1. READER QUESTION
A new client has contacted us. They have brought to our attention their self-managed superannuation fund.
The SMSF had a trustee company “Something Pty Ltd”.
“Something Pty Ltd” was an operating company that ran a shop.
‘Something Pty Ltd” went into liquidation was liquidated and has been wound up quite some time ago circa 4 years.
The Superannuation fund has a property in it, 500 acres of farm land worth $650,000.
There is no debt and the members pay the rates on the property each quarter.
The trust deed is unable to be located.
Where should we start in remedying this situation? Given that the SMSF has no trustee.
ANSWER
Given there is property title and potential conveyancing issues along with trust law and SISA compliance issues, there is no quick fix.
The services of a reputable law firm with expertise in all the above areas will be required.
Clearly the SMSF is well behind in its lodgements – otherwise the independent auditor would have picked this up…. along with missing deed.
A new trustee will need to be chosen by the members and a corporate trustee is recommended.
A trust deed of variation will need to be done for the SMSF … trust deed or no trust deed – you could check with the bank and/or last known SMSF auditor to see if they have a copy.
We suspect a raft of compliance issues will come into play when the SMSF’s compliance obligations are being updated.
These will not be limited to:
- the trustee issue
- possible investment standards
- in-house/personal use assets
- sole purpose test
Steps need to be taken to get this SMSF into compliance mode as soon as possible and it cannot be done on the cheap – some professional fees will be involved.
2. READER QUESTION
I just wanted clarification on the latest company tax rate changes down from 30% to 27.5%.
In relation to the franking account do we now have to go back and re-calculate the company’s franking account as we had to do many years ago when the company tax rate had gone down from 34% to 30%?
I am not too sure if the Legislation is retro or just effects the franking account from 1 July 2016.
Could you please clarify?
ANSWER
We refer you to draft Practical Compliance Guideline PCG 2017/D7 published by the ATO.
Nothing contained therein indicates that the franking account balances need to be altered.
The key change is that since 1.7.2016 dividends are only allowed to be franked to 27.5%.
In the event shareholders of small companies (less than $10 million) have received dividend statements since 1 July 2016, then they need to be sent amended advices, advising that their dividends are only franked to 27.5%
3. READER QUESTION
Can the costs of obtaining probate for a deceased estate be claimed against the Capital Gain of a property if the asset being sold was the only asset transferred to the beneficiaries through the Will?
ANSWER
The cost of obtaining probate may be included in the fifth element of the cost base of the property. The cost base of a CGT asset consists of five elements. The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset. The cost of obtaining probate may be characterised as title establishment expenditure.
You may wish to apply for a private ruling.
We note that the cost of obtaining a simple probate would not be significant.
However in our research we came across two interpretative decisions which indicate that where there is a dispute over control of the Estate that legal costs may be added to the cost base.
Of course this is where significant costs may be incurred.
We recommend you review ATO ID 2001/730 and ATO ID 2004/425.
4. READER QUESTION
We have two clients Mr. A & Mrs. B (husband and wife). On the 1st January they decide to live separately. On the 30th April the divorce is granted by the Court. As part of the divorce settlement, Mrs. B keeps the family home. Mrs. B decides to sell the family home. Can Mr. A’s SMSF purchase the house? I don’t see that Mr. A’s SMSF is not able to purchase the property. We think that after the divorce Mr. A & Mrs. B are not associates, could you please confirm? Is there anything else we need to consider?
ANSWER
It’s a really good Question but too close to the line for comfort.
First of all you would have to clear the ‘associate’ issue and we would recommend an application for private ruling in this instance fully explaining why this purchase was consistent with the SMSF’s investment strategy SISR s52(2).
In the event your client had his children living in the dwelling at any time then it would be an in-house asset. In the unlikely event these hurdles could be overcome, then market value would have to be paid for the building and this would have to be demonstrated to the satisfaction of the Auditor of the SMSF.
5. READER QUESTION
Scenario: A couple have taken out a mortgage on their house to lend those funds (approximately $250,000) to the business of a relative (Business A), and deduct the interest they pay to the bank from their tax, as they receive interest from the business. Due to a restructure, they want to transfer these loan funds to another family business (but legally separate) (Business B). Business B actually owes money to Business A. Business A wants to repay the couple, so they can put their loan account down to $0, before they transfer the funds to Business B; however Business A does not have sufficient funds to do this ($250,000).
