the above factors have been contrived to give a private journey the appearance of work travel.

In relation to the accommodation, meal and incidental expenses incurred, these expenses are generally deductible where:

  • the employee’s work activities require travel to be undertaken;
  • the work requires the employee to sleep away from home overnight;
  • the employee has a permanent home elsewhere; and
  • the expenses are not in the course of relocating or living away from home.

If you would like to read our detailed newsletter on the new ATO guidelines on travel expenses please click here.

3.     Relaxation of exempt vehicle record keeping requirements

In a recently issued draft Practical Compliance Guideline (PCG 2017/D14), the Commissioner aims to relax the current FBT record keeping requirements for certain vehicles (panel vans, single cab utes and dual cab utes not designed principally to carry passengers).  The draft PCG states that where certain conditions are met, no records are required to be maintained by the employer each year to demonstrate that the work-related FBT exemption applies to the vehicle provided to an employee.

Under the current FBT rules, where such a vehicle is provided to an employee for work related purposes and any private use is limited to ‘minor, infrequent and irregular’ travel, the vehicle is an exempt fringe benefit and not subject to FBT.

There has always been uncertainty on what exactly is ‘infrequent and irregular’ private use and how much private travel is more than ‘minor’, particularly because records such as odometer readings and logbooks are not mandatory for exempt vehicles.

The PCG now stipulates stringent conditions to permit an exemption for records required to be maintained by the employer.

  1. The vehicle provided to a current employee is an ‘eligible vehicle’ and is provided to the employee to perform their work duties. Please click here to view eligible vehicles.
  2. The employer takes all reasonable steps to limit private use of the vehicle and has measures in place to monitor such use;
  3. The vehicle has no non-business accessories;
  4. The vehicle’s GST inclusive value is less than the luxury car limit;
  5. The vehicle is not provided as part of a salary packaging arrangement;
  6. The employee uses their vehicle to travel:
  • Between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip;
  • No more than 750 kilometres in total for each FBT year for multiple journeys taken for a wholly private purpose; and
  • No single, return journey for a wholly private purpose exceeds 200 kilometres.

Once finalised, the guidelines will apply from 1 April 2017 and are therefore applicable to the 2018 FBT year.

Although the draft guidelines are well intended, the difficulty with applying the guidelines is that an employer must still be able to demonstrate that the use of any relevant vehicles provided to employees meet the above eligibility criteria at all times. This in itself requires record keeping. Click here to read more on what to do next and see our full article on the draft guidelines. 

4.     Small Business Entity FBT concessions

The Small Business Entity (SBE) turnover threshold for the 2018 FBT year is $10 million (increased from $2 million). As a result, entities meeting this new threshold (i.e. turnover less than $10 million for the year ended 30 June 2017) will be able to access the small business car parking exemption and extended work-related items exemption from 1 April 2017. We believe this exemption will now extend to a larger number of employees.

The small business car parking exemption applies to an SBE where an employee’s car is not parked at a commercial car parking station and the employer is not a public company (or subsidiary) when the benefit is provided.

The exemption in respect of work-related items extends to SBE’s that provide employees with more than one work-related portable electronic device in an FBT year – including where devices have substantially identical functions. It is important to note that the condition that the items must be primarily used for the employee’s work purposes in order to access the exemption.

5.     ATO areas of focus 

In 2018, the ATO have announced that it will be paying particular attention to:

  • Cars valued under the statutory formula method – The ATO will be focusing on whether the car’s base value, reduction of days available for private use and application of employee contributions have been correctly calculated;
  • Weekend conferences and staff retreats – In relation to offsite retreats and workshops, employers need to closely consider the activities undertaken to assess whether they have the character of recreation and whether meal entertainment benefits have been provided;
  • Employer declarations – The ATO will be targeting employers claiming deductions under the otherwise deductible rule without complying with the documentation requirements;
  • Benefits provided by contractors, clients and suppliers – An ongoing area of ATO focus is non-cash benefits provided to employees and / or associates by third parties (such as clients, suppliers or contractors). In many cases it may be difficult for, employers to argue that they were unaware of the benefits being provided. Employers need to consider their obligations in respect of these benefits;
  • Amounts reported at certain labels of income tax returns and BAS such as Fringe Benefit employee contributions, contractor expenses, motor vehicle expenses, superannuation expenses and salary and wage expenses. Where no FBT return has been lodged, this may increase the risk that the employer entity is selected for an ATO audit or review.

If you would like to discuss Fringe Benefits Tax and how you may be affected this season, please contact Rachel Pritchard, or Rebecca Lay on (08) 6311 6900 for more information.

