Alpha Legacy

18/09/2017

No one is surprised by the statement that those in business get deductions that are not allowed to those who are employed. The magic formula for income tax deductions are contained in simple statements found in the legislation: "Expenses necessarily incurred for the generation of assessible income are tax deductible." A read of this sentence, even a careful read, hides the detail of the requirements underpinning the approval or, heaven forbid, the disapproval of the Australian Taxation Office. Most arguments (audit fights) centre around whether the expense was necessarily incurred, and whether it is sufficiently linked to the income as to be, to a fair minded person, something that generated, or formed part of the expenditure which generated, the income of that period.

For the overwhelming number of employee taxpayers, the routine of income generation shuts out a great number of deductions which the ATO deem to be unnecessary. This includes certain usage of motor vehicles. The position of the ATO is, philosophically speaking, rather contradictory, but that point will be addressed in a later blog. Some vehicle usage, however, may qualify for deductions and where vehicles are used in a manner which qualify for a deduction profile, the deduction in a return can be significant. For many taxpayers, motor vehicle deductions are the biggest single category of income tax deductions in the entire return.

In prior times there were four different methods of determining the amount to be deducted in an income tax return. This has now been changed. This firm sees only two methods cycling through our client base. These are the percentage use (%) and the cents-per-kilometre use (CPK).

To gain access to either of these methods, there needs to be some connection with the motor vehicle driving and the income generation. The ATO has succeeded in disallowing mileage used from the taxpayer's normal place of abode to the first location where non-trivial work is performed and vice versa. In times long passed, I witnessed advice given to taxpayers that encouraged them to take a duty from the employer to both deliver the mail to a mailbox (which of course was near to their home) and to stop at the post office on the way to work to pick up the mail. This, as was said, was work performed for income and, therefore, it made the subsequent journey mileage tax deductible from the post office to the last mailbox. The ATO has come out with (now long-standing) rulings which have dealt with this clever rouge and thus the focus on the words "non-trivial" are brought into clear emphasis.

What then, are qualifying deductions for motor vehicles? This rhetorical question is easily answered in theory (remember above? necessarily incurred for the generation of...) but difficult to portray to an agent across a desk long after the mileage is driven. There is a matrix of considerations for different types of vehicle usage, such as for tradesman, traveling sales, commission agents, etc. which do not actually touch focus of THIS blog. The focus of this blog is to bring out the singular most important rule in all of tax profiling : "The better records you keep, the less tax you will pay". The context of motor vehicle deductions dictates that a further rule must be formed from the question how are you to keep records on a motor vehicle? The answer is simple, "Show me your logbook."

Sound like an anti-climax? Consider this: Without a log book, the most that can be deducted for the usage of a motor vehicle (passenger vehicle and light utility) is $3,300. This is comprised of an ATO-imposed limit of 5,000 business kilometres under the CPK method. Unless the taxpayer can PROVE more than 5,000 km business usage, no access to the % method is allowed. The easiest way to prove your business kilos is to simply keep a logbook in the vehicle with you and fill it out each day.

Despite advertising, this firm holds some question whether the little books available in news agencies really meet all the criteria of the ATO. The entries in a logbook need to be signed by the driver when the expenses are incurred (such as fuel oil, repairs, etc.) or the business kilometres driven (date, purpose of trip, start-finish kilometres). Many small logbooks don't contain provision for this aspect of the record-keeping. This may constitute a risk to a taxpayer in a full-blown audit.

A properly-kept logbook may give a much more satisfying outcome as it constitutes a more accurate record of the distances and holds promise that the magic line of 5,000 kilometres might be reached. Here is something which may motivate you: consider the well-known statistic that (for nearly all fossil fuel vehicles) 80% of the wear and tear on the engine occurs in the first three minutes of the cold start. If you warm up your vehicle properly before driving, the engine will last longer. Any mechanic will tell you that. Well, fill out your log book each morning, transpose yesterday's final odometer reading into the day's start reading and write enough detail to show the purpose of the trip. When you do something during the day for your boss, or for work-related activities just jot down the purpose in the log book when you start up. Easy!

You object"Scott, you fool, that sounds hideous! Besides, how can I drive 5,000 business kilometres in a year?" My answer, "How do you know you are NOT driving that far?" After all, you deliver fittings to the job site, you pick up documents from the other office, you transport people from time to time over to locations to pick up another vehicle, you run errands for the boss...etc. Let us be real, if the cost of a log book is $5, at the statutory rate (CPK) of $0.66 per kilometre, it only takes 22 kilometres driven for business to recover the tax (assuming 34% tax: $5.00/0.34 = $14.7059 rounded to $15 tax deduction-22 kilometers @0.66 =$14.52 rounded to $15 tax deduction) and anyone who actually drives a vehicle will know that22 kilometres is nearly nothing in driving terms.

