Tax Smart Blog

Effective Employee Performance Management

Sun, 27 May 2012 10:46:00 GMT

The relationship between employers and employees is like any other working system in that it requires constant maintenance in order to ensure that there are no breakdowns which may be detrimental to both parties.

In order to attract and retain good employees a business and its management team must provide a workplace that also meets some of the requirements of the employees.

These include:

A safe workplace
A workplace free of bullying and harassment
Clearly defined roles and responsibilities
Motivation and leadership
Grievance handling procedures
Career advancement prospects (where possible)
A team based environment
Flexibility

Many of these items can be contained in workplace Policy and Procedure Manuals which are provided to staff upon commencement usually during their induction process.

Failure to have adequate workplace policies and procedures in place can prove to be a significant liability for employers if workplace health and safety, discipline and/or employee grievance issues arise and are progressed.

One of the most difficult issues employers face in relation to staff appears to be in managing poor and/or diminished performance.

Management are generally reluctant to approach staff when the required work standards are not being met, and in many cases the wrong approach to addressing performance issues can give rise to claims of:

Adverse action (breach of employee’s rights)
WorkCover claims
Insurance claims
Unfair dismissal claims
Friction and disruption at the workplace

It is important to carry out some basic procedural steps when disciplining an employee for poor performance and these steps include:

Ensure that you have established reasonable evidence that the employees’ performance is below the required standard
Provide specific details such as statistics, dates and documentation and avoid generalities
Check the employee’s contract of employment and establish their contractual status and employment relationship to ensure the correct process is applied, e.g. casual, permanent or permanent part time award employee, apprentice or trainee, employment contract, salaried staff or contractor.
If the complaints have arisen from one or more other employees conduct a prompt and efficient review or investigation of their claims and document your findings
Always give the person being performance managed the opportunity to respond to the claims of diminished or unsatisfactory performance.
Set clear goals for improvement
Set a clear timetable and review process
Offer advice, support and where possible additional training to assist the employee in improving their performance
Close on a positive note so that the employee feels that they are valued and able to improve to meet the required standards

Where performance interviews are conducted it is essential that the content of these meetings is recorded and a copy of the agreed outcomes kept by both parties for future reference and the employee’s performance is monitored.

If the required performance goals and objectives are not being met within the defined (and reasonable) time frames further performance management may be required where written warnings may be issued which determine that if the required performance standards are not met disciplinary action up to and including dismissal may occur.

If performance management reaches this level of the process it is genuinely prudent to seek specialist HR/IR advice to ensure that the correct procedures are followed.

It is also a good and often neglected strategy to provide positive reinforcement to workers who just do their work every day and do a good job.

In many cases the “high flyers” are rewarded and the poor performers “disciplined” with the people in between left out of the equation even though they are the backbone of the business.

In organisations where incentive bonus schemes are in place it is essential to review the Key Performance Indicators and outcomes of these schemes with employees constantly so that the schemes do not become expected additional benefits and the drive and enthusiasm for the schemes forgotten or devalued.

Leading by example and genuine positive reinforcement relayed to staff creates a positive workplace environment and increases productivity and staff retention.

ATO Data Exchanges with Other Australian Government Agencies

Sun, 27 May 2012 10:42:00 GMT

You should be aware the ATO provides taxpayer data to other Australian government agencies.

Purpose and means of data matching

The purpose of the data-matching program is to identify cases where there is a risk of either incorrect payment of personal financial assistance or tax evasion. The ATO provides income information derived from tax returns to the Centrelink Data Matching Agency (DMA) on a cyclical basis (up to nine cycles per year) on selected agency clients. This is used to determine the eligibility criteria for benefits and to assist in the detection of fraud within the welfare system.

The data is provided by us under the provisions of the Data-Matching Program (Assistance and Tax) Act 1990.

Assistance agencies provide the DMA with client data, including tax file number (TFN) and identity details, for matching by the ATO. The data is passed via Centrelink and used for a series of matching exercises, with output from those exercises being returned to the DMA.

The following data is returned to the DMA for each case where the ATO has identified the client from data provided:

Personal identity
Declared income
Date of most recent taxation assessment
Amount of the spouse tax offset
Surname and any other name details of the spouse in respect of whom a spouse offset is claimed
Surname and any other name details
An indicator, if the TFN is compromised.

The ATO conducts matching exercises against our internal data to detect cases where:

Individuals are receiving more than one payment simultaneously
A lesser entitlement or no entitlement exists
A greater entitlement exists
Income details of assistance agency payments are understated in tax returns.

Other data exchanges

The ATO exchanges data with Department of Human Services programs such as Centrelink, and other government agencies, under separate legislative provisions, as detailed in the following paragraphs.

Centrelink

Each week the ATO provides taxpayer identity information derived from the processing of TFN Declarations (previously employment declarations) to Centrelink. Centrelink matches this data against clients receiving unemployment benefits to ensure benefits are not paid after employment has commenced.

The ATO passes approximately 100,000 records to Centrelink each week. Around 12% of these are found to be Centrelink clients. ATO data is provided under table item 1 in table 1 in section 355-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

The ATO provides taxpayer income details to the Family Assistance Office (FAO) for the purpose of administering the family tax benefits system. This involves ongoing, daily exchange of income and family benefit data between Centrelink and the ATO, via a mutual client register, for family assistance administration and payment reconciliation. These details determine a family's eligibility for benefits.

