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Tax Office Sets Compliance Focus Areas for 2010/11

The ATO has released its compliance program for 2010/11. The program sets out risk areas facing the tax and superannuation systems identified by the ATO and the compliance activities that it plans to undertake to address them. Despite acknowledging that most taxpayers demonstrate high levels of voluntary compliance, the ATO’s latest compliance program flags needed attention on numerous target areas including individual taxpayers claiming incorrect or fraudulent refunds and small businesses omitting or incorrectly reporting property sales in business activity statements.

The program also reiterated the ATO’s continuing and increasing use of data-matching projects to verify information provided by individual taxpayers in their tax returns and by other parties. In particular, the ATO flagged interest in cross-referencing information relating to income received from employment, welfare, interest and dividends. This year, the ATO expects to data-match over 500 million transaction records reported to it by third parties.

ATO is Contacting Participants in Collapsed Agribusiness MIS

The ATO has advised that it will be contacting approximately 60,000 identified participants of recently collapsed Agribusiness managed investment schemes (MIS) during August 2010 to help them understand the tax consequences of their investments. The ATO has advised that affected taxpayers will need to factor in any changed tax implications in these schemes when they prepare their tax returns.

GST and Requirements for Tax Invoices

The GST regulations which previously specified the requirements for documents to be tax invoices or recipient created tax invoices (RCTIs) have been removed. This follows recent changes to the GST law which simplified the requirements for documents to be considered tax invoices or RCTIs by replacing those requirements with equivalent but more flexible principles. The regulations commenced on 1 July 2010 and apply in relation to net amounts for tax periods starting on or after 1 July 2010.

Reportable Employer Superannuation Contributions Definition: Changes Proposed

The Government has recently proposed that it will amend the law to clarify the scope of the reportable employer superannuation contributions (RESC) definition. RESCs are generally superannuation contributions made under formal salary sacrifice agreements. Amounts reported as RESCs are used in determining eligibility for a range of government financial assistance programs.

The Minister for Superannuation, Chris Bowen, said the Government has become aware that some contributions made on behalf of an individual, which the individual or their employer has no real capacity to influence, are being captured by the RESC definition. The Minister said it wasn’t the Government’s intention for this to occur. The changes are proposed to apply from 1 July 2009 to ensure that the contributions are not captured by the RESC definition.

Minimum Pension Drawdown Amounts — 50% Reduction to Continue

The Prime Minister has recently announced that the Government will extend for another year the 50% reduction in the required minimum payment amounts that must be made from account-based, allocated and market-linked pensions. The relevant regulations will need to be amended and the Government says this will be done in the new financial year.

The minimum amounts had been reduced by 50% for the 2008/09 and 2009/10 financial years — that will now be extended for the 2010/11 financial year. This means, for example, that the minimum annual drawdown for 2010/11 for someone aged 64 years or less will remain at 2%; and for those aged 65 – 74, will be 2.5%.

Division 7A Benchmark Interest Rate

The Tax Office has advised that, for the income year that commenced 1 July 2010, the benchmark interest rate to be used in calculating the interest component on the repayment of a private company loan received by a shareholder (or the associate of the shareholder) is 7.4%.

Trust’s Unrealised Gains can Be Treated as Income

In a recent case, the NSW Court of Appeal has confirmed that it was permissible for a trust, in terms of its trust deed and accepted accounting principles, to treat unrealised gains made on share investments as income of the trust.

ATO Sends Warning to SMSFs Regarding Employee Share Schemes

The ATO has warned taxpayers of an arrangement where an individual nominates his or her SMSF as the acquirer of shares or share options under an employee share scheme and the trustee of the SMSF pays no consideration or less than market value consideration for the shares or options. The warning provided in Taxpayer Alert TA 2010/3 states that the arrangement could have superannuation and income tax law implications for both the SMSF and the individual.

Reasonable Travel and Meal Allowance Amounts

The Tax Office has released a Taxation Determination which sets out the amounts the Commissioner considers are reasonable for the 2010/11 income year in relation to claims made for: overtime meal allowance expenses; domestic travel allowance expenses; travel allowance expenses for employee truck drivers; and overseas travel allowance expenses.

Superannuation and Instalment Warrant Rule Changes

The superannuation law has recently been amended to reduce the risks for superannuation funds investing in limited recourse borrowing arrangements (eg instalment warrants). The legislative changes seek to ensure that the recourse of the lender (or any other person) against the superannuation fund trustee for default on the borrowing is limited to rights relating to the acquirable asset.

Cooper Super Review Makes 177 Recommendations

The Government has released the long-anticipated final report of the Super System Review. The Review Panel, chaired by Jeremy Cooper, made 177 specific recommendations aimed at improving the governance, efficiency, structure and operation of the country’s superannuation system. A key proposal includes a simple low-cost superannuation product known as MySuper for investors who do not want to engage in superannuation decision-making.

In relation to self-managed superannuation funds (SMSFs), the Review Panel was not of the view that significant changes were required as it found that the sector was largely successful and well-functioning. Nevertheless, it made 29 recommendations relating to SMSF service providers, auditors and the regulatory framework. Notably, the Review Panel maintained its proposed ban on SMSFs investing in collectables and personal use assets. Examples include artwork, antiques and exotic cars.

The Government is expected to formally respond to the review within the next two months.

PERSONAL TAXATION

50% Savings Discount for Interest Income

From 1 July 2011, the Government will provide individuals with a 50% tax discount on up to $1,000 earned on interest.

This includes interest earned on deposits held with any bank, building society or credit union as well as on bonds, debentures or annuity products.

