More 2008-2009 Tax Tips

According to the Chinese calendar we are now in the Year of the Ox. People born in the Year of the Ox are said to be patient and thoughtful - two attributes that will be useful in 2009. In this newsletter we identify current tax issues relevant to our clients. I invite you to spend a patient and thoughtful minute reading these two pages.

New investment allowance

The investment allowance was originally announced in December 2008 but was revised on 3rd February 2009. This concession now offers a real benefit to both small and larger businesses.

How does it work?

Broadly, the allowance provides an extra 50% tax deduction when a business purchases new plant & equipment before 31 December 2009.

The purchase of the asset must be under a contract entered into before the above dates. However, the asset can be delivered and installed ready for use within 12 months of this time. What types of assets will qualify? The investment allowance applies to assets that qualify for normal depreciation claims (equipment, computers, motor cars etc). Improvements to existing depreciating assets can also qualify for the allowance. The asset must be used in carrying on business. Secondhand equipment, buildings and other capital works do not qualify.

Does this effect depreciation claims?

The allowance is in addition to depreciation and does not effect depreciation claims in any way.

How much do we need to spend?

Small business with turnover below $2 million must spend $1,000 or more on a single asset to qualify for the allowance. The allowance is based on the purchace price (GST exclusive).
Larger businesses must spend $10,000 or more on a single asset to qualify.

How do you claim the allowance?

The allowance is claimed as an extra tax deduction in the relevant tax return.

Example

A small business that buys and installs a $2,000 computer before the end of December 2009 can claim an additional $900 deduction in its 2008- 09 tax return

More information

The details of the investment allowance are based on media releases at this time. CFMC will review the proposed legislation once it is introduced into parliament.

Division 7A watch-out

Division 7A can deem a loan by a company to be an unfranked dividend. This basically results in double taxation as the same income is taxable to both the company and shareholders. These provisions can also apply to a trust which makes distributions to a company.

The ATO approach to Division 7A is continually evolving through public rulings, determinations and interpretatve decisions. In a recent meeting of the National Tax Liason Group, the ATO expressed some views that could be unfavourable to many taxpayers. The ATO approach basically differentiates between loan repayments made before and after lodgement of the company tax return.

Broadly, any repayments of existing loans made prior to the lodgement of a company 2008 tax return may not be included in the miniumum principal and interest repayments for 2008/09. Company and trust loans require proactive management to avoid any unnecessary tax risks. For this reason, we recommend that you discuss your individual circumstances with us well before 30 June each year.

Contracting through companies and trusts

It is quite common for many consultants and contractors to provide services through a company or trust structure. However, we need to be mindful of the tax rules dealing with personal services income ('PSI') which can potentially make some structures completely ineffective for tax purposes.

In a recent case before the Administrative Appeals Tribunal (11 February 2009), a taxpayer failed to in his attempt to rely on the 'results test'. This is one of the most important aspects of the PSI rules. The terms of the legal contracts in this case were simply not consistent with the requirements of the results test.

Appropriate drafting of service contracts can substantially improve the tax effectiveness of these business structures. However, this involves an appreciation of the PSI rules, the ATO approach and the common law principles of contractors.

Ref: Taneja and Commissioner of Taxation [2009] AATA 87

Going overseas and your superannuation

If you become a non-resident and have your own self-managed superannution then you could be exposed to substantial tax unless you take some simple steps.

Broadly, if the majority of the trustees and members of a self managed superannuation fund become nonresident then the fund may fail the residency test. A breach of the residency test will mean that the fund will lose its concessional tax treatment and become noncomplying. In a worst case, the fund could loss almost half the value of its assets to the ATO.

These residency issues are outlined in Tax Ruling TR 2008/9 issued on 10 December 2008.

As with most tax issues, pro-active management can avoid these complications. Please talk to your CFMC contact if you may be effected.

Superannuation funds and GST

Most self-managed superannuation funds do not register for GST. This is often the most cost-effective approach when there is no legal requirement to register. Funds that own commercial property will generally be registered for GST.

For GST registered funds, the calculation of GST input tax credits can be quite complicated. The fund will typically have a mixture of taxable supplies (eg commercial rent) and input taxed supplies (eg contributions, dividends, trust distributions interest, residential rent). This means that superannuation funds will rarely be able to claim back 100% of the GST input tax credits on expenses.

Costs relating specifically to taxable supplies such as commercial rental are generally eligible for full input tax credits. Some expenses relating to input tax supplies may qualify for reduced input tax credits, effectively allowing 75% of the input tax credit to be claimed. Generally, input tax credits cannot be claimed on the remaining costs.