Tax Deductions

Question 1

Can you please respond to the following tax issue?  We would like to know the tax implications to both the employer (XYZ University) and for employees that are prepared to forfeit leave as a donation to the University.  As a registered DGR we would be able to provide tax deduction receipts to staff.

The situation is set out below:

The University would like to investigate starting a benevolent fund at GU whereby the employees donate 1 day of their recreation leave to the fund.  We would like to know the tax implications for employees making this donation and whether it can be done as a pre-tax donation upfront into the fund?

Answer

For the staff to give consideration of the one day’s leave there must be a constructive receipt under section 19 of the ITAA 1936.

The leave will be assessable, but a tax deduction will be available for the donation to the Deductible Gift Recipient (DGR).  This needs to be clearly explained to the staff.  In our view, the annual leave will need to be added to the employee’s payment summary when it is assigned to the DGR.

Question 2

The following 6 positions have been made redundant:

1. CFO
2. Finance Manager
3. Assistant Accountant
4. Office Manager/PA
5. Reception
6. Senior Web/IT

And replaced with the attached structure.

Basically, I am not certain if this is a Bona Fide redundancy as the “job descriptions” have been split amongst the new categories.

I am concerned for tax implications and was wondering if the Church will sign a deed of release stating that this is Bona Fide and that if the ATO does not recognise this as the case the individual employees are not hit with a tax bill later in life and that the Church bears the costs, what do we do please?

Answer

Restructure

For space and confidentiality reasons we cannot print the attached structure.  What is clear however is that 6 positions are being replaced with 6 positions that have been rebadged with a clear organisational chart and delineation of duties?  This serves to make matters more streamlined and efficient with each staff member being clear about their core responsibilities.

Thus, there is a demonstrated need for the financial management and administration function to continue with 6 functions similar in nature to those of the departees.  We strongly doubt these are genuine redundancies but if there are outgoing persons who could benefit from the redundancy concessions you may wish to apply for a private ruling.

Question 3

This is the situation.

• I shop at Woolworths for personal, non-business items and spend over $30.
• As a result, I qualify for a fuel discount and it is automatically loaded onto my Everyday Rewards card.
• I put 50 litres of fuel into a car that is owned by my business and used 100% for business purposes.
• The pump price is $1.50 per and the pump says I owe $75.
• I used the fuel discount from my Everyday Rewards card, and this reduces the fuel price by $2 (50L x 4c/L).
• I use my personal credit card to pay the balance of $73.

Questions:

• Should the business reimburse me $73 or $75?
• Should the business claim a tax deduction (and the associated GST input credit) for $73 or $75?
• Does the advice change if I also spend $5 on food in the petrol station and qualify for an extra $2 discount (50L x 4c? L)?  In this case, does the discount apply to the cost of fuel (a business expense) or the cost of food (a personal expense)?

Answer

The reimbursement should be for the actual expenditure i.e., $73 meaning tax deductions and income tax credits are claimed on this factual amount.

Likewise, in the third situation, it is suggested that the focus is on the actual cost of fuel.

Question 4

We have moved to new premises and spent about $500,000 on interior design and fit-out for the new office.

This is a capital expenditure and will be amortised over a period of years.

The contractor’s invoices were paid by progress billing and all invoices were paid except for a small retention which will be paid after the defects liability period.

What depreciation rate are we going to use and over how many years can we amortise the asset?

Answer

It depends on whether you are a Small Business Entity and the nature of the expenditure.  “Office Fit-out” is a general term.

Structural improvements fall within the definition of the capital allowance (deductible at 2.5%) and we suggest some of the expenditure may come under this term.

Plant and equipment items are basically items that can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building.  Plant items also include items that are mechanically or electronically operated, even though they can be fixed to the structure of the building.  Plant and equipment items include (but are not limited to):

• Hot water systems
• Carpets
• Blinds
• Ovens
• Cooktops
• Range hoods
• Garage door motors
• Door closers
• Freestanding furniture
• Air Conditioning

The building write-off allowance is based on historical building costs and includes such items as bricks, mortar, walls, flooring, wiring, etc.

Question 5

My client has asked me to write off a few invoices for bad debts.  What are the rules and laws regarding this?

Answer

We take it you mean for taxation purposes.  To claim a deduction for a bad debt it must be written off in the books of accounts prior to 30 June.  It is important that all reasonable steps to recover the debt have been taken.  A commercial judgement is allowable – meaning it is not essential that all legally available steps to collect the debt are taken.

The deduction is claimed under s25-35.  To claim a tax deduction, the debt must:

• Be in existence (e.g., No deed of release has been executed)
• Be bad
• Be written-off as a bad debt in the year of income the deduction is claimed, and
• Have been brought to account as income in any year (or, if by a money lender, the debt must be in respect of a loan in the ordinary course of that business).

If a debt is ‘bad’ based on a commercial judgement, it is also bad for s25-35 purposes.  A creditor doesn’t have to take all legally available steps to recover the debt.

A debt is considered to be ‘bad’ if:

• The debtor has died leaving no, or insufficient, assets to meet the debt
• The debtor cannot be traced, and the creditor cannot find the existence of (or location of) assets against which action could be taken.
• The debt has become statute-barred and the debtor is relying on this defence (or it is reasonable to assume so) for non-payment.
• The debtor is a company in liquidation or receivership and there are insufficient funds to pay the whole debt, or the part claimed as a bad debt, or
• If, on an objective view of the facts or probabilities existing at the time, there is little or no chance of the debt (or part of it) being recovered.

A debt will generally be accepted as ‘bad’ (depending on the particular facts of the case) if the taxpayer has taken all reasonable steps to try to recover the debt and not simply written it off as bad.

Question 6

I am buying a property which has Machinery and Cows all included in the price, say $900,000.  Breakup $75,000 land and $150,000 other, which means that I have to pay more stamp duty and means that there, are no tax deductions for me with my purchases.  When coming to selling I will be taxed on the full purchase price simply because I have no cost to offset the cow or item (machinery).  The situation favours the man that I am buying off.

How can I get around this so that it is a deduction for me?  Maybe make out the cheque to him but put on the cheque butt Machinery?

Answer

This is not an unusual situation.  The seller does not want to specify the value of the livestock and plant and equipment as he will have a tax bill.  This stance is not entirely correct and if it comes to the attention of the ATO they may well then assign their own values in determining the vendor’s taxable income.

Where does this leave you?  You have the opportunity to assign reasonable values to the livestock and plant and equipment.  A call to a livestock agent may give a reasonable estimate.  Likewise, a quantity surveyor can value any sheds, fencing, and plant – their fees are usually quite reasonable.

Question 7

I am seeking some advice on how we should deal with “Capital Assets”

For example, if I had a large lawn mowing round and I bought 25 lawnmowers at $3,000 each from another state throughout the year and each lawnmower cost $400 in freight/transport costs to get to my city/state – does the law require that the $400 per lawnmower in freight costs forms part of the “capital asset” value?

Answer

Freight forms part of the cost base for depreciation.

Question 8

Recently we had $70,000 worth of Global Positioning System equipment stolen from the premises of one of our Bulldozer Operators.

To reduce the probability of the equipment being stolen from the bulldozer at night, the operator removes the equipment & takes it home each night. It was stolen from out of a company car that was parked in his shed at home.

The police were notified & they investigated the robbery.

The equipment was only 6 months old, and I want to know the best way of writing it off from a taxation point of view?

Can we write it off in a single year, this year would be good as I will have a tax liability?

Answer

As the goods have been stolen, the item can be written off. Beware that any insurance recoveries are assessable income.

Question 9

I have a Welder at a desalination plant construction site who travels 180 kilometres each day 6 days per week & carries his work gear to & from home.

His gross income is $160,000. In 2009/2010 he claimed at D2 $7,386 as motor vehicle costs which the ATO accepted. He had few receipts.

He has fuel receipts for a quarter that extrapolates to $6,200 for the full year & repair costs of $1,200

What are the evidentiary requirements of D2? Is it likely the ATO will accept that significant travel has significant fuel etc. costs even though the taxpayer has incomplete documentation?

We were hoping that you may be able to shed some light on a bit of a tricky deductibility question?

Answer

Fortunately, YES. The ATO stated in TD 97/19 that claims for fuel and oil will be accepted if based on:

• The business kilometers travelled.
• The average fuel cost; and
• The average fuel consumption.

Under that determination, odometer readings must be maintained if no other records are available. Ensure that the employee also has a current logbook.

We note that motor vehicle claims would normally be made at item D1, Work-related car expenses.

Question 10

A company has an investment portfolio through a Fund Manager, which invests in shares Colonial W/S Geared Share etc.  The Fund Manager issues a Tax Statement as at 30^th June 2011 – Franked Dividends $1,011.66, Deductions/Tax Credits $2,235.58, Taxable Income $3,247.24.  The imputation credit represents 221%, far more than 70/30 on franked dividends.  Can I claim the full tax credit?  The company’s profit is minimal or a loss.  How do I claim the tax credit?  Can that be converted in relation to the loss?  I have asked both Fund Members – no idea.  By the way, the investment is in Australian Shares.

Answer

Yes, claim the full amount.  Foreign tax credits may be included, and this situation is not unusual in geared funds as interest is a major expense.

Question 11

As part of a new Marketing Campaign, we are looking at giving some of our existing customer’s $1,000 incentive for any successful referrals (i.e., introducing us to new people who become customers).

The majority of our customers are PAYG earners.  The question I have is would this $1,000 be deemed as INCOME for taxation purposes in the hands of the customer?  There is no limit on how many $1,000 incentives we give to customers.

Answer

Yes, there is no doubt that these payments are assessable in the hands of the recipients.  In effect, they are receiving a commission for sending you new business.

Question 12

I currently lease my motor vehicle & claim the business use percentage annually from logbook records. After the 2012 tax year, which is the end of my fifth year of doing this, a restructure at work regarding business travel means I no longer need to rely so heavily on the vehicle for work use. I intend to revert to the cents per kilometres basis after this tax year. What are the procedures to document this change after 2012? i.e., a change in business use.

Answer

There is no procedure as such, and no formal election is required.  It is true that logbooks are valid for 5 years unless patterns of usage change.  The advantage in reverting to cents per kilometre is that no substantiation as such is required.  Instead, you may make a reasonable estimate of kilometres travelled as long as total business travel does not exceed 5,000 kilometres.

Question 13

Further to our discussion, the following is my question:

• The client bought a luxury car for $97,220.00.
• Car cost base in Depreciation $57,466.00 ($59,136 2020/21).
• The non-depreciable amount is $39,774.00 “balance sheet.”

How do we clear the “non-depreciable” amount of $39,774.00 in the case of selling the car and against which item?

Selling price $45,000.00 after 2 years.

Answer

Where the cost of a car is above the depreciation cost limit (for the income year in which it was first used) then the balancing adjustment is determined by the following formula:

Termination Value x (car limit in the year of first use + amounts used in the second element of the car’s cost) divided by the total cost of the car.

So, let’s assume you purchased the vehicle in the year ended 30^th June 2010 meaning the cost limit was $57,180.

In this case the calculation for the adjusted selling price:

$45,000 x (57,180 ÷ 97,220)

This equals $26,467 and this should be compared to the book value of the vehicle which will depend on what depreciation method you have used.

Question 14

I have a query relating to the deductibility of expenses associated with a finance lease on a motor vehicle used 90% for business.

1. Can the client claim depreciation?
2. Can the client claim interest?
3. Alternatively, should the client just claim the lease repayment amount and not depreciation or interest? The monthly lease payments are inclusive of GST?

Answer

No.  As the client is not the legal owner of the asset, depreciation, and interest cannot be claimed on a finance lease.  It is the lease payments that are deductible to the extent the motor vehicle is being used for business purposes.

If the client is registered for GST, only claim the payment subject to business and net of GST.

The GST is an input tax credit against the percentage extent of business use.

