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Tax avoidance aims at minimising tax liabilities, and it is allowed by all taxpayers provided that respect to the law is maintained at all times. Tax evasion on the other hand has no respect to the law; it is a scheme or plan designed mainly to reduce or avoid tax significantly. It can also be something simple such as making false claims in the taxpayer’s tax returns, which can be fake or exaggerated deductions or intentionally not reporting income earned. This article addresses those deliberate tax frauds io\n two parts, and below is the first.
Tax laws require that you keep records of every transaction or event that that might be relevant to working out a capital gain or loss from a CGT event. Despite this, some people are still failing to declare shares and other assets that could be subject to CGT. Penalties can apply if you don’t keep records of the shares or assets for at least five years, so to avoid falling foul of the ATO, you should maintain records using a code that identifies the company the shares were acquired in, the class of shares acquired, the date on which they were bought or sold and the price that was paid in each case.
Capital works deductions can be claimed on assets such as rental property. The may include deductions for construction expenditure such as adding a room, garage, patio or pergola to a building or extension, making alterations such as removing or adding an internal wall and making structural improvements such as adding a gazebo, carport, sealed driveway, retaining wall or fence. When such an asset is sold for CGT purposes, the cost of these deductions must be added back to determine the actual value of the asset and failure to do this, either knowingly or unwittingly is a mistake the ATO sees all too frequently.
Claiming for expenses paid for in cash and for which you have no written evidence is a common error committed by taxpayers. Written evidence is required by the ATO for expenses valued at more than $300. This can be a document from the supplier of the goods or services that shows the supplier’s name, the amount of the expense, the nature of the goods or services, the date the expense was incurred and the date of the document. Written evidence could also be another document or combination of documents containing the information listed above, such as bank statements, credit card statements, BPAY reference numbers or email receipts.
Another common mistake some businesses make is giving low or interest free loans to employees, without being aware they may be subject to Fringe Benefits tax (FBT). A loan is defined as any transaction that, in substance, involves the lending of a sum of money. For it to be subject to Fringe Benefits Tax, it must be provided to an employee and it must be provided in respect of the employment of that employee. It will also attract FBT if there is no interest charged or the rate is less than the relevant statutory interest rate and the employee is under no obligation to repay the loan (i.e. repayment is not enforceable by law).
There is still a lot of confusion about what you can and can’t claim as work-related expenses and a common error relating to work clothes is uniforms. To be able to claim for purchase and cleaning of a uniform, it must be distinctive to the organisation you work for and be compulsory to wear as a condition of your employment. A uniform is distinctive to the organisation you work for if it has been specifically designed for them, bears the company logo and is not available to the public. The only circumstance in which you can claim expenses for a non-compulsory uniform is if your employer has registered its design with AusIndustry.
Following on from the previous misnomer, some people continue trying to claim as a deduction laundry and dry cleaning costs for their regular work clothes. The perception is possibly that because what they wear is used primarily for work purposes that its cleaning and maintenance should be a deductible expense. Unfortunately, you can only claim for actual uniforms that are distinctive and unique to your employer and which you are required to wear. You must have written evidence of their cleaning schedule (i.e. diary entries or receipts) if your claim for laundry and dry cleaning is more than $150 a year.
Just as you can claim depreciation on a PC or laptop used in a home office environment, so you can claim depreciation on home office furniture and fixtures such as desks, chairs, curtains, carpet and the like. In both cases however, you can only claim 100% depreciation if they’re used exclusively for business purposes. if they’re only used partly for business purposes and are partly for personal use, then you must work out the percentage of business vs private use and only claim for the business percentage. To claim depreciation, you must have written proof of purchase for the items being depreciated.
There are two kinds of expenses that property owners can claim on their rental properties. These are ongoing expenses and capital expenses and you can potentially claim both types, as long as you know how to go about claiming and don’t confuse one with the other. This is a common mistake that landlords can make, replacing rental items when they wear out or break and then claiming them as ongoing repairs, rather than what they are, which is capital expenses. Such capital expenses cannot be claimed as outright deductions (unless they cost less than $300) and must instead be depreciated over several years.
To qualify as a fringe benefit and attract Fringe Benefit Tax (FBT), a benefit must be provided to an employee or associate in relation to their employment. As far as company directors are concerned, unless they are also shareholders in the company, they are treated like normal employees. That means any benefit they receive from the company in the form of free or discounted items or services is subject to FBT. The only time this is not the case is if they are also shareholders, in which case, rather than attracting FBT, they are taxed personally on the value of the benefit they have received.