The purpose of the activity is to allow prompt assessment of entitlements, reconciliation of payments and immediate recovery of outstanding debts to the Commonwealth. ATO data is provided under table item 6 in table 1 in section 355-65 of Schedule 1 to the TAA.

To detect Centrelink clients failing to declare assets, the ATO matches all beneficiaries against trust data from the tax return database. This identifies welfare beneficiaries who are also recipients of trust distributions. The ATO provides details of trust income to Centrelink, along with the Centrelink reference number as an identifier. Subsequent checks determine whether or not the trust income was declared to Centrelink at the time the entitlement to the benefit was determined. The ATO does not pass TFNs to Centrelink. This data is provided to Centrelink under the trust beneficiary data-matching program.

Child Support Registrar

The Child Support Registrar has access to ATO taxpayer income details (employment and investment income) for the purpose of assessing the amount of an individual's child support payments and for garnishee action, where appropriate.

The Child Support Registrar's acquisition of taxpayer information from the Commissioner of Taxation is provided for by the Child Support (Registration and Collection) Act 1988 and the Child Support (Assessment) Act 1989.

The ATO can also provide information to the Child Support registrar voluntarily, for the purposes of administering the two child support Acts referred to above, under table item 7 in table 1 in section 355-65 of Schedule 1 to the TAA.

Department of Immigration and Citizenship

Department of Immigration and Citizenship (DIAC) onshore compliance staff request address information for individuals who have been classified as 'illegal non-citizens', to assist in locating them. DIAC provides name and date of birth details to the ATO and this is used to retrieve address details. The ATO is authorised to communicate information to DIAC for the purpose of assisting in locating persons who are unlawfully in Australia, under Item 3 in Table 7 in subsection 355-65 of Schedule 1 to the TAA.

Some specific information about persons who are visa holders or sponsors can also be disclosed to DIAC for the specific purposes set out in table item 4 in the same table.

Australia - ATO Data Matching Project and Temporary Visa Holders

Wed, 09 May 2012 12:23:00 GMT

On 16 November, the ATO announced a data matching program in respect of temporary visa holders in order to identify potential non compliance with Australia's taxation laws

This continues work done by the ATO on:

The ongoing Living Away From Home Allowance audits; and
Verification of Medicare Levy Exemptions.

Revenue leakage here is a major concern along with tax actual revenue falling well below budget projections.

The ATO will request and collect the names, addresses and other details of entities who have applied for various temporary Visa subclasses between the period 1 July 2008 and 31 March 2011 from the Department of Immigration and Citizenship.

The following visas will be checked:

Subclass 457 visa (Business (Long Stay) visa) - this is for employers who would like to employ overseas workers to fill nominated skilled positions in Australia.
Subclass 417 visa (Working Holiday visa) - this visa allows young people (aged between 18 to 30 years) to have an extended holiday in Australia supplemented by short term employment (no more than 6 months with the same employer) and study.
Subclass 419 - this visa is for professional academics to visit Australia on a temporary basis, to observe or participate in an Australian research project at an Australian tertiary or research institution.
Subclass 420 - this visa is for those who intend to work temporarily in Australia in the entertainment industry.
Subclass 421 - this visa is for professional and amateur sportspeople, judges and adjudicators who want to come to Australia to participate in their field of sport.
Subclass 428 - this visa provides for the temporary stay of persons who will be full-time religious workers in Australia.
Subclass 442 (Occupational Trainee) - Temporary visa for persons undertaking a supervised and comprehensive training program of which at least 70% is workplace based; or post graduate supervised work experience for professional registration purposes

It will also apply in respect of Visa Subclasses 406,410, 411, 415, 416, 418, 420, 422, 423, 424, 426, 427, 462, 570, 571, 572, 573, 574, 575, 576 and 580.

The information provided by the Department of Immigration and Citizenship will be electronically matched and analysed with certain sections of ATO data holdings to identify potential refund fraud and other non compliance with lodgement and payment obligations under taxation law.

Records relating to individuals who applied for and were granted visas under the above subclasses will be matched.

This matching will commence April 2012.

GST Low Value Threshold to Remain

Wed, 09 May 2012 12:44:00 GMT

Late last year the Government released the Productivity Commissions final report into the economic structure and performance of the Australian Retail Industry and its response.

Of particular concern to retailers, was the low value threshold when goods are imported directly into Australia.