Question 15

I have a client who has a production business in the film industry. He does film with his own equipment and editing with his own equipment. What I am wondering is if the purchase of movie DVDs and movie tickets is deductible for this type of business as it is an education-type thing as well as a pleasure and entertainment type of purchase. Could this be educational due to the viewing of camera types used and filming and editing techniques?

Answer

You may be able to make a partial claim here, if you wish to claim we would be suggesting keeping a diary of what was studied in that movie and how it related to the client’s business. Exercise caution on this one.

Question 16

Our client moved interstate due to employment. During her absence, she rented out her home. She paid for storage for her belongings during the period of the rental.

Is the storage costs deductible against the rental income received?

Answer
There is a good arguable position for them being deductible, if it can be shown that for the house to be rentable, the belongings had to be removed under section8 (1) ITAA 1997.

Question 17

My query is concerned with the purchase of a Rent Roll by my estate agent client.  The full cost is recorded in the books.  Can the full amount be written off over succeeding years as a tax deduction?  If so, how much?

Answer

Clearly, this is an item on capital account.  The purchase of the rent roll is recorded as an asset in the balance sheet.  No tax deduction as such is available.

Question 18

I have some questions to ask with regards to tax.  I was not able to find anything with regards to these two matters in the books, so I am therefore sending this email.

I wanted to know from a tax viewpoint with regards to Petty Cash.  I have heard various and different datums and want to know what is and is not correct.  I am told you can spend up to $1,000 of petty cash a week with no receipts.  I have then been told that no, it is only $200 a week with no receipts and that is if the transactions are less than $50 each otherwise there needs to be a receipt.  I am then told that no, it is only $200 a year that can go unaccounted for in terms of petty cash.

The other question I have is concerning staff theft.  A guy that I met the other day said that they are able to claim $10,000 on staff theft a year to be taken as a tax write-off.  I ask if this is the case as we had someone working for us up until the end of last year that was stealing from the Company, probably up to that amount.  He is no longer working with us, but I feel that this is something that we should be claiming in the new tax year.  The guy said that it definitely exists, but I have not been able to find it as of yet.

Answer

You have been misinformed through no fault of your own.  Clearly, you operate a business.

GST – If you want to claim an input tax credit no tax invoice is required if the transaction is less than $75.

Income Tax – You should keep a petty cash imprest system and retain all receipts.  An imprest is a cash account a business relies on to pay for small, routine expenses. Funds contained in imprests are regularly replenished, in order to maintain a fixed balance. The term “imprest” can also refer to a monetary advance given to a person for a specific purpose. There are patterns of expenditure and these should be dissected into expenses.

There is no ATO sanctioned amount for “no receipts” for businesses as such.  The “$200 a year” does exist but it relates to the substantiation of expenses by individual taxpayers, and this could apply to a sole trader or a partnership (with individual partners).

Question 19

A business is carried on through a family trust.  The trustees decided, after the year end, that they wanted to reward a person, for their services to the trust, by giving them a bonus.

This bonus was only paid to the person in the following year and when it was paid, PAYG was deducted.  Can the trust claim this bonus, which was only a provision at the year-end as a deduction from the trust’s profits?

Answer

The bonus must be determined and properly documented preferably by way of a minute prior to year end.  Your second sentence indicates the decision was made after 30 June.

Question 20

A client purchased a franchise for electrical testing in April 2007.  The Trust Deed states that it is to run for 15 years.  At the end of 15 years, the Franchisee returns all rights, software, etc. to the Franchisor.  There is NO buyback.  Initially treated the $140,000 as Intangible Capital Asset and would treat as Goodwill – to be written off against sale price or in this case NIL.  However, I am now looking at Effective Life of Intangible Depreciating Assets and TR 2011/2.  Should we be writing off the Franchise price in equal instalment for the life of the Franchisee i.e., 15 years?

Answer

The $140,000 expenditure which includes software is the right to operate a business for a set length of time.  If there is no possibility of renewal, then it may be possible for a claim to be made.

It really depends on what you actually paid for and indeed the value of the software.

To be certain though we would need to review the franchise agreement and given the circumstances a private ruling could be applied for.

Another possibility may be “black hole” expenditure.  However, the ATO would probably share your initial view: i.e., that the expenditure forms part of the cost base of the asset.

Question 21

Background: Our Company has purchased Another Company – an element of the purchase price involved goodwill.  Question:  The Company that was purchased is failing to make a profit, meaning that we will have to write the goodwill off.  Can we claim the goodwill as a capital loss and subsequently claim a tax deduction?  Do we include a Future tax benefit in our Balance sheet for a Capital Gains loss?

Answer

No, for accounting purposes you continue to amortise Goodwill in the expenses as per AASB 112.  However, this is not a tax deduction.  When you sell or discontinue the business then the capital loss will be crystallised which means you will be able to offset this against current or future capital gains.  Refer to paragraphs 20-22 inclusive of Accounting Standard AASB112-Income Tax for the correct accounting treatment.

Question 22

I have a damaged pontoon (due to a storm) in my investment property which I’d like to remove.  The cost of removal is around $10,000.  I wonder if the cost is fully deductible.  My other option is to replace it and it costs around $30,000.  The cost includes the removal of the damaged pontoon.  I am confused whether the whole cost or part of it is regarded as repair cost or capital cost?

Answer

If the pontoon was identified in the list of assets and was being depreciated, write off the remaining book value.

The cost of removal should be added to the cost base of the new asset.  This expenditure is clearly capital in nature.

Question 23

My colleagues are asking what they can deduct and up to what limit from their individual tax returns if they do not have any receipts.

Answer

Division 900 of ITAA97 provides rules for substantiating certain expenses.  There are some special circumstances where taxpayers are not required to provide written evidence:

• Where the total of all work-related expenses, including laundry expenses total $300 or less (the $300 limit excludes travel allowance expenses, meal allowance expenses, car expenses, and award transport allowance expenses).
• Where laundry expenses do not exceed $150.
• Where the claim is limited to expenses covered by an ‘award transport payment.’

Question 24

Can you please let me know what tax minimisation steps are available to a taxpayer whose taxable income is around $250,000?  In addition, he wants to sell his investment property that he owns with his wife and it will make a net profit of $130,000.  He seems to think that forming a Trust will help, however, I disagree.  Your advice will be greatly appreciated.

Answer

We assume this taxable income is salary income.  As the investment property is jointly owned and about to be sold forming a Trust would at this late stage be unlikely to help minimise the CGT on sale.

The essence of tax effective structures is that they are set up at inception i.e. before investments are made.

We do not have enough information but make the following general comments:

Tax effective wealth accumulation normally arises from two tried and tested sources:

• Carefully selected negatively geared investments held for the long term with a view to capital gains.  Real Property and ASX Shares are the most common investments.
• Maximising deductible contributions into a reliable superannuation fund with a proven track record.  This may involve a Self-Managed Superannuation Fund (SMSF)

Reference to pages 68-69 and 84-85 of our annual publication will also assist you.

Question 25

We have installed an exercise/gym area on our factory premises for the employees to use.  We have two qualified personal trainers on staff that are on call for anyone that uses the area/equipment.

• Is the equipment and upkeep tax deductible?
• Although the personal trainers are happy to be paid as normal wages, they still must have insurance cover. Can the Company cover and claim that?
• Are there any other tax benefits for having the onsite exercise/gym area?

Answer

The ATO commenced a campaign in 2012 writing to employers and wanting to understand the number of benefits and value of those benefits in respect of:

• In-house benefits – both goods and services
• Exempt taxi travel
• In-house recreational facilities
• Exempt Cars

The ATO has a particular interest in the salary packaging of the above benefits.

Clearly, the ATO has concerns over how employers are tracking and valuing in-house benefits.

Regarding the in-house recreational facilities, this can include gyms, swimming pools, tennis, and squash courts.  Whilst there is an exemption within the FBT for in-house recreational facilities, the exemption is restricted to the provision of the facility.

It seems that the ATO’s focus is on other benefits provided in conjunction with the recreational facilities.

Gym memberships are subject to FBT unless the minor benefit applies – see TR 2007/12.

Question 26

We are a Construction Company that on occasion has jobs away from the Sydney area where it requires our employees to live away from home (coming back to their own place of residence on the weekend).

We pay for all accommodation (this is necessary as if we paid them to get organise their own accommodation, we would not have any workers) and it is treated as an expense to the Company.

On the days they are away we pay them a ‘meal allowance of $50’ per day.   (In our Enterprise Agreement it says that if they are required to work away from home that the Company would pay accommodation and they would receive a meal allowance, it is ratified by Fairwork Australia).

My question is:

• how should the meal allowance be treated? As an allowance see ATO TD2012/17 Ruling 1a.
• As an allowance is this subject to PAYG Withholding?
• Or, is the meal allowance, FBT, and if so, how do we treat the accommodation paid by the Company and expensed?

Answer

We would note TD2013/16 has also been released.  This is not subject to PAYG Withholding and FBT does not apply.

Question 27

My client has a building approximately 45 years old especially built as a blacksmith workshop of 258 square meters.

He now wishes to close the business and rent the building.

Construction – The floor is a concrete slab that will need resurfacing when the heavy machinery has been removed.  The walls are concrete blocks, 4 roller doors, and windows all of which are in good condition.  The steel frame is in good condition.

The roof, the problem area, is made of Super 6 asbestos which has deteriorated and is leaking.  The removal of asbestos is very expensive because of health regulations that must be complied with. 

In order to lease the building, the roof will have to be replaced, and with asbestos now not available, for health reasons, my client wishes to replace the roofing with a metal material.  Repairs are to bring the roof back to its original condition, but this is not possible because the original material used not being available and metal is the alternative.

Because of this should the whole replacement of the roof be claimed as an expense or the removal and disposal of the original asbestos roof be claimed as an expense and the materials and installation of the new metal roof be capitalised?

Answer

We direct you to tax ruling TR97/23 – please refer to the examples contained therein.

Where the work that is going to be carried out which has added to, altered, or changed the roof or part of it, compared with its earlier condition or function, then the Commissioner is likely to claim the ‘repair’ is in fact an improvement, alteration, addition or renovation, any one of which is capital expenditure.

Whilst a repair restores the asset to its former condition or level of efficiency, an improvement makes an item functionally better than it was previously.

Recent AAT decisions suggest that work does not cease to be a repair because different materials are used.  It is the restoration of efficiency in function rather than the exact repetition of form that is significant (Case V16788 ATC1107).  A similar finding can be found in Private Ruling No.1011599677485.  In this case, the ATO found that the replacement of the damaged sections of asbestos roofing with Colourbond constitutes a repair as the change in material did not improve the efficiency of function.  Therefore, seeking a private ruling from the ATO is recommended.

Question 28

Rainwater Tank – I rent my house out to tenants.  I live in a completely self-contained unit at the rear of my house, on the same block of land.  I had a 10,000-litre galvanised tin water tank I used for watering my garden – before the house was tenanted out.

Last year I replaced the tin galvanised water tank (10,000 litres) with a new 1,500 litre Colourbond tin (green) water tank in the same spot I had the old tank.

The water tank (rainwater) is connected (electronically) to the laundry and toilet in the rented house.  The water is only used for the laundry and toilet of the rented house.

The cost to set up the whole system consisted of:

1. Cost of foundation (Red Gum beams, white ant treatment, etc) for the 1,500-litre tank to sit on.
2. Cost of the 1,500-litre rainwater tank
3. Cost of the electrical piping etc for the supply of water to the rented house, laundry, and toilet.
4. A yearly change for the cost of a new filter each year at $110.00 a time.

Question: Of the A, B, C, D, which can be written off immediately and which much be depreciated?  What rate of depreciation is to be used?  Also, PC or DV? 

Note, the full cost (after shorter Federal Rebates) is about $5,000 to me.

