Small Business
Small business tax offset rules, small business bench-marking, the sharing economy and the new small business restructure roll-over rules – are a key focus for the ATO this month.
While we wait for the final Senate composition and the release of legislation detailing all those budget announcements, there are still plenty of changes with the tax landscape this month.
No change to cents per kilometre rate
A legislative instrument has been issued to confirm that the rate that is to be used in calculating deductions for car expenses under the cents per kilometre method will remain at 66 cents per kilometre for the year ending 30 June 2017.
The rate will remain at 66 cents per kilometre until the Commissioner determines that it should be varied.
From the ATO
Small business tax offset calculator
From the 2016 year onwards individuals are entitled to a tax offset if they are classified as a small business entity (SBE) in their own right or they derive income from a partnership or trust that is a SBE.
In very broad terms, the tax offset is equal to 5% of the individual’s tax liability for the year which relates to their net small business income. The tax offset is capped at $1,000 for the 2016 income year.
The ATO has released an online calculator to assist practitioners and taxpayers in determining the amount that can be claimed under the small business tax offset rules. The calculator can be used by sole traders, partners in a partnership and beneficiaries of a trust.
It is important to note that the calculator does not actually calculate the tax offset that can be claimed. It is to be used in determining the net small business income amount that needs to be entered into the individual tax return and which is then used in calculating the tax offset.
More information
Reminder on the sharing economy
The ATO has decided that it is an appropriate time to remind taxpayers of the tax obligations that can be triggered when someone is involved in the sharing economy.
One of the key things to remember when assisting clients who are involved in the sharing economy is to keep coming back to the basics of the tax rules. That is, even though clients may be earning income from different sources or using different platforms to derive income, the fundamental tax issues remain the same.
Some of the important issues that would need to be considered in connection with the sharing economy include:
- Determining whether someone is carrying on a business or is simply involved in a hobby or recreational pursuit;
- The ATO regards ride-sourcing services as taxi travel, which means that the provider needs to register for GST regardless of their turnover;
- GST would not generally apply to residential rental income, but this would still normally need to be reported as income for income tax purposes; and
- Using a property to derive income can impact on an individual’s ability to utilise the main residence exemption for CGT purposes in the future.
The ATO is also likely to pay close attention to the deductions being claimed by those who participate in the sharing economy. Clients need to ensure that they keep appropriate records to substantiate the deductions that are being claimed against the income that they earn.
More information
Small business benchmarks
The ATO has released updated small business benchmark information for more than 100 industries. The latest benchmarks use data taken from income tax returns and activity statements lodged for the 2014 income year.
The ATO uses the benchmark information to identify businesses that might not be declaring all of their income or that may be avoiding some of their tax obligations.
Tax payers can use the benchmark information to identify industries that may be at higher risk of ATO audit or review activity. The benchmark information can basically operate as an early warning that taxpayer might be subject to a higher level of ATO scrutiny.
The information can also be useful from a commercial perspective as it can show taxpayers how their business compares with other businesses in the same or similar industry.
Just because a business falls outside the benchmarks doesn’t necessarily mean that there is a problem, as there may well be good reasons for the differences. One of the important things is to try and identify those differences with the aim of showing that the client is fully compliant with the tax laws despite falling outside the benchmarks.
When a tax payer’s business is reporting above a benchmark, this suggests that expenses are high relative to sales. This could indicate that the business has high levels of wastage, the client is charging a lower mark-up than competitors, the business hasn’t recorded all of its sales or maybe competitors have been able to source materials at a lower cost.
When a client’s business is reporting below a benchmark, this suggests that expenses are low compared to sale. This could indicate mark-ups are higher than competitors, the business is very efficient and has low waste levels or expenses are not being recorded.
More information
New fuel tax credit rates
The ATO has updated its guide to the fuel tax credit rules to include the rates that apply from 1 July 2016.
The new rates cover liquid fuels, gaseous fuels and blended fuels.
From 1 July 2016 excise rates apply for biodiesel and ethanol which affects the fuel tax credit rates for blended fuels.
More information
Rulings, IDs & Determinations
Reasonable amounts for travel and overtime meals
TD 2016/13 – Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2016-17 income year?
The Commissioner has issued a Taxation Determination setting out the reasonable travel and overtime meal allowance amounts for the 2017 income year.