To quote the Assistant Treasurer Bill Shorten:

•   The Government appreciates the current pressures being felt by retailers and the long-term challenges facing the industry, which plays a vital role in providing employment and economic growth in Australia.
•   The retail industry is one of Australia's largest employers, with 1.2 million people working in the sector, or 10.9 per cent of the total working population in 2010-11. The retail industry makes a significant contribution to economic output, contributing $60 billion or over four per cent of GDP in 2010-11.
•   The inquiry has been undertaken to better understand these challenges and help the retail sector prosper.
•   The Commission's report makes clear the low value threshold for GST and duty on imported goods is not the main factor affecting the international competitiveness of Australian retailers. The Commission found there are in-principle grounds to reduce the low value threshold, but that it is currently not cost-effective to do so.
•   It calculated that lowering the threshold to $100, for example, could collect around $500 million in revenue, but at a cost of $1.2 billion in administration and compliance costs.
•   However, if significant improvements were made to the cost of processing international parcels, the Government would be in a position to reassess the threshold.
•   The Government will establish of a Taskforce to investigate options to improve the efficiency of processing low value imported parcels. The Taskforce will be chaired by Dr Bruce Cohen, supported by Mr Jim Marshall and Professor Caroline Chan, and will provide an interim report in three months and a final report to the Government no later than July 2012.

Review of the ATOs Cash Economy Benchmarking

Wed, 09 May 2012 12:18:00 GMT

On 28th November, 2011 the Inspector-General of Taxation (IGT), Mr Ali Noroozi announced terms of reference for his review into the Australian Taxation Office’s (ATO) use of benchmarks to target the cash economy and called for stakeholder submissions.

"My review will look at the ATO’s use of cash economy benchmarks for small businesses. Taxpayers and tax agents are concerned about how these benchmarks are developed and applied", said Mr Noroozi.

The ATO has published benchmarks for over 100 industries covering small businesses with a turnover under $15 million. The ATO indicates that these key financial ratios provide guidance on the income it expects businesses in a particular industry to report. Taxpayers falling below the benchmarks may be contacted by the ATO and be required to explain the shortfall.

Mr Noroozi explained, "Taxpayers and tax agents have expressed frustration at what they see as an inference by the ATO that their business is just not making enough money".

Taxpayers and their agents are concerned that the benchmarks do not adequately account for legitimate differences between businesses. It is suggested that these differences may be due to external or internal factors such as locality, inaccurate business classification by the ATO or owner specific management decisions.

Mr Noroozi said, "Every business is unique in some way. Benchmarks like any rule of thumb may have limitations. We need to understand the extent to which taxpayers are being incorrectly captured and whether resulting compliance action is appropriate".

The ATO has indicated that, where taxpayers’ explanations for benchmark variance are unsatisfactory, and their records are inadequate, benchmarks may be used as a basis for calculating default or amended assessments. Concerns have also been raised about the ATO’s expectations of small business record keeping and its communication with taxpayers and tax agents.

Mr Noroozi said, "It has been suggested that the overall ATO approach in this area can be ‘heavy handed’ with too much faith being placed in benchmarks. My review will also consider whether record keeping requirements expected of such small businesses are too onerous and whether it is fair to use benchmarks as the basis for default assessments".

"I am actively seeking community input to this review. I welcome submissions with both positive and negative experiences with the ATO’s compliance activities involving the use of benchmarks. Your submissions and identities are strictly confidential and not disclosed to anyone, including the ATO", said Mr Noroozi.

Terms of reference and submission guidelines for the review are available on the IGT website: www.igt.gov.au. Submissions are due by 3 February 2012.

RICH CLAIM $260 MILLION IN CHILDCARE TAX AID

Thu, 19 Apr 2012 15:10:00 GMT

There are concerns that over $260 million comes out of consolidated revenue each year to subsidise childcare for high-income families.

More than 65,000 families that earn double the average wage - or more - are claiming the childcare tax rebate.

In the past the Government has considered applying a means test but decided such a move would cut women's workforce participation.

But new data reveals the cost of subsidising childcare for wealthier households.

It cost taxpayers $244 million for the childcare rebate and $14.7 million for the childcare benefit for families earning more than $150,000 last year. That is an average of almost $3700 a year to each higher-income family.

Families earning between $30,000 and $60,000 a year still get the biggest slice of taxpayer funds for childcare ($658 million) followed by those earning less than $30,000 ($593 million).

But $1 in every $6 of taxpayer assistance for childcare goes to households earning more than $120,000 a year, and $1 in every $12 to households on more than $150,000.

The Australian Council of Social Service has indicated the means-tested childcare benefit and the non-means-tested childcare tax rebate should be rolled into a single means-tested payment, to direct the funding to families on the lowest incomes.

Just another issue in the mix as we head towards budget time in early May.

TAX MEASURES IN MID-YEAR ECONOMIC AND FISCAL OUTLOOK

Thu, 19 Apr 2012 15:07:00 GMT

On 29^th November, 2011 the Gillard Government announced a number of measures as part of the Mid-Year Economic and Fiscal Outlook that build on ideas discussed at last month's Tax Forum.

Fringe benefits tax (FBT) reform – Living-away-from-home allowance and benefits

The Government will introduce reforms to stop individuals from being able to exploit the tax exemption for living-away-from-home allowance and benefits.

This tax exemption is being increasingly misused by a narrow group of people, particularly highly-paid executives and foreign workers, at the expense of Australian taxpayers.

Rorting of this tax exemption was one of the issues raised at the Tax Forum, and has seen the total amount of tax-free living-away-from-home allowance reported by employers to the Australian Taxation Office increase from $162 million in 2004-05 to $740 million in 2010-11.

Under reforms announced:

Access to the tax exemption for temporary residents will be limited to those who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as 'fly-in fly-out' workers; and
Individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.

