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Issue 134, 25 August
2006
Welcome to the latest issue of
Thomson's Tax & Accounting Insight, your free news service for tax and accounting professionals.
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Articles in this edition include:
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A deduction for travel between two workplaces is allowed
for in section 25-100 of the Income Tax Assessment Act 1997
(ITAA 1997). The effect of the 'non-commercial loss rules' in Division
35 of ITAA 1997 is that where the total of otherwise deductible
amounts that are attributable to a business activity exceed the
assessable income from that business activity, the loss must be
deferred until a later year in which the business activity makes a
profit. These rules will apply unless the entity satisfies one of
the four 'non-commercial loss tests' (being the 'income
test' in section 35-40 of ITAA 1997, the 'profits test' in
section 35-35 of ITAA 1997, the real property test in section
35-40 of ITAA 1997 and the 'other assets test' in section
35-45 of ITAA 1997).
A question arises as to whether an amount or part of an amount,
which is otherwise deductible as a transport expense between
workplaces (one of which is a business), is attributable to the
relevant business activity under section 35-10(2).
Draft Taxation Determination TD 2006/D21 states that where a
business is being carried on at one of the workplaces, the transport
expense amount is attributable to both the relevant business
activity and the activity of the other workplace. The expense must
be apportioned on a 'fair and reasonable basis'. In most cases
an apportionment of 50% to the workplace at which the business is
conducted and 50% to the other workplace is reasonable
This summary article appears in the September 2006 Recent
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Tom and Anna are the owners of a company that operates four
very successful cafes. Three of the cafes operate from strata
retail premises owned by the company. The company has been built
up to this stage over 12 years by the reinvestment of virtually
all profits at the expense of Tom and Anna's personal lifestyle.
After years of living in rental accommodation Tom and Anna
recently decided to purchase their own home, since they have
negligible personal assets (other than their shares in the
company). Their bank manager told them he would approve a loan for
the required $545,000 only if the company provided a guarantee for
this personal borrowing. Tom and Anna agreed to this condition
when he pointed out that no stamp duty cost would be involved
since the assets of the company were already charged in favour of
the bank to secure the company's small overdraft.
Tom and Anna went ahead with the purchase of their dream home.
Disaster! If Tom and Anna default on the loan they will be
deemed to have received an unfranked dividend of $545,000 from
their company, resulting in a tax liability of $253,425. To add
insult to injury, the company's franking account balance will be
reduced by $545,000, possibly resulting in a franking deficit tax
liability.
Believe it or not, this is the consequence of Division 7A of
the Income Tax Assessment Act 1936. Under Division 7A, a
company guarantee in favour of shareholders is treated as a deemed
dividend to the extent the guarantee is called upon. It does not
appear possible to undo the tax mischief that can be unwittingly
created by the giving of a company guarantee.
Once again, neither ignorance of the provisions nor a lack of
tax avoidance motives can be used to get Tom and Anna off the
hook.
This article appeared in Thomson's inTax
Magazine (August 2006); Australia's best independent monthly
tax magazine. It provides concise reports of the latest tax news,
plus the practical implications of tax developments in an
easy-to-read magazine format. To find out more, phone Thomson
Customer Service on 1300 304 197 or click
here.
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In releasing the Tax Office's 2006/07 Compliance Program
(Thursday 17 August 2006), the Commissioner said that 'tax
scheme promoters, Project Wickenby, identity crime, tax havens,
failure to declare capital gains and an expanded focus on high
wealth individuals are key risk areas for the year ahead'. The
Commissioner also flagged that, in 2006/07, the Tax Office would:
- continue its push to detect and
bring to account those who use false or stolen identities;
- look at arrangements that use
tax havens and countries with bank secrecy to identify
attempts to avoid Australian tax obligations;
- expand its coverage of high
wealth individuals with a net wealth of around $30 million;
- look closely at situations where
the tax performance of private groups and public companies, or
individuals who control them, is out of line with economic
performance, or wealth accumulation is inconsistent with the
performance of the group;
- look at 'the growing number of
senior company executives' whose total remuneration exceeds
$1 million;
- identify unreported capital
gains, and arrangements designed to avoid or minimise CGT. The
Commissioner said that 'around 6,000 high risk individual
investors will be checked to make sure capital gains have been
declared';
- contact businesses who
deliberately manipulate their affairs, or use complex
structures to minimise a capital gain;
- continue to focus on areas such
as: GST compliance, employer obligations such as PAYG
withholding and FBT, non or late lodgment of returns and
activity statements, and compliance by self-managed super
funds.
