Tax & ATO News Australia

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Consultation paper September 2016: Proposed changes to penalties for small business and individuals.

The ATO has recently released a consultation paper titled ‘Proposed changes to penalties for small business and individuals.’ More information on the proposed changes can be found on the ATO website.
 

Essentially, under the proposed changes, the ATO will provide ‘one chance’ before applying a penalty in the following circumstances:

  • For certain small businesses and individual clients, the ATO will not apply penalties for false or misleading statements for failure to take reasonable care for errors made in income tax returns and activity statements, and
  • the ATO will not apply failure to lodge on time penalties for late lodgement of income tax returns and activity statements


The ATO is of the opinion that it is open to the Commissioner to exercise his general powers of administration to give effect to these changes, and therefore a law change is not required.

 

The following parameters would apply to this proposal:

  • The one chance policy would be available to small businesses (with turnovers under $2 million) and individuals, subject to some criteria, with eligible taxpayers being informed at the time that the ‘one chance’ opportunity is provided.
  • This policy would not extend to taxpayers who demonstrate reckless or dishonest behaviour, or those who disengage or cease communicating with the ATO during an audit or review
  • Those who receive their one chance will be given a clear explanation of their error, and what they need to do to get things right in the future.
  • After the one chance has been provided, failure to lodge on time penalties would automatically apply if lodgement was not received by the due date.


The ATO claims that this policy is designed to benefit the taxpayer, as the taxpayer will save time and money by, for example, avoiding the need to research penalty information, lodge objections, and of course, release from the penalties that would otherwise be imposed.

 

However, those with a more cynical eye, or those who have more experience in dealing with the ATO, will likely have a different idea about the ATO’s motives, as well as the possible effects of the proposed changes.
 

Firstly, it is possible that these new rules may encourage overzealous auditors to circumvent the one chance policy by pursuing taxpayers for the 50% penalty rate for reckless or dishonest behaviour where they would not have previously.
 

There are also areas of uncertainty which have not yet been addressed by the ATO. Say, for example, that a taxpayer has not lodged their returns for the 2012, 2013, and 2014 financial years. In light of an audit, would the one chance rule apply to all three years, or just to the first year, with penalties then being automatically assessed for the following years?
 

The ATO’s intentions surrounding future penalties after one chance has been given are also cause for concern, particularly in light of the ATO’s statement that,

‘After the one chance opportunity has been provided, failure to lodge on time would automatically apply if lodgement was not received by the due date.’

Whilst according to the legislation penalties do indeed automatically apply, the current opportunity to contact the ATO to explain the reasons for delay seeking an exercise of the Commissioner’s discretion to remit the penalty seems to be closed to a taxpayer who has been given ‘one chance’.
 

A taxpayer with good grounds to be treated leniently would have to pursue more formal legal avenues, which would likely mean greater costs and more time, a result that is antithetical to the ATO’s supposed intentions.
 

While these proposed changes may appear good natured and well-intentioned at first glance, it remains to be seen whether the likely results of the changes will result in a net positive for the taxpayers of Australia.
 

Posted in: Tax & ATO News Australia at 10 October 16

Budget Announcements: Super contributions from a small business standpoint.

Super contributions from a small business standpoint.

Scott Morrison’s budget has been received with mixed reactions, but what effect does it have on small business and super?

The small business capital gains concessions in Division 152 of the Income Tax Assessment Act 1997 can be a fruitful tool for those involved in small business that are looking to add a little spice to their super. Whilst these concessions can be a real boon when properly utilized, there is no comment so far on whether their effectiveness will be impeached by Morrison’s new, slightly stingier, super rules.

 A key aspect of the budget was the introduction of a lifetime non-concessional contributions cap of $500,000. The lifetime cap takes into account all non-concessional contributions made on or after 1 July 2007, and will commence at 7:30pm on 3 May 2016. The purpose of this cap, according to the ‘Tax and Super’ Budget overview is to:

“Limit the extent to which the superannuation system can be used for tax minimisation and estate planning. Less than 1% of superannuation fund members have made contributions above this cap since 2007.”

