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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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 Are You Taking Advantage of Tax Offsets?     

 

No one wants to pay any more tax than they have to, so it’s a good idea to check if you’re eligible for tax offsets. They may just reduce the amount of tax you have to pay. Tax offsets differ from deductions which are taken off your income before your tax is worked out. With a tax offset, the Tax Office works out the tax due on your taxable income then reduces it by the total amount of your tax offsets. Tax offsets can only reduce the amount of tax you pay to zero and you’re not refunded any excess.

 

Here are some of the tax offsets you may be able to claim on your tax return:

 

Net medical expenses tax offset

The net medical expenses tax offset allows you to claim a tax offset of 20 per cent of your out-of-pocket medical expenses over $1,500. There is no upper limit on how much you can claim.

You can claim medical expenses for things such as:

- dental bills

- optometry bills

- prescribed medical aids

- hearing aids

- certain residential aged care accommodation

- maintaining a properly trained guide dog.

However, expenses for some cosmetic operations and therapeutic treatments are excluded.

 

Mature age worker tax offset

People who are aged 55 or over on 30 June 2008 and still working may be entitled to a tax offset of up to $500. This tax offset aims to encourage and reward mature age workers who stay in the workforce.

To be eligible for the full $500 offset, you must:

- be an Australian resident for tax purposes;

- be aged 55 years or over on 30 June 2008, and

- have earned a ‘net income from working’ of $10,000 or more, up to a maximum of $53,000.

If you earn between $1–$9,999, or $53,001–$62,999 you may be entitled to a partial tax offset.

 

Senior Australians tax offset

The Senior Australians tax offset is available to senior Australians who meet certain conditions based on age, income and eligibility for Australian Government pensions.

It’s easy to get confused between this tax offset and the mature age worker tax offset. However some people can claim both so it’s important you check if you’re eligible.

 

Dependent spouse offset

If you provided financial support to your spouse (de facto or married) throughout the year you may be entitled to claim up to $2,100 for the dependent spouse offset. You may be eligible if your spouse’s separate net income was less than $8,682 and neither you nor your spouse were able to claim the family tax benefit Part B.

 

Last updated 10.07.08

 

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Robson Consulting Group Pty Limited
Chartered Accountants, Business & Financial Advisors
Suite 14 Level , 207 Albany Street (North), Gosford NSW 2250
PO Box 846 Gosford NSW 2250
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Email: mail@robson.com.au

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