November 2005
IN THIS ISSUE:
Example of how it might work
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Say that your income is higher than your
spouse’s and you both own a rental property
financed through a joint low interest loan
provided by your employer. There’s no FBT
and all the interest costs are factored into your
salary package. At the same time, you and
your spouse are able to share the income of
the property jointly. Your spouse’s share of the
property income is taxed at a lower rate than
your share, thus potentially reducing the
overall tax paid on the property.
Fringe benefit opportunity
Your annual tax compliance check-up
DIY super check-up time
Will I be audited by the ATO?
More options for retirement
FRINGE BENEFIT OPPORTUNITY
It’s not all that often that you expect the Tax
Office to highlight a potential tax planning
opportunity – but it does happen at times.
The ATO recently confirmed a potentially
useful salary sacrifice arrangement involving
an employer provided low interest loan to
acquire an income producing property jointly
with your spouse.
ANNUAL COMPLIANCE CHECK-UP
CONSIDER A LOW INTEREST LOAN
In a recent ATO Interpretative Decision (ATO
ID 2005/219), it was confirmed that if your
employer provides a low interest loan jointly to
you and your spouse and you use the loan to
acquire an income producing property jointly,
the loan should not be subject to fringe
benefits tax (FBT) if structured correctly.
Here’s a check-list of some current hot spots
for individual taxpayers that you may want to
have a look at.
Where are the advantages?
Mindful that an ATOID isn’t binding, provided
you seek advice to make sure you come within
this Interpretative Decision, because of the
way the FBT laws operate at present:
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your employer will not pay any FBT on the
low interest loan
you effectively carry all the interest costs
(reflected in your salary package) even
though the loan is a joint one
This can work particularly well where one
spouse has a higher income than the other
spouse.
It’s time for your annual tax compliance checkup and although 30 June 2006 seems light
years away, it’s best to be prepared.
Work related expenses
The ATO is getting increasingly touchy about
what it regards as being a dramatic increase in
the value of work-related expense claims.
Last year, the value of these claims was about
$10.7 billion (up 9.1% on the previous year).
A WORD TO THE WISE
Whatever fears the ATO has, be absolutely
clear that there is nothing wrong with making a
valid claim for a work related expense. A range
of these deductions were set out in our June
newsletter this year.
If you are going to claim work-related
expenses for things like cars, travel, uniforms,
laundry and self education expenses in your
2006 return, the ATO may want to look closely
at what you are claiming.
The Tax Office is also likely to take a particular
interest in your 2006 tax return if you are a:
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construction tradesperson
food processing and preparation worker
dance, drama and music instructor
school teacher or academic
health care professional
Rental properties
This continues to be a significant problem area
as in past years.
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working more closely with land titles
offices, State revenue authorities,
commercial service providers and the
Australian Valuation Office to understand
the overall market and to get information
about your property sales if there are any
examining share registries and other public
data sources for information on share
sales if you have sold shares
matching information reported by managed
funds with information lodged on your tax
returns to check that your return is correct
Aggressive tax planning
If you have a rental property and want to make
sure that there’s nothing for the ATO to be
concerned about, here are some tips to follow:
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don’t overstate interest deductions (e.g.,
by including amounts related to borrowing
expenses)
only claim deductions for a property that is
genuinely available for rent
be careful with claims for repairs and
maintenance (things like renovation costs
are generally not deductible as repairs and
maintenance – they are usually part of the
capital cost of the property)
always apportion deductions where there
is a private non-deductible element (e.g.,
as sometimes occurs when you incur
travel costs to visit a rental property)
be careful if you pay any legal costs in
relation to your property – they may be
capital expenses and not deductible
against your rental income
declare all rental income
A NOTE ON HOLIDAY HOMES
If you have a holiday home and you rent it out
when you are not using it, the ATO is paying
particular attention to whether or not you are
disclosing your rental income correctly.
Capital gains
This year the ATO is targeting a range of
capital gains from the sale of rental properties,
vacant land, holiday homes and the sale of
shares and managed investment funds.
You should be aware that the Tax Office is
getting smarter in the way it targets people and
determines whether or not they are correctly
reporting these types of gains.
To give you an idea of what the ATO is now
doing to track down transactions, this year it
will be:
Aggressive tax planning used to be something
associated almost exclusively with high networth individuals and businesses.
Recent experience shows that this is no longer
the case.
You need to be particularly wary if someone is
trying to interest you in a venture on the
promise of a large refund or deduction claim
that’s disproportionate to your real outlay.
It may be OK, or it may not – so it’s best to get
advice before you commit yourself.
MAKE USE OF PRODUCT RULINGS
If you are thinking about participating in a
managed investment scheme, you should
check if the ATO has issued a product ruling.
These rulings at least provide you with some
certainty on the extent to which any expenses
incurred by the project are deductible if the
project is implemented as outlined in the ruling.
DIY SUPER CHECK-UP TIME
If you are one of the many people who have
set up a Self Managed Superannuation Fund
(SMSF) for yourself, now is the time for you
and your advisers to check your fund’s tax
compliance risks ahead of the ATO’s current
compliance activities in this area.
What’s the Tax Office looking at?
Here’s a checklist of some of the key areas of
current concern. You can use this list as part of
your strategy to review your SMSF.
A TRUSTEE’S LIFE IS A LONELY ONE..,
You should be aware that if your SMSF is in
breach of any of rules governing your fund, the
trustees are responsible for any breach.