Fringe Benefits Tax: Exempt Vehicles

The ATO has recently released a new draft practical compliance guideline (PCG 2017/D14) in relation to exempt vehicle fringe benefits which we believe is relevant to you and your employees. The PCG aims to relax the current FBT record keeping requirements for certain vehicles (for example panel vans, single cab utes and certain dual cab utes that are not designed principally to carry passengers).

Under the current FBT rules, where such a vehicle is provided to an employee for work related purposes and any private use is limited to ‘minor, infrequent and irregular’ travel, the vehicle is an exempt fringe benefit and not subject to FBT. Where private use of the vehicle is more than just minor, infrequent and irregular, the provision of the vehicle is a residual fringe benefit.

On this front, there has always been uncertainty on what exactly is ‘infrequent and irregular’ private use and how much private travel is more than ‘minor’, particularly because records such as odometer readings and logbooks are not mandatory for exempt vehicles. The onus is on the employer to be able to reasonably demonstrate that their employees do not use work vehicles for more than minor, infrequent and irregular private use.

The draft PCG in a nutshell

The draft PCG states that where certain conditions are met, no records are required to be maintained by the employer each year to demonstrate that the work-related FBT exemption applies to the vehicle provided to an employee. These conditions include:

  1. The vehicle provided to a current employee is an ‘eligible vehicle’ and is provided to the employee to perform their work duties . Please click here to view eligible vehicles;
  2. The employer takes all reasonable steps to limit private use of the vehicle and has measures in place to monitor such use;
  3. The vehicle has no non-business accessories;
  4. The vehicle’s GST inclusive value is less than the luxury car tax threshold (ie $65,094 for the 2017/18 year for non-fuel efficient vehicles);
  5. The vehicle is not provided as part of a salary packaging arrangement;
  6. The employee uses their vehicle to travel:
    • Between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip;
    • No more than 750 kilometres in total for each FBT year for multiple journeys taken for a wholly private purpose; and
    • No single, return journey for a wholly private purpose exceeds 200 kilometres.

Where the above conditions cannot be met, employers should continue to have employees maintain and provide records of the use of the vehicle to enable the employer to determine if the vehicle is subject to FBT and to what extent.

What the draft PCG achieves

There have been mixed responses from the industry in relation to the extent of the draft PCG’s effectiveness in easing the compliance burden on employers and employees.

In our view, while the draft PCG is well-intended, the difficulty with applying the draft PCG is that an employer must still be able to demonstrate the use of any relevant vehicles provided to employees meets the above eligibility criteria at all times.

This in itself requires record keeping, for example:

  • Regularly comparing the opening and closing odometer readings of the vehicle with the total distance the employees are expected to travel between home and work;
  • Obtaining declarations from employees which confirm that their private travel is minor, infrequent and irregular; or
  • Maintaining a valid log book, so work trips and private trips can be recorded.

The PCG suggests that ‘reasonable steps to limit private use’ include a monitored employment policy limiting the private use of work vehicles’. It is also important that it can be shown that the policy is enforced. Employment handbooks, intranets and contracts should therefore be up to date so employees are aware of the limitations on any work vehicle provided to them.

What to do next

Given that an employer and its employees still need to be able to demonstrate that the private use of a work vehicle is within the above rules, it is still unclear how much relief the PCG will actually provide. Until the PCG is issued as final, we recommend that you review your current employment and car travel policies to confirm whether they are in line with the PCG’s comments. You should also consider how effectively the current policies are monitored and enforced in practice.

Where you are satisfied that the private use of work vehicles provided to employees meets the draft PCG’s guidelines, in our view, the following records should be maintained at a minimum:

  • opening and closing odometer records should continue to be maintained by employees;
  • declarations should be obtained from employees to show that the private use of the vehicle is minor, infrequent and irregular;
  • estimates of home to work travel obtained for each employee and compared to odometer records on a periodic basis; and
  • evidence that the employer’s policy regarding limited private travel is enforced and monitored.

We will be monitoring any updates to the draft ruling closely as various industry submissions have been made to the ATO.

If you would like any further information, please do not hesitate to contact either Rachel Pritchard or Rebecca Lay of our office on (08) 6311 6900.

ATO shakes up claiming of employee travel expenses

ATO shakes up claiming of employee travel expenses

The 2018 FBT year is coming to a close on 31 March 2018 and an area which will require closer consideration this year is the treatment of travel-related benefits. Last year, the ATO issued Draft Tax Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? The Draft Ruling changes the landscape for the treatment of travel related benefits and brings some positive developments in the ATO’s views on when an employee is considered to be travelling on work.

