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Client Alert: The Budget Edition

Tax News | Views | Clues

Topics in this Budget issue

  • ATO targets disclosure of foreign sources of income
  • Investment loan interest payment arrangement
  • ATO reporting requirements for builders and contractors
  • Deduction for property expenses denied
  • Pitfalls of "late" super payment
  • Doctor found to be a share trader
  • FBT rates and thresholds for 2012–13
  • Car expenses - rates per km for 2011–12

ATO targets disclosure of foreign sources of income

Following recent compliance activities that have been conducted, the ATO says many Australian resident taxpayers may not be aware of their Australian taxation obligations in relation to their worldwide income. The ATO has reminded taxpayers to correctly report foreign sources of income when required. Examples of foreign sources of income can include:

  • interest accrued in an offshore bank account;
  • income derived from a foreign investment (eg dividend or rental income);
  • income from an asset that has been inherited from an overseas source;
  • a foreign pension or annuity; and
  • foreign trust income.

The ATO has announced that for taxpayers who make full voluntary disclosure of their foreign source income, any applicable penalties may be reduced by 80%.

Investment loan interest payment arrangements

The ATO has released a Taxation Determination that provides the Commissioner’s views in respect of certain “investment loan interest payment arrangements”. According to the Commissioner, the general anti-avoidance provisions in the tax law can apply to deny a deduction for some, or all, of the interest expenses incurred in respect of these arrangements.

The type of arrangements discussed in the Determination broadly involve outstanding loans on a residential home, an investment property and a line of credit. The ATO says a key feature of these arrangements is the use of the line of credit to pay the interest on the investment loan. This results in all (or most) of the interest on the investment loan being, in effect, capitalised. That is, the payment of the investment loan interest is deferred.

According to the ATO, the deferral has the economic effect of allowing the taxpayer to repay the home loan at a faster rate than would otherwise be possible.

ATO reporting requirements for builders and contractors

The Government has introduced regulations that require certain businesses in the building and construction industry to report annually to the ATO details of payments made to contractors in the industry.

The new requirements essentially mean that purchasers must report certain transactions for which they have been issued an invoice. The reporting requirements will commence on 1 July 2012.

Deduction for property expenses denied

In a recent decision, the Administrative Appeals Tribunal (AAT) denied a taxpayer’s claim for a deduction for various expenses incurred in buying, renovating and selling properties.

Among various issues, the AAT noted that the taxpayer was unable to produce documentary evidence in relation to stamp duty, legal expenses, renovations, wages and director fees, interest and legal expenses.

TIP: All documents supporting deductions must be kept for five years from the due date or actual date of lodgment of the return for the year to which the expense relates, whichever is the later. If an objection, a review or appeal arising from an objection, or a request for an amendment of an assessment, is outstanding when the five-year period ends, records must be kept until the matter is resolved.

Pitfalls of “late” super payment

A taxpayer has been unsuccessful before the AAT in arguing that the Commissioner should exercise his discretion and reallocate excess super contributions to a previous financial year.

The taxpayer had used an electronic funds transfer on 30 June 2007 to transfer the funds, but they were not credited to the super fund’s account by the bank until 2 July 2007, thereby pushing the transfer into the next financial year. The excess concessional contributions for the 2008 financial year amounted to almost $54,000 and the Commissioner imposed excess contributions tax of around $17,000.

In rejecting the taxpayer’s arguments, the AAT noted the Commissioner’s practice to deem contributions as having been made “when the funds are credited to the superannuation provider’s account”.

The AAT also disagreed that there were “special circumstances” that would allow the Commissioner to exercise his discretion. It noted that the taxpayer was in the same situation as every other taxpayer and that it was incumbent upon the taxpayer to ensure that the electronic funds transfer was effective and completed at the right time.

TIP: Amounts contributed and counted in the “wrong” financial year, causing an investor to exceed the relevant superannuation contributions cap, could lead to an excess contributions tax bill. Investors should consider planning any extra contributions early and should not leave transfers to the “last minute”. Note that this year, 30 June 2012 falls on a Saturday.

TIP: The Commissioner may only exercise his discretion to reallocate or disregard excess contributions if “special circumstances” exist and the making of a determination is consistent with the object of the superannuation law. Please contact our office for more information.

Doctor found to be a share trader

In a recent decision, the AAT held that a medical doctor was engaged in a share trading business not only in relation to listed shares she acquired, but also in relation to units she acquired in a listed aged care property trust that she had purchased from her family trust (albeit, for more than their market value at the time). Moreover, it was these units that generated an unrealised loss of over $1 million and which, as a result, enabled to her to reduce her other taxable income for the year ended 30 June 2009 below nil.

In arriving at its decision that the taxpayer was carrying on a share trading business, the AAT took into account the following factors:

  • the nature of the activities and whether they have the purpose of profit-making;
  • the complexity and magnitude of the undertaking;
  • an intention to engage in trade regularly, routinely or systematically;
  • operating in a business-like manner and the degree of sophistication involved;
  • whether any profit/loss is regarded as arising from a discernible pattern of trading; and
  • the volume of the taxpayer's operations and the amount of capital employed by her.

TIP: If the taxpayer is a share trader, losses may be deductible against other income. If the taxpayer is not carrying on a business of share trading, capital losses can only be applied to reduce capital gains.

FBT rates and thresholds for 2012–13

The ATO has announced important FBT rates and thresholds for the 2012–13 FBT year (which commenced on 1 April 2012).

Some of the key rates and thresholds include:

  • The benchmark interest rate is 7.40% pa (down from 7.80% pa for the 2011–12 FBT year).
  • The record-keeping exemption threshold is $7,642 (up from $7,391 for the 2011–12 FBT year).

Car expenses – rates per km for 2011–12

The Government has announced the “cents per kilometre” rates for calculating tax deductions for car expenses for the 2011–12 income year. Note that these are unchanged from 2010–11 and are as follows:

  • Small car (non-rotary engine up to 1600cc, or rotary engine up to 800cc): 63c/km.
  • Medium car (non-rotary engine 1601 to 2600cc, or rotary engine 801 to 1300cc): 74c/km.
  • Large car (non-rotary engine 2601cc and above, or rotary engine 1301cc and above): 75c/km.


 

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Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.