Income Tax Planning Stuff

Moving from cash to accruals

Since the Henderson Case it has been clear that there is only one appropriate way to return income for a year – either cash or accruals. TR 98/1 covers which one is correct for each year.

But what happens to your debtors when in year one you were correctly on cash and in year two you will correctly be on accruals? This is exactly what Henderson covered as it concluded the $170k of debtor just never got taxed. The court Correctly concluded there is nothing in the Tax Acts to pick this income up…

And this is obvious as when the old STS optional cash method was available there were specific rules to make sure debtors were picked up.

So as long as you are not forcing the change from cash to accruals to avoid tax (see Part IVA and Commercial Union) or looking to increase the debtors on 30 June to take a larger gain (Part IVA), it appear the debtors just never get taxed.


Income Tax Part IVA Planning Stuff Rulings

Part IVA and partnerships of discretionary trusts

The most annoying habit of the Commissioner is to let everyone do something for years and then to finally try to close it down. Take the Commissioner’s announcement on 16 December 2009 that an unpaid present entitlement from a trust to a corporate beneficiary is a loan to which Division 7A applies. So 12 years of saying every trust should have a corporate beneficiary and 12 years of auditing these structures saying nothing is overturned overnight… Well it is about to happen again I fear…

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Thirty years ago, every accounting and legal partnership was a partnership of individuals. But this has changed to the point where the most common structure today is a partnership of discretionary trust rather than individuals. Actually these partnerships of discretionary trusts are becoming old hat as everyone moves to a company where the shareholders are discretionary trusts.

But in Taxpayer Alert TA 2013/3, the Commissioner raises concerns about the restructure from a partnership of individuals to a partnership of discretionary trusts. He does his norm “sham” argument but it is obvious he thinks these restructures may be schemes to which Part IVA might apply. The Commissioner states that professional practices may operate as a partnership of discretionary trusts, but may not be used for the to avoid tax obligation through income splitting.

This is only a Taxpayer Alert. And the Commissioner is very clear he is only considering tax benefits arising in the 2013/14 and later income years. So if you undertook a restructure like this before 1 July 2013 it appears it is safe.

But it starts to look like December 2009…

FBT Planning Stuff Tax Policy

The post the salary packagers do not wanted you to see…

Go to any salary packager’s website and they will have a calculator. After you complete or the details the calculator will tell you how much you will save in tax by salary packaging a car. THIS NUMBER IS ABSOLUTELY RUBBISH. I don’t mean the calculation is wrong in any way at all. What I mean is that the calculator compares apples and oranges to get the tax saving.

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What these calculators do is compare the after tax outcome of leasing the car in your own name with leasing the car under a salary packaging arrangement. The tax saving is right based on this comparison. BUT NOBOBY LEASES A CAR IN THEIR OWN NAME SO THE COMPARISON IS WORTHLESS. Outside of salary packaging, almost everyone who wants a car buys it with either cash they have saved or by using the equity in their home. The interest rate on cash you already have is 0%, but lets call it 3% as you could have invested it in a very secure investment. Your home loan interest rates is about 5-6% and does not look like moving much for some time.

The implicit interest rates in leases for cars are from 8-11%.

So if you were to do a real comparison it would be comparing salary packaging a leased car with using the equity in your home. There may be a tax saving between leasing you car in your own name and salary packaging it BUT that tax saving will be reduced by the extra funding costs of the interest rate in the lease when compared to the interest rate on your home loan.

Don’t compare leasing under salary packaging with leasing in own name. Compare leasing under salary packaging with borrowing from your bank using the equity on your home loan. And I dare you to ask the packaging companies to do this calculation for you… And watch them sweat…

Tax Policy

Finding extra revenue in the tax system? Where?

I think I have a right to say this as I gave up a high paid job as a tax advisor and spent three years working in the Treasury, on the Henry Review and in the office of the Assistant Treasurer and most of the time I tried to convince people to remove tax give aways to raise revenue (What happened to your packaged laptops??? He he he…)

All based on the 2011 Tax Statistics from the ATO…


So we need another $20 billion a year for changes to education funding and disability funding (since writing this the 2013 MYEFO now suggests we have a structural deficit of around $30 billion) .Rather then digging into portfolio budget statement to find savings, commentators are going to the revenue system. They say remove negative gearing, which would see a massive decrease in capital gains tax and stamp duties. They say increase company taxes, which would just decrease income tax as most company tax is claimed back by shareholders as imputation credits. They say raise the GST (rate or base? who cares) which, forgetting it is a state tax, would tax the most vulnerable as well as the most affluent and that it would probably be linked to a massive reduction in individual tax rates as was done when the GST was introduced.

Lets get real and admit if you really want to raise taxes by $20 billion a year the place to do it is in the individual tax system. And lets raise it on the richest Australians – to steal from the Occupy movement – the 1%. If you are earning more than $280,000, you are in the top 1% of tax paying individuals and you and your fellow 1%ers are paying $23 billion in income taxes, at an effective tax rate of 41%, making up 18% of all the individual taxes paid. But we want another $20 billion from you. To raise the additional $20 billion we just need to have an effective tax rate on these 1%ers of around 76%. That’s not the marginal rate, that is the average rate on every dollar they earn. Someone earning $300k with be left with about $73k after tax…

OK. We cannot get close to raising $20 billion by only going after the 1%ers. What about just those on the highest marginal tax bracket – earning more than $180,000? Unfortunately, that only includes under 3% of tax paying individuals. And we would need to increase their effective tax rate from 38% to 60% – a more than 50% tax increase – a hundred times more than the 0.5% levy the government is proposing from 1 July 2014.