Would there be a problem with the 2 businesses doing general journals to reflect the change in the funds? And, is there a problem with the couple then claiming interest incurred in loaning the funds to Business B, considering there was no literal cash transfer of funds (it was all on paper/journals)?
The journals I envisaged were: Business A: Debit Loan account from the Couple Credit Loan account to Business B (i.e. reducing the amount Business B owes Business A). Business B: Debit Loan account from Business A (i.e. reducing the amount owing to Business A) Credit Loan account from the couple.
ANSWER
The fundamental test for deductibility of interest as consistently applied by the Courts is the “use” Test i.e. the use to which the funds have been put.
So only by the proper tracing of the application of the funding can you determine its tax deductibility. By this, whether the loan was used for working capital in a business or to purchase an income producing asset.
Securitisation or presentation in the balance sheets of particular entities is irrelevant. So by a strict interpretation of the relevant case law you could run into trouble by simply doing journals.
6. READER QUESTION
In GST Concession one is non-commercial event. The sale is GST-free if the amount charged is either of the following: less than 75% of the amount the registered charity, gift deductible entity or government school paid to purchase the item that is subsequently sold. My Question is what can be defined as purchase? We are growing seedlings and sell. Can we count in the wages paid to staff to grow the seedlings? Can we count the rental of the nursery, water, electricity etc?
ANSWER
Non-commercial activities
The commercial activities of a registered charity, gift deductible entity or government school are taxable but the non-commercial activities of these organisations can be GST free.
This means that, if it is registered for GST, the registered charity, gift deductible entity or government school does not pay GST on the payment it receives for its non-commercial sales, and it can claim GST credits for the GST included in the price of purchases it uses to make these sales.
The term ‘non-commercial activities’ refers to sales made when the payment received for the sale is less than a specified amount. The sale is GST-free if the amount charged is either of the following:
Less than 50% of the GST-inclusive market value
Less than 75% of the amount the registered charity, gift deductible entity or government school paid to purchase the item that is subsequently sold.
Your Question relates to Section 38-250 of A New Tax System (Goods and Services Tax) Act 1999. You seek interpretation of subparagraph 38-250(2)(b)(ii) which provides ‘if the supply is not a supply of accommodation – is less than 75% of the consideration the supplier provided, or was liable to provide, for acquiring the thing supplied.’
It is possible to interpret subparagraph 38-250(2)(b)(ii) narrowly such that it only applies where the thing acquired is identical to thing supplied. However, the Commissioner has a long standing view the subparagraph 38-250(2)(b)(ii) can apply to any sort of supply other than accommodation, and that it is not a requirement for the thing acquired to be identical to the thing supplied.
Accordingly, the word ‘acquiring’ in the phrase ‘acquiring the thing supplied’ is interpreted as including acquisitions of things that are on-supplied, the acquisition of those things used up in providing services or manufacture and acquisitions of things that are ‘used’ in combination in making a supply of something else.
The charities consultative committee resolved issues document (CCCRID) states:
When working out the cost of providing something, a charity should include:
All direct costs incurred – for example, materials and direct labour; and
A reasonable apportionment of indirect costs incurred – for example marketing, administration, office expenses, electricity, telephone and insurance.
We refer you to the section titled Non-commercial activities of charities, cost of supply and market value tests. It provides a methodology for working out the cost of providing a supply for the purpose of subparagraph 38-250(2)(b)(ii).
7. READER QUESTION
I work for a charity and have access to Fringe Benefits Tax Exemption which is taken out fortnightly and put on to my home loan. I was wondering on top of this can I also Salary Sacrifice into my Superannuation or get a car on a lease. If I am allowed to Salary Sacrifice is there a cut off amount per year that I am allowed to utilise?
ANSWER
Yes, speak to your employer for limits and we refer you to page 85 of the 2016 Publication:
Capping of concessional FBT treatment for certain employers:
| Employer |
FBT Concession |
|
Public benevolent institution (other than public hospitals) and health promotion charities |
FBT exemption (capped at $31,177) |
|
Public hospitals, non-profit hospitals and public ambulance services |
FBT exemption (capped at $17,667) |
|
Rebatable employers – certain non-government and non-profit organisations |
FBT rebate (capped at $31,177) |
|
Religious institutions |
FBT rebate (capped at $31,177) |
Note this incurs the mark-up factor of 2.1463 (type 1 benefits) and 1.9608 (type 2 benefits). Superannuation is not included in the above limits.
