TAXWISE BUSINESS NEWS
November 2004
| CONTENTS: |
| ATO??S COMPLIANCE PROGRAM |
| TROUBLE PAYING YOUR TAX? |
| EMPLOYEE OR CONTRACTOR? |
| CGT IN THE SPOTLIGHT |
| TRADING STOCK FOR PRIVATE USE |
| EMPLOYERS AND SUPER CHOICE |
There??s 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 almost 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:
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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. |
? 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 lodgment obligations
| 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.
| EMPLOYEE OR CONTRACTOR? |
It??s 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
| CGT IN THE SPOTLIGHT |
Strong gains in the property market over the past five years, and in the sharemarket more recently, have turned the ATO??s attention to capital gains tax (CGT) compliance.
Real estate is currently the main focus. The Tax Office has found that many people make two common CGT mistakes: not including capital gains in their tax returns in the correct financial year (or not at all) and not calculating their capital gains or losses properly.
Sales of high value/high growth properties are a particular focus for the ATO at present. This project already involves 112 audit cases relating to Gold Coast properties and will be expanded to the sale of properties throughout Australia.
The ATO also plans to move their active compliance focus from property towards the sharemarket in early 2005, and will also be focusing on any claims you may have made under a range of small business CGT concessions.
A WORD TO THE WISE?
You should ensure that your CGT records and tax return details are correct and complete. The Tax Office will be increasing its data matching capability in the property area, including matching State Revenue office sales information against tax return details. They are also planning a pilot that will match data from share registries against net capital gains in return forms and CGT schedules to test compliance on share disposals.
What CGT records do I need to keep?
You should keep records of everything that may be relevant to working out whether you have made a capital gain or capital loss from an asset ?? i.e., records to substantiate the details and timing of the purchase and sale of the asset and associated costs.
You need to keep these records for 5 years after the last ??CGT event?? (e.g., the sale of an asset) that gives rise to the capital gain or loss. In practical terms, this means that for CGT purposes you may need to keep records for periods considerably longer than 5 years.
Example
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To help you overcome the problems of having to keep CGT records for long periods of time, the ATO has agreed to let you discard your CGT records after five years if you set up a CGT assets?? register and have it certified by a professional tax advisor. This is simply a schedule of information about your CGT assets that you have transferred from your CGT records (for example, contracts, invoices, stamp duty, legal fees, etc). |
On 1 October 2004, Jim entered into a binding contract for the sale of a home unit he had held solely as an investment property since 1 July 1986. The CGT records for this transaction need to be kept for 5 years from 1 October 2004 ?? that??s over 23 years that the records should have been kept by Jim for this transaction!
What??s included on a CGT assets?? register?
For most assets this register includes:
? the date of acquisition of the asset
? the cost of the asset
? a description, amount and date for each cost associated with purchasing the asset
? the date of disposal of the asset
? the amount received on sale of the asset, and
? any other information relevant to calculating your CGT obligation
FOCUS ON RECORD KEEPING
It??s not only good business sense to keep proper records - it may now also be costly not to do so.
Not many people are aware that since 1 July 2000 the Commissioner has had the power to impose a separate administrative penalty (up to $2,200) if you have not kept or retained records required by a tax law.
Although the Commissioner is only likely to use this penalty as a last resort, it??s best not to give him an excuse to use it.
DID YOU KNOW?
If you are operating in retail, primary production or a service industry, the ATO has published its views on acceptable record practices for your daily business transactions!
Using your business??s 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??s 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.
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BUSINESS TIP If you are a baker, butcher, caterer, greengrocer or own a restaurant, delicatessen, take-away food shop or mixed business (e.g., milk bar, general store, convenience store), you don??t have to take account of every item of trading stock taken for your private use. Instead, you can rely on a standard schedule for the value of goods taken from trading stock in these businesses that is published by the ATO each year. |
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 is taken from stock
? the reason why the item is taken from stock
? the description of the item
? the cost or the market value of the item as the case requires
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If you deliberately understate your taxable income, you could face penalties of up to 75% plus interest. However, if you voluntarily disclose an understatement of income you can receive a substantial reduction on penalties that may otherwise apply. |
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 super-annuation 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)
NO CHOICE IS MADE?
If your employees don??t choose a fund, you can continue to make the contributions to the same fund as you do now ?? but there are also new requirements that this fund offers a minimum level of insurance cover.
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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. |