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Robson
Consulting Group
With over 26 years experience in Business
Management and personal wealth creation, Robson Consulting
Group is your "one stop shop" to all of
your Business growth and personal wealth creation
needs.
Are you on the tax office hit
list?
The birds are singing,
the sun is shining and just when you thought life
was good, its tax time again. With increasingly
sophisticated methods of matching the information
you declare to the Tax Office against your records
practically everywhere else, we reveal who is on the
hit list and why.
1. Small and medium
sized enterprises and their executives
Three key issues exist
for SMEs: the relationship between company income
and your personal income; the income declared
between related entities; and, GST integrity –
particularly on property transactions. The first
rule, regardless of who is on the hit list, is to
lodge your tax return on time (or at least enabling
us to lodge it on time). Here are a series of other
areas to look at to make sure your business doesn’t
become an audit target:
Your income vs company
income
An emerging focus for
the Tax Office is how income flows between a
company, its executives, and any related entities.
Generally, the Tax Office has not mapped this level
of interaction before unless there has been a
problem. Now, technology has advanced to explore
these relationships. In other words, the Tax Office
will be looking at the income you declare relative
to that of your business and its related entities,
and then making a call as to whether you should be
further investigated. One key area is company loans
to shareholders.
If your business has
outstanding company loans to shareholders, be wary
of Division 7A. If you have a debit loan account
this can be deemed an unfranked dividend in the
hands of the shareholder. A debit loan account
arises when the company makes payments on behalf of
a shareholder or advances funds to them. Where an
unfranked dividend occurs, the dividend is declared
as income on the shareholder’s personal tax return
and taxed at their marginal tax rate.
Company losses
There are a couple of
problem areas when it comes to claiming company
losses. Obviously, claiming a loss where the origin
of that loss cannot be proven, or where losses
claimed are from a related party (that is not part
of a consolidated group) are going to be denied.
Another problem area is where you have a mix of
carry forward capital and revenue losses and you
attempt to claim all of those losses against revenue
profits. Capital losses can only be offset against
capital gains.
Buying or selling a
business
In addition to the
standard capital gains tax issues from any sale
(i.e., making sure you declare the capital gain),
the Tax Office is looking closely at mechanisms such
as share buy-backs, capital reductions and the sale
of shares to exit from businesses. Debt forgiveness
or write off to facilitate a transfer of a business
will also be in the spotlight. Nothing wrong with
any of this providing it is managed correctly. The
devil is in the detail. |
GST integrity
GST on property
transactions is a continued focus. In particular:
- unreported property
sales, particularly of new residential premises;
- valuations used
under the margin scheme;
- incorrect reporting
of adjustments arising from a change in the extent
of creditable purpose; and,
- correct treatment of
supplies to associates.
In addition, where GST
refunds are high or above an industry standard,
expect a call from the Tax Office. The Tax Office
has tackled a number of GST frauds of late where
falsified or overinflated invoices have been used to
generate higher refunds.
2. The wealthy
Over the last few
years we have seen a number of high profile targets
such as Glenn Wheatley, fall foul of the Tax
Office. Off shore tax minimisation schemes are a
primary target.
In addition to its
focus on off shore schemes, the income declared by
directors of public and private companies is also
under scrutiny. In this area, the key triggers are:
- Where tax
performance varies substantially from business
performance;
- Significant
variations in tax payments that are inconsistent
with economic indicators;
- Unexplained losses;
- Tax outcomes that
are inconsistent with the intent of newer law;
- Private assets
treated as business assets;
- Non-disclosure or
lack of transparency in offshore dealings,
especially involving tax havens, banking secrecy and
low tax jurisdictions;
- Distortions and
inconsistencies in market valuations.
3. Contractors and the
self employed
Contractors, even
those working through a company structure, can fall
foul of the alienation of personal services income (PSI)
rules.
The PSI rules are designed to ensure that
contractors really are in business for themselves
rather than being quasi-employees (and thus paying
less tax than their salaried colleagues and
receiving larger deductions). Under these rules,
unless certain conditions are met, the Tax Office
treats any income as income earned by you rather
than income earned by the business.
This means that
your personal tax rates will apply to your business
income and you will be denied access to a range of
tax deductions normally available to business. To
qualify as a personal services business, you need to
pass at least one of four tests.
4. Landlords
Landlords claim some
$3 billion a year in subsidies (with nearly 1
million landlords claiming to have lost money on
rental properties and only 500,000 making money in
2005/2006)
Here is the Tax
office’s list of common mistakes made by landlords:
- Claiming deductions
for rental properties not genuinely available for
rent.
- Incorrectly claiming
deductions for properties only available for rent
part of the year, for example a holiday home.
- Incorrectly claiming
the cost of structural improvements as repairs when
they are capital works deductions, such as
remodelling a bathroom or building a pergola; and
- Overstating
deduction claims for the interest on loans taken out
to purchase, renovate or maintain a rental property.
A loan can be taken for both income-producing and
private purposes, like to buy a car or go on an
overseas holiday. The interest on the private
portion of the loan is not tax deductible.
There are two
categories of rental property expenses you can
claim:
- Expenses for the
year you paid them, like council rates, repairs,
insurance and loan interest; and
- Expenses that are
deductible over a number of years, like borrowing
costs, creating structural improvements and costs of
depreciating assets. |
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