ATO's  Compliance Program

There is no doubt that small business is a key player in the Australian economy.

If you are one of the 2.3 million micro-businesses (annual turnover of less than $2 million), you account for 96% of all businesses registered in the revenue system.   You collectively contribute more than 12% of tax revenue (but at the same time account for about 68% of debts owed to the ATO).

Add this to 82,000 small to medium enterprises (annual turnover between $2 million and $10 million) that account for 20% of tax revenue and you can see that the ATO has a vested interest in making sure that small business is tax compliant.

As we are now over half way through the 2005 tax year, you should be aware that the ATO has released its 2004-05 Compliance Program.   You can expect the ATO to have a particular interest in the following areas:

-     ensuring trustees of self-managed superannuation funds are meeting their obligations

-     increasing enforcement work in the cash economy

-     increasing compliance work in relation to your obligations to your employees

-     ensuring capital gains tax obligations are being met

-     reviewing record keeping to ensure record keeping practices are of an acceptable standard

-     pursuing outstanding debt and lodgement obligations

      Cash Economy Alert

If you are in the following industries, you can expect the ATO to take an interest in your tax situation this year: motor vehicle trading, tourism and hospitality, fishing, antiques and art dealing, horse racing, restaurants and cafes, building and construction, clubs and hotels, and barter exchanges.

ACCOUNTING NEWS         Issue 7

Employee or Contractor?

It is important to know the status of your workers for tax and other purposes because you have different obligations as an employer depending on whether you classify your workers as employees or contractors.

These obligations may include PAYG withholding, compulsory superannuation contributions, fringe benefits tax, payroll tax and workers'  compensation insurance.

It's best to seek advice about the status of your workers and any associated obligations (it can vary significantly from case to case).   However, here are some "rules of thumb" to give you an idea of what is taken into account in working out whether your workers are employees or contractors:

Employee checklist

Your worker may be an "employee" where he/she:

-     is paid for time worked

-     receives paid leave

-     is not responsible for providing materials or any equipment required

-     must personally perform the duties of his/her position

-     works hours set by an agreement or award

-     is part and parcel of the business, takes no commercial risks and can't make a profit or loss from the work performed.

Contractor checklist

An independent contractor usually agrees to produce a defined/designated result

for an agreed price and in most cases:

-     is paid for results achieved

-     provides all or most of the materials and equipment to complete the work

-     is free to subcontract work

-     has freedom in the way the work is done

-     provides services to the general public and other businesses

-     is directly responsible (including costs) for rectifying poor workmanship

-     is free to accept or refuse work, and can make a profit or suffer a loss from the work

ACCOUNTING NEWS         Issue 8

Employers and Super Choice

You should be aware that from 1 July 2005, as an employer you will have to provide your employees with a choice of superannuation funds.   At present, only you as the employer choose the fund into which your employees' superannuation contributions are made.

Although the administration of this new super choice regime has not been finalised, from 1 July 2005 some of the procedures you will have to follow include:

-      provide your employees with superannuation choice within the guidelines set out in the superannuation choice legislation (unless your employees are covered by State Awards or have certified agreements in place that specify a superannuation fund, e.g., an Australian Workplace Agreement)

-       prepare a standard choice form that will advise your employees of the important matters they should consider before they exercise choice (the ATO is developing a form that you can give your employees) click here to access the ATO form

ISSUE 9 ?? TRADING STOCK

It is essential to physical count the stock on hand at 30 ^th June.   If it cannot be done on that date, then make sure you document any variations due to sales and purchases.

In the event of a tax audit, it is essential that the taxpayer can prove the accuracy of trading stock values shown in the return.

Stock is treated as being on hand even it not on your premises, so long as, at 30 ^th June, you have the right to dispose of it.

Claims for advance payments for trading stock can only be made if the value of that stock is included in the return as part of:-

• The cost of goods sold;
• Or the value of trading stock at year??s end

Taxpayers can choose each year to value their trading stock using different methods.   A different trading stock method can be selected for each item of stock.

Valuation Methods

Except for special rules applying to the valuation of livestock, there is no restriction on the combination of values made up of :-

• Cost price;
• Market value; and
• Replacement price

A fourth special method is available to cater for obsolescence for some trading stock.   Taxpayers must indicate on their tax returns if they have used this method.