It is important to note that contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings and is estimated to have a gain to revenue or $550 million over the forward estimates period.

Other relevant Budgetary Measures:

  • From 1 July 2017 a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts will be introduced.
  • Will require those with combines incomes and superannuation contributions greater than $250,000 to pay 30% tax on their concessional contributions, up from 15%.
  • From 1 July 2017, the superannuation concessional contributions cap will be lowered to $25,000 per annum.
  • The government will also introduce catch-up concessional superannuation spending by allowing unused concessional caps to be carried forward on a rolling basis for up to 5 years for those account balances of $500,000 or less. This will allow those with lower contributions, interrupted work patterns or irregular paying capacity to make ‘catch-up’ payments to boost their superannuation savings.
  • From 2016-17, the unincorporated small business tax discount will be available to businesses with an annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8%.


Do the new budgetary measures alter the effectiveness of div 152 and small business CGT concessions?

S 292.90 (1) ITAA 1997 states that your non-concessional contributions for a financial year are the sum of:

(a) each contribution under subsection (2)

Subsection (2): a contribution is covered under this subsection if:

(c) it is not any of the following:

(iii) a contribution covered under s 292-100 (certain CGT payments), to the extent that it does not exceed your CGT cap amount when it is made.

Therefore, if the small business CGT concessions are included in section 292.100, they are not covered as a non-concessional contribution, as per the rules of 292.90.

S 292.100 (1) states that a contribution is covered under this subsection if:

(b) the requirement under subsection (2) is met

Subsection (2)(a) the requirement of this subsection is met if the contribution is equal to all or part of the *capital proceeds from a * CGT event for which you can disregard and * capital gain under s152 (or would be able to do so, assuming that a capital gain arose from the event.)

As such it is clear that div 152 small business CGT concessions are not included in the definition of a non concessional contribution, and as such it seems unlikely that they will be included in the $500,000 cap.

There is nothing to suggest that the definition for non concessional contributions will be changed to include div 152 small business capital gain exceptions. We think that these SBC continue to present themselves as a valuable method for those hoping to continue to invest in their super.
 

Posted in: Tax & ATO News Australia at 18 May 16

Corporate tax avoidance – what does Apple’s tax bill have to do with us?

On the face of it, the clever, multi-jurisdictional structures of companies like Apple and Google seem a clear case of corporate tax avoidance, and the Federal Govt in Australia appears justified in trying to stamp it out. Many reports and newspaper articles loudly proclaim that companies like Apple are only paying in the order of $193m tax in Australia on $27b revenue.

But like all things in tax, politics and computer design, nothing is ever as simple as it seems.

Firstly, there are a lot of moving parts in Apple’s international structure, which it must be stressed is completely legal.

Apple and other multinationals have simply done exactly what countries like Ireland and Singapore wants it to do: that is, bring its business to those countries in exchange for low corporate tax rates. It seems more than a little sanctimonious to criticise Apple for doing precisely what a sovereign country has encouraged it to do.

Or should we criticise Ireland for offering lower tax rates to attract the business? That would be odd, seeing as Australia (and most other countries) do a version of the same thing.

If Australia were striving to develop a healthy economy and thriving/robust society after years of internal turmoil and struggle, wouldn’t we as Australians want to try and find ways to attract investment and innovation to our shores?

Secondly, the law of unintended consequences is definitely something to watch. The Government’s own Parliamentary Budget Office has warned that unilateral diverted profits tax (a so called “Google Tax”) could lead to other countries imposing higher taxes on Australian businesses abroad in retribution.

Commentators and politicians tend to constantly overlook a fundamental feature of international taxation – profits are taxed at the source of the good or service, not where it is consumed. To be fair, commentators are not alone in overlooking this – the ATO has forgotten this on occasion as well, as the High Court case of Crown Insurance Limited, which I ran, shows.

The Managing Director of Google Australia, Maile Carnegie, clearly explained the issue by reversing the argument at the Senate Hearings this week:

“If you look at someone like Rio Tinto, they have 35 per cent of their customer base in China, but less than 1 per cent of their tax in China ... Google has a similar structure.”

