March 2007
IN THIS ISSUE:
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Simplified superannuation update
Reforms for small business
Time to review service entities
Drought relief expanded to businesses
Cutting your fuel costs
Bringing the goods homes
Easier GST for some?
Annual Compliance check-up
These contributions are only taxed at 15% in
your super fund. However, if your concessional
contributions exceed this amount, you (not
your super fund) will be effectively taxed on the
excess at the top marginal rate of tax plus the
Medicare levy (i.e. 46.5%).
PLANNING AHEAD NOW…
There’s a transitional period from 2007-08 to
2011-12 - for those of you who are 50 and
over, the cap on concessional contributions is
$100,000 each year (but it’s not indexed!).
SIMPLIFIED SUPER UPDATE
The Government’s reforms to simplify
superannuation have been passed by the
Senate and are now awaiting Royal Assent.
Most of the proposed changes will be
effective from 1 July 2007.
Also, there are transitional arrangements
that apply in the period leading up to 1 July this
year that could impact on your own super
arrangements right now.
Should I be doing anything now?
Take some time to plan ahead now before 1
July this year. Get appropriate advice so you’re
ready for any changes when they take effect.
Although there are many aspects to the
proposed changes, one area that you should
look at now in particular is how the new
contribution rules will impact on your super.
Self employed people will be able to claim a
full deduction for their superannuation
contributions, as well as being eligible for the
Government co-contribution for their post-tax
(i.e. non-concessional) contributions, from 1
July 2007.
Non-concessional contributions
From 1 July 2007, there will be a cap of
$150,000 a year on the amount of nonconcessional contributions you can make.
If your non-concessional contributions exceed
this amount in a financial year, you and not
your super fund will be taxed on the excess at
effectively the top marginal rate of tax plus the
Medicare levy (i.e 47.5%).
This is a significant change because it will limit
your opportunities to make large contributions
into your superannuation close to retirement
without incurring significant penalties.
A snapshot on the contribution rules
Concessional contributions
There will no longer be varying aged based
limits on the amount of concessional
contributions you can make.
From 1 July 2007, your concessional
contributions will simply be limited to $50,000
(indexed) each year.
PLANNING AHEAD NOW…
There are two things you need to consider:
 special rules that will allow people under
65 to bring forward two year’s worth of
non-concessional contributions; and
 there will be a transitional cap of $1 million
for non-concessional contributions made
between 10 May 2006 and 30 June 2007 –
you need to consider the impact of this on
your super contributions now!
Any concessions for small business?
The $150,000 non-concessional cap will not
include the proceeds from the disposal of any
of your assets that qualify for the small
business capital gains tax concessions, up to a
lifetime limit of $1 million.
Withdrawing Superannuation Benefits
From 1 July 2007, superannuation benefits
paid from a taxed source (generally, complying
non-government superannuation fund) as
either a lump sum or as a pension, will be tax
free for people aged 60 and over who have
retired.
When you turn 65, you will be able to access
your superannuation benefits tax free, even if
you are still working. The compulsory cashing
requirement at age 65 will be removed,
generally enabling superannuation benefits to
remain in a superannuation fund until the
member’s death.
Benefits paid from an untaxed source (mainly
affecting public servants) will still be taxed, but
at a lower rate than they are now for people
aged 60 and over.
The Reasonable Benefits Limit (RBL) system,
which effectively limits the amount of
superannuation benefits which can be
withdrawn at concessional tax rates, will be
abolished from 1 July 2007.
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and level of contributions meet your
retirement needs;
can help you prepare and implement an
investment strategy that meets your
superannuation targets; and
can advise you whether a particular
superannuation product or investment is
the right financial decision for you,
including advice about restructuring your
superannuation needs.
REFORMS FOR SMALL BUSINESS
It’s an opportunity to let you know about a few
initiatives that are on the Government’s
drawing board during 2007.
These may well have a positive impact on you
if you’re a small business taxpayer.
What’s a ‘small business’?
As a small business operator, you may be
entitled to access a number of tax concessions
targeted at small business, which we have
discussed from time to time in our newsletters.
Currently, one of the first hurdles we have to
get over is trying to work out whether your
business is in fact a ‘small business’ for the
purposes of a particular concession.
In this regard, each concession has different
entry eligibility criteria, usually based on
varying levels of turnover and/or assets.
Who do I talk to about my super?
It’s important to get the right advice from the
right person.
Your tax agent or Accountant:
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can advise you on and help you with all tax
matters in relation to your superannuation;
may be able to help with some aspects of
setting up your superannuation;
can help you run your superannuation
(e.g., prepare accounting records, produce
financial statements and prepare and
lodge returns if you have a self managed
superannuation fund).