Solar System – I have a house that I rent out to Tenants.  The cost of electricity to them (which they pay for) is approximately $2,000 a year. I want to install a Solar System that would cover the cost of $2,000 a year.  This would cost me $11,500 for a 5kw unit.

The whole system consists of:

1. 20 solar panels (Guaranteed 15-20 years)
2. 1 Inverter (Guaranteed 5 years)
3. Motoring System (Going on the roof)
4. Installation Costs
5. Electricity Trust connection costs (Government Department)

Question: Of the above costs A.- E.  what can be written off immediately and what can be depreciated and at what rate (PC or DV)?

Also, if during the year, at any time I receive a cheque from my Electricity Supplier (credits on feeding it to the grid), is this taxable to me?  The credit (if any) will be paid to me as owner/landlord.  The tenants pay the electricity costs they use.

I get the credit, they pay a small amount, if any for the electricity they use, as tenants.

Answer

The rate of depreciation for the full construction cost of the water tank is at 2.5% straight line.  However, the annual replacement cost for the new filter is able to be written off immediately.  In this instance an apportion of it will have to be made for personal use because you live on the property.

The cheques from the Power Company will be assessable income.  As all of the costs are incurred in installing a functioning unit of plant, they are all capital in nature and the solar panels should be depreciated at 10% DV.

Question 29

We received a very detailed question from a valued subscriber which dealt with Deferred Directors Bonuses.

Answer

Here a Company will by way of Directors’ Minutes declare a Bonus payable to one or more Directors prior to 30 June

This means the Company is contractually bound to make the payment but usually does so subsequent to 30 June, meaning tax is deferred for one more year.

Given the tax is then higher in the following year, the deferral then becomes ongoing just to maintain the original benefit in year one.

This is now an area of audit focus by the ATO, and they will generally check:

• That all directors’ resolutions were prepared by 30 June in the relevant
• The Director’s fee was paid within a reasonable time and pay as you go (PAYG) was deducted at this time.

We sent our subscriber a copy of TR2002/21 PAYG Withholding from Salary, Wages, Commissions, Bonuses or Allowances Paid to Office Holders and also Taxpayer Alert TA2011/4 Deductibility of Unpaid Directors Fees.

Question 30

Are employee gifts tax-deductible?

Answer

Yes, as long as they do not constitute “entertainment” gifts, and if they are less than $300 each and deemed to be “minor and infrequent” then FBT does not apply either.

Question 31

We have been depreciating our assets using the diminishing method.  A decision has been made to use prime cost for all future assets.  My question is whether we can change the existing assets to prime cost and if so, do we use the written down cost as the start point?

Answer

The answer is no.  However, a taxpayer can make a realistic estimate of the remaining useful economic life of an asset and in so doing change the rate of depreciation.

Question 32

One of our tax clients is a cattle farmer and he recently built a donga on his cattle farm.  He and his family live in this donga.  Can I get some advice on whether I can claim the depreciation on this donga as a tax deduction and what is the depreciation rate if I could claim it?  The donga is not bolted to the ground and can be lifted and transportable.  Please advise me what TR this is related to.

Answer

As the expenditure is private and domestic in nature, it is not tax-deductible.  If the Donga is used as an office, then a proportion may be tax-deductible – usually at 2.5% but there may be fixtures that attract a higher rate which a quantity surveyor could confirm by way of report.

Question 33

Recently we had a break-in.  The safe was compromised and the social fund money belonging to the staff was stolen.  This was not covered by insurance as we do not handle any cash so had no need to insure for loss of cash from the premises.

As responsible employers, we will make good at this loss.  Can we claim the expense as a tax deduction?

Answer

Yes, it is a tax deduction on the basis that you are gifting each employee who is a member of the social club funds to cover their loss.  If the loss per individual is less than $300 then that is exempt under “minor and infrequent benefits.”  This is the only solution we can think of as it is not strictly a business loss or outgoing.

However, if the ATO views this expenditure in the nature of entertainment then there will be an FBT exemption (under $300) but there will be no tax deduction.  You may wish to apply for a private ruling.

Question 34

Please can you advise whether the construction costs of preparing land to be subdivided (e.g., roads, power, electricity, council contributions) can be claimed in the year the costs are incurred or should the costs be expensed proportionally over the tax years in which the block sells?  All of these costs have to be incurred before any one of the blocks in the subdivision can be sold.

Answer

They are a tax deduction to be claimed in the year incurred but closing stock (which would incorporate these costs) would reduce the cost of goods sold.

The effect of this is that the costs you refer to are expensed proportionally over the tax years in which the blocks sell.

Question 35

Mr A has obtained a loan of $250k using his residential house as security. For example, he used $100k for personal use and used $150k for investment use.

Unfortunately, his loan statement does not distinguish between the monthly interest and principal payment for personal use and investment use.

What is the best way to calculate the interest and principal payment of investment use for deductibility? Mr A wants to make sure to know the way of calculation to satisfy the ATO in case of inquiry.

Answer

Retain detailed records of the disbursement of funds at the time the loan was taken out.  The “use” test as consistently applied by the courts determines the deductibility of interest. You demonstrate that loans have been used to acquire income-producing assets by having the written evidence to justify such a claim in the event of an ATO audit. If 60% of the funds have been applied to genuine investments, then 60% of the interest is tax-deductible.

Question 36

The case is this: a client has received $75000 from income protection insurance monthly benefit.

This covers a weekly claim from 2009 when the claim was first made up to 2017. A group certificate has been issued with the amount included as a Lump sum “E”.

From our assessment, the amount is fully assessable in the year of receipt. This was the 2017 year, despite it covering 8 years while the claim was sorted. While this seems unfair, we seek to confirm that this treatment is correct.

Answer

It is confirmed that this treatment is correct. An individual who is not in business reports income as it is received… on a cash basis.

Question 37

Division 7A dividends

There is a small (family) private company and made a profit from 2015/2016 and paid the company tax. But the company had not enough assets at that time and eventually made an item of “loan to the director” on the FS. In 2015 /2016, there was no dividend to shareholders (director).

This is the first case for me to deal with it. I have not done well at it

For your reference, Loan to the director: $100,000 for 2015/2016 and expected in $150,000 for 2016/2017.

I would like to know how to manage the “loan to the director” for the correct company tax return.

Do I have to apply for Division 7A for the company?

If applied, could you please let me know in detail how to apply for that including the minimum repayment and interest, etc…?

Answer

First of all, what are the shareholders’ marginal rates of tax?

It may be better to declare dividends if they have little or no taxable income.

This can be done by crediting their loan accounts – no actual payment needs to be made.

It sounds as of franking credits do exist.

You need to have a complying loan agreement in place and calculate interest on the loan which will depend on the timing of the debits to the loan account.

The first year the loan was advanced incurs no interest.

For your information, the benchmark rates of interest are in our annual publication.

The formula in subsection 109E(6) of the ITAA 1936 will be of assistance. We hope this helps.

Question 38

How long does a small business have to keep records for referral by the Taxation Office; it used to be 7 years?

Answer

Generally, you must keep your written evidence for five years from the date you lodge your tax return or if you:

• Have claimed a deduction for decline in value (formerly known as depreciation) – five years from the date of your last claim for the decline in value.
• Acquire or dispose of an asset – five years after it is certain that no capital gains tax (CGT) event can happen, so you know you do not need the records to work out a capital gain or loss.
• Are in dispute with the ATO – the latter of five years from the date you lodge your tax return or when the dispute is finalised.

Individuals with very simple affairs may only have to keep records for two years from the lodgement of tax returns.

Question 39

My query is when making a distribution of profits from a Discretionary Family Trust to beneficiaries if the profits consist of rental income and Franked Dividends, must the Franked Dividends and imputation credits be distributed to each beneficiary by the same percentage?

Or can you mix and match the split up between the Franked Dividend and imputation credit as to how you want?

Assuming all other streaming conditions are met and are permitted by the Trust Deed.

My example is as follows:

Rental income       $35,000

Franked Dividend   $10,000

Imputation credit    $4,285  

Total income           $49285

Can beneficiary 1 be distributed income of $20,000 and imputation credit of $2,000?

Can beneficiary 2 be distributed income of $20,000 and imputation credit of $2,000?

Can beneficiary 2 be distributed income of $9,285 and an imputation credit of $285?

Answer

As a general comment, the imputation credits are attached to the franked dividend and income retains its character as it flows through a trust. The franking credits cannot be separately dealt with.

The judgement in Thomas v Full Commissioner of Taxation 2015 FCA 968 certainly backs this up.

The judgement of the Bamford case provides that a discretionary trust could only stream franked dividends and capital gains to specified beneficiaries, other trust income must be distributed to beneficiaries on a proportionate basis. The proposed distribution in your example is workable.

Question 40

I am a 70-year-old taxpayer who is a sole trader and has previously received a tax-free threshold of $30,000 however this year because I have earned in excess of $65,000 taxable income according to my Accountant, I am not able to receive it.  Do I or do I not receive the tax-free threshold?

Answer

As long as you are an Australian tax resident, you will get the tax-free threshold which is currently $18,200. The excess is subject to income tax.

Question 41

I have asked ATO a question regarding claiming Capital Works Deductions when I had rental property during last year. On the ATO website, it has been written that you can claim 2.5% of the construction cost of the building but the advice which was given to me by ATO was not convincing. They have told me that I can only claim any improvement or construction which I have made during the rental period. They have told me that the construction cost should be part of the cost base and should be used when the property is sold i.e., part of calculating Capital Gains tax or loss.

I have not convinced with their advice because it is in contrast with the information they have written on the following link and the example they have given on that link.

https://www.ato.gov.au/General/Property/In-detail/Rental-properties/Rental-properties—claiming-capital-works-deductions/?anchor=Whatcanyouclaim#Whatcanyouclaim

On the above link, through the example, it clearly shows that I can claim the construction cost of the building which was happened before renting up the property.

My question from you.  I have rented up my property most of the last year, Can I claim 2.5% of the construction cost of the building of the property? If yes, then can I add to the construction cost, the preliminary cost such as site work, surveying cost, planning cost, electrical and plumbing cost, etc., and the finishing costs such as paving, fencing, tiling, painting, etc.?

Answer

Depending on the date of construction the ATO may or may not be correct.

What is the date of original construction – if after July 1982 – in all likelihood there will still be claims available.

As the construction costs will include some ineligible items and past costs will need to be determined, you must engage a quantity surveyor.

The expense will be easily recovered in the first year alone.

Question 42

My client is a family trust, with a corporate trustee. Operating as a clothing retail store. The manager has been made bankrupt. The director of the trustee company is his son……

Query – can the son be sued as the administrator for the bankrupt is chasing the beneficiary loan to the bankrupt circa $100K?

Answer

The corporate trustee can be sued if it owes the bankrupt money.

The loan is an asset of the bankrupt and the administrator in bankruptcy will seek to recover this on behalf of the creditors – it is that simple.

In this instance, the son cannot be sued personally unless it can be proven that he, as the director of the trustee company, allowed the business to trade while insolvent. We consider this unlikely but also mention in passing potential exposures with the ATO regarding Directors’ Penalty Notices.

First, analyse the loan account which probably is the result of unpaid distributions to the beneficiaries and drawings from the business. Are there any amounts that can be offset such as incorrect postings to other accounts and/or wages for personal exertion?

Even if the accounts were finalised, it is possible to do year-to-date accounts and/or seek to have these matters taken into account when cutting a deal with the Administrator.

The correct term is “Trustee in Bankruptcy”.

Question 43

My question surrounds a testamentary trust.

We have the Tax Return sorted but have a query regarding entering the opening journal in the ledger for the testamentary trust.

The testamentary trust has received cash and listed shares from the deceased’s estate. The Debit side of the journal goes to Cash at Bank and Shares Held, where does the credit side of the entry go: • Corpus Trust Funds • Individual beneficiary entitlement account • Other?

Answer

It is definitely Corpus Trust Funds.

