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The ATO has announced that, after consultation and collaboration with business taxpayers and industry representatives, it has developed what it calls a “safe harbour” mechanism for calculating car fringe benefits under the operating cost method.
In ATO parlance, a safe harbour is a guideline that allows taxpayers to make use of a simplified and efficient way to calculate their tax obligations where certain conditions are met.
In this case, the ATO has come up with a streamlined approach to working out the business use percentage of car fringe benefits for fleets of 20 cars or more, which it says will be applicable from the 2017 FBT year onwards (from April 1, 2017).
“The new approach reduces the record-keeping burden for your business clients,” it says, adding that it allows taxpayers “to use an ‘average business use percentage’ when using the operating cost method”.
How does it work?
Business taxpayers can access the safe harbour and use this new simplified approach if:
– they are an employer with a fleet of 20 or more “tool of trade” cars
– the vehicles are not part of salary packaging arrangements, and employees cannot elect to receive cash instead
– the cars have a GST-inclusive value of less than the luxury car tax limit in the year acquired
– employees are mandated to maintain logbooks and there are valid logbooks for at least 75% of the cars in the logbook year.
After all of the above is in place, an employer can use the logbooks to calculate the fleet’s average business use percentage.
The ATO says this simplified record-keeping approach can be applied for a period of five years in respect of the fleet (including replacement and new cars) provided the fleet remains at 20 cars or more.
The last condition is subject to there being no material and substantial changes in circumstances. An example of such a change would be a relocation of the employer’s depot that would substantially alter the business use percentage of the fleet.
The ATO developed the new safe harbour method after taking on board relevant feedback from tax practitioners and business taxpayers which showed that compliance with record-keeping requirements of the operating cost method can be difficult and time-consuming for employers with larger fleets.
See the relevant ATO practical compliance guideline for more details.
The ATO has issued guidance on making claims for mobile phone use as well as home phone and internet expenses. It says that if a taxpayer uses any of these for work purposes, they may be able to claim a deduction if there are records to support claims. But the ATO points out that use for both work and private use will require a taxpayer to work out the percentage that “reasonably relates” to work use.
The ATO requires that records are kept for a four-week representative period in each income year to claim a deduction of more than $50. These records can include diary entries, including electronic records, and bills. “Evidence that your employer expects you to work at home or make some work-related calls will also help you demonstrate that you are entitled to a deduction,” its guidance says.
When you can’t claim a deduction for the phone
Of course if an employer provides a phone for work use and also pays for usage (phone calls, text messages, data) then you are not able to claim a deduction. Similarly, if you pay for usage but are subsequently reimbursed by your employer, you are not able to claim a deduction.
How to apportion work use of the phone
As there are many different types of plans available, you will need to determine the work use using a reasonable basis.
If work use is incidental and you are not claiming a deduction of more than $50 in total, you can make a claim based on the following, without having to analyse the bills:
– $0.25 for work calls made from a landline
– $0.75 for work calls made from a mobile
– $0.10 for text messages sent from a mobile.
Usage is itemised on bills
If you have a phone plan where you receive an itemised bill, you need to determine the percentage of work use over a four-week representative period, which can then be applied to the full year.
You will need to work out the percentage using a reasonable basis. This could include:
– the number of work calls made as a percentage of total calls
– the amount of time spent on work calls as a percentage of total calls
– the amount of data downloaded for work purposes as a percentage of total downloads.
Usage is not itemised on bills
If you have a phone plan where you don’t receive an itemised bill, you can determine work use by keeping a record of all calls over a four-week representative period and then calculate the claim using a reasonable basis.
The ATO uses an example to further explain this.
Ahmed has a prepaid mobile phone plan that costs him $50 a month. He does not receive a monthly bill so he keeps a record of his calls for a four-week representative period. During this four-week period Ahmed makes 25 work calls and 75 private calls. He worked for 11 months during the income year, having had one month of leave. He therefore calculates his work use as 25% (25 work calls out of 100 total calls). He claims a deduction of $138 in his tax return (25% x $50 x 11 months).