The Draft Ruling details the ATO’s interpretation of when travel expenses would be deductible to an employee or ‘otherwise deductible’ for FBT purposes to an employer, in light of the 2014 John Holland case. In John Holland, the critical question was whether airfares paid for on behalf of fly-in, fly-out (FIFO) employees travelling to and from a site in Geraldton were subject to FBT or were ‘otherwise deductible’.

The ATO has withdrawn various rulings including Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits, which previously provided a 21-day rule of thumb to determine the nature of an employee’s travel and whether an employee was travelling for work or may be seen to be temporarily living away from home.

This new Draft Ruling does not replace the 21-day rule of thumb. Instead, it provides a number of further factors which must be considered to determine whether a travel expense would be deductible to the employee or subject to FBT to an employer. In the Draft Ruling, the ATO introduces two new concepts which have not arisen out of law or any previous ATO guidance – ‘special demands travel’ and ‘co-existing work locations travel’. Both concepts are now highly relevant in determining whether a travel expense is deductible or subject to FBT and it is important that both employers and employees are across these new terms. These concepts are discussed below.

While the Draft Ruling was initially welcomed by both employers and employees as there was little guidance on this issue, now that the dust has settled, there are a number of key scenarios where travel expenses are often incurred which remain unaddressed in the Draft Ruling. This means that both employers and employees will need to consider the different circumstances in which travel expenses arise and whether in each scenario the expenses are deductible.

The Draft Ruling distinctly separates the treatment of travel expenses relating to transport (e.g. flights and car running costs) and travel expenses relating to accommodation, meals and incidentals.

Transport expenses – general principles

Under the Draft Ruling, the deductibility of a transport expense (such as airfares and car running costs) will depend on the type of travel undertaken by the employee. The ATO outlines four categories of travel, being ordinary home to work travel, special demands travel, co-existing work locations travel and relocation travel (these terms are explained further below).

Importantly, the ATO notes that an employee is not entitled to deduct a travelling expense simply because they receive a travel allowance to cover the expense.

The following factors are relevant in ascertaining which category a transport expense will fall into.

  1. Whether the employer and the work activities require the employee to undertake the travel;
  2. Whether the employee is directly or indirectly ‘paid to travel’. The Draft Ruling states that for employees on a wage, this factor is satisfied where the employee is paid for the period of travel (either as wages or ‘something else’ such as travel time). However, for salary earners, the employment contract will need to be considered to determine if the employee is being paid to travel to fulfil their employment duties. Where the employee is not being paid to travel, the ATO considers the transport expenses are non-deductible and/or subject to FBT;
  3. Whether the employee is under the direction and control (i.e. subject to the employer’s orders or directions) of the employer. The Draft Ruling provides several examples of direction or control such as whether the employee must take phone calls during the travel and whether the employee is required to complete work tasks while travelling;
  4. The travel arrangement must not be contrived.

Transport expenses – relevant factors

Broadly, transport expenses are deductible to an employee (or ‘otherwise deductible’ and not subject to FBT to an employer) where the travel is undertaken in the performing of the employee’s work activities and is not private in nature. Deductible transport will typically include trips between work locations and between a work location and another place (that is neither home nor a work location). In contrast, trips between the employee’s home and work are private in nature and non-deductible/subject to FBT.

The four categories of travel outlined in the Draft Ruling have different tax outcomes for each category.

Accommodation, meal and incidental expenses

The ATO’s view as outlined in the Draft Ruling is that accommodation, meal and incidental expenses are only deductible to an employee (and ‘otherwise deductible’ to an employer) where:

  1. The employee’s work activities require the employee to undertake the travel;
  2. The work requires the employee to sleep away from home overnight;
  3. The employee has a permanent home elsewhere; and
  4. The employee does not incur the expenses in the course of relocating or living away from home.

In determining whether an employee is living away from home, regard should be had to various key factors.

  1. The time spent working away from home. The longer an employee spends working away from home, the more likely the employee is living away from home and not travelling for work;
  2. Whether the employee has a usual place of residence at a previous location, or whether the employee has in fact left their previous location and has now relocated;
  3. The nature of the accommodation. Fully equipped accommodation, exclusive use of the accommodation (i.e. it is not shared between different employees) and the ability to have family or friends visiting, may all indicate that the employee is living away from home; and
  4. Whether the employee is or can be accompanied by family or visited by family or friends. An employee who has travelled to a work location with their family and transferred personal belongings is more likely to have relocated for work and not merely living away from home.

Key takeaways – the good and the bad

On one hand, the Draft Ruling provides some common examples which are useful to both employees and employers, particularly in relation to FIFO arrangements. The ruling also confirms the ATO’s view of the John Holland case and expands the situations in which an employee is travelling for work based on the new ‘special demands travel’ and ‘co-existing work locations’ criteria.