Individuals: Tax Office priority areas for individuals
will include: high income earners, unreported dividends, capital
gains and rental property income, deductions for work expenses and
outstanding tax returns.
Micro businesses: Tax Office focus will be in relation
to record keeping, the cash economy (with a particular focus on
the building and construction industry), lodgment obligations, GST,
employer obligations and the management of tax debts (according to
the Commissioner, over 800,000 businesses in this segment have
outstanding tax debts).
SMEs: The Tax Office will monitor and review compliance
of 1,000 wealthiest individuals and monitor the tax performance of
privately held groups and the individuals controlling them.
Large businesses: The Tax Office will review losses to
check if they have been correctly incurred and deducted, conclude
tax disputes under mutual agreement provisions of Australia's
double tax treaties, and scrutinise businesses that have tax haven
dealings.
Tax practitioners: The Tax Office says it will: 'build
[its] relationship with bookkeepers, and provide products and
services to help them; monitor compliance by the legal profession;
take 'firm action' where tax practitioners engage in or
support tax evasion, fraud or criminal activity.
Tax Office focuses on losses
The Commissioner commented that, with the changes to
self-assessment, and now a shorter period of time to make
adjustments, the Tax Office will be reviewing as quickly as
possible the loss positions or past losses claimed by SMEs and
large companies to ensure that any artificiality in relation to
those losses is addressed early rather than too late in the
amendment periods. For large business, he said the Tax Office
planned to conduct about 75 income tax audits in 2006/07.
Mr D'Ascenzo also noted that, in a buoyant economy 'with
quite a lot of share and property sales', issues like CGT and
rental property income and deductions warrant the Tax Office's
attention. The Commissioner said that, as Tax Office figures show
that 65% of investors report losses, 'that sort of dynamics ...
behoves us to ensure that those losses are appropriate and
legitimate, and that certainly remains an area of focus for us in
the coming year'.
This article appeared in ATP's daily Latest
Tax News (Tuesday 22 August 2006). With tax fast-moving and
ever changing - EVERY DAY, practitioners rely on Thomson ATP's
daily Latest Tax News for quick, accurate, comprehensive
information - no compromises. When you need to know what's new
in tax and related news every day, there's only one place to
look - LTN. To find out more, click
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Amendments have been made to the Income Tax Regulations
1936 to exclude high-risk categories of taxpayers (individuals and small
businesses who have elected and are eligible for the simplified tax system)
from the standard two-year tax return amendment period. These excluded
taxpayers will have a four-year amendment period. It will apply to the
following:
- taxpayers involved in
non-arm's length transactions between associates;
- taxpayers involved in
transactions to which an unpaid present entitlement applies;
- taxpayers involved in
transactions involving Division 7A of the Income Tax Assessment Act
1936
(ITAA 1936);
- employee share schemes;
and
- income from foreign
transactions.
These amendments commenced on 27 June 2006 and will
apply from the 2004/05 income year onward.
This article appeared in Thomson's Client
Alert Newsletter Service. Client Alert is a monthly newsletter that
promotes your business and develops your client's awareness of upcoming
tax issues. To find out more, phone Thomson Customer Service on 1300 304 197
or click
here.
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Australian Tax Handbook - Tax Return Edition 2006
Updated with all developments to 1 July 2006. All the
assistance you need to stay on top of approaching deadlines and
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experience is unsurpassed, the Tax Return Edition provides insight
and clarification on budget changes and other developments, clear
overviews and practical examples in one up-to-date volume - published at the peak of tax time when you need it most.
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For more information on how you can combine
these two essential resources call 1300 304 197 or click
here
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Covering an extensive range of topics from
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For more information call 1300 304 197 or click
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FBT Compliance Toolkit
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Forget tedious manual calculations, filling
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Div 7A Loan Calculator
Take the guesswork out of Division 7A
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This timesaving compliance resource places
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Containing essential templates and model loan agreements to help
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Tax Return Desktop Guide
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latest developments in tax return preparation and general taxation
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Payroll workshops: book now for September and October
sessions!
Help your payroll staff increase their professional expertise
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Note: AHRI members receive a 10% discount on all payroll
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Click above to secure your place or call
1300 304 197
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