Question 44

We would like to obtain your advice on a topic that we were unable to find within the tax essentials manual – relating to R&D grants.

Scenario: Whispering Waters Pty Ltd is the trustee to Whispering Waters Unit Trust (UT) with the UT holding all the assets, profits/loss, and business dealings. The Unit Trusts’ legal liability gets pushed to the Whispering Waters because it is the trustee and so helps to protect the Unitholders of the UT. As the assets are held by the UT; the UT is eligible for a 50% capital gains tax discount when selling the assets. Unitholder Companies get their proportioned share distribution of the UT’s profits and pay tax accordingly. The company is used to park the tax paid and can pass Franked Dividends (FD)and Franking Credits (FC) to the Family Trusts when beneficial. The Family Trusts then can pass the FD’s and FCs to their beneficiaries to minimise tax by maximising the benefit of the FC’s. Assumption: that all business entities are profitable.

1.       Are R&D grants available to Private Unit Trusts with a corporate trustee?

2.       Is there any way to structure the Unit Trust to be eligible for R&D grants?

3.       If part of the R&D process is to be done overseas, does it still qualify for the Australian R&D grant?

4.       What are the criteria needed to satisfy a R&D grant if the entity is creating computer software applications?

In Addition, …

If the entity is structured (refer to the diagram provided) and the purchaser is only interested in buying the application and not the company; would we be right in assuming that this structure would not entitle them to the 50% CGT discount but would qualify for the R&D grant?

Answer

To answer your questions:

• R&D Grants are not available to private trading trusts with a corporate trustee.
• Possibly as a public trading trust (the only exception) but due to the compliance and regulatory burdens, it is very unlikely that this will be feasible.
• Overseas activities require special approval – what you do here is apply for an overseas finding. Generally, overseas activities will only be eligible if it can be demonstrated that the activities cannot be conducted in Australia.
• Refer to business.gov.au/assistance/research-and-development-tax-incnetive/guidance as this contains several examples.

The diagram notates unitholders that appear to be simple companies with no underlying trusts – if this is the case then it is correct to say that such a company cannot access the CGT discount.

Regarding the R&D Grant… the eligible activity would need to be conducted (and expenditure incurred) by this company after carefully reviewing the guidelines and taking appropriate professional advice.

Question 45

I wish to obtain some advice regarding a company’s franking account.

With the change in the corporate tax rate from 30% to 27.50%, what are the implications for the franking account?

1.    Do we need to convert the existing balance to the new tax rate or?

2.    Should we be recording separate balances i.e. One at the old rate and another at the new rate?

3.    Can dividends be franked according to the rate of tax paid in the past i.e., 30%?

Please include in your advice all calculations required and references to the legislation.

Answer

Your current franking account balance is not adjusted by the change in the company tax rate. Refer to S202-60 of the ITAA 1997.

In the 2016 income year, the maximum number of franking credits that could be attached to a dividend was 3/7 multiplying the net dividend. Refer to Tax Laws Amendment (Small Business Measures No.1) Act 2015.

However, from 1 July 2016, the maximum number of franking credits that could be attached to a dividend is: –

The corporate tax rate for the imputation purpose of the entity for the income year/divided by (100% – Corporate tax rate for imputation purpose of the entity for the income year) multiplying the net dividend. Refer to the Enterprise Tax Plan Act.

The corporate tax rate for imputation purpose of the entity for the income year is defined as “the entity’s corporate tax rate for the income year, worked out on the assumption the entity’s aggregated turnover for the income year is equal to its aggregated turnover for the previous income year” Refer to S995-1.

Question 46

Do the changes to the depreciation rules also apply if I own rental property within a company structure? For example, if Company ABC purchases an apartment on 2 Feb 2018 and it has an existing dishwasher in the apartment, can I depreciate the existing dishwasher? If I was an individual acquiring the apartment, I cannot depreciate the dishwasher unless I purchase it new, but I’m not sure if this same rule applies when you are a company?

Answer

As these changes do not apply to corporate structures you will still be able to claim depreciation on the dishwasher.

Question 47

Can you confirm the following P&L and Balance Sheet…?

Summarised as:

P&L

Net Profit for year  – $81,742

Balance Sheet  
Cash – $55,828
Debtors – $24,585
Loans to directors – $45,192
ATO Debts – $93,403
Retained Profits/(loss) –  (49,539)

Net Assets are $32,202 including the director’s loan.

Sec 109Y (2)

Net Assets + Div 7a Amounts – Non-comm Loans – Paid-up Share Value – Repayments of Non-commercial Loans

Is the distributable surplus calculated as…

Net Assets = $32,202

+   Div 7a Amts: Nil

• Non Comm Loans $45,192
• Paid up share $1
• Repayments Nil

=   -$12,991

Assuming the above is correct, then a Div 7 Divided is declared. As there is no surplus to distribute, then there is no dividend. Is my understanding correct?

Answer

This would appear to be correct as the amount to be taken as a dividend cannot exceed the company’s distributable surplus s109Y ITAA 1936.  This is calculated at the end of the relevant income year.

From your worksheet, you have correctly used the formula in s109Y (2) to work out the distributable surplus and this does not always equate to retained earnings.

Question 48

We require an opinion on the following: –

We have a client that owns two car yards with multiple brand dealerships, and they run a sprint car operation that competes around Australia. We are wanting to know more about the deductibility of the sprint car expenses.

The sprint car setup is a serious operation, all drivers/mechanics, etc. are employees and are not family members. The main business owner and his son are involved as managers of the sprint car operation, but not day-to-day managers as their day job is actually running the car yards. The primary purpose of the sprint car operation is to promote the car yard business. Ballpark numbers $400k in expenses and $200k in prize money.

The “Sprint Car’ business is operating under the same entity as the car business. The ‘loss’ has been written off as advertising in previous years.

Do you know of any ATO guidance documents on the deductibility of these types of expenses? Do you have any advice on the general deductibility of the expenses?

Answer

This is a division of the business that derives assessable income and as long as all expenses are incurred in deriving that assessable income, we don’t see a problem. As the owner and son are not actively engaged in driving the sprint cars, it cannot be suggested that this is a personal pursuit – it is crucial that there is genuine and prominent advertising on the vehicles along with other promotional material.

Although this is not a sponsorship situation, ATO interpretative decision ATO ID 2005/284 is worth a read as well as it makes it clear sponsorship payments in broadly the same context will be deductible – this ID deals with motorcycle sponsorship.

Question 49

I am enrolled as a full-time master’s student at Melbourne Uni. I receive a tax-free graduate research stipend. The role is part of a training program, so I can qualify as a veterinary pathology specialist, and I teach, perform research, and also perform diagnostic duties as part of the role. I recently submitted my tax return and claimed $2000 in veterinary textbooks that I purchased that are directly related to performing my role at Uni and will also aid in the completion of my specialist examinations.

Are these not tax-deductible? My tax return has been “delayed”. I started this role in January and prior to this was working as a veterinarian (and paying tax).

Answer

The fundamental test for deductibility is… was the expense incurred in earning assessable income?

As this research stipend is not assessable… the ATO may fairly take the view that expenditure is not a tax deduction.

Did you have any assessable income for the year ended 30 June 2018 and could it be argued that the expenditure (at least in part) related to this income?

Also, there is the possibility of some of this expenditure being self-education expenses.

All this would depend on what disclosures you have already made to the ATO.

Question 50

Can you help me with this question re Facie Rights to build a building?

If the company buys a right (e.g., the right to build a building in other people’s land). That right can be amortised in accounting.

Can it be amortised for tax purposes?

If the right is perpetual, what amortisation rate should be applied?

Answer

On the basis this is an existing business… this is simply a capital investment.

There is no connection between the expenditure and the derivation of assessable income and no tax deductions available under ITAA 1997.

In the event the right expires or is otherwise disposed of at less than its purchase cost, then this is a capital loss to be offset against future capital gains.

In the event the right is exercised then this is a third element added to the cost base for capital gains tax purposes.

It certainly is not an eligible expenditure for the 2.5% building write-off.

Question 51

One of my staff members resigned on Monday knowing full well that we are going on holidays on the 14th, she was asked to work until the 22nd and agreed to it, she has contacted us and said that her father is sick, and she is unable to attend work and is not sure if she will be able to work any of the days between now and the 22nd. Do I have the right to dismiss her on the spot?

Answer

Based on the limited information supplied, and taking into consideration the status of the employee e.g., award or contract, length of service number of employees in the organisation, etc are unknown our view is as follows:

If the employee is entitled to a notice period and takes personal or carers leave during this notice period, dismissal is not an option.

Question 52

A new client has come to us in the following situation:

They want to wind up the company.

2018 FY

P&L

• Profit $(390) 

Balance Sheet

• Loans from directors $ 5,989
• Other loans $6,688
• Issued capital $200
• Accumulated Losses $12,877

I have noticed that the tax return shows:

1. a balance of the franking account of $27,446
2. carried forward income losses $1,258
3. carried forward capital losses $87,763

If they just wind up the company, then the directors will make a capital loss on the loans and the franking credits will be lost.

Is there a strategy to utilise as many of the franking credits as possible?

Answer

It is necessary to establish who the shareholders are and whether they are in a position to use the franking credits.

An example here would be pensioners – potentially their pension reduces 40 cents per dollar of taxable income over a certain amount.

Also, if they have a high taxable income independent of all this then they may not wish to receive dividends they will pay tax on.

This occurs when their marginal rate of tax is higher than the franking credits available.

The ongoing annual costs of maintaining the company will also need to be considered. Proceed with caution as the balance sheet figures you quoted are not consistent with the franking account information.

Question 53

I have a rental property and over the years have had 3 tenants break their lease, leaving with money owing either rent or water charges. I have been told by the real estate agent that the tenant has promised to pay the money back that they owe but after many requests from the real estate, there has never been any money. I have Landlord insurance that covers loss of rent and have claimed it on one occasion. But when the tenant has promised to pay it back, I have given them the benefit of the doubt and by the time it is realised that they are not going to pay, it is too late to claim the loss.

Recently I have changed insurance companies and about 2 weeks later my tenant broke their lease owing money and is now saying that they will pay it back. I do not want to put in a claim for loss of rent because it is still only 3 weeks into my new insurance policy. I am getting sick of being stiffed with these tenants who cannot pay their way when they have signed a lease. I am wanting to claim the loss on my income tax in the rental section but there really is nowhere to put it and everything I have read from the ATO does not mention what to do if the tenant skips out leaving money owing.

Is there somewhere on my tax return I can claim the loss of the income from these tenants who leave owing money?

Answer

I am sorry this is probably of little comfort to you… but given you are unlikely to receive the rent you will not have to pay tax on it.

This means your assessable income will be lowered by the bad debt. The ATO’s position on claiming bad debts is that the debt needs to have been formerly returned as assessable income.

As Landlords generally account for rent on the cash basis, this is clearly not the case with you, and cannot claim the bad debt.

Question 54

We built and operated a supermarket. Sold the business in 2005 and kept the building. Lease payments, paying for our retirement. In 2016 the Lessee went bad and suffered considerable losses.

Due to lease payments in arrears, we exercised the landlord’s prerogative and reoccupied the premises. To re-establish the supermarket business, we established the trading company XYZ Trading Pty Ltd with 3 directors, myself the director/secretary, my wife, and my daughter as directors.

In August 2017, we sold the business with a 10-year lease.

2018 tax affairs were completed recently. Which informed us of an $80,000 plus tax credit.

Our information: this tax credit can only be used by XYZ Trading Pty Ltd. Is this so?

Are there better options than establishing XYZ Trading Pty Ltd as a share trading company on the stock market? Can XYZ Trading P/L distribute this tax credit to the directors of XYZ trading P/L or, distribute the tax credit to UVW Pty/Ltd- XYZ Family Trust?

Are there other options?

Answer

We assume the $80,000 tax credits relate to the income tax paid by XYZ Trading Pty Ltd.