If, then, small driving can build up significant motor vehicle deductions, what happens when the magic threshold of 5,000 km is breached? Here is what happens:

The legal requirements enabling the acceptance of a log book for these purposes is that the log book MUST be in proper form and kept for a minimum of 12 consecutive weeks in a tax year. The log book must be completed in the first year where reliance upon that log book is evidenced in the income tax return of the taxpayer. Johnny completes his logbook for the minimum 12 weeks and the last day is July 5th 20XX. Johnny cannot rely on that log book for the income tax return for the year ending 30 June 20xx as the doomsday bell has sounded for that year and at midnight of 30 June 20XX Johnny did not have a log book which meets the criteria of the ATO.
Johnny can come to our office and have a nice coffee and commiserate by crying in his cup, but the paperwork is not in proper form. We would add: don't cheat in this one, as the ATO has all sorts of really devious ways to verify the information in a log book. After all, the ATO has the advantage that they can make you bear the burden of proving your tax position and our experience informs us that the ATO agent who handles your audit will massacre you (financially speaking) if you abridge your duty.

Assuming, however, that you have the proper period and, proportionally speaking, you breach the magic threshold. (this means 1,250 km legitimate business kilometres in exactly 12 weeks of driving- we take the assumption of 4 weeks annual leave) so multiply the driving by four. The clouds part and ray of warm sunshine hits you in the face and your tax agent gets very excited. (I know what your are thinking... "gets excited?" what a sad life tax agents lead). Your tax agent calculated the percentage usage of your log book mileage for business and comes up with 41.9% (round it to 42%). This now means that you can deduct 42% of your fuel, registration, insurance, repairs maintenance, cleaning and, best of all, 42% of the depreciation of your vehicle which would occur in that year. Let's look at these figures, assuming a 2 year old vehicle costing, say, $28,000 with $24,000 fully financed for five years with monthly payments of, say, $510.00:
Fuel and oil (not holiday stuff) $2,458.00
repairs and service $490.00
registration and insurance $1156.00
2 tyres on rotation $310.00
Depreciation prime cost $3,500.00
cleaning 2 washes with wax $112.00
Interest on car loan $1,982 (our calculation-yours may be different on this point)
Total MV expenses $10,008.00

Take 42% of this figure $7,205.76 ($7206)

This is a far better outcome for the taxpayer than the $3,300 limit which is imposed on the CPK method. The key to opening up this deduction rests on two points : legitimate business kilometres driven, and a properly constructed log book. Many of our clients lose out on the higher deductions. They can clearly show significant business mileage, but cannot show more than 5,000 km and certainly do not have a properly constructed log book. This is a tragedy. They simply lose.

The reasons why this scenario arises is from a small but powerful belief which clings to people that somehow they don't drive many deductible kilometres, and since they have never deducted motor vehicle usage in the past, it all seems too hard. After all, most people fear the taxman and they would apparently rather lose what they think is a small deduction rather than incur the focus of the ATO. This is a symptom of the first-time player not only in tax issues, but also in the courts where advantage clearly rests with the repeat player. That player understands exactly how things work, the costs, and the risks. First time players are nervous about cost, the entire process is daunting and intimidating and it all looks too hard.

A well-trained tax agent will question a taxpayer and lead the taxpayer through what paperwork needs to be constructed through the year to enable a more tax-efficient outcome for the taxpayer in the following returns. We have found that taxpayers will get angry at the tedious effort which must take place and when trying to develop good habits in record keeping the effort seems much more burdensome. But, after the taxpayer disparages our personal character, even calling me... well, we will forget for the moment what they call me, but when they sit across the desk in the following year, if the paperwork is tight, they will be paying themselves.One good outcome with good paperwork will turn a taxpayer from a leaking rowboat (oars, what oars?) to a far more efficient cargo ship. Some clients go into mania with record keeping and that presents a difficult scenario for the tax agent trying to manage the expectation gap with enthusiastic clients. We might turn ourselves to this issue in a later blog. For now, the border with information overload stands close and we will stop. Did you fill out your log book this morning?