These rates can be relied upon by taxpayers who qualify for the exception from the normal substantiation rules.
Specific rates are supplied for the following categories:
- Overtime meal allowance expenses – for food and drink in connection with overtime worked and where a meal allowance has been paid under an industrial instrument;
- Domestic travel allowance expenses (excluding employee truck drivers) – accommodation, food and drink, and incidentals that are covered by the allowance;
- Travel allowance expenses for employee truck drivers – food and drink that are covered by the allowance; and
- Overseas travel allowance expenses – food and drink and incidentals that are covered by the allowance.
It is important to remember that just because someone receives a travel allowance does not necessarily mean that they can claim a deduction for expenses incurred. You still need to determine whether the taxpayer has incurred expenses in the course of their income earning activities.
Also, even though the normal substantiation rules may not apply, taxpayers are still expected to keep sufficient records to explain the deductions that have been claimed.
More information
Deductions for gifts to clients
TD 2016/14 – Income tax: is an outgoing incurred by a business taxpayer for a gift provided to a former or current client deductible under section 8-1 of the Income Tax Assessment Act 1997?
This tax determination confirms that it is generally possible to claim a deduction for the cost of gifts that are provided to former or current clients if the taxpayer is carrying on a business and reasonably expects that making the gift will generate future assessable income (e.g., encourage the recipient to refer others to the business).
It is still necessary to check whether the expenditure is private or capital in nature or whether it involves the provision of entertainment as deductions would not generally be available in these situations.
More information
Deductions for airport lounge membership
TD 2016/15 – Income tax: is an employer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for the annual fee incurred on an airport lounge membership for use by its employees?
The ATO confirms that an employer would normally be able to claim a deduction for the cost of the annual fees incurred on an airport lounge membership for use by its employees where the membership is provided in connection with an employment relationship.
The ATO notes that the fees can still be deductible even if the employee uses the lounge membership for private purposes (e.g., while travelling on holiday).
More information
Implications of applying the new small business restructure rollover rules
LCG 2016/2 – Small Business Restructure Roll-over: consequences of a roll-over
The ATO has finalised a law companion guideline which explains some of the implications of applying the new small business restructure roll-over rules from 1 July 2016.
This LCG provides a number of examples which are intended to demonstrate different aspects of the rules including:
- How to determine the cost of the assets that have been acquired by the recipient under the CGT, trading stock and depreciation rules;
- How to determine the relevant acquisition date for the assets that have been acquired by the recipient;
- How to calculate the cost base of shares that have been issued by the recipient as consideration for the assets being transferred;
- How to apply the loss denial rules which prevent future capital losses from being recognised in certain situations;
- How to apply the simplified depreciation rules when assets that form part of a small business general pool have been transferred;
- Some of the indirect tax implications that might still need to be taken into account when the restructure roll-over rules have been used.
More information
What is a genuine restructure of an ongoing business?
LCG 2016/3 – Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters
The ATO has finalised another law companion guideline dealing with the small business restructure roll-over rules. This LCG deals with the issue of when a transaction is part of a genuine restructure of an ongoing business. It also deals with some other specific issues that are expected to arise when clients are trying to use the roll-over rules.
One of the main conditions that needs to be met in order for the roll-over relief to apply is that the transaction needs to part of a genuine restructure of an ongoing business. This is a question of fact and will depend on the circumstances in each case.
In very broad terms, the taxpayer is required to demonstrate that the restructure is expected to deliver benefits to the business itself. The ATO notes that restructures undertaken primarily for the following reasons are likely to be treated as a genuine restructure of an ongoing business:
- Asset protection;
- Maintaining key employees;
- Raising new capital;
- Simplifying the taxpayer’s affairs.
However, if it appears that the restructure is being undertaken for the following reasons then the ATO is likely to conclude that the condition is failed:
- The restructure is being done to facilitate the sale of the business or a business asset;
- The restructure is undertaken to facilitate succession planning strategies; or
- The transaction is undertaken to facilitate the extraction of wealth from the business assets.
The LCG also provides comments on a number of other issues, including the potential application of the general anti-avoidance rules in Part IVA, the application of the active asset requirement and some examples dealing with the requirement that the restructure does not cause a material change in the underlying economic ownership of the relevant assets.
The ATO confirms that the rules are not intended to apply to the transfer of shares in a company or units in a trust.