Manufacturers

When using the cost price method to value trading stock, manufacturers of goods must include work-in-progress.   Full absorption costing must be used, taking in account all direct and indirect costs of manufacturing the goods to their completed stage of production, including the cost of labour and materials, and the appropriate share of overheads for items like rent, rates, interest and factory administration (see Taxation Ruling IT2350).

Obsolete Stock

Part of year end planning should involve a review of all stock and a determination of the appropriate valuation to be used.

If, for special reasons including obsolescence, the value of stock is less than either its cost, market value or replacement value, the taxpayer can bring that stock to account at a lower value.

To determine whether stock is obsolete (or becoming obsolete), the taxpayer must consider:-

• The age of the stock;
• Quantities expected to be sold during the year;
• Length of time between the last sale, exchange or use of the stock;
• Industry experience; and
• Price of the last sale and the price at which the taxpayer is prepared to sell the item

If the stock can be sold as scrap, it should be valued at its scrap value.   If it remains on hand and cannot be scrapped and has no other use, it can be valued at nil.

ACCOUNTING NEWS         Issue 10

Trading Stock for Private Use

Using your business' trading stock for private or domestic purposes is not uncommon (e.g., bakers taking home various breads and pastries for themselves and their families).

However, you may not be aware that when you take an item from your business' trading stock for private use, you have to take into account an amount as assessable income.

What's assessable?

As a general rule, where trading stock is taken from a business for private use but remains owned by the same person that carries on the business, the cost of the trading stock is assessable.

Alternatively, if this trading stock does not remain owned by the same person that carries on the business, the market value of the trading stock is assessable.   So-

-     if you are a sole trader and you take an item of trading stock for your personal use, you have to include the cost of that item of trading stock as assessable income in your tax return; and

-     if all the partners in a partnership share in an item of trading stock for their joint personal use, the partnership includes the cost of trading stock in the assessable income of the partnership.

Of course there will also be an offsetting deduction in your trading stock account.

Example

A farmer with a grazier primary production business will often kill livestock for his family's use and as rations for his employees.   The cost of this livestock for both the family and the employees is assessable income for the farmer.   However, in respect of the employees' rations, a deduction would also normally be available for the same amount.

What records do I have to keep?

When you take an item of trading stock from your business for private use, the ATO expects you to keep the following information:

-    the date the item was taken from stock

-    the reason why the item was taken from stock

-    the description of the item

-    the cost or market value of the item as the case requires

ISSUE 11 ?? BAD DEBTS

To claim a tax deduction for a bad debt, the debt must satisfy all of the following conditions:-

• It must exist
• It must be bad (not merely doubtful), but neither is it necessary that it be irrecoverable)
• It, or a part of the debt, must be written-off as a bad debt before 1 July
• It must have been included as assessable income in the same year or in an earlier year

A debt cannot be written off as bad on the last day of the year if the debt was also incurred on that day.   The tax office accepts that a debt is bad for tax purposes if (for example):-

• The board or managing director has decided as a matter of commercial judgement, that the loan is bad in that it is unlikely to be recovered; and
• The decision is recorded in writing

With that documentation of the decision, the bad debt may be claimed in that year, even if it is not in fact written-off in the books of accounts until after 30 ^th June

The minimum requirements for proving that a debt is bad include:-

• Issuing a formal demand notice
• Cessation of trading with that firm or person
• Valuation and/or seizure of security; and
• A thorough financial analysis of the debtor

It is very important that the debt, having been identified as bad, is ??written off?? by the end of the income year.

In Taxation Ruling 92/18, the ATO accepts a debt is ??written off?? if ??

• A Board, in writing, authorises the writing off before year end and writes off the debt in the books of accounts in the next year; and
• A written recommendation by the financial controller to write off the debt is agreed to by the managing director and there is a physical writing off in the books of accounts in the nest year.

It is no longer necessary (before writing off) to have taken all available steps to recover the debt by the end of the year.

Note that if a deduction has been obtained for a bad debt, but the debtor repays the debt, the repayment is assessable income in the year it is repaid.

GST Implications on Bad Debts

Do not forget to claim the GST back on debts that have been written off.   You have a decreasing adjustment entitlement.

Claiming of Bad Debts by Companies

Do not write off any bad debts without first getting professional advice on whether the company satisfies either the ??continuity of ownership?? test of the ??same business?? test.   Claims for bad debts are deductible only if the same shareholders held more than 50% of the voting power in the company:-

• For debts incurred but written off in the same year, all of the year; and
• For debts incurred in an earlier year, the date the debt was incurred to the end of the income year of the claim.

