Taxpayer Alerts for R&D

The Commissioner has just released two taxpayer alerts that relate to the R&D Tax Incentive…

TA 2017/2 Claiming the Research and Development Tax Incentive for construction activities
TA 2017/3 Claiming the Research and Development Tax Incentive for ordinary business activities

These Taxpayer Alerts “provide a summary of our concerns about new or emerging higher risk tax or superannuation arrangements or issues that we have under risk assessment.”

So what are these concerns?

Some or all of the activities registered are broadly described and non-specific. For example, projects may be registered instead of the specific activities undertaken.

Some or all of the activities registered are ordinary business activities that are not eligible for the R&D Tax Incentive.

Some or all of the activities were undertaken in the course of their ordinary business activities and recharacterised as R&D activities at a later time.

So the concern the Commissioner has is that taxpayer’s are incorrectly claiming the R&D Tax Incentive in relation to activities that are not R&D…

So the next time an “R&D advisor” tells you that activities are R&D activities, ask them what will happen if the Commissioner concludes these activities are just “ordinary business activities”. Then read the project description they write as see if you think some or all of the activities in the description “are broadly described and non-specific.”

R&D advisors need to pick up their game or the Commissioner will start asking the Government to limit access to this incentive even more.

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SMSF and accountants… what can they do?

The easy answer is… lots.

ASIC have a great information sheet on this, but in summary and accountant without any AFSL can…

You may provide advice on establishing, operating, structuring and valuing an SMSF, as long as you give your client the appropriate warnings. This includes [stating that the] advice [is] provided for the sole purpose of, and only to the extent reasonably necessary for, ensuring compliance with the superannuation legislation [and the document includes] advice on the process of winding up or exiting an SMSF. You may not recommend that your client acquires or disposes of an interest in an SMSF.

With the right disclaimer I am setting these SMSF beasts up if my client asks me to

You may provide a recommendation or statement of opinion on how your client should distribute their available funds among different categories of investments. You may not advise your client to make particular investments through the SMSF.

I am telling them if they want to image it themselves they need to have a balanced portfolio but not telling them what exact investments to buy.

You may provide tax advice on financial products, such as an interest in an SMSF and underlying investments held by the SMSF, as long as you do not receive a benefit as a result of your client acquiring a financial product (or a financial product that falls within the class of products) mentioned in the advice.

I am telling them what will be the tax consequences of the assets they decide to hold.

So if they come to me and say they want to put their business real property into their SMSF I can pretty much do it all for them.

But also remember, if you do send them off to an AFSL holder, you need to disclose any commission you are getting…

 

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Tax Breaks for Big Business

Every time I have a conversation about tax policy someone always tells me that before I make the changes I want I have to “stop all the tax breaks for big business”.

So what are these “tax breaks for big business” that I need to get rid of first?

Fortunately, each year the Government releases a list of all of its “Tax Expenditures”. And for all the normal people who have no idea what a tax expenditure is, the Government defines it as…

Tax expenditures typically involve tax exemptions, deductions or offsets, concessional tax rates and deferrals of tax liability.

So lets go through the top 25 of these exemptions, deductions or offsets, concessional tax rates and deferrals of tax liability and see what “tax breaks” those big businesses have. This list can be found at page 9 of this document.

  • By far the biggest is the CGT exemption for individuals on their main residence ($63 billion a year).
  • Next is the superannuation exemptions of just over $30 million, which again only apply to individuals as super belongs to individuals.
  • GST-Free food, education, aged care and health cost over $17.5 billion a year, which exists to help individuals with important costs.
  • The 50% CGT discount for individuals and trusts is next at just under $10 billion and again this  cannot be used by almost all big business.
  • Family Tax Benefit exemption, Child Care benefit exemptions, Medicare levy reductions combined cost $8.5 billion a year.
  • Tax concessions for charities, not for profits, and donations to these organisations costs $4.5 billion a year.

As yet, not a single “tax break” for big business. Actually, in the top 25 tax expenditures all big business gets is:

  1. Exemption from interest withholding tax on certain securities at $2.3 billion a year (but most of this relates to people buying Government debt);
  2. Concessional rate of excise levied on aviation gasoline and aviation turbine fuel at $1.2 billion a year; and
  3. Capital works expenditure deduction at $1.1 billion a year

I did not include lower company tax rate and simplified depreciation as they only apply to businesses with turnover less than $2 million – hardly big business.

So while the tax system is littered with tax breaks for individuals, you would be trying hard to find any substantive tax breaks for big business in our tax system. If you don’t borrow overseas, don’t own aircraft and lease your buildings there is nothing in this list for your big business at all.

 

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Fairfax journalist spinning a tax story again…

Why do Fairfax journalist have to exaggerate every tax story they have to push their ideology?

