Welcome to the CapitalQ blog...
The Federal government plan to means test the private health insurance rebate has cleared parliament's lower house this morning with opposition attempts to delay the commencement of the law change until after the next election failing.
Once passed by the senate, which is expected to be a formality, the new means test will apply from July 1, 2012.
Individuals earning more than $83,000 and families earning more than $166,000 will have their rebate reduced on a sliding scale.
Individuals earning more than $129,000 and families on incomes greater than $258,000 will lose the rebate altogether.
It is estimated the result will be an increase in the cost of private health insurance of up to $500 and $1000 respectively.
Once passed by the senate, which is expected to be a formality, the new means test will apply from July 1, 2012.
Individuals earning more than $83,000 and families earning more than $166,000 will have their rebate reduced on a sliding scale.
Individuals earning more than $129,000 and families on incomes greater than $258,000 will lose the rebate altogether.
It is estimated the result will be an increase in the cost of private health insurance of up to $500 and $1000 respectively.
We are asked at least on a weekly basis about contractors (both by potential employers and potential contractors) and our response is always 'be very careful if you insist on operating that way'!
To add weight to our cautious approach we can now confirm the ATO has advised that it will effectively be cracking down on taxpayers who claim to be independent contractors, by reviewing:
To add weight to our cautious approach we can now confirm the ATO has advised that it will effectively be cracking down on taxpayers who claim to be independent contractors, by reviewing:
- taxpayers who have reported personal services income (PSI) and who may have incorrectly self-assessed themselves as conducting a personal services business (PSB); and
- data held in the Australian Business Register (ABR), and cancelling any Australian Business Numbers (ABNs) where records indicate that taxpayers are not carrying on an enterprise.
In relation to the ATO's crackdown on PSI, the main taxpayers they are concerned about are contractors who receive PSI (either directly or through an entity) but who are effectively employees. This issue is important because deductions and reporting obligations may be affected as well as the payment obligations of the paying company (effectively the employer).
In regards to ABNs, they will be focusing on individuals (sole traders) as they comprise almost 50% of the records on the register.
If you receive a letter regarding either issue please contact us so that a response strategy can be formulated. In particular if they advise they are to cancel your ABN, contact us as soon as possible, as we may be able to object against the decision to cancel the ABN and have your registration reinstated. Alternatively, if you have not yet received a letter but are either not required to hold an ABN, or have stopped operating the relevant business, we could pre-empt the ATO by cancelling the ABN before they do removing the chance of a potential 'black mark' against your name.
A recent AAT decision (AAT Case [2011] AATA 779) has affirmed how difficult it is for those with an adjusted taxable income of over $250,000 to utilise business losses.
In this case, a taxpayer who carried on a loss-making beef cattle business which incorporated 2,000 hectares of land and 1,200 head of cattle was unsuccessful in overturning a ruling issued by the Commissioner in which he refused to exercise his discretion to allow the taxpayer to apply his business losses against his other income.
Based on the evidence presented, the Tribunal held that the taxpayer did not satisfy s.35-55(1)(c)(i), as it said the nature of beef cattle production does not take more than 2 decades to produce assessable income greater than deductions. The Tribunal also held that the taxpayer did not meet the criterion in s 35-55(1)(c)(ii), as it found 6 years to be a commercially viable period on objective evidence.
For those of you not familiar with the non-commercial loss provisions, as from 1 July 2009, an individual with an adjusted taxable income of over $250,000 have their business losses quarantined for utilisation against future profits of that business activity only. This is regardless of the fact that the business may have satisfied the existing commerciality tests which include:
1. Assessable Income Test: Annual income exceeding $20,000
2. Real Property Test: The value of real property used in the business exceeds $500,000
3. Other Assets Test: The value of other assets used in the business exceeds $100,000
4. Profits Test: The activity must have produced a profit in 3 of the last 4 years.
Adjusted taxable income includes an individuals:
- taxable income;
- reportable (salary sacrifice) super contributions;
- reportable fringe benefit amounts; and
- total net investment losses
While a high income individual may be prevented from looking to one of the four tests because they fail to meet the income requirement, there is a further avenue for relief in the form of an ATO discretion to allow the utilisation of tax losses, if there is an objective expectation, based on evidence from independent sources (where available), that the business will produce taxable income in a timeframe that is considered commercially viable for the industry concerned.
This is to be contrasted with the ATO's discretion that applies for individuals that meet the income requirement. In exercising that discretion, the ATO need only satisfy that the business will satisfy one of the four tests within a commercially viable time frame.
Disappointingly, the ATO will not recognise valid commercial reasons for a long yield time where they depart from the industry norm as evidenced in the following example:
Joe earns in excess of $250,000 and has a substantial rural property. The property has a family residence and sheds and apart from one area of the property where a few goats are kept, is otherwise developed with nut trees.
As Joe's income is higher than $250,000, Joe applies to the ATO seeking the exercise of the discretion in paragraph 35-55(1)(c) to allow him to access his losses.
In support of his application, Joe provides a letter from the secretary of the Nut Tree Growers Association that states that yields from that number and type of trees would ordinarily be sufficient to allow Joe to make a profit within about six years. This is the industry norm for growers of that type of nut tree. However, because the soil on the property is not very fertile and the site does not get a lot of sun, Joe accepts that the lead time for his particular not-growing activity will be nine years not six years. Joe otherwise manages his nut tree orchards in accordance with industry management practices.