If losses were incurred in more than one year during which shareholdings change, care should be taken to ensure that that shareholder test is satisfied.

ISSUE 12 ?? CHILD CARE REBATE

The government has announced that it will introduce the new 30% rebate for out-of-pocket child care expenses with effect from 1 ^st July, 2004 .   As a consequence, parents should keep all receipts for childcare paid in the current year.

The rebate will cover 30% of out-of-pocket child care expenses, i.e. fees paid for approved care less Child Care benefit (CCB), for taxpayers who received CCB and meet the CCB work/study/training test.

CCB is primarily claimed fortnightly through reduced child care fees based on an estimate of family adjusted taxable income.   Centrelink then calculates the correct entitlement to CCB on an annual reconciliation basis once it has received child care usage data and the family??s annual adjusted taxable income when tax returns are lodged.

The correct amount of out-of-pocket child care expenses can only be calculated once the final reconciliation of CCB is completed.   The 30% rebate will be claimed on the succeeding year??s tax return.   This means that the rebate entitlement for the 2004/05 year will be claimed in there return for the 2005/06 year.

The child care rebate will be payable up to a maximum rebate of $4,000 per child.   The rebate will be non-refundable but taxpayers will be given the option of transferring any unused amount to their spouse.

ISSUE 13 ?? TAX CHANGES

Medical Expenses

With effect from 1 ^st July 2005 the definition of eligible medical expenses is to be amended to exclude cosmetic procedures.   Effective from 2005/06 purely cosmetic procedures will not be eligible for the 20% Medical expense tax offset that applies to net medical expenses in excess of $1,500.

Tax Cuts

With effect from 1 ^st July, 2005 the tax scales have been changed.   Don??t forget to update your tax scales in your payroll software before doing your first payrun for the 2006 year.

Superannuation Surcharge

The superannuation surcharge is to be abolished effective from 1 ^st July, 2005 .

Superannuation on back payment of wages

The government has announced that it intends to amend the rules to make it compulsory for a superannuation guarantee payment to be made in the quarter when the back payment is made.   The change is effective from the date of Royal Assent.

Closure of SHASA

Effective from 1 ^st July, 2006 the government has announced that it will close the Superannuation Holding Accounts Special Account to new employer deposits.   This means that employers will no longer be able to make deposits to this fund to meet their superannuation guarantee obligations.   In the future contributions will have to be made to a complying superannuation fund or a retirement savings account.   Between 1 ^st July, 2005 and the closure of the fund employers will be able to use the SHASA to meet their choice of fund obligations for employees who do not exercise choice.

Tariff Concessions

The 3% tariff on business inputs with no domestic substitutes imported under the tariff concession scheme is to be abolished effective from 11 ^th May, 2005 .

Fringe Benefits Tax

Effective from 1 ^st April, 2005 the removal of the requirement that contributions to an approved worker entitlement fund be under an industrial instrument to be exempt from FBT.

ACCOUNTING NEWS         Issue 14

"Low Doc" Loan Alert

If you have a "low doc" loan or are considering one, make sure the income you disclose in your loan application matches the income disclosed in your tax return.

What's a "low doc" loan?

When a borrower takes out a "low doc" (i.e., low document) loan, it's usually not necessary for the borrower at the time of application to prove income (e.g., with financial statement or tax returns).   The trade-off is a higher rate of interest charged on these loans.

What's the problem?

The ATO is currently comparing "low doc" loans with borrowers' tax files and has found that in around 70% of the loans examined:

-       the loans could not be serviced by the income disclosed in the tax return (in some cases the annual loan repayments alone exceeded reported taxable incomes)

-       some people with substantial loans had not lodged tax returns at all

ACCOUNTING NEWS         Issue 15

Trouble Paying Your Tax?

The ATO expects you to pay your tax debts as and when they fall due for payment.   If you don??t, there??s not only the outstanding tax to pay but also additional charges like penalties and the General Interest Charge.

However, the Tax Office may recognise that you face genuine difficulty in paying a prior year tax debt or debts.

Sometimes it??s possible to negotiate a payment arrangement with the ATO if you have the capacity to pay the debt (including additional charges) and meet your current tax liabilities.   The Commissioner also has discretion to release you from your debt in cases of serious hardship.   This discretion is a last resort and is very rarely exercised by the Commissioner.

ACCOUNTING NEWS         Issue 16

Business Travel Expenses

Claims for business travel expenses (within or outside Australia ) incurred by self-employed persons and partners must be supported by written evidence if they are away from the ordinary residence for 1 to 5 nights.

