R&D Tax Incentive claims in focus

The Tax Office warns that it is working closely with Aus Industry to identify taxpayers involved in aggressive R&D Tax Incentive arrangements. It says some claims made for the R&D incentive have been negligent on the compliance requirements generally expected when making a claim, with some other instances even bordering on tax avoidance and fraud.

The program offers companies a way to claim eligible R&D expenditure by way of a tax offset. The definition of R&D is very broad and applicable to all industry sectors to encourage innovation. However, the Tax Office and Aus Industry are scrutinizing claims to ensure their legitimacy.

Eligible entities engaged in R&D may be eligible for:

a 43.5% refundable tax offset for eligible entities with an aggregated annual turnover of less than $20 million, provided they are not controlled by income tax exempt entities; or
a 38.5% non-refundable tax offset for all other eligible entities (entities may be able to carry forward unused offset amounts to future income years).

Aus Industry’s compliance work focusing on the eligibility of R&D activities while Tax Office work focuses on the R&D tax offsets allowable in respect of those activities. Both parties work together to undertake complementary risk assessment and compliance work.

The Tax Office says that it is concerned businesses and tax agents could be following R&D consultant advice without substantiation of expenditure or objectively assessing the advice.

Errors often slow down the processing of any refund, as the Tax Office then has to verify the information submitted and confirm eligibility. The revenue collection agency has the following tips to help avoid those errors and prevent delays:

Check registration – check that you have registered your R&D activities with Aus Industry. You must register each year before lodging your R&D claim, and your annual registration number must be included on your R&D schedule. Check each year the timing when this needs to be done and if you use an agent then you may be able to get an extension of time.

Ensure BAS lodgement is up-to-date – if you have overdue activity statements, lodge these before claiming. BAS outstanding can impact your income tax.
Review grouping rules – to determine if you are eligible for an R&D tax offset, review the grouping rules (although note that the Tax Office quotes the old rates of 45% refundable and 40% non-refundable). If you have an aggregated annual turnover of $20 million or more, you are not eligible for the refundable tax offset, but may be entitled to the non-refundable tax offset

Here are the R&D incentive schedule instructions 2015, and for the Tax Office’s FAQ page on the incentive, click here.

Single Touch Payroll questions answered: Have your say

When the Single Touch Payroll initiative was first floated at the end of 2014, it was touted as a tool that would eliminate several red-tape producing processes and do away with the need for many reporting demands presently dumped on small business owners.

It is called “single touch” because the interactive online tool is intended to fulfil all business reporting obligations (payment summaries, superannuation contributions, pay-as-you-go withholding and so on) “at the touch of a single button” the government announcement said.

Under Single Touch Payroll, employers will be required to electronically report payroll and super information to the Tax Office when employees are paid, using Standard Business Reporting-enabled software.

Since then however, feedback from the business community has shown that the proposed start date of July 2016 will simply not be achievable, especially for small and medium sized businesses. Also the fact that the finer details of its design were not even finalised was viewed with great concern.

There were also concerns expressed by business owners regarding cash flow issues that could result from the government’s plan to have employers remit PAYG withholding and superannuation guarantee contributions in the same transaction as salary payments.

The government took the initiative and held off on implementing Single Touch Payroll until a more thorough consultation with stakeholders could take place.

As a result of committing to further consultation, the Tax Office is keen to address the many concerns that businesses of all sizes have expressed. It says it is aiming to continue to consult with industry groups and business on a revised proposal to test:

real time compulsory reporting of payroll information
voluntary real time payment of PAYGW and super guarantee as an option
running pilots with small business from July 2016 to test various scenarios, including simplifying the process of bringing on new employees with streamlined TFN declarations and Super Choice forms, and the timing for implementation.

The Tax Office has thrown open the topic for ideas, and has published a discussion paper on Single Touch Payroll on its “Let’s Talk” web page.

Let’s Talk is a space where the taxpaying community can contribute ideas, ask questions, and generally have a say on tax and super topics. There are online forums, quick polls and surveys that touch on topics that are open for consultation.

The Single Touch Payroll discussion paper includes a wide range of questions that touch upon many of the concerns expressed by the business community. You can read these discussions here, which consists of wide ranging questions from the business community — many of which may reflect your own concerns — with responses from the Tax Office.

Tax Office data matching blitz targets merchant credit card sales

In an unprecedented first for small business tax compliance, the Tax Office has revealed it will chase up incorrectly disclosed income and match it to credit card and debit card records throughout the 2014-15 financial year.

As part of the blitz, the Tax Office will ask major Australian financial institutions for the online purchase details of around 90,000 business-owning taxpayers.

Almost 900,000 sets of credit and debit card payment information will be matched to merchant accounts to determine the real amount and value of transactions processed in the 2014-15 financial year.

According to a government statement, the blitz aims to ensure “merchants are correctly meeting their taxation obligations in relation to their business income.

“These obligations include registration, lodgement, reporting and payment responsibilities.”

The Tax Office is calling for businesses to make voluntary disclosures to correct mistakes before the sweep begins.