No permanent resident legitimately using this tax exemption for accommodation and food expenses will lose any entitlements.

These reforms will not affect other tax concessions, such as those that apply to travel and meal allowances, and remote area fringe benefits.

The reforms will apply from 1 July 2012. This start date will enable the Government to undertake an extensive consultation process on these reforms, so appropriate transitional arrangements can be put in place, including in regional Australia.

These changes will ensure that a level playing field exists between temporary residents and permanent residents, and that Australian taxpayers are not funding the unfair exploitation of concessions.

This reform progresses recommendation 9(c) of the Australia's Future Tax System Review, and will provide savings of $683.3 million over the forward estimates.

Personal income tax reform – Dependent Spouse Tax Offset

The Government will further reduce outdated workforce participation disincentives for spouses without dependent children to take up paid employment by restricting the Dependent Spouse Tax Offset to those with spouses born before 1 July 1952. This reform will not affect people whose spouse is an invalid or a carer, or who receive the zone, overseas forces or overseas civilian tax offsets.

A taxpayer's entitlement to the Dependent Spouse Tax Offset is reduced by $1 for every $4 of income which their dependent spouse earns above $282 per year. This means that the effective tax rate on the first $10,000 earned by a dependent spouse without children is around 25 per cent.

This measure builds on the reform announced in the 2011-12 Budget, which progressed recommendation 6(a) of the Australia's Future Tax System Review, and will provide savings of $370.0 million over the forward estimates.

Responsible economic management

The Government will defer four previously announced tax reforms by one year.

The start date of the standard deduction for work related expenses will be deferred until 1 July 2013.

The start date of the 50 per cent tax discount for interest income will be deferred until 1 July 2013, allowing more time for consultation with stakeholders on issues previously raised by industry.

The start date of the phase down in interest withholding tax for financial institutions will be deferred until 2014-15.

The start date of the new tax system for managed investment trusts will be deferred until 1 July 2013, allowing more time for consultation with stakeholders about how to best implement the elements of the package.

Together the deferral of these four measures will provide savings of $2.1 billion over the forward estimates.

SPECIFIC TARGETS IN 2011/12

Wed, 11 Apr 2012 13:23:00 GMT

THE ATO WILL:

Use of data matching to ensure taxpayers return all of their income and claim offsets they are entitled to.
Use of data matching and risk profiling to identify those who are using non-lodgement or partial lodgement to circumvent their responsibilities.
Identify businesses who have received government payments and review those suspected of not returning income or not meeting their pay as you go withholding and superannuation obligations.
Use sophisticated data filters to detect overstated or fraudulent claims.
Focus on those who fail to report some or all cash transactions to ensure a level playing field.
Examine businesses operating outside our small business benchmarks.
Reduce phoenix arrangements through a coordinated program of reviews and audits of tax affairs.
Protect employees rights by ensuring employers are paying the correct amount of superannuation guarantee.
Implement strategies to deal with trustees of self managed superannuation funds and act against the illegal access or release of superannuation.
Focus on lodgement compliance within private groups, including wealthy Australians.
Contact highly wealthy individuals who have outstanding lodgement obligations. The ATO will also work closely with those who have been subject to compliance activity to clarify their payment obligations and support the collection of any outstanding debt.
Examine large business corporate governance processes for managing income and indirect tax risks.
Engage the very largest taxpayers in cooperative compliance approaches.
Review related party arrangements to ensure profits are not shifted out of Australia.
Review multinational borrowing arrangements to ensure Australian companies are not given inappropriate levels of debt, interest or guarantee rates.
Continue to deal with the abusive use of tax secrecy havens including Project Wickenby.
Strengthen involvement in multi-agency task forces that target the tax implications of organised crime.

Work-related expenses

Attention to deductions made by people employed as earthmovers, flight attendants, carpenters and joiners (including apprentices and trainees), and real estate employees. The ATO has found people in these industries are at higher risk of getting their work-related expense claims wrong due to the types of deductions they claim.

GST-FREE SUPPLIES

Wed, 11 Apr 2012 13:20:00 GMT

A GST-free supply is a supply that is deemed to be GST-free by the Act. However, input tax credits can be claimed on the purchases used to generate the GST-free supply. It is important to note that it is the supply that is GST-free and not the supplier. For example a bakery may sell GST-free items such as bread, but also sell soft drinks that are taxable supplies.

Food

The broad approach of the Act is to make all food and beverages fit for consumption by humans GST-free, and then remove specific items from the definition.

Most staple items of food are GST-free, including: meat, bread, vegetables, fruit, eggs, cheese, flour sugar, plain milk, cereals and canned foods.

Other items of food that are specifically a Taxable Supply include: restaurant food, takeaway food, most food that has been prepared and frozen meals.

Other examples of food that attracts GST are:

Chocolate and other confectionary;
Cakes, muffins & puddings;
Pies & sausage rolls;
Bread and buns with sweet filling or coating;
Biscuits;
Soft drinks and alcohol.

Health

The provision of medical services is GST-free. In general the service must be provided by an approved medical practitioner and be a recognised health service. Hospital care, medical aids, prescription drugs, and private health insurance are also all GST-free when provided in accordance with the Act.