Having examined the case, the ATO concludes that, despite the large number of trees on the property and the fact the business is being conducted in accordance with industry management practices, the discretion should not be exercised in Joe's favour. This is because the lead time for this activity to become profitable is greater than the industry norm.
In this case, a taxpayer who carried on a loss-making beef cattle business which incorporated 2,000 hectares of land and 1,200 head of cattle was unsuccessful in overturning a ruling issued by the Commissioner in which he refused to exercise his discretion to allow the taxpayer to apply his business losses against his other income.
Based on the evidence presented, the Tribunal held that the taxpayer did not satisfy s.35-55(1)(c)(i), as it said the nature of beef cattle production does not take more than 2 decades to produce assessable income greater than deductions. The Tribunal also held that the taxpayer did not meet the criterion in s 35-55(1)(c)(ii), as it found 6 years to be a commercially viable period on objective evidence.
For those of you not familiar with the non-commercial loss provisions, as from 1 July 2009, an individual with an adjusted taxable income of over $250,000 have their business losses quarantined for utilisation against future profits of that business activity only. This is regardless of the fact that the business may have satisfied the existing commerciality tests which include:
1. Assessable Income Test: Annual income exceeding $20,000
2. Real Property Test: The value of real property used in the business exceeds $500,000
3. Other Assets Test: The value of other assets used in the business exceeds $100,000
4. Profits Test: The activity must have produced a profit in 3 of the last 4 years.
Adjusted taxable income includes an individuals:
- taxable income;
- reportable (salary sacrifice) super contributions;
- reportable fringe benefit amounts; and
- total net investment losses
While a high income individual may be prevented from looking to one of the four tests because they fail to meet the income requirement, there is a further avenue for relief in the form of an ATO discretion to allow the utilisation of tax losses, if there is an objective expectation, based on evidence from independent sources (where available), that the business will produce taxable income in a timeframe that is considered commercially viable for the industry concerned.
This is to be contrasted with the ATO's discretion that applies for individuals that meet the income requirement. In exercising that discretion, the ATO need only satisfy that the business will satisfy one of the four tests within a commercially viable time frame.
Disappointingly, the ATO will not recognise valid commercial reasons for a long yield time where they depart from the industry norm as evidenced in the following example:
Joe earns in excess of $250,000 and has a substantial rural property. The property has a family residence and sheds and apart from one area of the property where a few goats are kept, is otherwise developed with nut trees.
As Joe's income is higher than $250,000, Joe applies to the ATO seeking the exercise of the discretion in paragraph 35-55(1)(c) to allow him to access his losses.
In support of his application, Joe provides a letter from the secretary of the Nut Tree Growers Association that states that yields from that number and type of trees would ordinarily be sufficient to allow Joe to make a profit within about six years. This is the industry norm for growers of that type of nut tree. However, because the soil on the property is not very fertile and the site does not get a lot of sun, Joe accepts that the lead time for his particular not-growing activity will be nine years not six years. Joe otherwise manages his nut tree orchards in accordance with industry management practices.
Having examined the case, the ATO concludes that, despite the large number of trees on the property and the fact the business is being conducted in accordance with industry management practices, the discretion should not be exercised in Joe's favour. This is because the lead time for this activity to become profitable is greater than the industry norm.
Proposed changes to the taxation treatment of share buy-backs will reduce their attractiveness to shareholders, particularly self-managed superannuation funds.
Broadly the changes (which will apply from the date of Royal Assent) will deny shareholders an entitlement to capital losses when their shares are bought-back. This will significantly change the financial attractiveness for superannuation funds to participate in share buy-backs.
Example
MSF (a complying superannuation fund) receives $100 in respect of an off-market buy-back of shares by ListCo, an ASX listed company. ListCo debits $70 against its share capital account and the balance of $30 is taken to be a fully franked dividend.
SMSF purchased the shares for $90 6 months previous. Under the existing law, it will be entitled to a capital loss of $20 ($90 less $70).
The proposed laws will deny this capital loss through increasing the amount of consideration taken to apply to the capital component ($70) by the lesser of:
• the dividend amount ($30); or
• the loss amount ($20).
Superannuation funds are generally eager to participate in buy-backs due to the financial attractiveness of the return comprising of both excess franking credits and capital losses. At the same time listed companies were better off through more tax-effective management of their cost of capital.
These changes, which were released for as an Exposure Draft by Treasury in during the second half of 2011 for comment, and we will keep you informed as to the progress of these changes.
Broadly the changes (which will apply from the date of Royal Assent) will deny shareholders an entitlement to capital losses when their shares are bought-back. This will significantly change the financial attractiveness for superannuation funds to participate in share buy-backs.
Example
MSF (a complying superannuation fund) receives $100 in respect of an off-market buy-back of shares by ListCo, an ASX listed company. ListCo debits $70 against its share capital account and the balance of $30 is taken to be a fully franked dividend.
SMSF purchased the shares for $90 6 months previous. Under the existing law, it will be entitled to a capital loss of $20 ($90 less $70).
The proposed laws will deny this capital loss through increasing the amount of consideration taken to apply to the capital component ($70) by the lesser of:
• the dividend amount ($30); or
• the loss amount ($20).
Superannuation funds are generally eager to participate in buy-backs due to the financial attractiveness of the return comprising of both excess franking credits and capital losses. At the same time listed companies were better off through more tax-effective management of their cost of capital.
These changes, which were released for as an Exposure Draft by Treasury in during the second half of 2011 for comment, and we will keep you informed as to the progress of these changes.
Copyright CapitalQ Chartered Accountants © | Disclaimer | Site Map | Software solutions for accountants by Acclipse