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At Henderson Edelstein, if we see a need in your business, we will tell you and initiate a plan to implement it as efficiently and effectively as we can. Sometimes, it will involve us and at others, it will be something you can implement yourself and we needn't be involved, other times it will be outside our service offering but we will be able to refer you to someone that can assist.

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tax news | views | clues


Business sale earnout arrangements back in spotlight

The Coalition government has decided that it will proceed with a long-standing proposal to improve the current tax treatment of earnout arrangements.

Earnout arrangements are a common way of structuring the sale of a business. Under a standard earnout arrangement, business assets are sold for a lump sum plus a right to further payments that are contingent on the performance of the business for a specified period following the sale.

The earnout right typically reflects the uncertainty surrounding profitability, the value of goodwill and cash flow projections. Under the current rules, the calculation of the tax on the sale is based on the lump sum as well as the estimated value of the earnout right, which means the seller could end up paying tax on an amount not yet received. The proposed changes aim to resolve this, as well as other tax issues.

The government has indicated that it intends to pass legislation to implement this proposal during 2014.

Although the tax changes won't apply until changes to the law are passed by Parliament, a transitional approach will be accepted by the ATO in many instances.


ATO administration of valuations under review

The Inspector-General of Taxation, Mr Ali Noroozi, is reviewing the ATO's administration of valuation matters.

Market valuations may be required to access the capital gains tax concessions for small businesses, when changing tax residence or under the GST margin scheme. There are many circumstances where they are required for tax purposes.

The Inspector-General said the main source of taxpayer concern is the compliance burden associated with valuations. He said that, "critically, valuations are inherently subjective and can be a source of significant uncertainty leading to ATO disputes which can be frustrating, time-consuming and costly".


           

The ATO is watching

 

Many clients ask us why they need to give us so much more information than they used to. The answer is two-fold: We have more obligations under the Tax Agents Services Act 2009 and the ATO are smarter at targeting taxpayers for review and audit. One of their most potent risk assessment tools is their data matching. The scope of data matching continues to expand and the ATO has announced that it will collect data relating to credit and debit card sales of merchants for the periods from 1 July 2012 to 30 June 2014 from various financial institutions, including the four major banks.

Records relating to 900,000 merchants are expected to be matched under the program to be checked for compliance with various tax obligations, including under-reporting or omitting business income.

The ATO says it will also acquire details of entities receiving taxable payments from local government council and shire authorities throughout the country covering the 2011 to 2014 financial years.
           


Motel business refused GST tax credits

 

Another way to raise your risk profile with the ATO is to delay in responding to their questions. A motel business has been mostly unsuccessful before the Administrative Appeals Tribunal (AAT) in a dispute with the ATO concerning claims for input tax credits.

Following a tax audit, the Tax Commissioner refused the taxpayer's input tax credit claims of around $88,500 due to a lack of documentation to substantiate the claims.

However, the representative of the motel business was unable to produce all of the relevant documentation when requested. He argued that a substantial amount of the records sought were lost due to flooding of the motel office in December 2008 and that he had been unable to respond to the requests for information as he was overseas.

Based on information provided before the proceedings, the Commissioner accepted that the taxpayer was entitled to some $16,000 of the original claim.

TIP:  All businesses need to build in a risk framework. This should include ensuring that your records can be understood by more than one person in the organisation. Also, the issues behind how records are kept (ie paper records or electronically), what records are maintained, where they are located, and how they are backed-up records.
           



Director penalty notices valid

 

When a director of a company is issued with a Director Penalty Notice (DPN) they have 21 days to deal with the debt or they become personally liable for a debt of the company.

A director of a company has been unsuccessful before the New South Wales Court of Appeal in arguing that director penalty notices issued to him for some $1 million (including interest) were invalid.

The Court of Appeal heard that the company had failed to pay withheld tax amounts to the Commissioner. The Commissioner then issued notices to the director, which sought to recover penalties alleged to be owing by the director in respect of the company's failure to pay the withheld tax amounts to the Commissioner.

The director essentially argued on a technical issue in the drafting of the notices.

The Court of Appeal found that the notices clearly informed him that he was liable because of statutory provisions associated with the section concerning director penalty notices.


Property rental deduction claims mostly refused

 

An individual has been mostly unsuccessful before the AAT in challenging the Tax Commissioner's decision to refuse a variety of deductions relating to rental properties. The individual, who worked full-time as an industrial chemist, owned rental properties with her husband and had done so for many years. In the 2003, 2004 and 2005 income years, they owned nine rental properties. The taxpayer declared a net rental loss for those years, arguing that she carried on a business of letting rental properties.

The AAT agreed that the taxpayer was carrying on a business of letting rental properties and allowed some claims, including part of her telephone, computer and other work-related expense claims. However, it refused most of the other disputed expenses, which included car expenses, travel expenses, repair and maintenance costs and the costs of investment courses and seminars. The AAT refused the claims, saying they either lacked the necessary connection with the individual's income-producing activities, or there was insufficient evidence to support the claims.


           

Daughter found to be "puppet director" of company trustee

A married couple has been successful before the AAT in a matter concerning access to the capital gains tax concessions for small businesses. The key issue in dispute concerned a trust (in respect of which the couple were beneficiaries) and the trust's entitlement to the concessions in connection with a capital gain made on the sale of assets by the trust in the 2008 income year. Specifically, the main issue was whether the trust was controlled, either alone or with others, by the couple's daughter.

The Commissioner argued that the daughter was a controller of the trust and that, therefore, the trust was connected with other entities controlled by the daughter, with the result that the trust breached the eligibility requirements for any of the capital gains tax concessions sought by the couple. However, the AAT found that the husband alone was the person who controlled the trust for the purposes of the small business concessions. Therefore, entities connected with the daughter, who was found to be a mere "puppet director" of the company trustee, did not have to be taken into account in determining the trust's entitlement to the concessions claimed by the couple.

In finding that the husband alone controlled the trust, the AAT noted, among other things, that the trust was not accustomed to acting in accordance with the daughter's wishes independently of her father's wishes in circumstances where her wishes and directions were actually her father's.

TIP: The Small Business CGT concessions are extremely generous but taxpayers must be careful to ensure they meet the eligibility requirements.
Please contact our office for further information.

Kind Regards

The Team
Henderson Edelstein & Co
www.heandco.com.au

 

In this Issue:

Business sale earnout arrangements back in spotlight

ATO administration of valuations under review

The ATO is watching

Motel business refused GST tax credits

Director penalty notices valid

Property rental deduction claims mostly refused

Daughter found to be "puppet director" of company trustee

 

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