Thirdly, as the Commissioner of Taxation has recently commented, major multinationals like Google and Apple are in continual dialogue with the ATO about specific items of income and deductions and are almost continually audited. These are frequently questions on which reasonable minds can differ, but the big companies have ample resources to properly argue their case with appropriate evidence, obtained in real time. In the words of Apple’s Tony King, "All our costs of doing business are reported in our books, and we buy products from affiliate companies outside of Australia. Apple has been operating in Australia for more than 30 years, and we now employ over 2,000 people here."

Transfer pricing is a well established mechanism by which multi-national companies are correctly taxed on the profit sources in specific countries. While Australia’s transfer pricing taxation regime is far from perfect, it is at least a well know, internationally accepted model that works.

As any business owner will tell you, one of the main objectives in how they run their business is how to remain competitive in a rapidly changing world, specifically, how to maintain profitability. Is it fair to expect any less from organisations like Google and Apple just because of their sheer size?

Google’s rep Maile Carnegie puts it this way, "I guess my answer to that one is that fundamentally, Google does not structure itself based on tax, it structures itself based on being competitive. We are not opposed to paying tax. What we're opposed to is being uncompetitive. And just like Australia needs to compete with Singapore or Ireland or the US or the UK for various things, we need to compete with the people sitting at this table as well as Tencent in China, as well as Ali Baba, who is now incorporated in the US. So we structure ourself to be competitive.”

Would you expect business owners or managers to respond in any other way?

Let’s take a moment here to consider the possible consequences.

My great concern is that taxes cannot be targeted at specific entities. Taxes that are introduced with the justification of a specific set of circumstances, quite frequently end up targeting taxpayers with completely different profiles.

So if the Treasurer introduces new legislation as a populist measure to counter the tax structuring of Apple and Google, we should all be very concerned to ensure that it does not end up catching ordinary Australian SME companies trading overseas. As we have seen, the consequences of poorly designed and administered tax can be incredibly damaging for individual taxpayers. These consequences should not be risked simply to grab a good headline that will have no other positive effect.

Putting it a little plainly.

Bad laws make bad results for the wrong people. The simple truth is that the more technical and complicated laws that are created, the more lawyers and accountants get paid to find loopholes (which we will, because greater complexity always results in greater loopholes) and you end up with an expensive cumbersome unworkable system that big companies with expansive legal budgets will always successfully exploit. Which of course greatly increases the chances of accidentally catching a little fish – the SME taxpayer – who cannot afford Apple’s lawyers and never thought for one second that the Google Tax would apply to them.


And don’t get me started on the possibility of retaliatory trade practices, identified by the parliamentary budget office, that’s for another article. 

Posted in: Tax & ATO News Australia at 10 April 15

ATO Settlements, Part of the restructure?

 As mentioned in a previous article the Commissioner of Taxation announced major changes to the ATO which include a new focus on early resolution of disputes through settlement as an alternative to stressful litigation.

I have recently been involved in a number of significant settlements with the ATO – all of which achieved great outcomes for my clients and reduced their tax bills enormously. Further, the outcomes have avoided the need for us to take the ATO to court which would have been stressful and time consuming for my clients, even if we won.

I enjoy settling my clients’ tax disputes with the ATO without litigation, as it provides far greater certainty, less cost and is an overall better process.

But one issue that definitely needs to be addressed as part of this new process is the interaction between debt recovery and taxation disputes.

Most people do not realize that the ATO treats the resolution of taxation disputes in a completely different department from debt collection and that the processes are entirely unrelated.

The ATO has not yet worked out that to a taxpayer, knowing whether they can afford the repayment of tax debts is of far more importance to the total amount of the debt. Taxpayers, or at least those who are not fabulously wealthy, need time to pay large debts, and without the imposition of high interest rates.

Taxpayers will have no choice but to fight the assessment of unfair tax if the immediate payment of even a reduced tax bill will cripple them financially anyway.

It is critical to the success of the settlement process that the ATO negotiator be authorized to settle the payment terms of any compromise tax position. This is just common sense and hopefully the ATO will see it. 