Cars Used by Disabled People:

Cars used for personal transport by disabled people are GST-free, as long as they are used for that purpose for at least two years.

Education

The supply of pre-school, primary education, secondary education & tertiary education are GST-free. Some trade and professional courses are also GST-free. The exemption extends to excursions that are related to the curriculum and some other supplies that are related to education.

Child Care

The supply of child care is GST-free where it is supplied by a registered provider or government funded.

Exports

Exports are generally GST-free, provided they are not re-imported or where the export is not made with a set time from invoice.

Duty Free

Supplies through an inward bound Duty Free shop are GST-free. Care needs to be taken as specific limits apply to each traveller over all, but especially to alcohol and cigarettes. Amounts brought in excess of these limits will attract customs duty and GST.

Tourist Refund Scheme

A refund may be sought by tourists on items they take with them when departing Australia. The minimum value of the purchase from any one shop must be $300 and not made more than 30 days prior to exit.

Travel

Travel from overseas to Australia and vice versa is GST-free. Also internal travel by overseas people is GST-free when arranged as part of their international travel.

Religious Services

Services provided in the practice of religion are GST-free provided they are done so by a religious institution.

Charitable Institutions

Non commercial activities will be GST-free, commercial activities will fall under the normal GST provisions.

Supply of a Going Concern

The supply of an enterprise as a going concern is GST-free under the Act, provided:

It is for consideration;

The purchaser is registered for GST;
Both parties agree in writing;
The supply is for all the items that the purchaser will need to continue to run the business;
The supplier carries on the business until the purchaser buys it.

Note that by just selling parts of a going concern does not mean that you will be eligible for this exemption.

MANAGING FUND INVESTMENTS

Wed, 07 Mar 2012 01:29:00 GMT

One of the most important duties of the trustees of a superannuation fund is to manage the fund’s assets.

To reduce risk and ensure that funds are being maintained for genuine retirement, trustees have a number of duties and responsibilities. These are summarised as follows:

Investment Objectives and Strategy

As part of managing the fund’s assets, a trustee of a superannuation fund, including a self managed super fund, is required to set an investment objective and strategy for the fund. These should be in writing and kept with the fund’s records.

Investment Objectives

An investment objective is a statement that identifies a fund’s investment goals. The objective should be measurable and able to be communicated to fund members. Examples of an investment objective could include the desire to:

Generate a specific rate of return;
Outperform a recognised investment (or cost of living) index over a specified period of time; and
Provide long term capital growth with some tax effective income by investing in certain asset classes.

Comply With Investment Restrictions

Although the superannuation rules require trustees to implement an investment strategy for the fund, they do not state exactly what investments a fund can acquire. However, the legislation does impose certain restrictions on fund investments in order to protect member benefits.

Arm’s Length Rules

All investments by a SMSF must be made and maintained on a strict commercial (i.e. arm’s length) basis. In other words, the relevant purchase/sale price of any fund asset should be based on a fair market value regardless of who the parties to the transaction are. Similarly, any rental or lease amounts paid for the use of any fund asset should reflect a fair market rate of return.

Loans to Members and Relatives

The trustees of a SMSF are prohibited from lending money (or providing any form of financial assistance) to a member of the fund or their relatives.

Borrowing

SMSFs are prohibited from borrowing money with some limited exceptions. These include short term borrowings:

For up to 90 days to pay a benefit or surcharge liability; and
For a maximum of 7 days to cover the settlement of certain security transactions.

In both these situations the amount of the borrowing must not exceed 10% of the fund’s total assets.

Although a super fund cannot borrow, it is worth noting that they are not prevented from investing in assets that do incorporate borrowings, such as geared managed investment funds or installment warrants.

Acquisition of Assets from Related Parties Rule

The trustees of a Super Fund, including a self managed super fund, are prohibited from intentionally acquiring assets from a ‘related party’ of the fund. This not only refers to funds purchasing assets from related parties but also includes such parties contributing assets “in kind” (e.g. in-specie contributions).

However, there are some important limited exceptions to the above rule for acquiring related party assets, including:

Listed securities (i.e. Shares, units or bonds listed on an approved stock exchange);
Business real property (i.e. Freehold or leasehold property interests used exclusively in one or more businesses) acquired at market value;
An in-house asset where the acquisition would not result in the level of the fund’s in-house assets exceeding 5%; and
Units in a widely held unit trust, such as a retail managed fund.

The definition of related party is very broad and includes:

All members of the fund and their associates, and
All standard employer sponsors of the fund and their associates

An associate includes a member’s relatives, business partners (and their spouse and children), or any companies or trusts a member controls or that control the employer sponsor.

A standard employer sponsor is an employer who contributes to the fund on behalf of members as part of an agreement between the employer and the trustees of the fund. Standard employer sponsors are usually employers who make employee contributions to their own corporate fund or to a relevant industry fund.

Breaching the acquisition of assets from related party rules is considered a serious breach and can incur severe penalties. It is therefore important for a trustee to ensure that any investment the fund makes will not breach these rules. If there is any doubt a trustee should seek clarification from their professional service provider or seek guidance from the ATO.