Your solicitor/legal adviser:
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can help you with any legal matters and
advice (e.g., in relation to setting up and
running a self managed superannuation
fund, such as establishing the required
trust).
Your licensed financial adviser:
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can give you advice about investment
products to ensure that your investments
This is confusing because what represents a
‘small business’ changes from concession to
concession. It can be a costly and time
consuming exercise working all this out.
However, there is some relief on the horizon.
Late last year, the Treasurer and Minister for
Small Business announced that legislation will
be introduced hopefully to make access to
these concessions easier and less costly for
small business.
The eligibility tests that currently exist for the
Simplified Tax System, Capital Gains Tax,
Fringe Benefits Tax, Goods and Services Tax
and
Pay-As-You-Go
small
business
concessions will be standardised.
A WELCOME SIMPLIFICATION
It is proposed that if your business has an
annual turnover of less than $2 million, you will
be able to choose to access any of these
concessions that meet your business needs.
All things going to plan, this simplified entry
point is expected to be operative from 1 July
2007.
Small business CGT concessions
And speaking of small business concessions,
the small business capital gains tax
concessions allow you to eliminate or reduce
your small business’s potential CGT in a
number of ways by providing:
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a total exemption for a capital gain on an
asset if you have continuously owned the
eligible asset for at least 15 years and
you’re 55 or over and retiring.
a 50% reduction of a capital gain on an
active asset.
a retirement exemption for capital gains up
to a lifetime limit of $500,000.
a deferral of a capital gain if you acquire
an appropriate replacement asset.
SOONER RATHER THAN LATER…
We raise this issue with you again because the
Government is legislating proposed changes to
improve the operation of these concessions.
As these changes apply to eligible CGT events
that happen in the 2006-2007 year, you may
need to look at this area now to identify any
potential tax planning opportunities.
Private company loans
Private company loans to shareholders or
anyone linked with or related to a shareholder
can be problematic, with nasty consequences
for the unsuspecting.
Late last year, the Government announced
that it would remove the automatic debiting of
a company’s franking account when a deemed
dividend arises in these circumstances – this at
least removes the element of double penalty.
The Commissioner of Taxation will also be
provided with a discretion to disregard a
deemed dividend.
He will be able to do this where there is
evidence that you have attempted to comply
with these provisions, have made an honest
mistake and efforts have been made to rectify
it.
Standard business reporting
The Treasurer has announced a new initiative
to reduce the amount of reporting your
business currently makes to government. The
focus will be on eliminating unnecessary or
duplicated reporting and improving the
interface between businesses and government
agencies.
Working with State and Local governments,
the Federal Government aims to reduce
business reporting burdens by:
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reducing the number of different agencies
to which you have to report the same or
similar information;
standardising and harmonising the data
you have to report; and
providing options for increased automation
of business reporting, including greater
pre-population of forms.
A deemed dividend arises if a loan like this is
not
TIME TO REVIEW SERVICE ENTITIES
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Last year we alerted you to changes in the way
the ATO looks at service entities.
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fully repaid in the same tax year in which it
arises; or
repaid on commercial terms where the
loan is for more than a tax year.
If this happens…
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your company’s franking account is
debited; and
the deemed dividend is taxable in the
hands of the shareholder or associate
without access to a franking credit to offset
the tax paid by your company.
Ouch! This effectively amounts to a double
penalty overall.
What’s a service entity?
By way of a quick recap, it’s common for
professionals (like lawyers, accountants,
doctors and dentists) to set up a separate
entity (e.g., a service trust or company) to
provide the business with staff, clerical,
administrative and other office services.
What’s the problem?
There’s generally nothing wrong with this type
of service arrangement – it’s not all about tax
and is often used as a planning strategy to
protect your assets.
However, the ATO has some particular views
about how your service entity should operate
for tax purposes.
The ATO is on the look out for fees and
charges levied by your service entity that are:
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disproportionate or excessive;
calculated using arbitrary or unrealistic
fixed mark-ups; and/or
charged without clear evidence that the
service arrangement adds value or
performs any necessary functions for your
business.
What’s the urgency?
If your business has a service entity, the ATO
is giving you until 30 April 2007 to make sure it
comes within its operational guidelines – so if
you’re using a service entity you need to make
sure everything is in place before then.
AND A WORD TO THE WISE…
If your service entity comes within the ATO’s
guidelines, the ATO has indicated that there’s
a significantly reduced risk that the ATO will
audit your service entity.
Even if your small business is not located in an
Exceptional Circumstances designated area,
you may still be eligible, provided you derive at
least 70% of your income directly from farmers
located in such areas.
A NOTE OF CAUTION
Changes to the eligibility criteria for this
business support means that it’s important for
you not to self-assess your potential
entitlement – seek advice.
