Posts in Tax

SMSF Rules change… again.

August 5th, 2016 Posted by Superannuation, Tax 0 comments on “SMSF Rules change… again.”

SMSF rules change, again

As every trustee of a self-managed super fund (SMSF) knows, the ATO loves shifting the goal posts. This time the taxman’s big change is to grant a seven-month extension on the deadline for SMSFs to ensure any property loans they have are operating on an arm’s length basis.

This change follows criticism of the ATO for failing to provide enough time for SMSFs to review their loan arrangements and either restructure or wind them up if they are not at arm’s length.

Although the extension will give SMSFs some badly needed breathing room before the new 31 January 2017 deadline, the ATO is determined to tighten the screws on limited recourse borrowing arrangements (LRBAs) with related parties, particularly as SMSF property investments stand accused of helping to fuel the current investment property boom.

What is an LRBA?

The new rules do not affect bank loans to an SMSF, only LRBAs with a related party such as a member of the SMSF, a relative or friend. The ATO defines an LRBA as a loan from a third party lender which the SMSF uses to purchase an asset held in a separate trust. Any investment returns earned go to the SMSF. With an LRBA, if the SMSF defaults on the loan, the lender’s rights are limited to the asset held in the trust and it has no recourse (or access) to the SMSF’s other assets.

As many SMSFs have entered into this type of arrangement to buy an investment property or business premises, trustees should ensure they review their current loan arrangements are consistent with what the ATO deems is an arm’s length arrangement. Anyone contemplating a new LRBA not financed by a bank or commercial lender should seek professional assistance before signing the loan documentation.

Ensure your SMSF complies

To help SMSF trustees determine if their loan arrangement complies with the rules, the ATO has outlined a set of key points it will consider in determining whether an LRBA with a related party is generating non-arm’s length income. These are called ‘Safe Harbour Rules’.

By 30 September, the ATO plans to have issued further guidance for SMSF trustees clarifying the circumstances in which it will deem an SMSF to be receiving non-arm’s length income from an LRBA. If an LRBA arrangement does not meet the regulator’s requirements, the SMSF has three options:

  • alter the terms of its loan,
  • refinance through a commercial lender,
  • or pay out the LRBA by 31 January 2017.

SMSF trustees should note all related party LRBAs need to be put on arm’s length terms on or before 31 January 2017, so the fund will also need to start making regular monthly repayments of principal and interest by this date.

Comply, or pay more tax

If the SMSF fails to comply with the rules by the 31 January 2017 deadline and the ATO determines it is receiving non-arm’s length income, it could face a stiff penalty in the form of additional tax. Non-arm’s length income in an SMSF will be taxed at 47 per cent, which is much higher than the normal 15 per cent concessional rate in the accumulation phase, or nil in the pension phase.

Check your collectibles

As if SMSF trustees didn’t have enough to do, they also need to ensure full compliance with the new rules around collectibles. ‘Collectibles’ covers assets such as artwork, jewellery, antiques, coins, bank notes, stamps, rare manuscripts and books, memorabilia, wine or spirits, motor vehicles and boats.

After 30 June 2016, these types of assets must not be leased or used by a related party of the SMSF, or stored or displayed in a private residence of a related party.

All decisions about collectibles must be documented and retained. The asset must also be insured in the fund’s name within seven days of acquisition, and if it is transferred to a related party, it must be at the market price determined by a qualified, independent valuer.

If you have any questions about what these rules mean or how the changes may affect your SMSF, please call our office.

How to avoid an ATO audit

August 5th, 2016 Posted by Tax 0 comments on “How to avoid an ATO audit”

How to avoid an ATO audit

There is nothing pleasant about being audited by the Australian Tax Office (ATO). Even in a best-case scenario, it creates stress and chews up time and energy. At worst, where the ATO decides you’ve failed to disclose important information or misrepresented your financial situation, the financial penalties can be significant.

While there is no way to guarantee you won’t be audited, there are things you can do to lessen the likelihood of it happening.

Be extra conscientious if you take cash

Accurately or otherwise, the ATO believes those who operate in the cash economy –restaurant owners, shopkeepers, tradesmen and taxi drivers among others – are disproportionately likely to fail to declare all their income.

This doesn’t mean you need to change careers if you sometimes get paid in cash. It does mean you can expect to be audited at any time. So be extra careful about having all your paperwork in order.

Try to avoid big income fluctuations

What’s most likely to get the red lights flashing at the ATO is either earning less than you have in previous financial years or less than others in a similar situation. The ATO has benchmarks for what it expects people in different industries to earn, which can be found on the ATO website.

Double-check your arithmetic

One of the most common triggers for an ATO audit is things failing to add up. This is a particularly tricky area for business owners. They can find themselves flagged for all sorts of discrepancies, such as inconsistencies between their income tax return and BAS on total sales and expenses.

Business owners should also be mindful that failing to pay employees the correct superannuation could result in a review of superannuation guarantee obligations. This can quickly snowball into audits of income tax, GST and fringe benefits tax.

Be punctual

Lodging your income tax returns along with all necessary supporting documentation on time, year in, year out, results in a good compliance history. That indicates to the ATO you’re serious about meeting your obligations and less likely to be engaging in creative accounting.

Keep records of work expenses

Each year the ATO focuses on a particular area of non-compliance. For the 2015-16 financial year that area is excessive work-related expenses.

As a general rule, taxpayers are allowed to claim expenses related to earning an income, assuming they weren’t otherwise reimbursed for these expenses and they have the necessary records. Be aware though that the ATO is cracking down on those who push the envelope.

Another area to watch is the $20,000 instant asset write-off. Business owners run the risk of getting audited if they attempt to take advantage of it for items that are going to be used privately.

Share your proceeds of the sharing economy

The ATO has also announced it is paying close attention to income generated by the likes of Uber and Airbnb. If you’re earning money by providing services in the so-called sharing economy, make sure you’re following the guidelines. In some instances, this may involve getting an ABN or paying GST. The guidelines can be found on the ATO website.

Expect the Tax Office to use data matching

These days, new technology makes it much easier for the ATO to keep track your finances. Thanks to increasingly sophisticated data analytics and risk modelling, it is able to identify and review income tax returns that omit information or contain incorrect statements.

Making sure you pay your fair share of tax but not more can be a complicated business. So call us now to discuss your end of financial year obligations.

What are the odds of an audit?*

  • On average, the ATO contacts over 350,000 taxpayers each year to alert them to errors in their tax return.
  • In the 2014–15 financial year, the ATO used over 650 million transactions reported by third parties to cross-check individual income tax returns and other income statements.
  • In 2014-15, the ATO conducted around 450,000 reviews and audits of the 12.8 million tax returns filed by individuals.

* Information supplied by the ATO