The in-house asset rules limit a superannuation fund from undertaking certain transactions with related parties in order to limit risk and to ensure that funds are being maintained for genuine retirement purposes. In-house assets are defined as:

An investment of a fund in a related or trust (i.e. a fund owns shares in a company or units in a trust);
An asset of a fund that is leased to a related party; and
A loan made by a fund to a related company or trust.

An investment, lease or loan that is an in-house asset is not prohibited but is limited to 5% of the market value of a fund’s assets. That is, if a fund leased an asset to a related party, the value of that asset (combined with any other in-house assets) must not exceed 5% of the total value of the fund’s assets.

In recognition of certain legitimate business arrangements the superannuation rules exempt certain assets, such as business real property, from being an in-house asset. This allows a fund to lease certain assets to related parties, or to invest in certain related entities without being limited to 5%.

In certain situations, assets that would otherwise be an in-house asset are exempt from these rules under transitional provisions announced on 11 August 1999.

Pay Benefits In Accordance With Preservation Rules

To ensure that superannuation savings are used for retirement and other permitted purposes, special rules apply to limit when members can access their superannuation. These are called preservation rules. Trustees of superannuation funds are responsible for ensuring that their fund complies with these rules at all times.

Superannuation benefits consist of one or more of the following preservation components:

A preserved benefit;
A restricted non-preserved benefit; and
An unrestricted non-preserved benefit.

Preserved Benefits

Preserved benefits can only be paid out as a lump sum or pension where a member has satisfied one of the following conditions of release:

Permanent retirement from the workforce on the member reaching their preservation age. Preservation age is determined according to date of birth as shown in the following table:

Date of birth	Preservation age
Before 1 July 1960	55
From 1 July 1960 to 30 June 1961	56
From 1 July 1961 to 30 June 1962	57
From 1 July 1962 to 30 June 1963	58
From 1 July 1963 to 30 June 1964	59
On 1 July 1964 or after	60

Termination of employment after turning 60 years of age;
Permanent incapacity;
Reaching age 65;
Death;
Compassionate grounds (situations approved by the ATO); or
Financial hardship

If a person has reached preservation age but not yet permanently retired, they can access their super in the form of a transaction to retirement pension (but they cannot make lump sum withdrawals).

Restricted Non-Preserved Benefits

Restricted non-preserved benefits must remain in a superannuation fund until a member:

Satisfies a condition of release for preserved benefits; or
Has terminated employment with an employer who contributed to fund on their behalf.

Unrestricted Non-Preserved Benefit

Unrestricted non-preserved benefits can be cashed at any time.

Breaching the preservation rules is considered a serious offence and can result in severe penalties for both the trustees of a fund and the member improperly obtaining access to their benefits. Trustees should ensure they comply with the preservation rules at all times.

Once a member has satisfied a condition of release they can access their benefit, depending on the fund’s rules, as either a lump sum or pension, or as a combination of both.

Pension That A SMSF Can Pay From 1 July 2007

Under the reforms a SMSF can now only pay two types of pensions. These are:

Account-based pensions
The transition to retirement income stream

Prior to the reforms SMSFs were able to commence to pay other types of pensions including:

Market linked pensions
Allocated pensions
Lifetime complying pensions

In cases where a SMSF had already started paying one of these pensions, the SMSF is allowed to continue paying it.

As Allocated Pensions were formerly the pension of choice, it is important to understand how these differ from Account Based Pensions:

Account-based pensions have no maximum limits, whereas allocated pensions do;
Account-based pensions usually have lower minimums than allocated pensions; and
Account-based pension payment factors are simpler and easily understood.

CHALLENGE TO SUPERANNUATION GUARANTEE CHARGE FAILS IN HIGH COURT

Wed, 07 Mar 2012 01:31:00 GMT

On 28th Sep 2011 the High Court of Australia confirmed the Superannuation Guarantee Charge Act (SGCA) and the Superannuation Guarantee Administration Act (SCAA) are valid under Australia’s Constitution...

In the case Roy Morgan Research Pty Ltd v Commissioner of Taxation.

Minister for Superannuation, Bill Shorten, said he was pleased with the outcome of the case.

“The Superannuation guarantee chare (SGC) was introduced to encourage employers to pay their employees’ superannuation on time,” Mr Shorten said.

“It also makes sure employees are compensated appropriately if their employer is late paying their superannuation.”

“The SGC plays an important role in the integrity of our superannuation system and I am pleased to see it will be maintained under this High Court decision.”

Employers who fail to pay their employees’ superannuation on time are required to pay the superannuation guarantee charge (SGC) to the Australian Taxation Office (ATO), which then transfers the SG amount plus an interest component to the employee’s superannuation fund.

The High Court found the SGC was constitutionally valid following a challenge by Roy Morgan Research Pty Ltd.

20 YEARS OF SUPERANNUATION GUARANTEE

Mon, 30 Jan 2012 23:06:00 GMT

Recently the ATO issued a fact sheet on the superannuation guarantee to acknowledge the twentieth birthday of superannuation guarantee.

This is a significant anniversary for the nation, and worthy of reflection. In the history of superannuation in Australia, the introduction of superannuation guarantee represents the underpinnings of a national framework for funding retirement income. It is something close to the ATO's heart, as the ATO's genesis as the Land Tax Office in 1910 was to collect tax which would provide for old age and invalid pensions.

