November 2005

FRINGE BENEFIT OPPORTUNITY

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.

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.

Where are the advantages?

Mindful that an ATO ID 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:

· 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.

Example of how it might work:

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.

ANNUAL COMPLIANCE CHECK-UP

It??s time for your annual tax compliance check-up and although 30 June 2006 seems light years away, it??s best to be prepared.

Here??s a check-list of some current hot spots for individual taxpayers that you may want to have a look at.

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:

· 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.

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:

· 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

·

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.

declare all rental income

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:

· 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

Aggressive tax planning used to be something associated almost exclusively with high net-worth 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:

Sole purpose for utilising your fund??s assets

· 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

Arm??s length dealings

· 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

Legal ownership of your fund??s assets

· 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.

Record keeping

As a bare minimum, make sure that the following records are kept:

· 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

Your fund??s investment strategy

· 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

Some common trouble spots to be on the lookout for:

Loans

· 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

· 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

· 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

· 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.

An income tax related audit or review

However, experience suggests that individuals are more at risk of attracting ATO attention if:

· 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

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.

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:

· 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)

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 .

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 the ATO may want to have a closer look at what??s going on:

· 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

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.