Posted in: Tax & ATO News Australia at 24 March 15

Reinventing the ATO

The Commissioner of Taxation, Mr Chris Jordan, announced today at the Tax Institute National Convention, that he wishes to reinvent the ATO. Before you roll your eyes and pass this off as a publicity gimmick, take a look at what he has said.

In his words:

"We’re looking to reinvent the ATO, to transform how we go about our cure business, and make the ATO a contemporary and service-oriented organization – to be a leading agency, relevant and response to the expectations of the community and the government.”

Although this sounds like fairly bland, bureaucrat-ese, I have been given the opportunity of some insider perspective through my interactions with the ATO at recent round-table consultations, which has led me to believe that there is a genuine attempt to change the culture, at least at the higher levels of the ATO. Whether (and when) this filters to the level of ATO officers that most commonly deals with my SME and affluent family group clients remains to be seen.

 

The Commissioner, however, must be applauded for these mooted changes, and if it comes off, text books about organizational cultural change will be written on this for years to come.

 

"Everybody has accepted by now that change is unavoidable. But that still implies that change is like death and taxes — it should be postponed as long as possible and no change would be vastly preferable. But in a period of upheaval, such as the one we are living in, change is the norm."
— Peter Drucker, Management Challenges for the 21st Century 

 

In the meantime, however, the most we can safely say is that there has at least been a recognition that the culture at the moment is perceived as:

• Hierarchical
• Siloed
• Bureaucratic
• Risk adverse

Sound familiar? Anyone who has had any interaction with the ATO over the last fifteen years will be nodding in agreement. That the ATO has recognized this is, by itself, a fantastic step in the right direction.

One practical issue that the ATO seems to be firmly embracing is the need for a better settlement process. In the past the ATO has allowed positions to become entrenched resulting in costly and stressful litigation. As our experience shows, the ATO has often got it wrong in the past and we have taken them to court on behalf of our clients on many occasions to prove it.

 

While beating the ATO in court is satisfying at one level, I personally prefer getting practical and worthwhile outcomes for my clients through early settlement. Fortunately the ATO now appears to be recognizing the value in this and has embraced early settlement – at least in principle. I have been involved in many recent settlements with the ATO (one recent one went until 11.00pm at night) and have achieved fantastic results for my clients, without the need to go to Court. Perhaps the ATO is capable of the change it so obviously needs within its cultural mindset, only time will tell but I certainly hope this proposed change in the ATO is genuine and that we can look forward to a lot more early settlements.
 

Posted in: Tax & ATO News Australia at 20 March 15

ATO’s Changes Out Of The Ashes Of The Phoenix

 By now, most of us have heard the term Phoenix Company, described by Nick Sherry1, as being “Similar to the mythical creature from which it takes its name, phoenix activity in its basic form involves the winding up of a company and the subsequent continuation of that business in a new ‘risen’ company.”

 

The great difficulty I have with terms like “phoenix” is that while they fit neatly into politicians’ soundbites and press releases, their real life application is much harder for the ATO to adequately define. This in turn means that taxpayers are left in the terrifying position of not knowing whom the laws are targeting.

 

In a 2012 report by PwC in conjunction with the Fair Work Ombudsman (Phoenix Activity Report), Phoenix activity was finally defined as; “the deliberate and systematic liquidation of a corporate trading entity which occurs with the fraudulent or illegal intention to: 

• avoid tax and other liabilities, such as employee entitlements
• continue the operation and profit taking of the business through another trading entity.”

There is no doubt, that the worst of these activities often leave a lasting legacy with unpaid wages, super, outstanding invoices to suppliers and other debts. The cost of which has been estimated at almost $2 billion by the ATO.

 

The key words in the PwC definition are “deliberate”, “systematic” and “fraudulent”. Where directors have engaged in such behaviour to avoid paying employee entitlements, then the full force of the law should be used. But what of the company that through no fault of the directors is left in a position where debts have mounted and the company cannot continue to operate? Should the same strict rules apply?

 

The great difficulty in administering tax law through emotive sound bites, is that it has the potential to lead ATO officers to think that acting tough should replace acting fairly. It is all too easy for an ATO officer to conclude that because a company has been liquidated, that the elements of fraud and deliberation must automatically be present. The cost and stress to taxpayers who are innocent of such charges is immeasurable.