Peter Martin is at it again today when he writes…

 Revealed: how the Tax Commissioner was leant on to deliver high-end tax cuts
Mr Martin again is going to show us how the current Government is a friend of big business and wants to keep the workers down by offering only tax cuts to the “high-end”… 

But hang on. I don’t remember any “high-end” tax cuts recently. So what is he talking about?

He intensionally leaves it to the last paragraph, where he writes…

The tax cut, for Australians earning between $80,000 and $87,000 would be delivered on October 1…

“High-end”?!? Peter, let me show you what the Budget papers say about why this change has been made to the individual tax rates...

This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37 per cent to 32.5 per cent, preventing around 500,000 taxpayers facing the 37 per cent marginal tax rate. This will ensure that the average full‑time wage earner will not move into the second highest tax bracket in the next three years. In the absence of this action, they would move into the second highest tax bracket in 2016‑17.

This “high-end” tax cut is to stop average full time wage earners having to pay any tax at the 40% tax rate. Since when is the “average full time wage earner” “high-end”? Come on Peter.

But it would not have served Peter’s ideology if he had have written an accurate article that was titled “Government pushes for average worker not to be overtaxed.”

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What has happened to ATO Interpretative Decisions?

According to the Commissioner, an ATOID is a “summarised version of a decision we have made on the application of the law to a particular situation.” (See PSLA 2001/8)

These have been around since 2001 and have been an amazing insight into the types of private rulings that the Commissioner has been giving to specific taxpayers.

In 2003 the Commissioner made over 1,200 of these decisions. And you can understand how there can be so many ATOIDs in a year. As PSLA2001/8 states…

… an ATO ID may be prepared for each decision on an interpretative issue where:

· there is no precedential ATO view on the issue, or

· there is an existing precedential ATO view however an ATO ID will improve the clarity or certainty of the ATO’s interpretation of the particular area of the law.

But it appears that there are no areas left that the Commissioner has not ruled on. Also, all the areas he has ruled on are perfectly clear.

Why? In 2016 the Commissioner released one ATOID. And that one was on what is the GST registration threshold for body corporates (booorrring).

The reason for ATOIDs was so that taxpayers could see what the Commissioner is saying to other taxpayers. Is he giving favourable ruling to some (as was suggested back in the 1990’s)?

Simply, ATOIDs serve a purpose as a resourse for taxpayers that the register of private rulings will never be (given its size). Also, it creates confidence in the private ruling system.

So if the Commissioner has decided to end ATOIDs, then what is he going to replace it with so taxpayers have both the resources and the confidence in the private ruling system?

Lets see how many are issued in 2017?

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One of many or just one…

This one is for my Quantity Surveyor friends who love to put together depreciation schedules…

The Commissioner has released a draft Taxation Ruling that considers whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets.

And this is a great question. How far down do we break something down before we start claiming depreciation on it? Part, compound, element, proton, quark?

The Commissioner states that for a component of a composite assets to be considered to be a separate depreciating asset, it is necessary that the component is capable of being separately identified as having commercial and economic value.

The main principles that need to be taken into account in determining whether a composite item is a single depreciating asset are:

  • Whether the depreciating asset will tend to be the item that performs a separate identifiable function;
  • Whether the asset is an item that performs a discrete function;
  • Whether there is a high degree of physical integration of the components;
  • Whether attaching the item to another asset, varies the performance of that asset; and
  • Whether the item is purchased as a system to function together as a whole and which are necessarily connected in their operation.

The draft ruling has a series of examples that use these factors. For example, the draft Ruling concludes that:

  • Connected warehouse storage racks are a single depreciable asset but unconnected racks are not;
  • A desktop computer package, including a monitor, keyboard and a mouse, is a single depreciable asset but an additional printer is not;
  • A mainframe and 50 slave terminals is a single depreciating asset;
  • A built-in GPS unit in a car is a part of the car but a portable GPS unit is not; and
  • A solar system is a single depreciable asset.

However, it is worth noting that in many cases adding a new component is a separate depreciable asset and not a modification to the existing asset. For example, adding additional solar panels to a current system will see the new panels treated as a separate depreciable asset.

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Excuses, excuses…

These are the best 10 excuses for not lodging an individual tax return given to the UK Revenue and Customs in 2016:

  1. My tax return was on my yacht, which caught fire.
  2. A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed.
  3. My wife helps me with my tax return, but she had a headache for ten days.
  4. My dog ate my tax return…and all of the reminders.
  5. I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant.
  6. My child scribbled all over the tax return, so I wasn’t able to send it back.
  7. I work for myself, but a colleague borrowed my tax return to photocopy it and lost it.
  8. My husband told me the deadline was the 31st March.
  9. My internet connection failed.
  10. The postman doesn’t deliver to my house.

So make sure in any divorce you get the accountant!

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