8. READER QUESTION
My electrical business operates as a trust. I am showing a gross profit of $2 million and a net profit of $1.2 million. In addition to the standard run of the mill deductions which I am already claiming, what mechanisms are there to defer 50% of this profit until next year? Can the trust invest in shares?
ANSWER
Given your trust has a gross profit of $2 million, it is clear that the business is not a small business entity.
Investing in shares prior to 30.06.2016 is a capital outlay which will not reduce tax – you need tax deductions.
The following are suggestions prior to 30.06.2016:
- Maximise super for yourself and family members working the business – either $30,000 or $35,000 (if over 50).
- Choose the best method to value (low) stock on hand in order to increase cost of goods sold – see our annual publication page 87.
- Stock up on consumables you will require in the coming year.
- Write off and discard obsolete items of plant.
- Write off bad debts in books of accounts – refer to Supplementary Bonus on our website “Year End Tax Planning”.
- Delay revenue into the next financial year if you use accrual accounting system.
- Bring forward expenses into this financial year. Care should be taken to ensure that any actions do not breach the tax anti-avoidance rules and tax prepayment rules.
9. READER QUESTION
We deal with the Australian Agent of a Singapore based company. We invoice the Australian agent who is registered for GST. The parent company (Singapore) has asked if we can invoice them direct to avoid GST. Is this correct? We still deal with the Australian Agent but invoice the Singapore entity. All work is completed domestically by an Australian based business and is registered or GST.
ANSWER
There will only be no GST if you genuinely do work for the Singaporean Company and it is not a supply in connection with Australia. That means the product or service will be used in Singapore. If that is the case it will be classified as an export.
However, if the work is domestically based then you should charge GST.
10. READER QUESTION
I am a Senior. I am a self-funded pensioner. Bonus issue #85 page 34, suggests I should be able to earn up to $29,000 per year tax free from interest, rents or other sources. I earn income including from interest and rents but I do not get any offset. I went to ATO website and it told me I wasn’t entitled to the offset. It didn’t ask how much I earnt. Please tell me what could be the reason for this conclusion.
ANSWER
If your taxable income is $29,000 then here is your tax position:
Taxable Income $29,000
Tax thereon $ 2,052
Medicare Levy $ 580
Total Tax $ 2,632
Less tax offsets
Senior Australians and
Pensions Tax Offset $ 2,230
Low Income Tax Offset $ 445
Tax Payable Nil
Kindly, note tax offsets do not result in refunds.
Your circumstances may be that your taxable income is much higher than $29,000.
When we said “earn up to $29,000” we were referring to your taxable income. We are sorry if this was not clear.
11. READER QUESTION
Is there any template for the Division 7A Agreement?
ANSWER
Be very careful with templates as they may become outdated. Speak to your Accountant or Lawyer to ensure any document you use complies in all respects.
There are documents that may be purchased such as on the Law Central website but tread very carefully as this is an area of ATO focus.
12. READER QUESTION
Would you please clarify the tax position of a home you buy to own and use occasionally but never rent out, if you mainly live at another location where you pay rent. For example, you buy and own only one house, say outside of a city, but you pay rent to live in a city apartment close to family for the majority of your time.
ANSWER
You cannot claim a tax deduction on your city apartment if the use is private and domestic in nature.
However for CGT purposes, you may add to the cost base of the asset ownership expenses you incur for which you do not claim a tax deduction.
These include (but are not limited to) insurance, interest, rates and taxes and repairs.
You may be eligible for capital gain tax main residence exemption as the property has never been used to produce income. You should speak to your accountant before you sell the property. Note, that at any one time you may only have one principal place of residence.
13. READER QUESTION
When calculating private kilometres for residual benefit in relation to a utility, are we able to use our best 3 months Business % (from a logbook) against total kilometres to work out the private kilometres travelled during the year? Or, do we have to record the actual private kilometres travelled? When using the cents per kilometre method.
ANSWER
We would refer you to Miscellaneous Tax Ruling MT 2034 which gives guidance along with an example of an employee declaration regarding private kms.
Paragraph 23 of the ruling states ‘As noted in paragraph 13, the appropriate reduction factor is the proportion of business kilometres travelled to total kilometres travelled in the vehicle DURING THE YEAR.