05/07/2017

Now that the doomsday bell has well and truly passed, attention to the reporting of the past tax period needs to commence. For businesses, including trading and discretionary trusts, review of wage and salary and construction of the payment summaries for the period needs to be completed as soon as possible. Any enterprise operating in the building and construction industry must also construct and lodge a "Taxable Payments Annual Report" (TPAR) which lists the payments made to subcontractors who provide labour components to the enterprise. This does not include subbies who work for another enterprise who might, for instance, construct a gate or windows to specifications and deliver it to a work site, provide truck and driver for transport of machinery, or who give professional consultation such as engineering advice on a structure or architectural plans. It appears that the reason for this report is to provide the ATO with information to track down cowboy workers who get paid cash and evade tax such as concrete workers or steel-fixers, carpenters, etc. The ATO takes the view that tradies need to pay tax too. Do you ever wonder why?

If any business has twenty or more employees, single touch payroll reporting (STP) is rolling along like a freight train. Under this new protocol, employers are required to report wages and salaries, reportable ancillaries such as Fringe Benefits and salary sacrificed superannuation contributions etc. differently from 1 July 2018, although we understand that STP can be voluntarily done presently if the employer's software is compliant with that standard. This is a live topic in the professional circles and some of us question the need to change the system at all. One new addition to this framework is the reporting of the actual superannuation paid to the member's super account. All of this has come about through the insertion of new Division 389 into the Taxation Administration Act 1953 (TAA). The ATO is approaching "real-time" reporting in a number of areas, utilizing computer appliances under projects starting some years ago. This is not something new and everyone in this profession has known about these pipeline changes for a very long time, although none of us have any enthusiasm for them. Some of us fear that the rolling out of these new changes will suffer the same fate as the rolling out of SBR1 and SBR2 which were touted as being faster and more efficient, but contrary to that assertion, this firm has found that SBR takes far longer, is less flexible, and has more issues with it, despite the money spent by the ATO in bringing that standard online. To be fair, however, there are some advantages, such as the downloading of more information in a single request window, although even in that, there are issues which arise because an employer may need to report in disjointed reporting frameworks such as quarterly BAS lodgments, but monthly IAS lodgments. SBR seems to have some issues with the disparate continuity of the reporting. Perhaps it is only this firm which experiences these types of problems. After all, the computer hates me. It all started when we swapped out the computer's favourite video card with another one. We think the motherboard was in a relationship with the video card and when we broke them up, the motherboard never forgave us for not being able to dialogue with the video card any more. In the end, the motherboard had to resort to on-board graphics and she has been resentful ever since.

Back to STP, the number of employees a firm retains will be the important milestone to determine whether the enterprise is required to report STR payroll. An enterprise can voluntarily report under this protocol, no problem. an enterprise which has 20 or more employees as of the previous 1 April of a tax year, will be required to report under STP for the following tax year. At the following 1 April, even if the number of employees falls below 20, we question whether the enterprise will be able to opt out of the STP reporting framework. The number of employees and not "full-time equivalent" will be the criterion used by the ATO to force enterprises into the STP reporting framework. The Commissioner, we understand, has a discretion under s. 389-10 TAA to grant an enterprise permission to exit the STP framework if subsequent numbers of employees falls below 20, but we have no knowledge about whether this discretion will actually be available in practical terms. If discretion is refused, there are appeal rights to the enterprise. Any enterprise in a consolidated group must aggregate employee numbers for STP purposes.

One very lively topic is the new Superannuation changes. A concept has now come about called the "Transfer Balance Cap". This means that for superannuation pensions, the total amount which can be placed into pension mode for any single member is $1.6 million. a fund in full pension mode can have more than $1.6 million in pension mode in limited circumstances:
1) if more than one pension is drawn, each member can have up to $1.6 million in pension mode;
2) any member whose Transfer Balance Account (TBA-don't confuse this with TBC noted above) is less than $1.6 million and enjoys above average returns, can let the balance of that pension account rise above $1.6 million without penalty. Of course, if the member is in pension mode, it means they have met a condition of release the most notable of which is Age. The required withdrawal amount is always set in percentage terms and the member, therefore, will need to increase the amount taken each period from the pension account as the balance increases.

We understand that any person in certain defined benefits funds (not many left, but some public servants and many who have been in certain types of employment still have defined benefit super accounts) will have rules applied to them differently when entering into pension mode. If anyone wants to know about the differences, then they can contact the office for either an answer or to be referred to someone with whom this firm has a relationship who specializes in Defined Benefits superfunds. Alpha legacy is not licensed to give advice on superannuation, although we can give advice on tax and other specific issues. We do a lot of financial statements/tax returns etc. for superfunds and deal with a plethora of tax issues with super, but we don't give any specific advice on superannuation. Pity really, but the licensing requirements are costly, and we question whether it is in the clients' best interests for our firm to obtain a financial services license for this and other products as the costs of the license must be passed to the clients, some of which would find it difficult to pay the fees upon our current modelling.