Business taxpayers must obtain documentary evidence of their business travel expenses.   There are different rules for employees receiving an allowance from their employer.

Motor Vehicle expenses are subject to substantiation whether they are incurred by employees or non-employees.

Motor Vehicle expenses are NOT included as travel expenses, but taxi fares (or similar expenses) and motor vehicle expenses are treated as travel expenses if they relate to overseas travel.

If the travel is for 6 consecutive nights or more, additional records must be kept.

You must record in a diary (or similar) ??

• The nature of the activity;
• The day and approximate time it began;
• How long it lasted; and
• Where you engaged in it

You do not need to record non-business activities.

ACCOUNTING NEWS         Issue 17

Compliance Focus on Private Company Loans & Payments

Payments, loans and forgiveness of loans made by private companies to shareholders or associates may operate as disguised distributions of profits

Our studies of small and medium businesses indicate that many directors and shareholders use company funds as their own without understanding that the company is a separate entity.   Many do not understand the tax consequences that arise from moving funds between entities.

Common errors to be aware of are:

?        not having appropriate loan agreements in place

?        shareholders failing to meet the minimum yearly repayments on the loan

?        creating a debit balance during the year through drawings and paying personal expenses with company funds

?        incorrectly using the FBT benchmark rate to calculate loan repayments, instead of the higher benchmark rate for private company loans

?        directors/shareholders not declaring income like directors fees or dividends, where these have been applied against their debit loan account

?        companies not declaring the interest earned on loans to directors.

The requirement timeframe to be paid out:

?        for the 2004 and earlier years is 30 June if the income year in which the loan is made; and

?        for the 2005 and following income years is the ??lodgment day??

We would advise you to:

?        keep proper records of shareholder loan account transactions

?        have written agreements in place (with stamp duty)

?        charge the correct benchmark interest, and

?        make sufficient repayments to repay the loan within the maximum time allowable.

The Tax Office is taking an active compliance approach:

?        for companies in the $2M to $10M turnover range, they have a strong educational focus directed to both tax professionals and their clients,

?        for companies in the $10M to $100M turnover range, they have increased their scrutiny of loan account transactions to determine whether aggressive tax planning is taking place.

It is important that debit loan account balances with shareholders must be paid out or structured as excluded loans.

ACCOUNTING NEWS         Issue 18

Your Employee Obligations

If you employ contractors or staff in your business, your obligations to your personnel extend beyond your day-to-day tax and superannuation responsibilities.

You need to be familiar with these wider responsibilities to ensure you are looking after your legal obligations towards your workers.

These responsibilities can arise from a variety of sources such as federal and state laws, contracts of employment (written or verbal), industrial agreements and awards.

Your obligations in the following areas are outlined briefly below:

?          wages and record keeping;

?          employee health and safety;

?          insurance; and

?          federal and state taxes.

You will need to check your own state or territory laws for details on things like state taxes (e.g., payroll tax) and employment laws and regulations.

Wages and record keeping

Make sure you pay your employees their correct wages, particularly if they are employed under an award or industrial agreement.

Whilst you are no doubt aware of the range of records you are required to keep for tax purposes, you should also be aware that employee awards or agreements usually also require you to keep specific employment records (e.g., for salary and wages).

EMPLOYEE Health and safety

As a business owner you have certain rights and responsibilities regarding your staff??s health and safety in your workplace. Generally, you are required to provide:

?          safe premises;

?          safe systems of work (e.g., safe machinery and other equipment);

?          a suitable working environment and facilities; and

?          information, instruction, training and supervision where appropriate.

The way in which these obligations apply may vary depending on your circumstances, so it??s best to get advice about what??s applicable to you.

Insurance

You are liable for compensation payable to any of your employees suffering work-related injury or disease.

To cover this, it??s compulsory for employers in all states and territories to have workers compensation insurance through an approved insurer. Your insurer indemnifies you for costs of any claims.

As your obligations in this area vary across states and territories, you need to get advice relevant for your locality.

Taxes

Working out your responsibilities in respect of your staff that can have tax consequences is a bit of a minefield. Here??s a checklist of some employee responsibilities:

?          remit PAYG withholding tax;

?          pay fringe benefits tax if applicable;

?          make compulsory superannuation contributions; and

?          pay payroll tax if required to do so (this is a state or territory tax).