However there are a number of shortfalls which we hope will be addressed in the final ruling. These have been raised in submissions to the ATO by industry representatives.

  1. A large focus in the Draft Ruling is that the employee must be under the direction and control of the employer and getting paid to travel to determine whether the cost is deductible and/or not subject to FBT. However there is no requirement that the employee must be ‘paid to travel’ under the law. The law only requires that the employees be required to travel as part of their employment – which is a broader concept to that described in the Draft Ruling.
  2. As there is a focus on direction and control, it is unclear whether an employee on a salary who is travelling outside of work hours (e.g. during the weekend) would be subject to the direction and control of the employer and considered to be travelling for work.
  3. There are several examples in the Draft Ruling where transport expenses of the employee were not deductible, however accommodation, meals and other incidental costs were deductible. This suggests that the rules in determining whether transport expenses are deductible are separate and distinguishable to the deductibility of other travel expenses. Previously, it was commonly understood that the entire travel arrangement would be subject to the same tax treatment for transport and other expenses (e.g. accommodation and meals).
  4. The ATO has removed the 21-day rule of thumb without replacing this with another practical guideline or safe harbour period of time. There is however, an example in the Draft Ruling where the ATO considers that an employee travelling on a three month work placement to an alternative place of work is living away from home, although guidance in what constitutes travelling for work versus living away from home is generally lacking in the Draft Ruling. Taxpayers need clear safe harbour guidance from the ATO as to what period of time would be considered to be travelling versus living away from home.

Action

Once issued as final, the Ruling will apply to taxpayers both before and after its date of issue and therefore applies for the 2017/18 FBT year. Accordingly, taxpayers should review their position taken in previous years and consider whether this complies with the Ruling guidelines. In light of this Draft Ruling, we anticipate that the ATO will be monitoring both employer’s FBT returns and employee’s individual tax returns in respect of work-related travel expenses.

Employers should:

  • Review the current travel expense and reimbursement arrangements with employees to ensure that all travel expenses are otherwise deductible under the new Draft Ruling, as a further FBT burden could arise.
  • Review employment contracts, and in particular, the role and responsibilities of  employees who travel for extended periods of time. Whether the employer is subject to the direction and control of the employer is an important factor.
  • Review arrangements with employees who are travelling between home and alternative work locations.
  • Review arrangements with employees who were previously considered to be living away from home but may now be considered to be travelling.

If you wish to discuss any of the above in further detail, please contact Rachel Pritchard or Rebecca Lay on (08) 6311 6900.

Cooper Partners Financial Services wins SMSF Firm of the Year

 

In what has been a highly enjoyable and successful week for our practice, we took great pride in being able to share with our team in celebrating the honour of Cooper Partners Financial Services being awarded the “SMSF Firm of the Year” at the 2017 SMSF Adviser Awards for WA at Crown last night.

The award is a credit to Jemma Sanderson and our team for all of the hard work and dedication put into establishing ourselves and our practice as leaders in the every changing and challenging superannuation and SMSF industry.

We pride ourselves on our technical depth, high quality innovative advice and exceptional service, delivered by specialist staff who are highly trained and skilled.

By being at the forefront of the ongoing reforms, we are able to analyse and communicate the changes as they come to hand not only to our clients, but also to the broader network of advisers that we consult to.

In the technological age where administration is commoditised, we have always favoured the human element and face to face contact with our clients, ensuring that we know all of our clients circumstances and can respond quickly to queries, issues and opportunities as they arise, delivering a value-added service to our high standards. We find that this goes a long way to ensuring a long term relationship with our clients.

We are humbled but proud that Cooper Partners Financial Services has been recognised as a leader in the SMSF industry.

In The Xpress Lane – October 2017 Quarterly Update

A quarterly tax update

Cooper Partners is now providing a summary of the top 5 hot-button issues from the tax world garnered during the last quarter that you might not otherwise have noticed.  A super quick way to stay current on the “need to know” tax developments that are relevant to you.

In this quarterly “In the Xpress lane”, the following is covered:

  1. Cross border debt by junior explorers
  2. Company tax rates for under $10M turnover
  3. Draft ATO ruling on the deductibility of travel expenses
  4. $20,000 instant asset write off
  5. ATO provides a further 7 years to repay certain corporate beneficiary entitlements

Latest ATO discussions re cross border debt and junior explorers

The ATO is currently drafting guidance on interest free loans and how the new arms-length principles under transfer pricing will apply to these arrangements. This will be relevant for junior explorers who are investing outside Australia.

To date there has not been an ATO ruling covering the Commissioner’s view on interest-free loans from related entities.

In the recent WA Tax Convention in August, the ATO said that it doesn’t really have an issue with interest free loans during the pre-feasibility stage, as banks would unlikely have lent to these explorers for such activities.