Bundled phone and internet plans
Nowadays phone and internet services are often bundled together. The ATO says that when taxpayers are claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. “If other members in your household also use the services, you need to take into account their use in your calculation.”
If you have a bundled plan, you need to identify the work use for each service over a four-week representative period during the income year. This will allow you to determine the pattern of work use, which can then be applied to the full year.
A reasonable basis to work out work-related use could include:
– the amount of data downloaded for work as a percentage of the total data downloaded by all members of the household
– any additional costs incurred as a result of work-related use – for example, if work-related use results in them exceeding their monthly cap.
– the number of work calls made as a percentage of total calls
– the amount of time spent on work calls as a percentage of total calls
– any additional costs incurred as a result of work-related calls – for example, if work-related use results in them exceeding the monthly cap.
Again, the ATO uses a worked example to illustrate.
Des has a $90 per month home phone and internet bundle, and unlimited internet use as part of his plan. There is no clear breakdown for the cost of each service.
By keeping a record of the calls he makes over a four-week representative period, Des determines that 25% of his calls are for work purposes. Des also keeps a record for four weeks of the data downloaded and determines that 30% of the total amount used was for work.
He worked for 11 months during the income year, having had one month of leave. As there is no clear breakdown of the cost of each service, it is reasonable for Des to allocate 50% of the total cost to each service.
Step 1 – work out the value of each bundled component.
Internet: $45 per month ($90/2 services).
Home phone: $45 per month ($90/2 services).
Step 2 – apportion work related use.
Home phone: 25% work related use x $45 per month x 11 months = $124.
Internet: 30% work related use x $45 per month x 11 months = $149.
In his tax return Des claims a deduction of $273 ($124 + $149) for the year.
There are certain behaviours, characteristics and tax issues that the ATO admits will attract its attention. But as it is more interested to see taxpayers get things right rather than the bother, and expense, of chasing down every misdemeanour, the ATO has spelled out the areas that most concern it — that is, the incidents or details that are more likely to raise a red flag.
Broadly, the following behaviours and characteristics may attract the ATO’s attention:
– tax or economic performance is not comparable to similar businesses
– low transparency of tax affairs
– large, one-off or unusual transactions, including transfer or shifting of wealth
– a history of aggressive tax planning
– tax outcomes inconsistent with the intent of tax law
– choosing not to comply or regularly taking controversial interpretations of the law
– lifestyle not supported by after-tax income
– treating private assets as business assets
– accessing business assets for tax-free private use
– poor governance and risk-management systems.
And there are certain areas of taxation — such as CGT, FBT, private company profit extraction (including Div 7A), the taxation of financial arrangements and more — that the ATO says its risk antennae are more sensitive to. Included in this list is the use of trusts.
Trusts in focus
One of the more expansive areas of concern for the ATO seems to be trusts, with several compliance issues highlighted by it as requiring particular attention.
For example, it says distributions from discretionary trusts to SMSFs will typically raise a red flag. It says these distributions “are subject to the non-arm’s length income rules and the amount is treated as non-arm’s length income and taxed at the highest tax rate of 45%”.
The elements that attract the ATO’s attention include:
– the complying superannuation fund (generally SMSF) is a beneficiary of a trust
– the trust is not a fixed trust (or one with fixed entitlements to income) and is not widely held
– distribution by trust to complying superannuation fund
– superannuation fund does not report amount as non-arm’s length income.
“Generally, distributions from discretionary trusts to complying SMSFs are automatically non-arm’s length income, so it would be difficult for a taxpayer to mitigate this risk if they were looking to engage in this behaviour,” the ATO says.
Distributable and taxable income, and tax-preferred entities
Differences between distributable and taxable income are also a hot ATO touch-point. “We focus on differences between distributable income of a trust and its net [taxable] income which provides opportunities for those receiving the economic benefit of trust distributions to avoid paying tax on them,” it says.