As mentioned previously, you can’t file the staff Christmas party under staff amenities, and inviting your clients to your party will not remove your obligation to pay Fringe Benefits Tax (FBT). If you really want to splurge on your Christmas party to thank your staff for all their hard work, you can legitimately avoid paying Fringe Benefit Tax by hosting your party on your own premises during business hours. If this seems a bit stingy you can still celebrate at an after-hours offsite venue and avoid paying FBT if you keep the cost per employee for the evening (meals, drinks, entertainment and taxis) to under $300 (including GST).
Because an increase in your stock’s value over the year is assessable income and a decrease is an allowable deduction, some businesses value their trading stock at cost to minimize their tax and have an inventory value as low as possible. There are penalties for undervaluing your trading stock, just as there are for not keeping stock records at all, which is another common mistake some businesses make. By law, you must keep records for five years and they must be in English or in a form that the ATO can understand in order to work out the tax you are liable to pay.
A common mistake made by some small to medium businesses is in claiming a deduction for legal expenses when the expense is actually of a capital nature. The ATO allows you to deduct all losses and outgoings that are incurred in the process of gaining or producing assessable income, but you are not allowed to deduct a loss or outgoing when it is of a capital, private or domestic nature, which is classified as a general deduction. There must be a tangible connection between the expense and the earning of income (i.e. the legal costs must be relevant to that end).
The cost base of an asset must be known in order to be able to determine the amount of capital gain or capital loss it incurs, and the failure by some businesses to keep adequate records in regard to this has led to problems at tax time. An asset’s cost base is comprised of a number of components; all of which require accurate record keeping to determine. These include the cost and incidental costs of acquiring the asset, the non-capital costs of owning the asset, the costs of enhancing the asset, any costs related to preserving ownership of the asset and the incidental costs of disposing of the asset.
If your business turns over more than AUD $2 million a year, the ATO will put you on Accrual GST automatically. The only time you have a choice between Cash and Accrual GST is if you earn less than this, so those $2 million+ businesses still on a cash basis will encounter problems when they lodge their BAS. For most businesses earning under this amount, their GST on Debtors is greater than their GST on Creditors, so being on a Cash Basis for GST is the best choice. Exceptions to this where a business could be better off on an Accrual Basis are those businesses with few debtors such as cafes, restaurants and retail businesses with not many sales on account.
Registering for GST is only compulsory if your business earns more than $75,000 a year. You can still register if you earn under this amount, but there are good reasons why many businesses choose not to do so. The first is the amount of paperwork that is required. A registered business must balance their role of trying to run a business with being a tax collector for the ATO, which adds to their administrative costs. The other main reason not to register is because you can undercut your GST registered competitors by 10% or sell at the same price and pocket the GST difference. However, no matter how attractive the alternative, once you hit the $75,000 p.a. annual turnover, you must register for GST.
Personal Accident Insurance that protects your income if you are unable to work attracts a tax deduction from the ATO. However, some taxpayers have been trying to claim a deduction for accident insurance held under life insurance that does not protect their income and are surprised when their claim for a deduction is rejected. The cost of your premiums can be claimed as a tax deduction only if your accident cover is in the form of income protection. It is also non-deductible if it is held inside superannuation or provides a lump sum benefit through life insurance or trauma insurance.
Whether it’s work, car or travel-related, whatever type of deduction you are claiming, you must be able to substantiate your claims if called upon to do so by the ATO. If the total amount of deductions you are claiming is more than $300, you must have written evidence in the form of receipts or invoices, while if it is less than $300, you must at least be able to show how you worked out your claims. Certain types of deductions also require certain special types of evidence, such as car-related expenses, which call for the keeping of a log book.
This is a mistake taxpayers can make when they receive a GIC remittance by the ATO. A General Interest Charge (GIC) is interest charged on unpaid tax debts and shortfall amounts. It can be remitted (reduced or cancelled) by the ATO if a taxpayer applies for a remittance and the ATO rules that the delay or shortfall was not of the taxpayer’s making or if it was, that they did everything in their power to rectify the situation in a timely manner. Because it is in effect a refund of monies owed or paid, it must be shown as income on your tax return.
Work-related deductions include clothing and footwear that protects you from the risk of illness or injury, or prevents damage to your ordinary clothes from your work environment. These items include fire-resistant clothing, sun protection clothing, hi viz safety vests, non-slip shoes, steel-capped boots, gloves, overalls, aprons, and heavy-duty shirts and trousers. Some taxpayers either knowingly or inadvertently try to claim ordinary clothes and footwear as protective wear, arguing that jeans and closed shoes are protecting them while they work. To be able to claim a deduction for protective clothing however, these items must possess protective qualities designed specifically for the risks of your particular workplace.
Thanks to a change in taxation legislation, new business start-ups are now able to claim certain business set-up costs in their first year of operation. This includes a new immediate tax deduction for assets, which can now be immediately written off if their value is less than $20,000. The mistake is made when new business owners try to claim set-up costs such as the purchase of office furniture and equipment as a deduction. This is in fact a capital expense and cannot be claimed as a deduction or in the first year, but needs to be depreciated over several years.