The tax credits or franking credits can only be accessed by the shareholders of XYZ Trading Pty Ltd.

XYZ Trading Pty Ltd can distribute the fully franked dividend to the shareholders in the 2019 financial year.

Question 55

We received your newsletter Issue #0099 – Federal Budget Update 2019-20 and have the following query (please see below) with respect to “Staff bonuses”.

Staff – Bonus (Issue #0099 – page 15) 

A bonus may be deductible in the 2019 year if it is quantified, approved, and committed to payment prior to 30 June (even if paid after 1 July). Determine whether any bonuses are to be paid and if so, ensure the amount is quantified and approved by Directors’. The relevant staff should be notified of the bonus prior to 30 June and that any PAYG Withholding Tax is remitted in the first activity statement after 30 June.

If we have quantified and approved a bonus of say $100,000 to various staff members before 30.06.2019 can we take up the amount as a tax-deductible expense in the 2018-19 accounts even if we have not actually paid this amount to the staff members before 30.06.2019…

If we take up the amount of $100,000 as an expense in 2018-19 but it is paid after 30.06.2019 should the amount be included in the staff members 2018-19 payment summary amount or can it be included in their 2019-20 summary as that is the year that it is being received by the staff members? We would usually pay the bonus to the staff in about October. We would remit the PAYG to the ATO once the payment to the various staff members had been made.

Answer

You can if you account income and expenses on an accrual basis and you are committed to paying the bonus in the 2019/20 financial year.

You are correct that the staff members do not need to include the bonus until it is being received. You don’t include the bonus in PAYG Payment Summary Statement if it is not paid in the relevant financial year.

Question 56

Are we able to pay a wage earner on a commission rate for work completed after hours?

They will be paid for an 8-hour day, but if they wish to work after 8 hours is it legal to pay commission on what is achieved after hours? By this I mean they are sent to complete various jobs, so can we pay commission on each job after hours, or does it have to remain as an hourly rate?

Answer

If the employee is covered by a Federal Modern Award, any hours in excess of 8 hours per day (depending on the hours of work and penalty rate provisions stipulated in the applicable award) should be paid at the applicable hourly rate plus applicable overtime rates.

Call-out provisions and penalties may also apply if the employee is required to attend work after the employee has left the normal place of employment.

Based on the limited information provided, payment as commission as suggested may be in breach of the Modern Award and/or the National Employment Standards and would not be advisable.

Question 57

A Client of mine operates a small Family Trust. He and his family members receive distributions from the trust.

Are the individuals eligible to receive any of the “Small Business Income Tax Offset” in the distributions they receive from the trust?

Answer

An 8% tax discount (SBITO) capped at $1000 is available for individuals in receipt of income from an unincorporated small business entity. The eligibility criteria for SBITO are:

• The trust must carry on a small business.
• The aggregated turnover is less than $5 million.

Please note that the SBITO does not apply in respect of personal service income unless the PSI is produced from conducting a personal service business.

Please also note that the SBITO legislation does not allow for look-through provisions. In other words, individuals cannot claim the SBITO for business income derived by another trust you are not a beneficiary.

Question 58

I have a query in relation to Payment Summaries.

We made a back payment to a number of employees in February 2019 which related to the period FY18, 01/07/2017 to 30/06/2018.

We have classed this as a Gross Payment on the Payment Summary and have already posted all payment summaries and uploaded the file to the ATO.

My query is should this back pay be shown in Gross payment or Lump Sum E? And are we required to re-issue all payment summaries?

We have contacted the ATO, but they did not sound confident and therefore would appreciate your advice with this.

Answer

If a back payment of salary or wages that accrued in a period more than 12 months before the date of payment (February 2019) is made, the payment should be labeled at Lump Sum E.

The ATO may calculate a tax offset on these payments.

If the payment was for a period more than 12 months before the payment, payment summaries should be reissued.

Question 59

If a person works 100% from home ( they work for a tech company) I can see that they can claim not only running expenses but also occupancy (they rent).  BUT my question concerns their initial training.  This involved them flying from Brisbane to Sydney to do intensive training in head office for a week.  It was done at the employees’ own expense and they stayed with family for the week.  Flights were also paid for by the employee.

Answer

Rent may be claimed as home office occupancy expenses if your employer does not provide an office. It is important that you apportion the rent between work-related and private use. The apportionment is usually based on a floor area basis (Taxation Ruling 93/30).

You can claim the cost of attending the training sessions that are closely related to your work activities. You may have to apportion the travel expenses between work-related and private purposes.

Question 60

Partnership question:

The partnership has made a revenue loss of $22,685. The non-commercial losses tests are already passed.

It is a 3-way partnership.  To my knowledge, there is only a verbal partnership agreement.

One partner has a taxable income of $70,000. – Garry

Two other partners have a taxable income of $5,000. Mike and Mark

So, what I would like to do is split the loss unevenly. I have reviewed TR 2005/7 and would like guidance on it.

My understanding is I can apply the ruling in the following way:

Partnership Taxable Loss before partner salary: $(22,685)

Partners Salary $20,000 paid to Garry.

Partnership Distributable Loss: $(42,685) including Partners Salary.

Reconciliation item $20,000

Net distribution:

Garry                       $(20,000)

1/3 remainder       $ (895)

Total to Garry        $(20,895)

Mike and Mark, get the same $(895) each.

Therefore, total loss distributed $20,895 + 895 + 895 = $22,685.

Have I applied TR 2005/7 correctly?

Is it correct to complete the tax return based on this example?

Answer

No this is not correct as laid out in example 3 of TR 2005/7. Please see below for an example of the correct layout.

TR 2005/7

Income tax: the taxation implications of ‘partnership salary’ agreements

Example 3

34. Christine and Julia formed a partnership under which it was agreed that they share the profits and losses of the partnership equally. The partnership agreement provided, however, that Christine would be entitled to draw $20,000 a year for managing the business. The agreement regarding the sharing of profits or loss is to be construed as an agreement to share equally in profits remaining after the salary is taken into account if any and equally in losses. The 2003-2004 year’s net (accounting) loss, after paying Christine’s salary, was $30,000. Determination of the net loss, for the purpose of completing the Statement of Distribution on the Partnership return, is as follows:

Partnership net loss (after deducting salaries)	$(30,000)
Plus:
Christine’s salary	$20,000
Net loss	$(10,000)

The net loss is then distributed, in accordance with the partnership agreement, being 50%, 50%, as follows:

Christine:
Interest in partnership net loss 50% of $(10,000)	$(5,000)
Distribution	$(5,000)
Julia:
Interest in partnership net loss 50% of $(10,000)	$(5,000)
Distribution	$(5,000)
Total distribution	$(10,000)

The $20,000 ‘partnership salary’ cannot create or increase a partnership loss. The salary was taken by Christine as drawings in advance of profits. Christine’s drawings do not affect her liability to tax, other than to determine her individual interest in the net income or loss of the partnership under section 92 of the ITAA 1936.

The $20,000 drawn in excess of available profits will be met from profits in future years and be assessable to Christine under subsection 92(1) of the ITAA 1936 in that future year when sufficient profits are available. If the partnership is wound up before this time, the $20,000 excess is repayable by her and thus not assessable under subsection 92(1) of the ITAA or section 6-5 of the ITAA 1997.

Question 61

Re: Small Business Write off

A SMSF has a couple of commercial properties. Is registered for GST.

Net assets of $1,000,000.

They have purchased an asset to go onto the buildings of $19,990 (ex GST).

Is the SMSF able to claim the under $30k instant asset write-off?

Answer

Self-managed super funds (SMSFs) are not prohibited from carrying on a business, but the business must be:

• allowed under the trust deed
• operated for the sole purpose of providing retirement benefits for fund members.

It would come down to successfully making the argument that the SMSF is “in the business of” to be classified as a small business entity.

The sole purpose test is often the sticking point here, and we would advise against making the claim.

Question 62

One of my clients, who is a pensioner with a disabled daughter has a taxable income of $22,679 and has no tax to pay but has a bill of$112.43 being for excess private health insurance reduction. Is this correct that being a pensioner does not negate this?

Answer

The Government has cut its private health insurance rebate contribution (marginally) but it should not have made that much of a difference at year end.

Ask the client to check the basis their insurer is calculating the rebate as obviously it is not matching with the ATO’s calculation.

Also, double-check the codes used at the private health insurance section, remember the ATO assesses eligibility for the level of rebate based on Adjusted Taxable Income.

Question 63

Please advise on the following regarding payment of wages:

Where a husband is employed as a Sales Representative/ Manager and he is paid the relevant award wage or higher, is it acceptable to employ his wife on a Casual basis and pay her the sales commission or bonuses as a wage that would otherwise be payable to her husband? The wife would not take an active role in the business other than being a home helper to the husband’s role.

Could this be an ancillary agreement (i.e., an extra remuneration) made after the original employment agreement undertaken with the husband (or maybe not?)

Answers

(HR/IR) -frame of reference

Any employee is required to be paid the minimum award wages and conditions and also the conditions contained in the National Employment Standards (NES).

In the scenario supplied, the casual employee would need to be paid as a casual award employee with 25% casual loading and a minimum payment per day or call-in as a minimum.

The scenario proposed in my view would be in breach of the Fair Work Act and Award provisions.

The payment of sales commissions and their relativity to the applicable Modern Award and wages is complex and requires specific advice.

Any agreement made needs to meet the minimum award requirements and NES and be in the form of an Individual Flexibility Agreement (IFA) and meet the Better Off Overall Test (BOOT).

The Fair Work helpline may be able to assist.

(Tax) -frame of reference

In practice, this does occur but as a responsible publication, we cannot advocate this as the bonus is solely the result of the husband’s personal endeavour.

In the event of an ATO audit… if the payments could be clearly identified as the husband’s bonus payments then there could be amended assessments.

If you were able to have the wife perform some genuine tasks… perhaps of a marketing nature, then the remuneration paid to her would be a matter for you to determine.

This could be an acceptable outcome for all concerned.

Question 64

My client “Mr. C” owns a Pty Ltd company. (S Pty Ltd) He owns 1 Ord Class share.

He wants to give some equity in S Pty Ltd to his employees, (A & B) who are unrelated to him.

He will give them J Class shares – no voting rights but can get dividends, that were created solely to give to these staff.

He will give A & B each 10 J Class shares with a face value of $10 each.

What will be the journal entry to record the shares being issued?

Dr Unpaid share capital $200

Cr Share Equity J Class Shares $200

Is the Dr entry a loan to employees, as they did not pay for them? Is it a Div 7a loan?

Answer

The journal you suggest is acceptable.

I really do not view this as an employee share plan question as the recipients receive nothing of real value.

A number of valuations have established that such shares are worthless.

The dividends the staff may or may not receive are entirely at the discretion of your client.

Arguably the shares may have some value on a members’ voluntary liquidation but that would depend upon the underlying net assets and the company’s constitution which would outline any such entitlements.

This is a matter your client should carefully consider.

The uncalled capital on the shares has no Division 7A implications as the debit should be placed in the share equity accounts (not the assets) – in any case, it is a paltry amount.

Question 65

We are having a bit of an argument in our office over Truck Driver’s overnight allowances, and we are confused.  We have read TD2019/11 and the ATO’s Truck Drivers – Income and work-related deductions.

The scenario is: 

My client is a long-distance truck drive that leaves on a Monday morning and returns the following Friday.  His employer pays him an overnight travel allowance of $37.61 per night and he is away for 240 nights which on his Payment Summary shows a total of $9,026.

As per the ATO Truck Drivers – Income and Work-related deductions he can claim $20 on breakfast, $25 for lunch & $45 on dinner and they are exclusive and cannot be swapped.

My client does not keep any receipts as once a week his wife prepares all his meals herself when they do the normal shopping, and he takes them with him.  As he states, it is very difficult to get decent meals whilst you are travelling, and he eats at all different times of the day.