The discount will be available for interest income earned directly as well as indirectly, such as via a trust or a managed investment scheme (MIS).

Adjusted taxable income

The Government states that taxpayers claiming the discount for interest income will have a reduced adjusted taxable income for the purpose of determining eligibility for transfer payments and other concessions.

This may result in some individuals and families becoming eligible for transfer payments or for a larger transfer payment.

The Government notes that the consequential expense primarily affects Family Tax Benefit, but will also affect other payments such as:

• the Baby Bonus;

• Child Care Benefit;

• the Education Tax Refund;

• the Commonwealth Seniors Health Card (CSHC); and

• the Pensioner Supplement (which is linked to eligibility for the CSHC).

The measure will apply from 1 July 2011.

Standard Deduction for Work-related Expenses

The Government will provide individual taxpayers with a standard deduction of $500 for work-related expenses and for the cost of managing tax affairs from 1 July 2012.

The standard deduction will increase to $1,000 from 1 July 2013.

Those taxpayers with deductible expenses greater than the standard deduction amount will still be able to claim their higher expenses, in lieu of claiming the standard deduction amount.

The standard deduction will reduce individuals' and families' adjusted taxable income for the purpose of determining their eligibility for transfer payments and other concessions (eg the Family Tax Benefit, the Baby Bonus, Child Care Benefit, the Commonwealth Seniors Health Card (CSHC) and the Seniors Supplement).

This will make some individuals and families eligible for transfer payments or for a larger transfer payment.

Medical Expenses Rebate Threshold Raised

From 1 July 2010, the medical expenses rebate threshold will increase from $1,500 to $2,000.

Taxpayers presently receive a rebate equal to 20% of net un-reimbursed eligible medical expenses above $1,500. This $1,500 threshold will increase to $2,000.

In addition, from 1 July 2011, the threshold will be indexed annually to the Consumer Price Index (CPI).

Medicare Levy Thresholds Increased for 2009/10

From the 2009/10 income year, the Medicare levy low-income thresholds will be increased to $18,488 for singles (up from $17,794 for 2008/09) and to $31,196 for those who are members of a family (up from $30,025 for 2008/09).

The additional amount of threshold for each dependent child or student will also be increased to $2,865 (from $2,757).

From 1 July 2009, the Medicare levy low-income threshold for pensioners below Age Pension age will be increased to $27,697 (from $25,299).

This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy while they do not have an income tax liability.

SUPERANNUATION

Co-contribution Matching Rate Permanently Reduced to 100%

The Government has announced that it will seek to permanently set the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that is payable on an individual's eligible personal non-concessional superannuation contributions at $1,000.

As a result, the previously-legislated increase in the matching rate to 125% for the 2012/13 and 2013/14 years (and to 150% for 2014/15 and later years) will not proceed.

Eligible income thresholds frozen

In addition, the Government says that for 2010/11 and 2011/12 it will freeze the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.

Under the superannuation co-contribution scheme, the Government currently provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for individuals with incomes of up to $31,920 in 2009/10 (with the amount available phasing down for incomes up to $61,920). The new measure will freeze these thresholds at $31,920 and $61,920 for two years.

The Government says this measure follows its earlier announcement in response to the Henry Tax Report, proposing a $500 annual superannuation contribution for individuals with an adjusted taxable income up to $37,000.

Superannuation Fund Deductions for Terminal Medical Condition Benefits

The Government has announced that it will seek to extend the range of benefits that are deductible by complying superannuation funds and retirement savings account providers to include terminal medical condition (TMC) benefits.

The Government says that this proposal addresses an anomaly in the taxation law regarding deductibility by superannuation funds and retirement saving account providers of the costs of providing certain benefits to members or holders.

Currently, the Government says deductions are allowable for the costs of providing benefits relating to the death, permanent incapacity and temporary incapacity conditions of release, but not those relating to the TMC condition of release.

This measure is proposed to have effect from 16 February 2008, the date the TMC condition of release was introduced into the superannuation legislation.

BUSINESS TAXATION

Look-through Treatment for Earnout Arrangements

All payments under a qualifying ‘earnout’ arrangement will be treated as relating to the underlying business asset.

Earnout arrangements are used to structure the sale of a business (or business assets) to manage uncertainty regarding the value of the business.

Under the earnout arrangement, an earnout right may entitle the buyer or seller to additional payments, depending on the subsequent performance of the business.

The proposed amendment will have effect from the date of the Royal Assent of the enabling legislation, with transitional provisions available for certain cases from 17 October 2007.

Increased Funding to Counter Cash Economy

The Government will provide $107.9 million over four years to the Tax Office, to address small business operators who use cash transactions to avoid tax. The Government states that this is expected to increase the "visibility of the Tax Office in the community".

This measure is expected to result in:

• an additional $491.8 million in revenue in fiscal balance terms over four years; and

• an increase of $39.9 million in Tax Office-administered expenses over the same period.

In underlying cash terms, the expected increase in revenue is $366.5 million over four years, including $146.7 million in GST collections that will be paid to the states and territories.

GST Compliance Program — funding for the Tax Office

The Government states that it will provide $337.5 million over four years (from the 2010/11 to the 2013/14 income years) to the Tax Office to fund additional activities that will promote voluntary GST compliance and provide a level playing field for Australian businesses.

The Government also states that the funding will address issues relating to:

• fraudulent GST refunds;

• systematic under-reporting of GST liabilities;

• non-lodgment of GST returns; and

• non-payment of GST debts.