However, post-feasibility, the entities will need to consider the group’s overall cost of debt. A low interest rate would usually be acceptable despite jurisdictional risk. Considerations include:

  1. If there is capacity to take on debt, then how much?
  2. The level of gearing where a higher gearing ratio will indicate less capacity to take on debt.

The new ATO guidelines won’t focus on factors, but will pose key questions like whether there is a reasonable expectation that an arm’s length party would have provided interest bearing loans.

It is expected a draft tax determination will be issued before January 2018.

The ATO will also issue a Practical Compliance Guideline which will provide further guidance on when an interest free loan is at low risk and not likely to be subject to audit.

It is expected that the term “quasi equity” will be dead.

Cooper Partners will keep you up to date on any developments.

Passive investment companies excluded from small business tax rate

The government has released draft legislation clarifying that passive investment companies and corporate beneficiaries of family trusts will not be able to access the lower tax rate for small businesses.

A recent media release from Minister for Revenue and Financial Services Kelly O’Dwyer revealed that the policy decision made by the government to cut the tax rate for small companies was not meant to apply to passive investment companies.

Previously, there was uncertainty around this with a draft ruling from the ATO stating that passive investment companies constituted carrying on a business making an inference that such companies and corporate beneficiaries of family trusts could access the lower tax rate .

The exposure draft bill amends the tax law to ensure that a company will not qualify for the lower company tax rate if 80% or more of its income is of a passive nature such as dividends and interest.

There are some unintended scenarios that may fall out with the new over layered test when determining the lower tax rate. The rules have been changed so that as soon as 80% of a company’s income comes from ‘passive’ sources, it cannot use the lower tax rate, irrespective that its aggregated turnover is less than $10M. Passive income includes dividends, interest, royalties and partnership and trust distributions attributable to passive sources.

One area of concern is the year-to-year nature of the test. We may find that active businesses may unintendedly fall in the higher tax rate due to interim business inactivity. There could be scenarios where businesses are sold and whether these gains effect the ratio combined with the effect where money just sits in the bank account earning interest.

Due to the tracing rules, corporate beneficiaries of trusts that carry on an active business may be able to take advantage of the lower tax rate. A similar tracing approach applies to dividends received from companies in which a shareholding of at least 10 per cent is held. This will mean holding companies of subsidiaries won’t be disadvantaged due to the dividends received. The amendments only apply to the year ended 30 June 2017 and later years.

Cooper Partners will road-test the 80% threshold through our relevant client base to determine the impact.

In the meantime this draft legislation is currently under industry consultation.

Draft ATO ruling on deductibility of travel expenses

The Commissioner released a draft tax ruling TR 2017/D6, on deductibility of travel expenses, which reflects the ATO’s current view of the taxation treatment of contemporary working and travel arrangements following the pivotal John Holland case with the creation of a new ‘special demands’ travel category.

The ATO’s tax treatment of travel expenses is now clearer since it revised and explained its view of the treatment of many common travel expenses and the ruling includes numerous new and interesting examples of both deductible and non-deductible travel expenses.

However, there are new concepts that need further clarity such as duration and location issues as well as further guidance on how travel between such locations should be treated. In the final ruling, we would like to see the ATO define ‘remote work location’ and include scenarios to address modern work practices.

It would be appropriate to introduce a time frame when travel costs are generally deductible in short term arrangements, as being more consistent with mobility industry standards combined with the general time limits for taxing employment income in Australia in most of Australia’s international double tax agreements.

This ruling has far reaching consequences particularly for employers and those that have been relying on an understanding of the application of the “otherwise deductible rule to reduce FBT exposure. Furthermore, we believe employees receiving travel allowances will be impacted with this new ruling as to what they will be able to claim against this allowance.

In the meantime we encourage you to consider how TR 2017/D6 will impact the deductibility of your employee’s travel expenses. Please contact your Cooper Partners engagement team if you require assistance.

$20,000 instant asset write off

This is the final year of the $20,000 instant asset write-off – to be abolished from 1 July 2018.

Until 30 June 2018, Small Business Entities (SBE’s) can claim an immediate write-off for most depreciating assets used in their business if the asset costs less than $20,000 and the below time frames are met. In broad terms, SBE’s are entities that are carrying on a business and have an annual turnover of under $10 million. This includes the turnover of any connected entities and affiliates.

Being in its final year of operation, the timing requirements around the instant asset write-off are important. To claim a deduction in 2017/2018, the asset must have been acquired on or after 1 July 2017 and first used or installed ready for use in your business on or before 30 June 2018.