My questions are:

If he keeps the number of meals that he is away for, breakfast, lunch, and dinner, can he just claim up to the allowance without keeping receipts?

Do we just claim back what he has been paid by his employer?

I do not understand why the ATO has these allowances and what they are used for as the TD & other ATO papers really do not give decent examples of what is acceptable with the ATO and only confuse the issue.

We also have this issue with some of our clients that receive an amount for domestic travel that is less than the ATO reasonable amounts.  Once again can we just use the amounts the ATO has published?

Answer

To answer your questions.

• He cannot claim the amounts outlined in para 23 of TD 2019/11 because he has not been paid the permitted full allowance to equal breakfast $25.20 Lunch $28.75 and Dinner $49.60. The amounts of these meals are separate and cannot be aggregated into a single-day amount.
• You may cautiously claim back the amount paid by the employer because it is below the above amounts being mindful the client may have to provide a reasonable explanation of the expenses if required by the ATO. If he informs his wife gives him a “packed lunch” then the claims will be denied. See example 3 paras 27-29 of TD 2019/11. In this case, a reasonable estimate of the cost of the “packed lunch” will have to be made.
• We don’t disagree with your comment regarding the confusion. However, we think TD 2019/11 (updated each year) is reasonable and attribute the confusion to a lot of misinformation out there in the marketplace and incorrect practices by tax agents. Everyone wants to make a claim but not everyone is paid the required allowance outlined in the relevant annual tax determination.
• Regarding the domestic travel by clients – they can only claim the actual higher cost incurred less the amount paid by the employer. Otherwise cautiously claim the allowance amount paid by the employer

Note, we have a different situation if the employee receives no allowance and instead incurs costs later fully reimbursed by the employer. In this instance, the employee can not make any claim.

Question 66

PAYG withholding for casuals… I have several clients with casual employees.

There is a tax table for daily and casual workers (QC 55445).

When do I have to apply this tax table? For all casual employees? My clients have a varied group – some work one day per week and have no other jobs (as far as I know), some work weekly. If they have filled in a TFN declaration and asked for the tax-free threshold to apply, can I charge the weekly rate?

Answer

Employees that are entitled to a tax-free threshold should be taxed as such and the ATO advises to use the following calculator, regardless of being full-time, part-time or casual, the casual/ day tax scale is for when it is a person in 2 jobs.

https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=TWC&anchor=TWC/questions#TWC/questions

Question 67

With recent changes in land tax law in South Australia, what mechanisms are available to avoid being subject to the aggregation of trusts and companies into the position of being regarded as the same entity for land tax? I have a different trust and company for each property…but similar directors in the companies.

Does having different shareholders from the directors of the companies affect aggregation?

Answer

You need to seek legal advice – the following comments are general in nature and we note there were late amendments to the legislation.

The legal owner of the land is the trustee company while the various state revenue bodies take into account beneficial ownership.

Under the new aggregation rules, it is crucial that the trustees take advantage of the nomination scheme by 30 June 2020 for the trust to avoid the surcharge tax.

Under this grandfathering measure of sorts, trustees can select an individual adult beneficiary to essentially “own” the land for land purposes.

This represents a tax planning opportunity for trustees.

Take advice on who you nominate in view of the shareholdings in the simple company.

Question 68

Can you please let me know if legal costs incurred in a building contract dispute are tax-deductible or form part of the cost base for CGT purposes?

Answer

Assuming the purchaser has incurred the legal fees in regard to the construction of passive investment, the costs would form part of the cost base for CGT purposes.

Question 69

Our staff member is planning to move on to another position and has previously taken leave in advance which leaves her owing us money. She understands that we are entitled to deduct the advanced leave from her final pay but says this will embarrass her financially and would like to explore other options to repay us. Can you please advise what options might be possible to help her situation or do we just deduct what is owing?

Answer

The issues of the debt move from the fact you have the right under the FairWork Act 2009 to recover the money on termination to it being a civil debt.

If you were to come to an agreement about paying the money back and the ex-employee defaults, you then have to take civil action in small claims to recover any monies owed.

Our professional advice is to recover the money on termination as that was what was agreed to and gives you greater protection. If you chose the path of allowing the ex-employee to pay the money back, please ensure you have an agreement in place for the recovery should they default.

Question 70

I have a query regarding Long Service Leave.

A Casual Employee who worked for 11 years. LSL = 8 2/3 weeks for 10 years continuous period. But in 2 of those years did not work for 4 months in 2013 & 4 months in 2015.

Work Commission says “An excluded period does not break an employee’s continuous service with their employer. However, it does not count towards the length of the employee’s continuous service.”

Scenario 1) Does this mean I take 8 months off total years which means she worked 10 years & 4 months = entitled to Casual LSL.

Scenario 2) In 2013 & 2015 did not work for 4 months each year.

Does this mean in 2013 the continuous service was broken & LSL starts to accrue again? In other words, in 2013 she did not work at all in October, November & December, and 1-month April 2014 = 4 months.

Does this mean her LSL begins again from 1 May 2014?

Answer

Western Australian legislation, the Long Service Leave Act 1958 along with the Fair Work Act 2009, indicate that the breaks do not interrupt continuous service but are excluded periods when calculating the length of continuous service.

Scenario 1 applies, take 8 months off the total years of service giving an entitlement to 10 years & 4 months casual LSL.

Question 71

My client has farmland rented out. He reports his rental income less expenses just like a normal rental property.

This year he is converting this farmland into a primary production business. During the year, he received partly a rental income and partly from primary production.

How will he report this in his income tax return?  A. Rental Property B. Primary Producer c. Both Rental property and Primary producer.

Another question… He intends to buy a second-hand tractor; can he avail of the current Asset Write-Off introduced by the government?

Answer

Option C as this is factually correct.

Yes, the tractor will be eligible for the instant asset write-off if it is less than $150k.

Question 72

I would like to know the correct formula for calculating LSL for a VIC employee who was full time then changed to casual.

The start date is 22/07/2002.
Request to take LSL 18/08/19 = weeks worked 890.86.
13 Weeks LSL already taken
Per the VIC LSL website employee is entitled to a further 1.8 weeks LSL

As the weekly hours are not 38. We have done the 3 calculations; the preceding 260 weeks are the highest of the 3 calculation options. This came to 29.02 hours per week.

Does this mean that the employees’ entitlement is either:

a) 1.8 weeks x 29.02 hours/week = 52.236 hours

b) 29.02 hours / week x 890.86 weeks worked = 25,856.45 hours worked
25,856.45 x .0167 hours accrued per hour = 431.80
Less 417.81 hours LSL already taken = 13.99 hours

Answer

This is the formula for calculating Long Service in Victoria.

LSL is calculated as the total number of weeks’ employment divided by 60 and multiplied by the ordinary weekly rate of pay at the time the leave is taken, or when the employee ceases employment.

So, the formula at A would be correct as it is 890.86/60 = 14.84 weeks LSL due less 13 weeks taken = 1.85 weeks for LSL, and his ordinary working week averages out to 29.02 hours he is to be paid 1.85 weeks if terminated or takes 1.85 weeks if still employed.

Question 73

I do payroll and we came across the hot place’s clause in the manufacturing award (see below) and I am just looking for clarification. Our HR person indicated that this used to be called hot works and appeared more specific to industries such as founders and welders however the definition she had previously seen appears no longer there. 

We have a factory in Victoria where the outside temp is regularly over 40 in summer and we usually start work early to avoid some of the heat however we would likely go over the 46 degrees (we have a large oven running constantly) despite having cooling in the factory. 

 The award indicates temperature rises by artificial means does that mean if the outside temp is over 46 and the inside temp the same, we would not have to worry but if it were 45 outside and 47inside we would have to pay this? Or have I misinterpreted the award and it applies only to certain industries?

1. d) Hot places

(i) An employee who works for more than one hour in the shade in places where the temperature is raised by artificial means must be paid:

Temperature	Amount of the standard rate
Between 46 and 54 degrees Celsius	2.9% per hour extra
In excess of 54 degrees Celsius	3.8% per hour extra

Answer

The interpretation is correct, but it applies to all industries covered by the manufacturing award.

Question 74

Hi, I have a primary producer client (partnership).

 In March 2020 each of the partners deposited $100,000 into a Farm Management Deposit, however, it appears that their respective share of net PP income before the FMDs will be less than $100,000.

Can the FMD deposit result in a tax-deductible loss for the year?

Note both taxpayers qualify under the FMD provisions.

Answer

The amount deposited needs to be funded from primary production activities – this is a requirement.

The Reader ran a test entry against a sample tax client and the tax return failed the integrity test when the FMD was greater than the net farm income.

The answer here is that a loss cannot be created. The relevant sections are s393-5(1) and s393-5(2).

Question 75

Could you please confirm that the car depreciation cost limit for the financial year ending 30 June 2020 $57,581 plus GST, in other words, l can buy a car up to $63,349?

Answer

That is correct – the motor vehicle deprecation cost limit does not include GST.

Question 76

Your advice on how we account for and tax an employee settlement payment following a dispute. 

Quick background and extract from the relevant sections of the settlement agreement:

BACKGROUND

1. The Employee was employed by the Employer from on or about 14 September 2016 until on or about 8 April 2020 (the Employment), on which date the Employment was terminated (the Termination). 
2. The Employee has made claims against the Employer alleging, variously, underpayment of wages and entitlements and/or breach of a provision of the Hair and Beauty Industry Award 2020 and/or breach of contract (the Employee’s Claims). 
3. The Employer denies all the Employee’s Claims. 
4. Without admission, the parties have agreed to resolve the Employee’s Claims and all matters arising from or in any way related to the Employment on the basis set out in this Deed. 
5. THE PARTIES AGREE 

3.1 In consideration of the Release given by the Employee by virtue of clause 4.1 of this Deed, within 7 days of the Employee serving upon the Employer a properly executed counterpart of this Deed, the Employer will pay to the Employee by direct deposit to a nominated bank account the sum of $7,550.00, less taxation as required by law (the Settlement Sum), in full and final settlement of all Claims. 

Could you please advise:

• Do we process this in MYOB as a single-line item backpay payment for $7550?
• How much tax is to be deducted?   Our lawyer suggests it is likely to need to be taxed in accordance with the Schedule 5 table as a back payment. The employee has a tax-free threshold.
• Can you confirm that no superannuation guarantee charge applies to settlement payments?

Answer

• Yes, this is a MYOB single line-item back payment for $7,550.
• Your solicitor is correct – apply the Schedule 5 table as a back payment and ensure adequate tax is deducted.
• No superannuation guarantee payment applies to this post-employment settlement as it does not fall within the definition of ordinary times earnings.

Question 77

As a professional Chartered Accountant in practice, I have been asked on many occasions as to the following that there is no real guidance by the material released by Government to the following:

Paying the JobKeeper allowance to employees does this payment attract:

1. Accrual of Holiday Pay
2. Sick Pay
3. Super fund contributions

Also, on the Cash Flow contribution by the Government, what are the true criteria that the Government uses to assess the eligibility?

If I can get some clarification it will be appreciated.

Answer

This taxable payment received by the employer maintains the employment relationship and entitlements such as annual leave and sick leave will continue to accrue. The Fair Work Act JobKeeper provisions mean a qualifying employer can:

• Request an eligible employee to take paid annual leave (as long as they keep a balance of at least two weeks)
• Agree in writing with an eligible employee for them to take annual leave at half pay for twice the length of time.

To make an agreement about using annual leave under the Fair Work Act JobKeeper provisions, a qualifying employer needs to:

• Qualify and enroll in the JobKeeper Scheme.
• Be entitled to JobKeeper payments for the employee to whom the agreement applies.
• Be a national system employer in the Fair Work system

Agreements under the Fair Work Act JobKeeper provisions can only be made about using annual leave, not other types of leave.

Currently, any agreements made under the new JobKeeper provisions end on 28.9.2020. Refer also to the article on page 2.