You can also find out more from the
Department of Agriculture and Fisheries at
www.daff.gov.au/droughtassist.
And for the farmers amongst you…
Don’t forget that there are also a range of tax
measures available to farmers affected by
drought and other hardships, including:
Farm management deposit accounts: these
accounts allow you to manage fluctuations in
primary producers’ income by a deduction for
farm management deposits made in a
prosperous year. When you withdraw from this
account, the amount of the deduction
previously allowed is included in your
assessable income in the withdrawal tax year.
DROUGHT RELIEF EXTENDED
If you’re a farmer, you’re already aware that
late last year the Government announced a
revised drought relief package to assist you.
Profit from forced disposal or death of
livestock: you may be able to spread the profit
over a number of years or elect to defer the
profit to reduce the cost of replacement stock.
If you’re in an area that is recognised as being
severely affected by the drought (Exceptional
Circumstances declared areas), you may be
entitled to assistance that mainly comes in the
form of income support and interest rate
subsidies.
Double wool clips: tax relief is available if you
have the proceeds from the sale of two wool
clips arising in an income year because of
early shearing caused by drought, fire or flood.
You may be able to defer the profit on the
advanced shearing to the next income year.
However, if you’re not a farmer but run a
business that services them, you are only too
well aware that the drought also cuts deeply
into your own business.
Insurance recoveries: you may be able to
spread insurance recoveries received for the
loss of your stock in equal instalments over five
years.
You may not be aware that the Exceptional
Circumstances drought relief has also been
recently extended to eligible small businesses.
Water facilities: check whether you’re entitled
to deductions for expenditure on water
facilities.
Does my business qualify?
Landcare operations: you may be entitled to
a deduction for capital expenditure you incur
on eligible Landcare operations.
If your business employs up to 20 staff and
derives at least 70% of its income from the
provision of goods and services to farmers,
you may now be eligible to access this drought
relief package.
CUTTING YOUR FUEL COSTS
What about alternative fuels?
A new fuel tax credits system commenced on 1
July 2006. If you’re eligible, fuel tax credits can
help cut fuel costs for your business by
providing a credit for the fuel tax (excise duty)
included in the price of your fuel.
Fuels like liquefied petroleum gas (LPG),
biodiesel, ethanol and compressed natural gas
(CNG), will not be eligible for fuel tax credits
until 1 July 2011, when these fuels will also be
taxed.
To be eligible to claim a fuel tax credit, you
have to:
TIP
If you’re using these alternative fuels in a
vehicle that’s at least 4.5 tonne travelling on a
public road, you may still be entitled to a grant
under the Energy Grants Credits Scheme.
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be registered for GST;
undertake an eligible activity; and
use eligible fuel.
In addition:
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for some types of diesel vehicles you may
need to meet extra environmental
requirements; and
to receive more than $3 million of fuel
credits in a financial year, you have to sign
up for the Greenhouse Challenge Plus
program. This is a government and
industry partnership aimed at reducing
green house gas emissions.
ENERGY GRANTS CREDITS SCHEME
If your business was claiming under the
Energy Grants Credits Scheme and you were
registered for GST, you should have been
automatically registered for the new fuel tax
credits system.
What’s an eligible activity?
You may be able to claim fuel tax credits if you
are using the right type of fuel for a range of
eligible activities in the following areas:
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road transport (travelling on a public road)
agriculture
fishing
forestry
mining
marine transport
rail transport
generation of electricity (business or
commercial)
nursing and medical
What’s the right type of fuel?
Currently, fuel tax credits mainly cover diesel
and petrol that is used in a range of required
circumstances (e.g., diesel and petrol for use
in vehicle greater than 4.5 tonne if you’re
making a public road transport claim). Other
fuels like kerosene, heating oil and toluene are
also eligible fuels in certain situations (e.g.,
burner applications such as heating).
How does it work?
At the risk of oversimplifying the process, your
fuel tax credit is calculated by multiplying the
number of eligible litres of fuel by the relevant
fuel tax credit rate.
At present, the standard rate is 38.143 cents
per litre. The rate is reduced to 18.51 cents per
litre for fuel you use in travelling on a public
road in a vehicle greater than 4.5 tonne and for
fuel used by emergency vehicles.
How do I make a claim?
If you use fuel in your business, you’ll
generally claim any entitlement to fuel tax
credits in your business activity statements.
Once you are registered for the scheme, the
ATO should include fuel tax credit labels in
your activity statements to enable you to make
a claim.
Here’s a simple example of how the fuel tax
credits system might work.