Paragraph 27 states ‘Detailed logbook requirements of the kind specified for the determination of the value of car benefits are not required by law in the case of vehicles other than cars. However, many businesses would in any event, maintain some form of logbook records…’
In the event you had chosen to keep a logbook for 12 consecutive weeks (3 months), you could have estimated the business kilometres over the whole year. You must consider any variation in pattern of use. For instance, large private travel over the Easter holidays must be taken into account in estimating business kilometres travelled for the whole year.
Paragraph 15 of the ruling indicates that the ATO accepts the use of the utility will be overwhelmingly business.
The onus is on the employee to keep records or make reasonable estimates as they will be signing the declaration.
The short answer though is that if you have the actual kms then you must use them.
14. READER QUESTION
Super Stream. We’re a small company with 9 employees. Super Guarantee contributions paid monthly in various Super Accounts direct via Bpay or EFT. Using Reckon Accounts Software. I can send the Super File via my business portal; can I continue to pay the contributions myself instead of using a Clearing House? I believe the Bpay & EFT method is far quicker & more accurate than the Clearing House. Can someone please advise?
ANSWER
SuperStream requires you to pay super and send employee information electronically and there are four options available to achieve this:
- A payroll system that meets the SuperStream standard (current versions or Sage One, MYOB, Reckon & Xero are SuperStream ready)
- Your super fund’s online system
- A super clearing house (including the ATO’s free Small Business Super Clearing House – for businesses with fewer than 19 employees).
- A messaging portal
Please note that you do not need to use SuperStream for:
- Contributions to your own self-managed super fund (SMSF) (i.e. if you’re a related-party employer – for example, if you’re an employee of your family business and your super guarantee contributions go to your SMSF), or
- Personal contributions – for example, if you’re a sole trader and you contribute to a super fund for yourself.
15. READER QUESTION
I have recently inherited a payroll system run via MYOB that appears not to capture the correct Superannuation Contribution Guarantee for some of staff.
Under the relevant award, staff who work a Saturday or Sunday as part of their ordinary 38 hour week should meet the definition of OTE and get super for their respective Saturday or Sunday work. I have identified how to get this working correctly and can see how this has been impacted in the 2015/2016 financial year, so I can run calculations to see how much superannuation contributions are short for each employee.
The real Question I have is when did the new definition of OTE come into effect?
The other question, potentially how far back would be reasonable to go back and substantiate previous year contributions that may have been impacted? The difficult part of this task is that once our payroll system and financial year rolls over, visibility to run previous year reports is only possible by accessing back-up files.
Your clarification in this matter is appreciated.
ANSWER
The relevant ruling is Superannuation Guarantee Ruling SGR 2009/2.
Further guidelines on how to calculate SG Contributions for drivers in the transport industry can be found in ATO Fact Sheet” Super for long distance drivers”.
I have perused its history and the Ruling itself has not changed since 1 July 2008.
What may have changed are various industrial and workplace agreements.
However if a person’s standard hours included some weekend work (i.e. shift workers), then they were always to the Superannuation Guarantee for that work.
It is possible that some worker entitlements may have been overlooked.
16. READER QUESTION
Income received from a private Canadian pension income code 46, what offsets are available on 2015 ITR? The items do not state a UPP. They have paid tax to Canada.
Basically, how to claim on the tax return?
ANSWER
These overseas pensions can be a minefield and we note that concessions available to domestic pensions generally do not exist for overseas pensions.
With enhanced data matching the ATO is now detecting these and this will further increase from 1 July 2017.
The Canadian pension will be assessable income in Australia with a tax credit available for any tax paid in Canada.
Net foreign pension without UPP is reported under 20L and net foreign pension with UPP is reported under 20D.
You will need to work out foreign income tax offset and report it in item 20O. We refer you to ATO guideline “Guide to Foreign Income Tax Offset Rules (NAT 72923)”.
17. READER QUESTION
My client purchased a house in 2012 with the intention to live in. However, after the settlement, he had to rent it out for 3 months because the owner of the house could not find another place. After that he moved in and lives there until now. This year, he wants to sub-divide the land and build another property at the back of the current property. When the building is completed, he will move into the new house and sell the old one. Will there be CGT on the sale of the old property? If yes, how will it be calculated?
ANSWER
There will be CGT on the sale of the residence.
This will be calculated on the number of days.
For instance 3 months would be 92 days divided by 1460 days (4 years)…divided by 50% for the CGT discount.
An adjustment needs to be done for the market value of the land retained by your client.
So say the capital gains was $100,000 the taxable capital gain is:
92 divided by 1460 times 50% times 100k = $3,150.