The Tax Office has released a list of the banks and financial institutions earmarked for data collection:

American Express Australia Limited
Australia and New Zealand Banking Group Limited
Bank of Queensland Limited
Bendigo and Adelaide Bank Limited
BWA Merchant Services Pty Ltd
Commonwealth Bank of Australia
Diners Club Australia
National Australia Bank Limited
St George Bank
Tyro Payments Limited
Westpac Banking Corporation

More of the Federal Budget’s small business concessions now have certainty

The legislation many small business owners will be glad to see being passed by Parliament has made it through and is now law.The Tax Laws Amendment (Small Business Measures No. 3) Bill 2015 puts into effect some of the concessions for small business that were included in the last Federal Budget.

These measures are the following.

5% discount on tax payable by unincorporated ‘small’ businesses
Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The income may be income from sole trading activities, or taxable distributions of business income from partnerships and trusts.

The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a non-refundable tax offset.

This measure will apply from the 2015‑16 income year, so if you’re currently running a small business, you will be able to get a 5% tax discount from this year.

Immediate deduction for professional expenses for start-ups
The new law allows taxpayers to immediately deduct a range of professional expenses associated with starting a new business, such as fees for professional, legal and accounting advice. The upfront deduction will also be available for costs incurred in accessing “crowd-sourced equity funding”.

Currently, these costs are only deductible over a five year period.

The immediate deduction is also available for payments of fees, taxes or charges relating to establishing a business to an Australian government agency. For example, this includes fees for incorporating a company. It also extends to payments made to state and local government agencies (not just federal agencies like ASIC).

This measure will apply from the 2015‑16 income year, so if you’re thinking of starting a small business this year (and it will turnover less than $2 million), you will get some immediate tax relief with upfront deductions for some start-up costs.

FBT changes for work‑related electronic devices
The FBT law has changed to expand the previous FBT exemption for work-related portable electronic devices (such as smartphones, laptops and tablets). A small business entity employer (that has an aggregated annual turnover of less than $2 million) can now access the exemption for more than one such device provided to an employee within the same FBT year, even where the devices have “substantially identical functions”.

Previously, the exemption was only available for one device per employee per year, unless the multiple devices provided did not have substantially identical functions. Employers that are not small businesses are still restricted to the one device limit.

According to the government, the change will remove confusion where there is a function overlap between different products (such as between a tablet and a laptop).

However, it is not too early to consider this change for business planning purposes. The extended FBT exemption should be taken into account not only for FBT-specific planning, but also for general management planning and budgeting in relation to staff benefits.

ATO crowdfunding guidance raises questions over gratuities, specialty donations

With the Uber-GST stoush mostly settled, the Tax Office has offered an olive branch to another high-profile disruptive economy in the form of provisional guidance that promises things will change if they need to.

Historically the Tax Office’s stance on crowdfunding has been narrow but definitive. Late last year, the regulator said crowdfunding activities would likely incur GST liabilities if they involved exchanging goods for donations. It’s common that ‘promoters’ (the individuals asking for donations) offer ‘funders’ prizes for their contributions, and the Tax Office saw that occurrence as a taxable consideration. That applied only to goods, though.

“…No GST should be payable by the entity where a contributor gets an equity or debt interest in return for the contribution,” the Tax Office then advised. Today that hasn’t changed, but its complete guidance has been fleshed out to account for more off-kilter crowdfunding arrangements.

One of these arrangements is known as reward-based crowdfunding and it involves donors receiving goods, services or rights in exchange for their donations. According to the Tax Office, this type of arrangement should incur a GST liability. The problem is that a GST-on-donations model may be difficult to implement.

Say we’re dealing with a sidewalk Santa selling reindeer ears in Sydney’s CBD throughout December. This Santa works on behalf of a charity registered as a gift recipient. Any money this Santa collects is GST-free. He doesn’t need to add GST to the cost of the donation.

Compare that with an online crowdfunding campaign calling for donations to a Christmas appeal. Shirley started the campaign, but she is not working on behalf of the charity running the appeal; she is not a registered gift recipient. Just like our sidewalk Santa, if people donate $5, they receive a Santa hat. But because they receive goods in exchange for their donation, the Tax Office says Shirley must collect GST on their donations.

From the donors’ perspective, a gift is an incentive to contribute. If GST is levied on donations, especially specialty donations given for holidays or to charities, it may disincentivise potential donors. The good news is the Tax Office is currently asking for consultation to construct a framework that would apply to scenarios like this.

Crowdfunding and income tax relies on a case-by-case treatment because donations don’t always fit neatly into definition of ‘ordinary income’ under tax law. In fact, the Tax Office’s case examples point out a host of instances where crowdfunding proceeds do not amount to assessable income because the donations are not “regular or recurring.”

Same goes for donors who donate to crowdfunding campaigns in exchange for equity in a business. The equity-based model borrows its rules from traditional business share arrangements, meaning it’s free from GST but subject to income tax.

“Supply of shares is an input taxed financial supply that is not subject to GST and the funder is not entitled to an input tax credit for the acquisition of the shares,” the Tax Office said in its guidance statement.

If this guidance made one thing clear it’s that we can be more firmly certain the Tax Office is keeping its eye on the way crowdfunding evolves. This provisional guidance is comprehensive, and most importantly, upholds the philanthropic spirit of the entire model.

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