Anne uses a 5 tonne truck in her business; she
delivers masses of flowers and plants from the
markets in outer Sydney to nurseries spread
throughout the CBD and suburbs. She lodges
her business activity statements quarterly.
From 1 July to 30 September 2006, Anne buys
2,200 litres of diesel for her truck. Because
she is travelling on public roads, the fuel tax
credit rate is 18.51 cents per litre. Anne is
entitled to claim a fuel tax credit of $407.22
(2,200 litres x 18.51 cents).
When Anne lodges her business activity
statement for the September 2006 quarter, she
can claim a fuel tax credit of $407.
BRINGING THE GOODS HOME
Is there an easier option?
Using your business’s trading stock for private
or domestic purposes is not uncommon, e.g.,
the butcher takes home meat for the family.
If you’re a baker, butcher, greengrocer, caterer
or you run a restaurant, delicatessen, takeaway food shop or mixed business (e.g. milk
bar, general store, convenience store), this
type of record keeping can be a real hassle.
You can do it if you want to but there is
another way.
Were you aware if you do this, the trading
stock is treated as if your business has sold it
to someone else and your business may end
up with some unexpected income?
What’s assessable?
As a general rule, when you take trading stock
from your business for private or domestic use
and it remains owned by the same person who
carries on the business, the cost of the trading
stock is assessable.
For instance, if you’re 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.
However, if this trading stock doesn’t remain
owned by the same person who carries on the
business, the market value of the trading stock
is assessable.
Example
A farmer with a livestock primary production
business will often kill livestock for the family’s
use and as rations for the 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, the end result is likely to be revenue
neutral because a tax deduction may also 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 record:
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the date the item is taken from stock;
the reason why the item is taken from
stock;
the description of the item; and
the cost or market value of the item, as the
case requires.
Instead, if you are in one of these businesses
you may be able to rely on a standard value of
goods taken from your trading stock for private
or domestic purposes - these are published by
the ATO each year.
Example
Tom is a butcher, and he regularly takes home
meat from his business over the income tax
year for himself, his wife Margery and son
Richard, who is 10. For the 2006-07 income
year, the ATO’s standard value of goods taken
from stock for a butcher is $980 for every
adult/child over 16 and $490 for every child
between 4-16. If Tom can rely on the ATO’s
standard values, the ATO will consider him to
have an additional $2,450 assessable income
for the year ($980 x 2, plus $490).
TIP
The ATO’s values are only a guide. Even if
you use the standard values, you should still
be able to demonstrate the value applied to
goods taken from your stock for private use is
fair and reasonable in light of your own
particular circumstances.
EASIER GST FOR SOME?
For those of you in a food retail business, it
can be really difficult at times to account for
GST when a mix of GST-free and taxable food
items are sold.
If you’re in this situation and using point-of-sale
equipment that only provides total sales
figures, you may find yourself faced with the
nightmare task of having to account manually
for your taxable supplies. If this is you, you
may need to look at the way you’re handling
this problem.
You should be aware that there are some
alternative GST simplified accounting methods
that eligible food retail businesses may be able
to utilise in this situation. These may allow you
to avoid the manual calculation grind by using
estimates (either supplied by the ATO or
calculated by you) instead.
NON-PAYMENT OF SUPER
The ATO investigates on average 13,000
complaints each year from employees who
believe their employers have not fulfilled their
Superannuation Guarantee obligations. The
ATO investigates all complaints made.
Working out the details of these alternative
methods is far from a simple exercise; you’ll
also still have compliance obligations. So if
you’re in a food retail business, consider
getting advice about whether you’re eligible to
use these alternative GST accounting methods
and whether they’re of any benefit for your
business.
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.
STOP PRESS
The Treasurer recently announced that these
GST simplified accounting methods are also
now available to restaurants, cafes and
caterers from 1 October 2006.
ANNUAL COMPLIANCE CHECKUP
This is just a reminder that the ATO has
published its Compliance Program for 2006-07.
This document is a useful way of finding out
what types of issues are on the ATO’s radar,
so if you have any problems in the following
target areas, you can fix them up before the
ATO auditor comes knocking:
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tracking assessable income with a
particular focus on pursuing business-toconsumer transactions (some strategies
the ATO is currently using include
matching quote books and appointments
to invoices, tracing owner builder
transactions through council records and
matching information from trade suppliers
to business);
compliance by trustees of self managed
superannuation funds;
checking high risk refunds before they are
issued (this can be a problem in the GST
area);
investigating the disclosure of capital
gains, particularly on property and shares
(the ATO is accessing property title
transfer information at a State and
Territory revenue authority level); and
making sure employers comply with PAYG
withholding, fringe benefits tax (don’t forget
the office Christmas party!) and super
obligations (especially Superannuation
Guarantee).