Governments in many countries, including Australia are faced with the financial and social challenges of an ageing population. Superannuation Guarantee has enabled Australia to develop a strong and substantial superannuation system to help address these future challenges.

The policy of superannuation for all Australians was a long time in gestation, but is now part of the essential character of our tax and super systems. Superannuation connects to and depends on our tax system for its foundations and strength. Among the concessions, benefits and incentives provided by the Commonwealth through the tax system, superannuation is the second largest expense.

Superannuation is now entering a new phase and on the birthday of super guarantee, it is useful and encouraging to reflect on what has been achieved to date.

From the mid-nineteenth century, occupational superannuation existed in Australia amongst white collar employees, but it was not until the 1970s that private superannuation became more widely available through its inclusion in industrial awards.

For much of its history, Superannuation covered only a minority of Australians. By 1983 it still only covered about 40% of the nation's workforce. Attempts in 1928, 1938 and 1976 to introduce a universal superannuation system all failed.

In 1985, amid an uneasy economic climate, the Government and the Australian Council of Trade Unions agreed to introduce productivity award superannuation, which allowed for part of the award system's wage increase to be a 3% superannuation contribution. By the late 1980s superannuation had extended to about two-thirds of the private sector. However, the low rate of contribution was not sufficient to substantially improve retirement incomes for the average paid worker.

In 1991, the Industrial Relations Commission's rejection of a further 3% increase to award superannuation led the Senate Select Committee on Superannuation in June that year, to inquire into 17 issues including taxation of superannuation, vesting of benefits, prudential controls, superannuation simplification, adequacy of public education and the rules governing employer contributions.2

On 20th August, 2011 the Government announced the introduction of SG in its Budget, stating that SG would provide:

A major extension of superannuation coverage to employees not currently covered by superannuation
An efficient method of encouraging employers to comply with their obligation to make contributions on behalf of their employees
An orderly mechanism by which the level of employer superannuation support could be increased over time, consistent with the government's retirement income policy objectives and the economy's capacity to pay.

The Superannuation Guarantee Charge Act 1992 and Superannuation Guarantee (Administration) Act 1992 (SGAA) came into effect from 1 July 1992, mandating a minimum level of employer contributions, with a charge imposed for failures to meet that minimum, which is then distributed to employees' super funds. Administration of the super guarantee acts was entrusted to the ATO.

In the first year after the introduction of SG, 80% of employees were covered. By 1999 this had increased to the present coverage of 91% of employees, a significant shift in just 16 years since the 40% coverage of 1983. The compulsory minimum level of employer contributions began at 3% and had risen to the current 9% by 2002. Other changes continued to refine the super guarantee system. Highlights include:

July 2005: Establishment of the Superannuation Holding Accounts to accept small SG contributions. From July 2006 the holding account has been limited to holding payments of shortfall SG amounts where a super fund for an employee cannot be found.
July 2007: The maximum age for SG contributions was increased from 65 to 70 in recognition that more Australians were choosing to work past retirement age.
Since 2002: Australia has entered into bilateral agreements with other countries to address double superannuation coverage. The ATO currently has agreements in place with 16 countries.
July 2003: SG contributions moved from compulsory annual contributions to quarterly contributions, allowing earlier investment and protecting employee benefits in situations of employer insolvencies.
July 2005: Choice of fund was introduced, allowing the majority of employees to nominate their own supper fund.
Jan 2006: The introduction of the late payment offset allowed employers to offset late contributions against an SG charge liability in certain circumstances.
July 2008: Ordinary time earnings became the standard earnings base for all calculations of SG contributions.
July 2009: The former Workplace Relations Act 1996 was replaced by the Fairer Work Act 2009. Some superannuation aspects of the new legislation commenced from January 2010.
July 2010: Introduction of the Small Business Clearing House administered by Medicare to assist small business employers meet their SG obligations.

As of March 2011 superannuation assets in Australia totalled $1.23 trillion, an increase from $230 billion in September 1995. This growth is predicted to continue to over $6 trillion by 2035. Of the $107 billion in total contributions made to super funds in the 2009-2010 financial year, $72 billion were employer contributions. In the same year over $60 billion in superannuation benefits were paid out from super funds as either pensions or lump sum amounts.

The corollary of mandated contributions is confidence in the superannuation system. The ATO helps to maintain high levels of trust and confidence in our super system through education of employers, and well targeted compliance assurance activity. The ATO investigates unpaid superannuation on behalf of employees (around 18,000 a year) who contact them when they believe their employers may not be meeting their SG obligations. The ATO focuses on employers and industries at high risk of not meeting their superannuation obligations, and since July1992, the ATO has raised over $4 billion in superannuation guarantee charge liabilities from employers not meeting their SG obligations. Approximately $2.5 billion has been collected and distributed to employee super accounts.

Further enhancements to the super system arise from key government reviews: the Australia's Future Tax System Review and the Super System Review, better known as the Cooper Review.

Following consideration of recommendations from both reviews, the Government, in its 2010 Budget announced significant changes to Australia's superannuation regime, primarily focused on the ability of each Australian to be able to accumulate adequate retirement savings.