A new rollover has been constructed called "Small Business Restructure Rollover" (SBRR) which will give some measure of relief where assets are transferred to a new entity in changing from an old structure to a new structure in the business. Restrictions on the way the assets must appear inside the tax return are mandated. In effect, the ATO restricts the application of the rollover relief to certain circumstances of a genuine rollover. Any transferred asset must be an active asset, both transferor and transferee must be Australian tax residents and the underlying beneficial ownership must also not pass to different people. There are other restrictions as well. The SBRR is applicable (at present information at least) to entities with a turnover threshold of $10 million or less.

Property sales are also undergoing changes with the new foreign resident withholding tax. In the past, this tax applied to property with a sale value over $2 million. If a contract has been executed prior to 1 July 2017 this threshold still applies. The threshold has now been lowered to $750 thousand for any contract executed on or after 1 July 2017 which will bring nearly all residential property single family dwelling house sales in the major capital cities into the withholding regime. The purchaser is required to withhold the amount of the tax (was 10% for the former contracts but now changed to 12.5% for contracts executed after 1 July 2017) where the sale is property owned, or partially owned, by a foreign resident.

To avoid this tax, the vendor must provide a clearance certificate. This certificate must be obtained from the ATO by the vendor and given to the purchaser prior to, or concurrent with Settlement. Of course, any vendor who doesn't want to be financially assaulted by this tax, should clearly communicated to a purchaser that the clearance certificate is on foot or has been obtained. The ATO has issued Q and A sheets and other materials. Some questions can be answered here:
https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Foreign-resident-capital-gains-withholding-payments---common-questions/

Just cut and paste this link into your browser to go to that page.

The last point (almost) in this post is that anyone who is on a working holiday visa is subject to a tax withholding which is split in the last ax period between earnings generated before 1 January 2017 and earnings generated afterwards. A new code is listed in most lodgment software packages which flags the status of the taxpayer as a working holiday lodger.

One more point: the NSW Office of State Revenue has issued guidance on certain property tax surcharges, two of which are levied first upon a property purchase and secondly upon land tax.

The purchase surcharge was levied initially at 4% on any property purchased by a foreign person. This 4% is in addition to the normal duty levied on property purchase. for any contract executed on or after 1 July 2017, this duty has now increased to 8% (wow!). On a property purchase of, say, a vacant block of land for $700,000, this will add a whopping $56,000 to the sale price. Foreign persons will also be required to pay stamp duty up front and no longer will enjoy a 12 month deferral of that duty on purchases off-the-plan.

The Land Tax surcharge is attached to land tax and applies to any property which is owned by a foreign person as defined. This land tax surcharge is 0.75% of the land tax value of the property each year. It applies even if the property would not otherwise qualify for land tax. As most land tax assessments are less than 0.75%, we view both this surcharge and the purchaser surcharge as either penalties or a back-handed way to try to urge foreign persons to become citizens of Australia and, therefore, exempt from these surcharges. Permanent redients and certain NZ citizens who hold subclass 444 visas can also avoid the purchaser surcharge if they occupy the property as their principal residence purchased for at least 200 days in the first 12 months of ownership. You can get more information here:
http://www.osr.nsw.gov.au/taxes/spd

and here:
http://www.osr.nsw.gov.au/taxes/land-tax-surcharge

Goodbye for now.

Scott Dobbs

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05/05/2017

As tax time 2017 approaches, an assessment of one's position with respect to the "doomsday bell" on 30 June at midnight is always a worthwhile exercise. The time between the posting of this small piece and the 30 June lock-in of the tax position of most people will seem to be quite small when it expires, despite the sense of a distant deadline looking into the future.

Much of "tax inefficiencies" which plague lodgments through Alpha Legacy arise from the lack of paperwork, that is, a lack of proper records and the ability to produce a tax invoice for particular spending. A subcategory of this lamentation arises from cash spending and lost invoices. One may be skeptical at this statement, but examples from past experience have shown that it is quite common for the records for very substantial spending can be lost, destroyed, become unreadable, the justification for spending is forgotten and no recollection of the purpose for the spending can be obtained. This is particularly acute where thermal invoices give a number instead of an item description, and a critical portion of that invoice has now become unreadable from being left in hot cars over summer periods, liquids spilled on the invoices, the invoices are lost down the side of a front seat in a motor vehicle for a very long period, or a myriad of other events which can arise from busy persons who suffer from multiple distractions, inadvertence, may deal with many people over the course of a single day, or from interference from others who do not know the importance of certain documents left on the console of a vehicle, on the desk, on the floor behind the desk, etc. After all, it just looked like paper trash and got thrown out in the bin.