The ATO is finding that property investors are making a variety of minor errors with regard to their rental properties which could be avoided with a little research. These include claiming interest on an investment loan when the rental property is being used for private purposes, not apportioning deductible interest on loans used for both investment and private purposes, not calculating deductible interest on a pro rata basis when the property is rented to family at a less than commercial rent, claiming deductions for voluntary advance payments towards the principal and claiming loan repayments as a deduction instead of just the interest part.
Another mistake some property investors make is claiming GST credits on investment property that they intend to keep. You are only eligible for GST credits on new residential property that you plan to sell. Property is classed as new if it is built from scratch, has never been sold as a residential property before, has been substantially renovated or is replacing a demolished building on the same land. You can claim GST credits for your construction costs and any purchases related to the sale, but you must clearly intend to sell the property and actively marketing it for sale is the best way of demonstrating this.
If you carry on an enterprise (business) and your turnover is more than the GST registration threshold ($75,000), you are required to register for GST. What many property investors do not realise is that by participating in property transactions (even a one-off sale), their activities may constitute an enterprise and they may be required to register for GST. They are also required to pay GST on the sale of new development properties, which is normally one eleventh of the sale price. Those engaged in the practice of ‘flipping’ properties (renovating and reselling for profit) need to work out if what they are doing constitutes an enterprise and whether they need to register for GST.
The ATO is currently looking at property developers who acquire development properties through newly established trusts. The stated intention is to hold the developed property as a capital asset to generate rental income, but the activity which follows the purchase is conducive with an intention to sell before or immediately following completion of the development. When sold, the trustee treats the proceeds as being on capital account, and because the property was purchased more than a year before the sale, claims the general 50% Capital Gains Tax (CGT) discount. The ATO has issues with this type of arrangement because the trustee may be carrying on an enterprise, which would make the property trading stock and the sale proceeds ordinary income.
55. Rolling over a capital gain for an active asset into super and either not putting it into your super fund or, if over 55, not showing that it was set aside for retirement
Small business turning over less than AUD $2 million a year can qualify for four different capital gains tax exemptions. One of these is the CGT retirement exemption, which has a lifetime limit of $500,000 which can be claimed from the sale of your business. If you are under 55 years old, the retirement exemption must be contributed to a super fund, and if you are over 55, you must be able to show that it is being set aside for your retirement. A problem the ATO regularly encounters is business owners rolling over a capital gain for an active asset but not putting it into their super fund or if over 55, not being able to demonstrate that it was set aside for retirement.
Some trustees of SMSFs erroneously believe they can dip into their super funds to pay outstanding debts or fund their small businesses. But if they do so without satisfying a condition of release, they will be acting illegally and may find their SMSF being issued with a notice of noncompliance and themselves being personally disqualified from being a trustee. The ATO may allow you to compensate for such a contravention of the Superannuation Act by calling the withdrawal a loan, but it must show all the characteristics of a loan transaction, including a loan contract, interest being charged and repayments made until the loan is paid back.
57. Saying you were a resident of Australia for tax purposes when you were not, or saying you were a non-resident when you were
Another common mistake made by overseas visitors is making an erroneous declaration about their status for tax purposes. Some claim to be Australian residents for tax purposes when they are not, and some claim not to be when they actually are. Often this is a genuine mistake, but in some cases it can be deliberate, because the tax rate for working residents and non-residents is markedly different. Non-residents are taxed at 32%, while residents are only taxed at 19%, so the incentive to be a resident for tax purposes is obvious. Generally, you are considered a resident for tax purposes if you have lived in Australia for more than six months continuously.
This is a common mistake made by taxpayers who have investments or bank accounts overseas. The common misconception is that because the money was not earned in Australia, there is no tax to pay and no reason to declare it in your tax return. While there may well be no tax to pay (not all overseas income is taxable), you still need to declare such amounts and failure to do so can attract stiff penalties. There is growing cooperation between governments and financial institutions around the world, and more information sharing means those seeking to hide overseas income from the ATO will find it increasingly difficult in the future.
Another common mistake is failing to pay CGT on assets you inherit as part of a deceased estate. When the asset includes property, CGT will need to be paid either by the estate or by the beneficiary. If the estate sells the property rather than transferring it to a beneficiary, then CGT will need to be paid on the sale and the remainder distributed amongst the beneficiaries. If the estate transfers the property to the beneficiary as is, then CGT is payable by the beneficiary, but only if and when they sell the property. The main residence of the deceased person does not attract CGT if sold within two years of their death.
Medical expenses tax offset is no longer available since 1 July 2019, and private health insurance was never tax deductible, but it must be shown in your tax return as it may help you avoiding Medicare levy surcharge where your income is high enough to attract the surcharge.