18. READER QUESTION
I have an associate who is paid via our payroll. He has just resigned with a positive account balance. He has set up a new company and wants me to pay this balance on invoice to the new company rather than through our payroll system. Is this legitimate?
ANSWER
No, if the entitlements relate to his time as an employee or his work as individual on an ABN, it is best that he be paid according to what actually transpired.
If the engagement was with an individual, it is not wise for either party to change it after the event.
The ATO takes a dim view of situations where a taxpayer is an individual on wages Friday afternoon but an independent company the following Monday morning.
19. READER QUESTION
I have clients who have purchased off the plan an apartment for rent in Bali, August 2014.
The loan was secured in the 2014/15 financial year and so to date not generated any income. It is anticipated it will start earning a rental income in the current financial year 2016/17.
The client wants to claim the loan interest in both the 2015 and 2016 tax returns. My understanding is the lead time between purchase and completion of the apartment is too long.
The client’s intent is that it has been from date of purchase a rental property.
The two scenarios’ I see is as follows:
Tax Office allows the interest for both years as a deduction
The interest for both years is capitalised and forms part of the cost base for any future Capital Gains.
ANSWER
Interest is deductible to the extent to which it is incurred in gaining or producing assessable income and is not of a capital, private or domestic nature. It seems that the courts have looked at the purpose of the borrowing and the use to which the borrowed moneys have been put in determining the deductibility of interest.
The lead time may not be too great – it is more a Question of fact – you need a timeline of when the apartment was completed.
Was it immediately made available for rent?
Does evidence exists for this?
If not…why not
Note, that in the event the client has stayed there the private portion has to be adjusted.
The client must be truthful as this has the look of a holiday home and it is very easy for the ATO to check immigration/passport records.
It is not necessary to show that the interest was incurred in producing income of a particular year, though a large gap may indicate that the necessary connection does not exist. The court examined the ‘connection’ with income of later years in Steel’s case (Steele 97 ATC 4239).
In addition, the Commissioner limits the operation of Steel’s case to circumstances where:
The interest is not preliminary to the income producing activities. In other words, it is not incurred too soon.
The interest is not of a private or domestic nature
The period prior to the derivation of income is not so long that the required connection between the outgoings and income is lost (TR 2004/4).
Similarly, interest was deductible where the taxpayer purchased the property with the intention of deriving rental income, even though no income was ever derived (Ormiston v FC of T 2005 ATC 2340).
You may want to seek a private ruling in which the Commissioner could affirm whether the lead time is too long that the necessary connection between interest expenses and income is lost.
20. READER QUESTION
We are a transport company that also, as part of our business, leases out a commercial shed to a bus company.
We are in the process of selling the shed and believe that we do not have to charge GST on the sale (being a going concern), to another business that will be using it for commercial purposes. Are we correct?
ANSWER
This is only a commercial property if the shed is business real property that has a separate land title.
In the event this is the case…is there a current lease in place with the bus company?
If answer is yes to both questions then it is likely that this is a going concern but we do not have the full facts and circumstances before us and suggest you confirm this matter with your lawyer.
21. READER QUESTION
If two entities each purchase a half share of an asset costing $35,000, can each claim their share outright as it is less than $20,000? Or, does the immediate write-off only apply if the total cost of the assets is less than $20,000.
ANSWER
No, in all likelihood the two entities you refer to are related and the anti-avoidance provisions contemplate this.
The reference is to “artificial or contrived arrangements.” In this case one entity would be using the asset and in any case the $20,000 limit has been breached.
22. READER QUESTION
We would like to obtain an ABN for a business unit (division) of our company.
The Company has its own ABN, but we would like to obtain an ABN for the activities and transactions undertaken by the business unit/division. Is this possible?
ANSWER
You can only have one ABN per legal entity. A subsidiary company may have its own ABN but clearly…it is a separate entity.
23. READER QUESTION
Your Taxation Summary Guide indicates that Gifts are generally not taxable. The ATO website appears to indicate that ‘Large’ Gifts may be taxable. Has the definition of ‘Large’ been established and what dollar gift may we give to our children without impacting their tax?
ANSWER
A gift through family dealings – “natural love and affection” has no tax implications. For Centrelink purposes there may be implications (for the Assets Test) particularly if the donor is seeking the age pension.
For Centrelink purposes gifts beyond allowable limits are considered ‘deprived assets’ which are asset tested for five years and are subject to the deeming rules.
Two tests apply when gifting assets:
Clients may gi