One particularly bad experience overtook me some years ago where, after sifting through Two large garbage bags of invoices and payment slips (literally) which covered two full years of trading for a construction client, the task for constructing financials and two business tax returns was finished. The client finally sent the signed returns back to the office of the firm, and the returns were lodged. Between the time that the returns were lodged and the point where the ATO had issued the assessments and the respective paperwork, the client telephoned my office to tell me "I found a few receipts in the console of the truck. I cleaned it out yesterday and found them." My answer was short "just send them over to me in an envelope." The client readily agreed.

A few days later, sure enough, an envelope was dropped on my desk from this client. It was slightly thicker than I expected, but I initially thought that the client had written a cover letter or that the receipts were, perhaps, A4 size and were folded up to fit the envelope. After all, "a few receipts" couldn't be much, just some small expenses here or there incurred while the principal was in a hurry. To my amazement, the invoices included 1) two gas-fired nail guns and three boxes of the nails for those guns, 2) invoices for protective clothing, small tools, drill bits, and hardware materials totaling about $7,500, (one receipt was out of time :-( and 3) a paid invoice for several thousand dollars in landscaping materials delivered and paid at a jobsite.(I don't remember this figure exactly, sorry).

You might shake your head at this event. Your tax affairs may seem quite small (or not!) as the case may be in comparison, but leakage at any rate is, to a motivated tax agent, unacceptable. The cardinal rule in tax affairs is "The better records you keep, the less tax you will pay". It may seem tedious and irritating during the year when you meticulously save everything, make records, keep the log book on the car for business driving, even the log on internet usage, telephones, the printer etc. at night at your home. I assure you, however, if you have all the records for your income-related spending during the period, when you sit across from my desk and the return is finished, you will be paying yourself for your efforts.

09/03/2017

The Superannuation changes recently enacted in the Federal Parliament may have a more far reaching impact on retirement asset building than many people know. The imposition of additional layers of tax in the recent years means that those with self managed funds should seek advice on the impact of these changes. Income thresholds, limits of the amount which can be transferred to pension accounts inside superfunds, and the alteration of contribution limits both concessionally and non-concessionally should flag to any superfund member that a review of their position and goals is necessary. If no review is sought by present members, they may find themselves in a position where the extra tax they pay later may eat a significant portion of their superannuation savings. Acting now to assess the position of the fund accounts and review goals which may have been set quite some time ago is a wise decision.

08/03/2016

Hello! Wow, what a beautiful day it is today. Today, being International Women's Day, we've got an article for you about something we ladies are great at - investing!

To say that Warren Buffett invests like a girl is somewhat controversial, but the book of this name posits that many of the attributes which make him so successful are natural to women. 

22/02/2016

Morning Folks! Wow, it's Tuesday already! Here's an article detailing some items we won't encourage you to include as part of your tax deductions. It's a brilliant read. Enjoy!

An IBM salesman who made $100,000 in bogus work claims, including his family grocery bill and $5000 in “secretarial services” from his seven year old, has lost in court.

14/02/2016

Happy Monday folks! Are you missing the weekend yet?
I know we probably all wish we could skip work for six years, just like this fella. Fortunately, Alpha Legacy is open today to help you with your tax needs. If you run an entity of any size and need help with your BAS or other matters, give us a call!

THE case started with confusion over where a civil servant in southern Spain worked.

07/02/2016

Morning everyone! All the small business owners in the house can breathe a sigh of relief - it appears our PM won't hike the GST up at this point - however, they haven't ruled out other tax reforms. Watch this space, and contact Alpha Legacy if you'd like an explainer on what's going on

Federal Government ministers say the Coalition has abandoned the idea of lifting GST, but its tax plans may still contain some bold ideas.

22/12/2015

Hello happy holidaymakers! We wanted to wish you a very Merry Christmas and brilliant New Year. Our office will be closing from the 23rd of December 2015 and will be reopening on the 5th of January 2016.

Please, stay safe this holiday season and enjoy yourselves heartily! Here's to a happy and prosperous 2016!

18/11/2015

Happy Wednesday, guys! You may have seen our little white flag fluttering in the wind as we rode in the over the weekend. We raised over $500 for Camp Quality thanks to our generous sponsors and had such an amazing time participating with many other great people to bring joy to kids who are suffering. We absolutely can't wait till next year! Check out our instagram for more visuals from the ride

Crowds line the streets for the much-loved Illawarra event, now in its 11th year.