PAYG withholding

If your business has employees, you??ll need to register for Pay As You Go (PAYG) withholding tax, withhold the appropriate amounts of tax from salary and wages and then pay these amounts to the Tax Office.

Here are some pointers to keep in mind:

?          You must report and pay the withheld amounts to the Tax Office monthly or quarterly when you lodge your activity statements (BAS).

?          You need to prov ide each employee with an annual payment summary of tax withheld (a ??group certificate?? in the old language) and provide an annual report on these amounts to the Tax Office.

?          The ATO will send you a stationery package if you are registered for PAYG withholding tax (except if you repor t electronically) that includes copies of payment summaries and guidelines for completing payment summaries.

Company or trust

If you run your business through a company or trust, keep in mind that directors can be treated similarly to employees f or PAYG purposes.

Sole trader or partner

If you are a sole trader or partner in a partnership, the rules regarding payment of wages, withholding tax and superannuation, will not be directly applicable to you. You will generally pay tax on your share of your business?? taxable income.

Fringe benefits

If you provide taxable fringe benefits to your employees, you will have to report and pay fringe benefits tax (FBT).

The FBT year runs from 1 April to 31 March of the following year. If you have to lodge an FBT return, it is usually due by 21 May, unless you are on a tax agent??s lodgment program.

Provide fringe benefits?

If you provide taxable fringe benefits to your employees or to associates of your employees (typically family members), you may have an FBT liability.

Examples of common taxable fringe benefits include: use of a work car for private purposes, cheap loans, entertainment and the payment of private health insurance costs.

Some benefits are exempt from FBT. For example, laptop computers (one per FBT year per employee), mobile phones mainly used for work, benefits of less than $100, some taxi travel and in-house health care facilities.

Superannuation

Your key responsibility here is to provide a minimum level of compulsory superannuation support, e.g., the superannuation guarantee (SG) contribution for each employee, which is currently set at 9% of their wages or salary.

If you have super obligations under an industrial award, these count towards the minimum level of SG support, as do payments made under a salary sacrifice arrangement.

Who??s covered by SG?

Most employees, whether full-time, part-time or casual, are covered by the superannuation guarantee legislation.

However, be aware that the term ??employee?? has a wider meaning for these purposes and may include other types of workers including company directors, some artists, sportspeople and certain contractors.

You don??t have to make SG contributions for an employee who is:

?          paid less than $450 a calendar month;

?          70 years or older; or

?          under 18 and works no more than 30 hrs per week.

Tax deduction if paid on time

SG contributions are tax deductible, provided they are paid on a quarterly basis to a complying superannuation fund or retirement savings account. Here??s the payment schedule for the 2005-06 year:

Period	Contributions due
1 Jul 05 ?? 30 Sep 05	28 Oct 05
1 Oct 05 ?? 31 Dec 05	28 Jan 06
1 Jan 06 ?? 31 Mar 06	28 Apr 06
1 Apr 06 ?? 30 Jun 06	28 Jul 06

Reporting to employees

From 1 January 2005, you no longer have to provide written SG contribution reports to your employees.

If you want to continue to report to your employees, you can do so. Otherwise, your employees will be able to find about their superannuation contributions when their super fund issues annual member contributions?? statements.

Super Choice

Of course, don??t forget that from 1 July 2005, many of your employees have the right to choose the superannuation fund into which your compulsory SG contributions are paid. This topic was covered in the May 2005 edition of this newsletter.

Payroll tax

If you employ people in a state or territory, you may need to consider payroll tax. This is a state and territory tax that is levied on wages paid or payable by you as an employer.

As each state and territory has its own legislation with differing provisions, rates of tax and levels of exemption, it??s best to consider getting advice about whether you have to pay this tax.

As a general guide, if you pay wages to someone in any state or territory, you are liable for payroll tax in that state or territory if your Australia wide wages exceed that state??s or territory??s general annual exemption level for the year (1 July ?? 30 June).

If you are part of a group of related employers, your Australia wide wages are the total wages for your group and not just your entity.

Here??s a list of exemption levels and tax rates:

State/territory	Exemption level	Rate
ACT	$1,250,000	6.85%
New South Wales	$600,000	6.00%
Northern Territory	$1,000,000	6.20%
Queensland	$850,000	4.75%
South Australia	$504,000	5.50%
Tasmania	$1,010,000	6.10%
Victoria	$550,000	5.25%
Western Australia	$750,000	5.50%

( ACCOUNTING NEWS         Issue 19