If you miss the deadline (i.e. if the asset is not being used in your business or installed ready for use on or before 30 June 2018) then the write-off threshold reverts to $1,000.

Missing the deadline may result in a disadvantage cash-flow outcome for your business than if the deadline is met due to the potential tax savings. But you should not let tax distort or blur your commercial instincts – as you don’t get any extra cash than you would otherwise have under the old rules, you should continue to only buy assets that fit within your business plan.

ATO provides further 7 years to repay certain corporate beneficiary entitlements

The ATO has released Practical Compliance Guideline 2017/13 which will allow trusts to refinance unpaid entitlements (‘UPE’) of corporate beneficiaries for an additional 7 years, where those unpaid entitlements are due to be repaid by the trust by 30 June 2018. This can provide a significant cash flow benefit where you would otherwise have been required to repay such arrangements.

The guidelines relate to unpaid entitlements of corporate beneficiaries to the income of a trust that were converted to a 7-year interest only loan. Under these new guidelines, the ATO will allow the unpaid amount of the UPE to be converted to a Division 7A complying 7-year loan. However, the new loan must provide for principal and interest payments over the additional 7-year term.

The ATO will not accept the refinancing to be done on an interest-only basis or refinance through a 25-year interest and principal loan.

The new Division 7A compliant loan must be put in place prior to the earlier of actual or due date for lodgement of the corporate beneficiary’s income tax return for the year in which the 7-year interest only loan matures which may for many be around May 2019.

The ATO have made no comment at this time whether this position will be extended further to UPEs that are due to be repaid in later income years. We will continue to monitor any announcements in this regard.

What to do now?

Cooper Partners will be reviewing client’s existing UPE arrangements to determine what action is required in light of the ATO’s new guidelines. In the meantime if you have any queries regarding the above please contact your engagement team members.

It’s an Octoberfest of Changes for Employers!

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With the Turnbull Government now settled in, many tax changes previously raised in the Budget are now coming through Parliament. Here is a rundown of the key changes impacting employers.

1. Personal Tax Cuts

Employers be aware as of 1 October 2016, the PAYG Withholding rates for employees have changed. The 32.5% tax threshold from $37,001 – $80,000 has increased to $37,001 – $87,000 for the income year ended 30 June 2017 as follows:

table-1

*Rates do not include the Medicare Levy Surcharge and Temporary Budget Repair Levy for taxable incomes >$180,000

The non-resident tax rates have also been updated to increase the 32.5% tax threshold to $87,000, up from $80,000 as below

table-2

The ATO have released updated PAYG withholding rates for both resident and non-resident individuals who earn over $80,000.

The new withholding rates have application from 1 October 2016, so will apply to your first payroll run from this date.

Actions

  • If you haven’t already updated your payroll systems, we recommend downloading the current tax tables from http://www.ato.gov.au/taxtables or contact your payroll software provider for the relevant update.
  • No further adjustments are required to be made by employers.
  • While the updated tax tables do not include any catch-up component for the portion of the year prior to 1 October, individuals affected will receive a tax adjustment for the 1 July to 30 September period upon assessment of their income tax return for the 2017 income year.

2.  SuperStream deadline is approaching for ‘small employers’

SuperStream is a new standard where employers pay superannuation contributions and disclose other relevant information electronically in the approved format. It applies to all employers and includes contributions made to self-managed superannuation funds (subject to some exemptions).

While medium to large employers (i.e. employers with 20 employees or more) were required to be SuperStream compliant from 1 July 2015, small employers were provided with an extended deadline until 28 October 2016. Where an employer is not SuperStream compliant by the deadline, the ATO can impose penalties, particularly where it considers that no or little effort has been made to comply with the SuperStream requirements.

Actions

  • If not already SuperStream compliant, you should review your current payroll systems to ensure that it meets the SuperStream reporting capabilities, or choose an alternative SuperStream option, such as:
    o   A super fund’s online payment system;
    o   The ATO Small Business Superannuation Clearing House; or
    o   Messaging portal.
  • Once you have chosen an option, you should then collect the relevant information for each employee and their chosen super fund as required under the SuperStream rules in order to commence SuperStream reporting and payment of super contributions.

3.  Backpacker tax changes on the horizon

The House of Representatives has passed changes which impose a ‘backpacker tax’ on individuals holding a Working Holiday 417, 462 or certain related bridging visas commencing 1 January 2017. The proposed changes seek to apply a 19% income tax rate on a working holiday maker’s taxable income on amounts up to $37,000, with the ordinary individual marginal tax rates applying against amounts in excess of this.

Actions

  • Employers of working holiday makers must register with the ATO in order to withhold at the 19% tax rate.
  • Failure to register requires an employer to withhold at the 32.5% rate and may expose the employer to ATO penalties.