The Tax Office is particularly concerned to
make sure your SMSF complies with the
following:
Your fund’s investment strategy
Sole purpose for utilising your fund’s assets
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The assets of your SMSF can only be
utilised for the sole purpose of providing
retirement benefits to you and other fund
members
If you run a business within your fund,
provide financial assistance to friends or
family from your fund or make investments
to benefit someone, then your SMSF could
be in breach of this rule
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Some common trouble spots to be on the
lookout for:
Loans
Arm’s length dealings
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Any dealings between your SMSF and its
members or related parties (where this is
permitted) must be at arm’s length
In practical terms, this means that any
dealings must be at prevailing market or
commercial rates. You should be wary at
all times of any arrangement to get around
this rule
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Legal ownership of your fund’s assets
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As trustee, you are required to keep
benefits and other assets of the fund
separate from personal assets and assets
held by employers who contribute to the
fund
This generally means that the assets must
be held in the name of the trustees on
behalf of the fund
TIP
Under some State or Territory laws, it’s not
possible at all for assets to be held in the name
of your fund. In such as cases, the ATO will
still expect the trustee to make a separate
declaration of trust on behalf of the fund over
the asset or assets affected.
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copies of the fund’s returns
all appropriate transactions’ records
statements of the fund’s financial position
accurate records of who the trustees of the
fund are and their consents to act as
trustees
minutes, in particular those outlining the
trustees’ investment decisions
Make sure your fund’s bank account is not
overdrawn
All your fund’s banking must be done
through the fund’s own bank account
Avoid doing any banking for your fund
through your personal account or the
account of any other trustee of the fund
Holiday homes
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Record keeping
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Your fund should not have any loans to or
from related parties
For example, your son decides to start his
own business and asks you to lend him
some money to finance his business
venture. As he is a relative of the fund
members, you are prohibited from lending
him money from your super fund
Also, you can’t use your fund’s assets as
collateral for a loan (this is because you
can’t raise a charge like this over any of
your fund’s assets)
Bank accounts
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As a bare minimum, make sure that the
following records are kept:
Your fund’s investment strategy may come
under scrutiny
Trustees of the fund are required to
prepare and implement an investment
strategy and regularly review the strategy
Trustees must make sure that all
investment decisions are made according
to this investment strategy
Experience shows that the Tax Office is
highly suspicious of any residential
property owned by an SMSF that is used
by relatives
This is likely to be in breach of a number of
the rules governing the use of a the fund’s
assets
Art work and collectables
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Another contentious area and one that
needs to be managed carefully
Your SMSF can invest in this type of thing,
but to come within the rules, members of
the fund cannot enjoy a benefit from this
investment
This means that with investments like art
works, you can’t display them in your
home
WILL I BE AUDITED BY THE ATO?
The million dollar question!! Although it would
be good to know for sure, the reality is no one
can say for certain whether or not the ATO will
review or audit any of your claims.
the ATO may want to have a closer look at
what’s going on:
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An income tax related audit or review
However, experience suggests that individuals
are more at risk of attracting ATO attention if:
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you haven’t disclosed a gain or
significantly under-reported it or have
failed to lodge a tax return
your deductions seem high or excessive
when compared to the income you have
declared
your claims for deductions are outside the
regular pattern for your job or the industry
you work in
the Tax Office has already sent you
requests for information and you haven’t
replied
you lodge your return late and have higher
than average claims
you work in an occupation that is of
particular current interest to the ATO, like
the occupations we have mentioned above
for work-related expenses
What the Tax Office knows
People often wonder what sort of information
about them the ATO can get access to
automatically. Each year the list grows and at
present it includes details such as:
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your interest and dividend income
your health insurance premiums and
medical expenditure and rebates
any government benefits and payments
you may receive
your employment income (including your
salary and wages, allowances, lump sum
payments [e.g., when you retire] and any
fringe benefits that are reported on your
Payment Summaries)
A NOTE OF CAUTION
The ATO is likely to investigate any gap
between what is disclosed in your return and
the type of information that the ATO gets
automatically from other sources.
An SMSF related audit or review
The Tax Office has developed a series of what
it refers to as non-compliance indicators. If
your SMSF has any of these indicators, then
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more than 50% of your fund’s assets are
unlisted shares and/or equities
your fund’s trustees are under 50
larger than average deductions are
claimed for management and investment
expenses
your fund’s assets are under $40,000 – the
Tax Office may want to satisfy itself that
your fund has a sufficiently diversified
portfolio of assets
your fund is established and wound up in
the same year
THERE’S NO NEED TO PANIC
Being picked by the ATO for a review or audit
doesn’t necessarily mean that you have done
anything wrong. If your tax affairs are in order
or your SMSF is being managed properly,
there should be no problem.
MORE OPTIONS FOR RETIREMENT
Prior to 1 July 2005, if you were below the age
of 65, the superannuation rules required you to
retire before you could access your super
benefits. However, it’s now been recognised
that you may want to reduce your hours of
work as you approach retirement.
From 1 July 2005, once you reach the age of
55 (phasing to age 60 if you were born after 30
June 1964), you can now continue to work and
access your super benefits through an
approved pension.
For example, if you’re in this situation, you can
choose to work on a part-time basis and use
part of your super to supplement your
employment income.
EARLY ACCESS SCHEMES
In spite of this new early access opportunity,
as a general rule you can’t access your super
early (that is, before you reach at least the age
of 55). If someone is trying to entice you to
enter a super fund on the promise that you can
gain early access to your super money for any
number of reasons (e.g., paying off credit card
debts, buying a house, car or even a holiday),
it’s highly likely that the arrangement is illegal.
Disclaimer
Taxwise® News is distributed quarterly by professional tax
practitioners to provide information of general interest to
their clients. The content of this newsletter does not
constitute specific advice. Readers are encouraged to
consult their tax adviser for advice on specific matters.