If an employer asks the employee to take annual leave, the employee has to consider the request. They cannot unreasonably refuse it.

Employees who are on annual leave continue to accrue their usual leave entitlements while they are on leave, and the period of leave counts as service.

Superannuation

For payments (or parts of payments) to employees in excess of an employee’s usual wages, superannuation is not required to be paid. This situation may arise where:

• An employee’s usual wages are less than $1,500 per fortnight (superannuation would be payable on the part of the $1500 payment necessary to cover the employee’s wages, but not on ay windfall balance); or
• Employees have been stood down without pay (superannuation will not be payable on the $1500 JobKeeper payment paid to employees as it is not paid as ordinary times earnings for work that has been undertaken).

Otherwise, employees will be entitled to statutory superannuation.

We trust this helps.

Question 78

JobKeeper Payments – In respect to SGC superannuation, could you please clarify:

• Is it applicable only to the excess wages over and above the $750.00 per week? or

• On the hours actually, worked?

Naturally, it is assumed that it would not apply to any Top-up.

 Answer

Superannuation remains payable on ordinary times earnings not the excess over $750 per week.

Using the concept of ordinary times earnings, you are right in saying it is not payable on any top up.

Is superannuation payable on JobKeeper Payments?

Whether superannuation is payable depends on an employee’s salary.

Superannuation is payable according to ordinary rules for payments to employees for ordinary time earnings (even if the funds for those payments are received through the JobKeeper Payment scheme). Therefore, superannuation is still payable for payments made to cover an employee’s usual wages.

Scenario 1 – If an employee ordinarily receives $1,500 or more in income per fortnight (before tax) and is still working: The employee will continue to receive their regular income according to their prevailing workplace arrangements. The JobKeeper Payment subsidy will assist the employer to continue operating by subsidising all or part of the income of the employee.

For example, Anne is a full-time employee who ordinarily earns $3,000 per fortnight before tax. As a result of JobKeeper Payments, her employer continues to pay her $3,000 in wages but will be reimbursed $1,500 from the government. This means the employer will only pay Anne $1,500 of the $3,000 salary from their own pocket.

Using the example of Anne above, because she ordinarily receives a fortnightly payment of $3,000, superannuation will be payable on her entire salary (even though $1,500 of her salary comes from JobKeeper Payment).

However, based on the information to date, superannuation is not payable for payments to employees which are in excess of an employee’s usual wages. The Government has said that ‘it will be up to the employer if they want to pay superannuation on any additional wage paid because of the JobKeeper Payment’.

Scenario 2 – If an employee ordinarily receives less than $1,500 in income per fortnight (before tax): The employer must pay their employee, at a minimum, $1,500 per fortnight before tax.

For example, Nick is a permanent part-time employee who earns $1,000 per fortnight before tax. His employer continues to pay him $1,000 per fortnight before tax, plus an additional $500 per fortnight before tax, totalling $1,500 per fortnight before tax. The employer will then receive $1,500 per fortnight before tax from JobKeeper Payment which, in effect, subsidises Nick’s entire salary. Nick is $500 better off under this scheme than otherwise.

Using the example of Nick above, the employer will be required to pay the superannuation guarantee on the $1,000 per fortnight of wages he is earning. However, it has the discretion whether to pay superannuation on the additional $500 (before tax) paid under the JobKeeper Payment.

For employees who have been stood down without pay, superannuation is not payable on the JobKeeper Payment.

Question 79

A married couple purchased a house in 1982 (i.e., pre-CGT). In 2008, they moved interstate to look after the husband’s mother.

Their home has been rented continuously since 2008, and they continue to live in rented accommodation interstate (i.e., their PPR). They own no other property, and the property is not geared.

In 2019, the house remained tenantless for 135 days, and the property manager has warned them to expect worsening rental conditions going forward when the current lease expires at the end of 2020.

The couple would prefer to leave the house vacant, but doing so would mean they would be faced with a $9,000 vacant residential land tax.

The couple is wondering whether they can rent the house to themselves paying at the lower end of the going market rate, leave the house vacant with no personal use, but possible ‘free’ short term stays by family and friends whilst declaring the rent as income and also continuing to claim depreciation of assets as is being done at present.

Answer

If they rent the house to themselves then there is clearly no landlord/tenant relationship.

In the event this comes to the attention of the ATO, this cannot be effective.

If the property was genuinely on the market for only 15-20% in excess of the standard rent for such a dwelling, then it may not be rented out.

However, it must be genuinely on the market (with the evidence available) and there is the possibility a suitable tenant might apply.

In the event of this happening…. It could be viewed as a windfall gain.

In the event, the property is not rented out then it is mission accomplished.

Question 80

A client of ours has had an employee quit without any notice. Are they able to withhold 1 weeks’ pay?

Answer

They can only withhold 1 week from the employee’s accumulated annual leave. It cannot be withheld from wages for time worked.

Question 81

I own a Practice that is on track to be purchased by a corporate entity which will continue the practice name and business as before while employing myself and my staff under new contracts.

This is planned to occur in late August 2020. The corporate purchaser will be listing a new company name and operating it under this company name, with the same public business name it has always had.

My employees will therefore no longer be employed by my old company, but by a different company, owned by a different entity entirely.

My question relates to my ability to reward very long-serving employees with a cash payment that is tax-effective both for them and for myself. I believe I may be able to pay them a redundancy payment with a tax-free limit.

This is calculated from a “base amount” of $10,989 plus a “service amount” of $5,496 which is multiplied by years of service.
Genuine redundancy payments are tax-deductible to the employer as well as not assessable for the employee.

My question is whether in my circumstance the ATO will regard such a payment as a genuine redundancy payment?

This is a genuine business sale, with my company no longer employing the employees and myself and my employees becoming employed by another company.

But the business itself will still trade uninterrupted and in this case, the ATO may seek to “look through” the change in entity structure.

Can you give me more clarity as to how the ATO may treat my circumstances?

Answer

Taxation Ruling TR 2009/2 provides guidance in this area.

There are four basic conditions to be met:

• The payment being tested must be received in consequence of an employee’s termination.
• The termination must involve the employee being dismissed from employment.
• The dismissal must be caused by the redundancy of the employee’s position.
• The redundancy payment must be made genuinely because of a redundancy.

All the above would appear to apply here for your arm’s length employees.

However, the situation is not so clear for working directors – particularly if your company continues to operate (see example 6 in the ruling).

The figures you suggest are correct.

Question 82

I received the information from a client regarding rental property. This was done by previous tax agents for my client.

Building cost (warehouse) is depreciated at 2% using the diminishing method (no other depreciable item). In my understanding, the depreciation rate for capital works generally should be either 2.5% or 4%. Do you know any case of 2% (2% for diminishing method – it means 1% for prime method)?

It was not an accounting entry as the same depreciation amount was used for the partnership tax return as well.

– Capital works-special build w/off value was depreciated @ 2% (diminishing method)

The client paid the special levy for roof replacement. Shouldn’t this be depreciated at 2.5% (prime cost method) from the payment date?

Do you think this is possibly a mistake? I think I should update it to 2.5% for past periods. Am I allowed to add the back-dated depreciation amount in the next financial period’s tax return?

Answer

The figures you suggest for the capital allowance are correct.

It is possible that you are referring to accounting entries – estimates of useful economic life as opposed to what the Commissioner allows as a tax deduction.

Some entities have two depreciation schedules – one for accounting purposes and one for the tax return with the rates varying on the above basis.

You are right about the roof – a replacement does not constitute a repair and the capital allowance claims should be made at 2.5%.

If the previous roof was listed in the capital allowance schedule this can now be written off.

It is an error, and you should go back and make the changes if they fall within the permitted timespan – generally two years from the date of assessment for an individual or four years for a business.

Technically you should go back and amend the relevant tax returns – having said this in practice sometimes these amendments are done in the current year.

Question 83

Scenario: ” A client recently purchased an Accounting firm for $250,000 which settled on 4th of June 2020. On the contract of the business purchase, the following assets are listed.”

1.    Computer Equipment – $10,000

2.    Client List/Books Records – $220,000

3.    Goodwill – $20,000

My question: Is Depreciation/Amortisation claimable for tax deduction purposes for any item of the assets listed above?

The previous owner has already claimed 100% depreciation on the computer equipment and the value of the client list/books and records is calculated based on the last year’s gross fees.

Answer

The computer equipment valued at $10,000 may be written off.

It is irrelevant that the assets have been written off by the vendor.

The remainder is essentially goodwill and there is no tax deduction for this – the entire amount should be capitalised.

Question 84

Our Operations Manager is stepping down from his position due to health concerns. We have offered him a new position in the warehouse which he has accepted. However, a question regarding the value of his accrued holidays has come up.

In moving position, upon transition, his new hourly rate is lower than the current rate he is being paid as Operations Manager.

When the Operations Manager moves to the new position and lower hourly rate, what happens to the value of the accrued leave? Does it transition to the lower rate or is it kept at the higher previous rate when he was employed as Operations Manager?

If the Operations Manager is currently being paid $40/hour and has 10 weeks holidays accrued, at the moment his holidays would be paid at this rate (and paid out at this rate if requested).

Once transitioned to the new position, let us say his new rate is $30/hour, are holidays now paid at this rate or the higher amount?

If the higher amount, would this mean that if he were to take holidays, he would get paid his previous hourly rate, instead of the new lower rate? If holidays were paid out would they get paid at the higher rate rather than the lower rate?

Answer

Annual leave if paid prior to the new role would be subject to the Fair Work Act 2009 or relevant award or JobKeeper provisions but if it is paid out prior to him taking the new role then it is at the higher rate.

His annual leave is paid at the salary/ wage he is on at the time he takes it. So, if he takes annual leave after changing into the new role and it only pays $30 per hour then that is all his annual leave is paid on.

Question 85

Regarding the JobKeeper payment, as an eligible business participant. How does the director take the money out from the company? As wages, dividends, or director loans?

If we are to take the money as wages and pay PAYG on it, would that be a problem? Because the eligibility criteria on the ATO website, states that the business participant must not be employed on 1st March 2020. (does it mean that the director can then be employed by the entity after 1st March 2020?)

Answer

As you rightly point out there is a choice for a business owner/company director.

You need to carefully consider the tax implications of each choice.

In the event the company has tax losses and/or franking credits, dividends could be a good choice.

Directors’ loans could be repaid if the company does not need the tax deduction and the company owes the director money i.e. no Div 7A issues.

On the basis, the director was not employed on 1.3.2020 but shortly thereafter wages may also be an option.

It is essential that PAYG be deducted from wages.

Question 86

I have a question regarding sick leave during annual leave.

If during annual leave, an employee becomes sick or needs to care for someone, does the leave stay as annual leave or should it be changed to sick leave?

Answer

It becomes sick leave and not annual leave.

Question 87

Personal Leave

1. Previously sick leave was 8 days per year and if the sick leave what not used within the year it dropped off.  We have workers that have been with the company for at least 10 / 15 years.  Can you please advise when Personal Leave started accruing?  I can only find the Fair Work Act 2009 where it says it “can” accrue not “must”.

• So, if I must go back and calculate the personal leave accrual, what start date will it go from?

3. Is there a “Cap”?  Previously I thought there was a maximum number of days that Personal Leave can accrue to (i.e., 3 / 6 months).  Is there a maximum number of Personal Days?
4. Is there a maximum number of Personal Leave time that can be taken in succession?  (please assume the worker has been with the company for at least 15 years).

3.1.  If so, can the worker then use the remaining days the following year?

Casuals

4.    Are Permanent Casuals entitled to Long Service Leave?  Again, we have casuals with permanent hours that have with the company for 10 / 15 years.  Will I have to calculate LSL for these workers?

4.1.  If so, can you see any ramifications if I transfer them to Part-Time employees, which will drop the hourly rate, but be entitled to HP & PL.  Can I then calculate the LSL on the hourly rate at the time of employment being the Part-Time rate?