4.  Simplified FBT approach for fleet cars

The ATO has released Practical Compliance Guidelines PCG 2016/10 which provides a welcome concession for employers in managing the logbooks of their employees using work fleet cars. The ATO now permits an employer to use a single average business use percentage across all work fleet cars calculated from valid logbooks – this means that the occasional missing or incomplete logbook should no longer cause the problems around FBT time.

There are several conditions in obtaining this logbook concession:

  • The cars must be used predominantly for business – i.e. they are ‘tools of trade’ and are not salary packaged;
  • The fleet has at least 20 cars and none of these cars exceed the luxury car threshold (currently $64,132);
  • The employees are required to keep logbooks for the fleet for each logbook year (i.e. once every five years) and valid logbooks are in fact held for at least 75% of the fleet the relevant year; and
  • The employer either chooses the type of fleet cars, or allows the employee to choose a car from a limited list.

The logbook average can be applied across the entire work fleet for a period of up to five years, including to new and replacement cars in the fleet (subject to certain limited circumstances).

Actions

  •  Review your logbooks
  • Ensure that at least 75% are valid and compliant with the logbook requirements.
  • The logbooks should be maintained for a 12-week period.
  • Review your payroll system
  • Ensure the appropriate value is selected as the reportable fringe benefits on PAYG payment summaries
  • The average business use percentage can be used
  • A comparison should be undertaken as to whether it is more favourable to use the actual logbook business use percentage, versus the average percentage to provide the lowest RFBA
  • We note however that where the total taxable value of reportable fringe benefits provided to an employee is less than $2,000 for an FBT year, no amount is required to be reported in the PAYG payment summary.

Further Actions

If you would like any further information in relation to the new employer obligations and how they may impact your business, please contact Rachel Pritchard or Rebecca Lay on (08) 6311 6900.

 

Super Update – Further details on the new NCC bring forward cap

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Following on from our Super Update last week, the Treasurer has provided further clarification regarding how the transitional rules will work for individuals who trigger the $540k cap before 1 July 2017.

Individuals have one last opportunity this year to use the higher personal after tax contribution limits of $180,000 per year. Where the taxpayer are in a position to take advantage of this, they could contribute up to $540,000 before 30 June 2017. Post July 2017, the bring-forward cap will be recalculated to reduce the remaining period’s annual caps from $180k per year to $100k per year.

Take an example: If an individual was to trigger the $540k bring-forward cap in the current year by making a $250k on after tax contribution to their superannuation fund, they would only be able to contribute a further $130k over the next 2 income years. The total over the 3 years of $380k represents the current year’s annual cap of $180k, plus the $100k annual cap for the next 2 years under the new rules.

Therefore, if you are in a position to consider utilising the $540k bring-forward cap in the current year to be able to contribute up to an extra $160k in non-concessional contributions. Prior to implementing the above strategy, please contact us to ensure you implement correctly.

 

Authored by Jason DeMarte and Jemma Sanderson

Tax Record Keeping – In An Electronic Environment

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Within a rapidly changing digital world and with an increasing number of businesses moving towards paperless offices, we are often asked whether tax records can be stored electronically and how long they should be stored for.

Electronic storage has obvious benefits, including ease of accessibility and storage efficiency. However, you should be aware of specific legislative requirements given the consequences of non-compliance for a company and its officers.

Below is a summary of some of the key record-keeping obligations of a company for taxation purposes and how this inter-plays with an electronic storage system.

We note that the records your business keeps should be considered in the context of your business operations and with regard to all the relevant commercial and statutory requirements specific to your business.

Income Tax Laws and the ATO

  • Income tax laws require businesses to maintain tax records that explain transactions undertaken by them.
  • Under the law, documentation can be maintained either in paper form or by means of electronic storage.
  • As a general rule, tax records should be retained until five years after the later of:
    • The date on which the records were prepared or obtained; or
    • the completion of the act or transaction to which the records relate.
  • It is important to note however that the events that mark the beginning or end of the retention period can vary according to particular laws. For example, capital purchases records will generally be required to be kept from the date of purchase until five years after the capital gains tax event (such as a disposal) has occurred and this period may be extended further if the disposal results in a capital loss.
  • Notwithstanding the above, records that support claims made in income tax returns may need to be kept for additional time, as outlined below.

Income tax returns and other ATO statements

  • There is no legislative requirement to keep copies of signed income tax returns or activity statements, provided taxpayers retain copies of the records used to prepare these documents for five years after either:
    • the due date; or
    • date of lodgement (whichever is the later).
  • This five year period also applies to taxpayer declarations relating to returns and documents lodged by a tax agent on the taxpayer’s behalf.
  • If the period in which the Commissioner may amend a tax return assessment is extended, records relating to transactions disclosed in that tax return are required to be retained until the end of the extended assessment period.
  • Income tax laws require that written records must be kept in the English language, or so as to be readily accessible and convertible to English.

