Eclipse Accounting Group – May 2010 E-Newsletter

This issue includes:

Why the Tax Office is Looking at Your Facebook Profile
Selling Your Business?  Watch out for CGT
Crackdown on "Phoenix" Activity
Employers Note:  Changes to Employee Payment Summary Requirements
Variation of PAYG Withholding Tax
Capital Gains Tax on Inherited Main Residences
Land Tax Update
Increase in company ASIC Fees

Why the Tax Office is Looking at Your Facebook Profile

A recent article published in the online small business magazine SmartCompany will have many people reviewing what they say and expose on Facebook and other social networking sites.

Tax Office staff are the last people you expect to be looking at your Facebook profile but according to a lecturer at Latrobe University’s Faculty of Law and Management cited in the SmartCompany article, the popular social networking site is being used to build prima-facie cases against investors using offshore tax havens. 

Our compulsion to share our every movement on online forums is being used by the Tax Office as a tool to build profiles on high net wealth individuals.  So, if you’re telling the tax office that you have a modest income but are constantly posting pictures of yourself in your floral board shorts in Barbados, or your latest shopping expedition in Paris, then you can expect a call from the Tax Office very soon.

Offshore tax havens are a particular focus and this compliance program has claimed the scalps of many high profile taxpayers through Project Wikenby. 

The accessibility of the information available to the Tax Office to investigate and build cases against taxpayers is increasing every day. Your Facebook profile is just another avenue.

If you are contemplating selling your business or want to make sure you have the right structure in place, contact us today for a review.

Selling Your Business? Watch out for CGT

If you’re selling your business, the CGT small business concessions have the capacity to reduce your capital gains tax liability to $0.  Understandably, the tax savings that can be achieved make the concessions very popular with business owners.   However, the extent of the tax savings also means that the concessions come under close Tax Office scrutiny.  Quite a few taxpayers have been stung with very large and unexpected tax bills because they claimed the concessions but did not pass the eligibility tests.

There are a number of rules and conditions that a small business and their owners need to meet to be able to access the concessions.  One of the main eligibility requirements is the $6 million maximum net asset test (although an alternative $2 million turnover test is available in some circumstances).  This test requires that the combined value of the assets of the business, any connected entities, any affiliates and any entities connected to the affiliates, is less than $6 million. 
 
The $6 million maximum net asset test applies at the time when the CGT event occurs (generally when the contract of sale is entered into), so you need to satisfy yourself, and be able to substantiate to the Commissioner if you are audited, that your net assets were less than the $6 million threshold at that time.

Crackdown on "Phoenix" Activity

In March 2010, the Assistant Treasurer announced new measures to combat "phoenix activity".

Phoenix activity involves the deliberate liquidation of a company in order to avoid the payment of liabilities, such as employee wages and superannuation, business creditors and outstanding taxes.  The business then continues to trade through the incorporation or establishment of a new entity and continues through this entity free of any of the above debts.

The new measures announced seek to expand and reform the use of security deposits and seek to increase penalties for failing to comply with the requirement to provide security deposits.

Security deposits (which are similar to bonds) are payments that are required to be paid by a taxpayer at the direction of the Tax Commissioner in relation to an existing or future tax liability.  Alternatively, the Commissioner may accept security in another form like a mortgage over property or a guarantee.  Refusal to provide a security deposit would be treated as a criminal offence.

Such a deposit is most likely to be required where the Australian Taxation Office believes that a foreign taxpayer is establishing or carrying on a business in Australia for a limited period of time only, or where some other risk makes a deposit appropriate, such as a risk of phoenix activity.

The penalty for non-compliance with a requirement to provide security has also been significantly increased for individuals from 20 penalty units ($2,200) to 100 penalty units ($11,000), and for companies from 100 penalty units ($11,000) to 500 penalty units ($55,000).

Employers Note: Changes to Employee Payment Summary Requirements

For the 2009-2010 financial year and all future years, if you make super contributions under a salary sacrifice arrangement or pay extra super contributions to a super fund for an employee, you may need to report these contributions on your employee’s payment summary.

These contributions are not included in the employee’s assessable income.

However:

• Employers must report them to the ATO as part of the payment summary reporting;
• The employee must report them to the ATO in their income tax return; and
• Reportable employer super contributions affect a range of government entitlements and obligation for individuals.

What are Reportable Employer Super Contributions (“RESC”)

RESC are those contributions you make for an employee where all of the following conditions apply:

The employee influenced the rate or amount of super you contribute for them.