The arrangements involve:
– the trustee determines a significantly reduced trust distributable income as compared to the trust taxable income
– the insertion of a tax concessional beneficiary to accept entitlement to the small trust distributable income together with the large liability to tax arising from the trust taxable income.
A tax concessional beneficiary may:
– have substantial prior-year losses
– have minimal resources that fall short of the tax liability arising from the distribution, resulting in a lack of capacity to pay the tax
– be taxed at a considerably lower rate (or not at all) than those ultimately receiving the economic benefits through this arrangement
– while these circumstances may normally be acceptable, they are not acceptable where the trustee manipulates the trust’s distributable income to this end.
The ATO says that what particularly attracts it attention is where a beneficiary has only recently been included as an object of the discretionary trust, and/or a beneficiary who has a minimal net asset position or one that is insufficient to meet the tax liability arising from the distribution.
Distributing largely to tax-preferred entities is also a red-flag signal to the ATO. This can occur when a beneficiary is tax-exempt, is in a loss position or is a newly-created company.
Income or capital?
Also in its focus are trusts that are carrying on a business of selling an asset as part of a profit-making undertaking. The ATO says it aims to ensure they are not claiming the 50% CGT discount in relation to profits from the sale of assets acquired, or developing this as part of the business or undertaking.
“Inappropriate characterisation as capital can occur where property developers set up special purpose trusts and report any profits from the ultimate sale of the property on capital account in order to claim the 50% CGT discount,” the ATO says. “These profits should be on revenue account for tax purposes because the property is sold as part of a profit-making undertaking.”
The ATO says that if taxpayers are concerned about a certain tax or super position, they can:
– engage with the ATO for advice to get certainty about a complex transaction or arrangement from one of our experts
– correct a mistake by requesting a self-amendment or making a voluntary disclosure.
Also see the ATO’s web page “Tax issues for trusts — tips and traps” for more.
It’s not mandatory for a business to have an Australian business number (ABN), but there are a few good reasons why you should. Foremost among them will be that without one, your business will probably feel a whole lot poorer than it should.
Other businesses that deal with you are legally bound to withhold tax from any payments they make to you if your business does not quote an ABN on invoices – and they must withhold it at the highest marginal rate.
Having an ABN also gives your business the ability to claim back goods and services tax (GST) credits, claim fuel tax credits you quality for, register to use the pay-as-you-go withholding system, be able to offer fringe benefits to employees, and just generally make dealing with other businesses much smoother.
Where to register
To get an ABN, you can apply online for free at the Australian Business Register, but before you do you need to determine if you are indeed entitled to an ABN. There is an online entitlement checklist here to help you decide if you are entitled.
The Australian Business Register is also the central collection point for basic information about every business with an ABN. Separate registrations are needed for GST, PAYG and so on, as well as business name registration.
If your turnover is more than $75,000 a year (before GST), you are required to register for GST, and to do that you need an ABN. (Taxi and Uber drivers, by the way, need to be in the GST system no matter what their annual turnover.)
Entities, not businesses
Every business that applies only needs one ABN (whether sole trader, partnership, company or trust) but can then run as many enterprises as they like from that single ABN as long as these operations are conducted under the same entity structure – one business can operate for example a furniture shop, a separate curtain outlet and an online fabric supply outlet. But if any of these operations are run by a different business entity, a separate ABN will be needed for it.
You will also need an ABN to register a website domain name with an extension that ends in “.au”, if your business intends to have an online presence.
If you choose a company structure for your business, the first registration undertaken will probably be with the Australian Securities and Investments Commission, which will issue you with an Australian Company Number (ACN). You need this when registering for an ABN (and the ABN will actually be the business’s ACN plus two digits at the beginning). You don’t need to show both numbers on invoices or stationery, just your ABN.
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