OK. Still not going to get there with taxing just the $180kers. Lets try the top 10% of tax paying individuals – or anyone earning more $105,000. The effective tax rate these 10% of tax paying individuals are paying is currently 34%. To get our extra $20 billion we need to raise this to 44%. That’s a very big jump…

Lets be honest… Can we just admit we can’t get an extra $20 billion (or the $30 billion now needed) just by increasing revenue? We can’t fund these new expenditures without cutting expenditures… so lets stop pretending we can and lets tell our leaders to stop spending our money on things we don’t NEED… not things we don’t want but things we don’t NEED… please.

FBT Planning Stuff

Even crazier (and legal) salary packaging ideas

In the National Tax Liaison Group FBT Subcommittee (yes I have sat on this committee and it is full of FBT nerds…) in November 2005 the Commissioner confrimed that, as an employer can provide a benefit to an employee for their long service valued at $1,000 after 15 years, increasing by $100 every year after that, and there is no FBT payable, an employee could ask their employer to package a long service award in their 15th year worth $1,000, then another $100 in the 16th year, then another $100 in the 17th year, and so on.

Just remember the benefit truly needs to be in recognition of long service and available to all employees so have a policy in place that allows this.

FBT Planning Stuff

Crazy (but legal) salary packaging options…

An expense fringe benefit arises when an expense is reimbursed, irrespective of when the employee incurred the expense that is reimbursed. So if you forgot to salary package an expense that it would have been beneficial to salary package then just get it reimbursed today and the benefit arises.

First a silly example… For ten years you purchase the Australian Financial Review online for $770 each year ($70 GST). Why not reduce your salary by $7,000 ($700×10 year), get the $7,700 reimbursed and have the employer recover the $70 of GST for each year ($700). You just have to track down the tax invoices and you will get $700 for it…

And now the real example… A taxpayer was asked to relocate to another city for work. They sold their house in the previous location and bought a new house in the new location. The real estate agent charged $9,000 and the stamp duty was $35,000. And it all happened a couple of year ago. This year the employee salary packages $44,000 and get these costs (exempt from FBT under section 58C of the FBTAA86) reimbursed. If you are on the highest marginal rate that is a tax saving of over $21,000. Nice!

Income Tax Part IVA Planning Stuff

Part IVA applies to small businesses

I don’t get that so many small business advisors think Part IVA can not apply to their clients. Yes it does not happen often but if it does your business is on the line. And here is where it is most likely to apply…

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You just read my post below and want to inject income into a loss trust. So a professional working though a company that has multiple clients, business premises, works for results and employs a second staff member (a PSB 100% sure) decides to inject income into a loss trust. To do this the company makes the trust its manager and pays the trust a management fee. This management fee would have been paid out to the professional otherwise as a salary but now it goes into the trust to use up the losses.

The Commissioner has made it clear that alienating personal services income, even if you managed to avoid the PSI rules as your are a personal services business, can still be subject to Part IVA (see NAT8028 factsheet). Sending the personal service income to a trust with losses so that no tax is payable is more likely to be subject to Part IVA than just leaving it in the company to be taxed at 30% as this fact sheet states. The scheme has one extra step (not leaving it in the company but paying to the trust as a management fee) and the tax benefit is larger (not paying 30% tax on the income but paying no tax on it at all.

If you advice ignores that the Commissioner has already got a position on Part IVA and personal services income in entities, you are not giving good advice.

I should mention that my former boss at KPMG, Chris Jordan, is more likely to go after the big end of town rather than the small end… but is that an excuse for bad advice?

Article Income Tax

Solar panels and tax – How many people have this wrong???

0010IP_Blue_Journal_Aug (Mansell)

By the way, after writing this article I found that I had been placed on the world’s largest “climate denial” database. Now I new thought a tax article could make me politically incorrect?

Income Tax Planning Stuff

Claiming a deduction for stamp duty?

In the Australian Capital Territory, for a rental property you can claim the stamp duty as a deduction – even though the Henry Review (which I had the misfortune of spend 6 months working on) wanted to remove this anomaly. Why? It’s a lease and not an ownership of all land in the ACT

But, rather than getting worked up about stupid tax outcomes…

What if I bought a block of land in the ACT (legally bought the remainder of the 99 year lease) with the intension of building a rental property? As the building goes up I fall in love with the new design and just before it is finished I decide to rent out my current home and move in to this newly built property. I have claimed the tens of thousands of dollars of stamp duty and the other costs as deductions but I never rent it out.

What will the Commissioner say?

From the ATO’s Rental Property Guide 2013 page 7 ( )…

“Expenses prior to property being available for rent

You can claim expenditure such as interest on loans, local council, water and sewage rates, land taxes and emergency services levy on land on which you have purchased to build a rental property or incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes.”

So it is all about when your intension changed. You need to prove the original intension was to rent out the property. And then you need to show that intension changed and from that date you can’t claim anything. There is not time you have to rent it out, you just need to be able to prove your intension to rent it out so that if the Commissioner turns up it is not just based on your word against his…

Funny Stuff

What a real tax nerd does on a holiday…