A keystone of these changes is the proposed increase to the superannuation guarantee contribution rate from 9% to 12% by 1 July 2019. Raising the age limit from 70 to 75 years is another significant proposal that would take effect from 1 July 2013.

Further changes announced in this year's budget include:

The greater use of tax file numbers to locate and match lost member accounts
An extension of the director penalty regime to make directors personally liable for unpaid superannuation guarantee amounts, and
From 1 July 2012, employers must report on employee payslips the amount of superannuation actually paid into their super accounts.

TRUST INCOME CHANGES

Mon, 30 Jan 2012 23:03:00 GMT

Legislation was enacted on 29th June, 2011 that impacts the taxation of trusts. The legislation introduces two new anti-avoidance rules and allows streaming of capital gains and franked distributions to beneficiaries for tax purposes. The changes apply from the 2010-11 income tax year.

As a result of the practical difficulties associated with the law being enacted so close to the end of the income year, the ATO has put in place two administrative arrangements in respect of the application of the new law to the 2010-11 income tax year.

For the purposes of making a beneficiary specifically entitled to a franked distribution of a trust, we will extend the time for trustees to record a beneficiary’s entitlement to a franked distribution to 31st August, 2011 if the trustee has the same period in which to make beneficiaries presently entitled to trust income.

The ATO does not intend to select cases for review or audit for the sole purpose of determining whether the purported streamlining of capital gains or franked distributions by a trustee is tax effective.

Educational Pty Ltd and Commissioner of Taxation (2011) AATA 445

Mon, 30 Jan 2012 23:04:00 GMT

Here the AAT held that the taxpayer was not carrying on an enterprise and therefore was not entitled to the input tax credits claimed of over $30,000.

In 2003 the taxpayer purchased a former fauna park near Cairns, intending to convert it into an educational and accommodation centre. From 1 October, 2005 to 30 June, 2009, the taxpayer claimed GST input tax credits in excess of $30,000 and made reported taxable supplies of $6,029 i.e. $548 in GST payable.

In 2009 the Commissioner conducted an audit the taxpayer’s educational affairs, concluding the taxpayer was not entitled to the input tax credits claimed.

Educational argued that its enterprise was one of an educational facility that specialises in immersion teaching. The ATO’s argued that the taxpayer had ‘not undertaken business-like activities in a business-like manner.’

After consideration of the decisions in Russell and Spriggs, the AAT held in favour of the Commissioner. The key was ‘if anything, this case is about preparation for commencement, not commencement itself’ – this despite the taxpayer having sought and obtained approval for a material change in use of ‘educational establishment’ in August 2004. While the venture was well motivated, the AAT took the view it lacked commercial character. The taxpayer’s negligible takings were from hiring out its venue. Crucially no students were ever accepted and no courses offered.

There was no business plan and the Company did not make a single taxable supply as an educational academy. Unsurprisingly, the AAT took the view the planned enterprise ‘never got going.’

TYPES OF CONTRIBUTIONS

Mon, 30 Jan 2012 23:02:00 GMT

Non-Concessional Contributions

Non-concessional contributions are contributions made by or for a member in a year that are not included in the assessable income of the super fund. Generally, these are contributions that have not been claimed as a tax deduction by the person making the contribution i.e. they are contributions funded from after tax income or savings.

A non-concessional contribution cap of $150,000 will apply per person per year. For members under the age of 65 they will be able to bring forward up to 2 years worth of contributions, to allow a contribution of up to $450,000 in any one year. The non-concessional contribution cap will calculate as three times the ongoing concessional contribution cap (which is indexed). Amounts in excess of the concessional cap are also included in the non-concessional contribution cap. Contributions over and above the non-concessional contribution cap are taxed at 46.5%.

Concessional Contributions

Concessional contributions are contributions made by or for a member of a superannuation fund that are included in the assessable income of a superannuation fund. These are generally employer contributions and those personal contributions for which a member will claim a tax deduction.

A concessional contribution cap of $25,000 per person per year now applies to concessional contributions from 1 July 2009. This cap will be indexed.

A transitional period will also apply for members over age 50 between 2007/08 and 2011/12. Where a member turns 50 during this period they will have a concessional contribution cap of $50,000 for each year from the time they turn 50 until the end of the transitional period.

Contributions in excess of the concessional contribution cap will be taxed at an additional 31.5% over and above any tax levied on the contribution.

Claiming a Tax Deduction for a Personal Contribution

Within the eligible caps, certain members may be able to claim a full tax deduction for any personal contributions they make to superannuation. A member will be eligible to claim a tax deduction for a personal contribution where they:

Are not considered to be an employee for the purposes of the superannuation guarantee ; and
Are considered to be an employee for the purposes of the superannuation guarantee but derives less than 10% of their total assessable income and reportable fringe benefits from that employment.

CGT Cap Amount

Contributions made from certain amounts arising from the disposal of qualifying small business assets are exempt from a person’s non-concessional contribution cap, up to a life time limit of $1.1 million.

Contributions allowed under the cap include:

Up to $500,000 of capital gains that are disregarded under the small business CGT retirement exemption; and
The capital proceeds from the disposal of assets that qualify for the small business CGT 15-year exemption.