The above records may be kept electronically as scanned documents provided that the electronic copy is a true and clear reproduction of the original and is in a form that the ATO can access and understand in order to ascertain a taxpayer’s tax liability.

Tax governance

We recommend that taxpayers prepare detailed records and supporting documents at the time they either enter into a transaction or adopt a tax position in order to manage tax risk.

Although five years is generally the period for retention for tax purposes, other legislation may require longer periods.

Company law

The Corporations Act outlines reporting requirements for financial records as well as for registers and meeting minutes books as outlined below.

Financial records

  • The Corporations Act requires that companies keep financial records for seven years from the date after the transactions covered by the records are completed.
  • These records must correctly explain the entity’s transactions and financial position and performance, and must enable true and fair financial statements to be prepared and audited.
  • Financial records include working papers that are needed to explain the methods by which financial statements are prepared and adjustments to financial statements are made.
  • The Corporations Act specifically allows for financial records to be kept in electronic form, provided they are convertible into hard copy and a hard copy is capable of being made available to a person entitled to inspect the records within a reasonable time.

Registers

  • Registers are required to be maintained for the duration of a company’s registration plus five years after the date on which the last entry was made.
  • Minute books of the Directors and Shareholder meetings are required to be maintained for the duration of a company’s registration.
  • These records can be prepared and stored electronically provided they can be reproduced at any time in a written form.
  • For this reason we believe it is prudent to retain minutes and resolutions in written form.
  • Companies are required to take reasonable precautions to protect records against damage and tampering.

Industrial law

  • All employers are legally required to keep time and wages records to provide support that employees have been paid correctly and have received their full entitlements.
  • Under West Australian state law, time and wages records must be kept for at least seven years after they are made, for both current and past employees.
  • Records relating to long service leave must be kept during the period of employment and for seven years from the date employment ends.
  • Employment records may be kept electronically provided they are readily accessible and are convertible into a legible form in the English language.

There are other record-keeping requirements that may apply to companies in relation to their employees, for example workers compensation legislation and industry codes to which the company is a party, may also impose specific record retention requirements.

SMSF law

If you have your own SMSF, over and above the general 5 year rule relating to tax records, SMSF’s need to keep the following records for a minimum of 10 years:

  • minutes of trustee meetings and resolutions
  • records of all changes of trustees
  • trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee
  • members’ written consent to be appointed as trustees
  • copies of all reports given to members
  • documented decisions about storage of collectables and personal-use assets.

Electronic record keeping

The Electronic Transactions Act 1999 (ETA 1999) contains specific provisions which state that a requirement or permission under a law of the Commonwealth for a person to provide information, in writing, to sign a document or to retain information or a document can be satisfied by an electronic communication, subject to certain minimum criteria being satisfied.

Where information is kept in electronic form, the electronic form used must be:

  • readily accessible so as to be useable for subsequent reference; and
  • a reliable means of assuring the maintenance of the integrity of the information contained in the electronic form.

Both the ETA and the ATO emphasise that the integrity of information is maintained only where the information remains complete and unaltered. Therefore, it is important to ensure that electronic record keeping systems contain sufficient security to ensure that the record cannot be altered or manipulated.

The ATO’s guidelines on the controls and features that electronic record keeping system should have in order to meet the record keeping requirements under the tax law are set out in Taxation Ruling 2005/9.

Further to these guidelines national and international standards exist for electronic records against which companies may assess their electronic record keeping systems, including AS/NZS ISO/IEC 17799:2006 which provides best practice recommendations for information security management.

Actions

  • Best practice is to ensure your business maintains reliable record keeping processes. The ATO will accept documents to be stored electronically so long as when printed or reproduced they are a reliable representation of the original.
  • We recommend that businesses consider implementing the above electronic standards as part of their tax record retention policies and systems to ensure that they are able to rely on their electronic records if and when the need arises.
  • Ensure appropriate back-up copies of computer files and programs are occurring and there is an ability to recover records if your computer system fails.
  • Ensure there are adequate controls to safeguard the security and integrity of the records, such as passwords or restrictions to access as appropriate.
  • Note that the above summarises the record keeping for tax. Any legal documents like contracts, leases, trust deeds, documents that need witnesses still require the original written version to be maintained.

If you would like us to conduct a health check of your record keeping for taxation purposes and sign off your electronic tax records or CGT asset registers please contact us.
This article was authored by Michelle Saunders and Robyn Dyson.