The contributions are additional to the compulsory contributions you must make under any of the following:

• Super guarantee law
• An industrial agreement
• The trust deed or governing rules of a super fund
• A federal, state or territory law

What are not Reportable Employer Super Contributions

If you can show your employee did not and could not influence the amount of super you contributed for them, they are not RESC and may include the following circumstances:

• Contributions made from your employee’s after-tax income.
• Contributions you make under industrial agreements.
• Contributions you make under an individual employment contract.
• Contributions you make under a fund’s rules or under a law.
• Contributions you make to a defined benefit fund.
• Making extra payments for administrative simplicity.
• Making extra contributions where you can show your employee had no influence.

RESC do not change how you currently work out salary or ordinary time earnings (OTE) for your employees.

Compulsory super contributions for employees are calculated as you would normally calculate them to meet your legal obligations.

Variation of PAYG Withholding Tax

If you are an Employee who has a negatively-geared rental property or other investment and/or substantial work-related deductions (eg. car expenses), you may like to apply to have your PAYG withholding tax (tax withheld from your wage) varied to a lower amount so that instead of receiving a large tax refund at year end, you actually receive the tax benefit upfront through greater take home pay which may be used to pay off your home loan sooner or just assist with regular living expenses.

Applications to vary PAYG withholding tax for the income year ending 30 June 2011 should be lodged in the next few weeks.  Contact Ashley or Matt at Eclipse Accounting Group Chartered Accountants if you would like to know what is involved.

Capital Gains Tax on Inherited Main Residences

If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a Capital Gains Tax (“CGT”) event happens to it.If you are a joint tenant and the other joint tenant dies, their interest in the dwelling is taken to pass in equal shares to you and any other surviving joint tenants on that date.

(A) Deceased died having acquired the dwelling before 20 September 1985

If you have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate, any capital gain or loss is disregarded if either of the following applies:

1. You disposed of your ownership interest within 2 years of the person's death. That is, if you sold the dwelling, settlement must occur within 2 years. This exemption applies whether or not you used the dwelling as your main residence or rented it out.

or

2. From the date of the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:
a. A person who was the spouse of the deceased immediately before the deceased's death;
b. An individual who had a right to occupy the home under the deceased's will; or
c. You, as a beneficiary. Note: it makes no difference whether the dwelling was the deceased's main residence.

(B) Deceased died having acquired the dwelling on or after 20 September 1985

In this situation, you disregard any capital gain or loss you make when a CGT event happens to the dwelling if:

1. The dwelling passed to you as beneficiary or trustee before 20 August 1996 and condition A2 (above) is met. The deceased must have used the dwelling as their main residence from the date they acquired it until death, and they must nit have used it to produce income.

or

2. The dwelling passed to you as beneficiary or trustee after 20 August 1996, either condition Al or A2 (above) is met, and just before the date the deceased dies, it was their main residence and was not being used to produce income.

A dwelling can still be regarded as the deceased's main residence even though they stopped living in it.

If you do not qualify for a full exemption from CGT, you may be entitled to a partial exemption.

Land Tax Update

Land tax is a tax levied on the owners of land in NSW as at midnight on 31 December of each year.  In general, your principal place of residence (your home) or land used for primary production (a farm) is exempt from land tax. 

However, you may be liable for land tax if you own or part-own the following:

• vacant land, including vacant rural land
• land where a house, residential unit or flat has been built
• a holiday home
• investment properties
• company title units
• residential, commercial or industrial units, including car spaces
• commercial properties, including factories, shops and warehouses
• land leased from state or local government

The Valuer-General has determined that the land tax threshold for the 2010 land tax year is $376,000.  The premium land tax threshold for the 2010 land tax year is $2,299,000.

Land tax is calculated on the combined value of all the taxable land you own above the land tax threshold.  The rate of tax is $100 plus 1.6 per cent of the land value between the threshold and the premium rate threshold and 2 per cent thereafter.

If land is owned by a trustee of a special trust the land tax threshold does not apply and land tax will be charged at a flat rate of 1.6% of the taxable land value up to the premium threshold of $2,299,000 and then 2% thereafter.

If the combined value of your land does not exceed the threshold, no land tax is payable.

Despite the fact that the Stamp Duties Office and Land Tax Office are both part of the Office of State Revenue, when you pay stamp duty on the purchase of property, the Land Tax Office is not notified.  Therefore, when you purchase a property that is potentially liable for land tax, it is strongly recommended that you notify the Land Tax Office at that time so as to ensure that you are not later issued with multiple years of land tax assessments and penalties.

Increase in company ASIC Fees

From 1 July 2010, ASIC will be increasing some of their fees in line with the Consumer Price Index.  For example, the Annual Review Fee will increase from $212 to $218.