Answer

 Personal Leave

Q1. If they were covered by Federal Awards it was in 1996 that sick leave went to 10 days, if they were covered by Queensland state awards it was in 2009 that sick leave increased to 10 days.

Q1.1.  01 January 2009 for state-based and 30^th June 1996 for federal employees.

Q2. No cap from 1996 Federal/2009 state, the state was a maximum of 13 weeks before 2009.

Q3. They can take as much leave as they have accumulated as long as they have a medical certificate.

Q3.1. Yes.

Casuals 

Q4. Casual employees are entitled to LSL since 30 March 1994. For accumulation see link:

https://www.business.qld.gov.au/running-business/employing/employee-rights/long-service-leave/entitlements

Q4.1.  If the employees wish to transfer to part-time by mutual agreement that is fine then they are entitled to be paid whatever rate of pay they are on when they take the leave, but accumulation would need to be done as per the link in question 4.

Question 88

Is there any tax or stamp duty payable If a trading company is sold while the shareholders keep its subsidiary?

If you sell the business and the name of the trading company (but keep the shares) can you under such conditions keep the subsidiary (which own properties) without having to pay CGT or S/D, because if not then you would pay these tax & duty to buy something you indirectly own?

Answer

If you sell the shares in the trading company then you lose the subsidiary because it is the head company that holds the shares in the subsidiary.

It is for this reason that we think you are referring to the sale of the business by your head/trading company and not its shares.

This is the only way the shareholders keep their subsidiaries.

Stamp Duty applies as the sale of a business is a dutiable transaction and the rate will depend on the state in which the business is located.

As long as all of the things required for the continued operation of the business are sold, then GST may not be chargeable under the going concern exemption.

A subsidiary company owned by the holding or trading company continues to own the properties.

The trading company continues to own the shares in the subsidiary so there are no concerns with a change of ownership in “land rich” corporations.

The sale of the business is irrelevant.

It is clear there has been no change in beneficial ownership and there are no stamp duty concerns.

As this is a major transaction, it is essential you get legal advice on these issues.

Question 89

My client purchased their principal place of residence property all-in for $600,000 in 2014 with $450,000 of bank debt.

The value has increased since 2014 and they have refinanced the bank debt to $750,000.

All the bank debt refinance top-up proceeds have been deposited into an offset account as have all additional savings. Consequently, my client has $700,000 cash in their offset account which they now intend to reinvest into another property asset.

They live in the current property as their principal place of residence.

I have advised my client not to use the funds from the offset for the next investment. Instead, I believe they should split the current loan into a $700,000 limit and $50,000 limit and pay $699,900 into the redraw of the $700,000 limit then redraw these funds to buy a new property, as the interest would then be permitted to be deducted against the income of the new investment.

Please can you confirm my understanding is correct? If my client were to subsequently move out of the current property and no longer use it as his PPR would this have any tax implication on the deductibility?

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.

The asset used for security or the flow of funds out of a carefully chosen account does not overcome this.

In this instance at least $450,000 of the initial money has been used to purchase the principal place of residence (PPR) which is not tax-deductible.

The ATO will go back and trace transactions in situations such as these.

There can be real problems with split loans in these cases.

However, if there is $700k in available funds that are solely used for the purchase of the investment property, then we suggest the interest is deductible.

To answer your question… if the clients moved out of the existing PPR and rented it out, the interest relating to your original purchase would be tax-deductible.

However, interest on funds drawn down for private purposes such as holidays, lifestyle items is not tax-deductible.

Question 90

Hi, I have a primary producer client (partnership).

In March 2020 each of the partners deposited $100,000 into a Farm Management Deposit, however, it appears that their respective share of net PP income before the FMDs will be less than $100,000.

Can the FMD deposit result in a tax-deductible loss for the year?

Note both taxpayers qualify under the FMD provisions.

Answer

The amount deposited needs to be funded from primary production activities – this is a requirement.

The Reader ran a test entry against a sample tax client and the tax return failed the integrity test when the FMD was greater than the net farm income.

The answer here is that a loss cannot be created. The relevant sections are s393-5(1) and s393-5(2).

Question 91

The question in relation to taxable distributions of Trusts.

A Trust which has a Trust Loss of non-primary production of $ 10,000 plus a Capital Gain of $ 100,000.

Is the taxable distribution to each beneficiary as per below? –

Beneficiary #1	Beneficiary #2
50% Non-Primary Production = ($5,000) Capital Gain = $ 50,000	50%   Non-Primary Production = ($5,000) Capital Gain = $ 50,000

I thought that you are not able to distribute losses of income to the Beneficiary – even though there is a Net Income in the Trust?

Answer

You are correct.

The trust’s taxable income retains its character as it flows through the trust.

The fact that the trust has a taxable income due to the capital gain allows the loss on the revenue account to flow down to the individual.

The 50% capital gains tax discount (if it is available) will be applied at an individual level.

Question 92

Regarding the SBE Pool for the year ended 30 June 2020.

If you claim your depreciation under the SBE rules, 30%, and 15%, do you have to write the pool balance off, if under $150,000 as at 30 June?

Answer

Yes, and this is an interesting situation because it does not always give the most optimal outcome.

In the vast majority of cases, SBEs will be very grateful for the concession but in a limited number of cases, there will be some who do not require it due to the tax-free threshold.

This could apply to sole traders, partners, and beneficiaries of a trust. Of course, if the write-off results in a loss, this may be carried forward. The relevant section is ITAA 328-210.

Question 93

Can a residual value of a motor vehicle under finance be considered a second-hand motor vehicle and qualify for an instant asset write-off (IAWO) for this financial 2019-2020?

Answer

The answer is yes to a genuine purchase, but the total claim including 2019-20 is limited to the motor vehicle depreciation cost limit of $57,581 and the business percentage.

However, if by ‘residual value’, you are referring to paying the final amount on a contract you took out say…3 years ago, then this is not a new purchase and you cannot claim the IAWO.

Question 94

Subject: interpreter’s professional attire

The client’s business structure is a sole trader ( now changed to a company) and working as a professional interpreter.

A professional interpreter needs to dress appropriately at all times. As a rule, an interpreter’s attire should be comparable to that of the moderator of the event being interpreted.

This client is generally wearing casual attire on non-working days, but she/he needs to wear a formal suit/dress with a formal bag depending on the events she/he needs to attend.

Can this professional attire be deductible?

If yes, where should it be included in the business schedule of tax returns?

How much worth of clothing/bag should be reasonable or legitimate as professional attire?

How often can the client purchase professional attire? The client is attending many jobs/cases (6 days a week).

Answer

This is no tax deduction – we are dealing with conventional clothes that are not unique to their occupation.

Similarly, professional staff are not entitled to claim a tax deduction for business suits or formal attire.

Question 95

Scenario: A grandmother nearing death, but of a sound mind. Her Will divides her estate equally between 2 sons. She now wishes to give 4 grandchildren (over 18) $20,000 each. Tax wise for the grandchildren is there a difference between giving the money to the grandchildren before death or is it better incorporating it in the Will for distribution after death.

Answer

On the likely assumption these funds are not in superannuation there are no tax implications.

In the event the funds are in superannuation, then it would be a good idea to get the funds out prior to death to pay the grandchildren in order to avoid death benefits tax payable by the fund.

Other than this there are no death taxes in Australia as such. The gifting provisions could affect Govt pension entitlements, but we note your “nearing death” comments.

Also, your comments that your client is of a “sound mind.” However, this may be an issue after death if the Will beneficiaries receive less than they expected.

They may suggest otherwise or that there was coercion involved. To avoid disputes it may be better to consult lawyers and have this formalised in the Will.

Question 96

I have a primary producer client who has over the years deposited funds under the Farm Management Deposit Scheme.

He is intending to make further deposits prior to 30 June this year, however, it appears that the planned deposit may result in deriving a loss on his farming activities.

The question is whether you can create a loss via a deposit into the Farm Management Scheme?

Answer

Carefully check the terms and conditions to ensure compliance with the FMDS. The source of funds in the FMDS should come from farming activities.

Refer to our answer to Question 1. The ATO will not allow a tax loss to arise from this situation.

Question 97

I believe the tax laws have changed with the amount we can claim on Plant used in a rental property.

Could you give me some guidelines as to what we can claim and what we cannot claim as a capital allowance for rental property plant?

Answer

The extent to which there is plant in a residential property is outlined in Taxation ruling TR 2004/16.

The outcome determines whether a deduction is available under Div 40 for depreciable assets or Div 43 for Capital Works.

Until 30 June 2017, investors were able to claim qualifying plant and equipment depreciation on assets found in an investment property they purchase even if they were installed by the previous owner.

Under the new rules, investors can depreciate new plant and equipment assets and items they add to their property, however subsequent owners will not be able to claim depreciation on existing plant and equipment assets.

Note that if the property is new, investors are still able to continue to depreciate plant and equipment.

Investors are still able to claim capital works deductions also known as building write off, including any capital works installed by a previous owner.

Note these changes do NOT apply to existing depreciation assets used or installed in residential properties held before 9.5.2017 and those which were used solely or partly for a taxable purpose.

Question 98

In the matter of Payment Summaries, could you kindly advise which category “JobKeeper” payments are shown?

If it is put under an allowance which category would it be under?

i.e., Are they included in “Gross Payments” or are they separated?

Also, the same situation with “Long Service Payments”?

Answer

The top-up payment of the Jobkeeper scheme is categorised as Allowance – Jobkeeper Top Up.

However, the entire amount of pay is classified as gross payment if someone earns more than $750 per week.

Payments for long service leave that accrued after 17 August 1993, except if the amount was paid in connection with a payment that includes (or consists of) either a genuine redundancy payment, early retirement scheme payment, or invalidity segment of an employment termination payment or super benefit, is reported as a Gross Payment.

Payment for long service leave accrued after 17 August 1993 where the amount was paid in connection with a payment that includes (or consists of) either:

• a genuine redundancy payment
• an early retirement scheme payment
• the invalidity segment of an ETP or super benefit.

…is reported under Lump Sum A.

Payment for long service leave that accrued after 15 August 1978, but before 18 August 1993 is reported under Lump Sum A.

Payment for long service leave that accrued before 16 August 1978 is reported under Lump Sum B.

Question 99

Re: treatment of a land lease

Clients have a land lease for 90 years.

They pay the rental every month, they pay all the bills related to the land e.g., Council rate, land tax, etc….

Please advise what is the treatment of the lease, it is a financial lease or an operating lease?

How do we present this lease in their financial statement?

Answer

The distinction between operating and financial leases is relevant when assets with a limited life are financed by way of a lease.

Broadly where the benefits and risks associated with ownership are transferred to the lessee, then this is a financial lease.

While it would appear, we are dealing with an operating lease, there will be financial statement disclosure issues involved.

Refer to Accounting Lease Standard AASB 16 Leases for guidance.

Question 100

Will the cash flow incentive given by the ATO be accessible for tax purposes?

What would be the circumstances that would make it accessible?

I was under the impression that it was a tax-exempt benefit paid to small businesses the get them over these troubled times and help them meet business loan repayments, tax payments, and or simply meeting trading business expenses?

Can you please clarify and elaborate on its treatment for tax purposes?

Answer

You are correct.

The cash flow boost is not assessable income and is not subject to GST.

The JobKeeper payments are assessable and not subject to GST.

Question 101

I would like to know whether a company is able to use the Loss Carry Back legislation.
One of our companies is having a large tax payable in the 2019 financial year; however, there are tax losses in the 2020 financial year.

The link of the Loss Carry Back legislation – https://treasury.gov.au/publication/business-tax-working-group-final-report-on-the-tax-treatment-of-losses/final-report-on-the-tax-treatment-of-losses/chapter-3-loss-carry-back

Answer

This has not been available for some time.

Sorry to advise that the repeal of the brief loss carry back offset took effect on 30.9.2014.