 

The Federal Government has recently announced that it will establish two taskforces run jointly by the ATO and other governmental organisations (see below for full list of involvement), one of which will confront phoenix activity. Whilst this strategy by the ATO shows very clearly that it is willing to be very tough on the worst and most blatant offenders, I can’t help but also be concerned at the effect this may have on the vast majority of taxpayers who try to do the right thing. Don’t get me wrong, I encourage a tough approach by the ATO for those that deliberately flout the law, if at the same time, there is a more reasonable approach for the taxpayers who try to do the right thing, and inadvertently get something wrong. Worse yet is the potential for the nightmare scenario for taxpayers of being accused by the ATO of something that is just completely false.


I have seen too much time, energy and money wasted in the past, when the ATO directs its resources at the wrong people (as confirmed in the Inspector General of Taxation’s very recent report. It is not an exaggeration to say that the ATO has wrongfully destroyed people’s lives and businesses with misdirected efforts or at worst ill-intentioned or uninformed objectives.


So yes, by all means, I heartedly applaud the ATO for going after the crooks, but let the rest of the SME community get on with business without unfair and wrongful interference. I would like very much to see this become law, in a way that is balanced and fair.


Fortunately, the ATO is making changes and we, here at SMH, have had great results with recent settlements for taxpayers. The concern, again identified by the IGT, is that these changes depend on the commissioner of the day being a benevolent dictator.

 

1.   former Minister for Superannuation and Corporate Law

*The Trusts Taskforce is made up of the ATO, Australian Federal Police (AFP), Australian Crime Commission (ACC), Commonwealth Director of Public Prosecutions, Australian Securities and Investments Commission (ASIC), Australian Government Solicitor (AGS), Attorney-General's Department (AGD), AUSTRAC, Australian Competition and Consumer Commission, Australian Business Register (ABR) and Australian Prudential Regulation Authority.
The Phoenix Taskforce is made up of the ATO, ASIC, AFP, ACC, ABR, the Fair Work Ombudsman, Fair Work Building and Construction, the Department of Environment, the Department of Employment, the Department of Immigration and Border Protection and the NSW and Victorian Offices of State Revenue.
 

Posted in: Tax & ATO News Australia at 16 March 15

New Commissioner of Taxation flags changes to the appeal process

Chris Jordan has only been in the top job at the ATO since 1 January 2013 and he has already identified that the current tax appeal process is not independent and needs to be fixed.
 
Tax appeals are currently heard in first instance by ATO officers and this process must be exhausted before an independent body (such as the Administrative Appeals Tribunal or the Federal Court) can hear a tax appeal.  This can take months (even years) and cost the taxpayer enormous amounts of money. There has been significant criticism of this process as it is not independent. There are examples of ATO officers who hear the tax appeal simply rubber stamping the work of the auditor. Worse, there have been allegations that the ATO has benchmarks for this process that require ATO officers to knock back 80% of appeals, rather than judge them on their merits.
 
The current system is clearly broken and needs to be fixed. The new Commissioner has taken a step in the right direction by moving towards an independent division, although it appears that this division will still be within the ATO.  It will be interesting to see whether this new appeals division really will be independent.
 
Small business taxpayers, many of whom I have acted for against the ATO, will rightly point out that this is all very interesting from an administrative law perspective, but how will things change for those taxpayers who have been subjected to the delays, cost and institutional biases of the current system?  Now that the new Commissioner has acknowledged that the current tax appeal process is broken, will there be meaningful compensation paid to those taxpayers whose lives have been financially devastated by it?
 
I am calling on the new Commissioner to relook at all such taxpayers and make it a key priority of his tenure. The only way that confidence in Australia’s tax system can be restored is by ensuring accountability for ATO officers and that means that the ATO must pay adequate compensation to those taxpayers who have unfairly suffered at the hands of the ATO.
 

Posted in: Tax & ATO News Australia at 13 March 13

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Tax & ATO News Australia

Author: David Hughes

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