A lighter look at the complexity of Australian taxation laws and the year that has been.
Dear Mr Claus,
Thank you for the opportunity to provide strategic business, tax and compliance advice for your operation. We’re pleased you have initiated this advice as the Australian Taxation Office (ATO) has instigated a number or reviews that may impact on your operations and your team, and its relationship to contractors. Some of these issues have been exacerbated by the pandemic.
We have identified a number of areas of concern as a starting point for further discussions. These include:
Western Australia border closures and ‘elf’ contractors
We understand that the hard border closure in Western Australia has created a series of logistical challenges for your delivery schedule. The very specific timing and nature of the gift delivery mean that, while existing vaccinated team members can enter Western Australia on a G2G pass, it is not possible to fulfil the 14 day quarantine requirements. To manage the Christmas Eve requirements, you have instigated a relationship with a local contractor.
We have several concerns about this relationship. Leaving aside our capacity to verify the existence of the elf in question, the elf appears to be an individual and not operating as a logistics specialist – no ABN is on record. Based on the information you have provided to us it appears that the elf is likely to be considered an employee of yours regardless of what your performance contract specifies. As such, you will be liable for superannuation guarantee and tax will need to be withheld from any payment to them. We refer you to the ATO’s contractor checklist.
The nature of the payment to the elf is also of concern. “Goodwill to all men” is an intangible asset and as such, we may need to bring in a specialist valuer. This asset has been a globally scare commodity over the last few years and while supply has improved dramatically since January 2021 and spikes in December each year, the normalised value is likely to be significant.
Business structure viability
The fact that you run a global enterprise that generates no income or profit but ‘gifts’ millions of toys each year produced by your offshore factory, has significant brand value, is represented extensively in merchandise, your spokespeople are employed by shopping centres all around the world, but you have never lodged a tax return or paid tax in Australia, is likely to trigger an ATO investigation. There is also a risk that the Serious Financial Crime Taskforce might become involved.
As discussed, we do not believe that the “it’s magic” argument will suffice in the event of an investigation. The argument has been tested previously with the ATO to no avail.
Your enterprise’s lack of structure also means that you are missing out on significant benefits. For example, tax deductions might be available for expenses you incur. A number of significant changes were made in recent years enabling businesses to immediately deduct the cost of assets used to produce income.
Your flying reindeers are likely to be considered beasts of burden and as such can be depreciated as plant. However, a deduction is only available to the extent that the reindeer are used to produce income that is taxable in Australia.
At present, you do not make any claim for expenses incurred during your Christmas Eve deliveries. While we understand food – cookies, reindeer food, glasses of milk and the occasional tipple of scotch – is provided free by the world’s children, there are likely to be other expenses that you incur. The cost of your uniform, dry-cleaning (removing chimney soot), and postage, to name a few.
As discussed, there are currently no provisions within Australian tax law to allow the Commissioner the discretion to ignore your tax liabilities as a goodwill gesture. Please contact John Kalachian or Henry Zhao at Fortis Accounting Partners regarding these issues.