More information
Cases
Advances made by companies were income, not loans
Rowntree and Commissioner of Taxation (Taxation) [2016] AATA 420
The AAT has concluded that certain funds advanced to an individual by related companies were not in fact loans and should therefore be assessed as income in the hands of the taxpayer. On the other hand, the Tribunal accepted that other funds advanced by related companies could be treated as loans rather than income in the hands of the taxpayer.
While the facts of the case are complex, the key issue related to a disagreement between the Commissioner and the taxpayer over the characterisation of certain funds advanced to the taxpayer by related companies.
The taxpayer argued that all relevant amounts paid by the companies were subject to loan arrangements. However, the AAT disagreed with the taxpayer’s assertions in respect of certain funds on the basis that the only evidence suggesting that the funds should be treated as loans was the existence of a deed to assign some of the debts and the taxpayer’s assertions that the loans existed.
Some of the factors which led the AAT to conclude that the loans did not actually exist included:
- There was no documentary evidence of a loan agreement being put in place or what the terms of the loan might be;
- The deed to assign the debts referred to loans made in June 2010, but the advances in question were made in August 2009 and January 2010;
- No other independent, verifiable evidence was in existence to support the existence of the loan or its terms (e.g., director’s resolutions etc.,);
- Repayments were only made after the taxpayer became aware that the ATO was conducting a review of the financial arrangements;
- The accounts of some of the related companies were unsigned and unaudited. As the taxpayer was the sole director of the companies the AAT felt that the accounts could not be treated as objective evidence of the existence of the loans.
The taxpayer also tried to argue that the rules in Division 7A dealing with complying loan agreements allow the written agreement to be put in place after the loan has been made (ie, by the relevant lodgement day). The AAT pointed out that while section 109N ITAA 1936 may allow the loan terms to be reduced to writing at a later point in time in order to avoid the application of Division 7A, this is not really relevant in determining whether a loan in fact existed in the first place.
We have seen a number of cases in recent years where the Commissioner has sought to assess taxpayers on funds received from related companies on the basis that the funds simply represent ordinary income rather than relying on Division 7A. This is another reminder of the importance of ensuring that clear and contemporaneous documentation is put in place to support the manner in which clients are seeking to characterisation transactions.
Taxpayer was reckless in failing to disclose income
The case dealt with a company that carried on a business of air-conditioning and refrigeration repairs and installations. However, for the income years in question (i.e., the 2011 and 2012 income years) the company also carried out solar panel installation work. The company did not report the income derived from the solar panel work in its tax returns or activity statements.
The ATO commenced a review of the company’s affairs, with the relevant ATO officer notifying the company’s director that this was due to its income being outside the small business benchmarks. Following correspondence between the ATO, the company and its director the ATO commenced a tax audit.
As a result of the review and audit activity the ATO assessed the company on the solar panel income. While the ATO originally imposed a penalty at 90% of the income tax and GST shortfalls, this was later reduced to 50%. The taxpayer applied to the AAT to have the Commissioner’s decisions reviewed, arguing that the penalties should be reduced primarily because the shortfalls were due to an honest mistake and the taxpayer had made voluntary disclosures.
Ultimately the AAT agreed with the Commissioner’s approach. The Tribunal noted that the taxpayer had been at least reckless in failing to disclose the solar panel income. The AAT did not accept that this was an honest mistake due to the following factors:
- The unreported amounts were not isolated errors, but occurred repeatedly over 8 activity statements and 2 income tax returns;
- The unreported sales were significant when compared with the rest of the company’s sales for the relevant years;
- The taxpayer, its director and his wife had not informed their tax agent about this income.
The AAT also found that the taxpayer had not really made a voluntary disclosure to the ATO. The taxpayer only made disclosures after the Commissioner had already asked for the specific information and documents which would have revealed the understated income (i.e., the disclosures were not really voluntary).
One of the things this case shows is the way that the ATO does seem to use the small business benchmarks in selecting taxpayers for review and audit activity. As the ATO makes this information public it is really up to practitioners and clients to utilise the data to identify situations where clients are likely to fall outside the benchmarks so that the reasons for the discrepancies can be identified.
If you have any queries on any of this or any other tax or accounting matters, then here at Fortis Accounting Partners, we are always happy to help.
