Individual Income Tax Return Disclosure Issues and Requirements · 2018. 11. 22. · individual is...

Individual Income Tax Return Disclosure Issues and

Requirements

Peter C. Adams

November 2018

Tax file number (TFN)

PAYG Withholding

Tax residency tests – rules, implications

ATO decision tool -

http://calculators.ato.gov.au/scripts/axos/axos.a

sp?CONTEXT=&KBS=Resident.XR4&go=ok

Part–year resident

Final return

Personal Tax Profile Section

Australian tax residency and ancillary issues

Australian tax residency tests

1. Common law “resides” test

2. Domicile test

3. 183-day test

4. Commonwealth superannuation test

NB - Only have to satisfy one of the tests to be tax resident


Introduction – categories of residency and taxing scope

Australian residents – subject to tax in Australia on:income derived from all (worldwide) sources

taxable capital gains derived from all (worldwide) sources


Introduction – categories of residency and taxing scope

Foreign residents – subject to tax in Australia on:income derived from Australian sources

taxable capital gains on “taxable Australian property”

Tax Residency• The “backpacker tax” legislative package finally passed both Houses of Parliament, after much

debate and a number of amendments.

• The Acts received Royal Assent on 2 December 2016.

• Working holiday makers are foreign workers on visa sub-class 417 and 462.

• Tax rates for working holiday makers, from 1 January 2017, are:

• 1. Does not exceed $37,000 - 15%

• 2. Exceeds $37,000 but does not exceed $87,000 - 32.5%

• 3. Exceeds $87,000 but does not exceed $180,000 - 37%

• 4. Exceeds $180,000 - 45%

• Employers of working holiday makers must register with the ATO.

• The ATO has issued a separate withholding schedule.

• Registration for employers already employing working holiday makers were required to register by 31 January.

• Employers that intend to hire working holiday makers will need to register with the ATO. Penalties may apply for failing to register.

Income Tax Framework - Individuals

Gross Income (total income, excluding gifts, windfalls, etc)

Less

(Exempt income) (disability pensions, defence force reserve, etc)

Assessable Income (ordinary income + statutory income)

Less

(Allowable Deductions) (general & specific deductions)

TAXABLE INCOME

INCOME TAX EQUATION

Assessable income

Deductions

Taxable income

Gross tax payable

Non-refundable tax offsets*

Medicare levy*

HELP Assessment debt**

Temporary budget repair levy***

Refundable tax offsets (Private

health insurance and franking)

Tax paid (if any)****

Tax refund

or

Tax payable

* For individuals, apart from the private health insurance

tax offset and the franking offset, the sum of the other

tax offsets cannot exceed the amount of tax payable

(see Divisions 63, 67 and s. 160AD). Non-refundable

tax offsets cannot be carried forward. Excess credit

cannot be used to reduce the Medicare levy, Medicare

levy surcharge, or HELP assessment debt.

** The term HELP Assessment debt under the Higher

Education Loan Program (HELP) includes the former

HECS Assessment debt.

*** The temporary budget repair levy of 2 per cent applied

for individuals' taxable income in excess of $180 000 for

2014/15 to 2016/17 tax years.

**** Includes tax installments, tax withheld under the PAYG

system and tax file number (TFN) amounts deducted.

From tax rates

determineminus

add

minus

minus

minus

CURRENT TAX RATES

• General tax rates 2018 (excl. Medicare levy)*

Note: A 2% temporary budget repair levy applied until 30 June 2017 for that part of taxable income that exceeded $180 000. Highest marginal rate reverts to 45% for year ended 30 June 2018.

Taxable income Tax payable

$ $

0 – 18 200 Nil

18 201 – 37 000 Nil + 19% of excess over 18 200

37 001 – 80 000 3 572 + 32.5% of excess over 37 000

80 001 – 180 000 17 547 + 37% of excess over 80 000

180 001 + 54 547 + 45%* of excess over 180 000

CURRENT TAX RATES (cont’d…)

• Tax-free threshold

– Most resident taxpayers – $18 200

– Recipients of certain tax offsets – the tax threshold is effectively increased

– Taxpayers who become/cease to be residents during the tax year – at least $13 464, with an additional amount according to the number of months the individual is a resident.

• Temporary Budget Repair Levy

– Temporary budget repair levy applied for the 2014/15 to the 2016/17 tax years.

– 2 per cent on individual taxable income > $180 000, for example on an income of $200 000, $400 of levy will be paid.

• Division 6AA of ITAA36 limits the tax advantages of diverting income to minors by imposing a higher rate of tax on some income diverted to prescribed persons.

– ‘Prescribed person’

o Person less than 18 years of age on the last day of the tax year; and

o Person who is not an ‘excepted person’ in relation to the tax year.

– ‘Excepted person’ is a minor who:

o is engaged in a ‘full-time occupation’ as defined in s. 102AC(6); or

o suffers from an incapacity or disability that prevents full-time employment (disabled and medically certified as being unable to work; in receipt of disability pension or care allowance; eligible for the double orphan pension).

MINORS

MINORS TAX RATES

(Assuming the minor has no other

income.) If eligible income below

$417, tax-free. Shade-in provisions

apply between $417 and $1307,

with tax at a rate of at least 66c on

each $ over $416. Over $1307 the

whole is taxed at 47 per cent.*

Note that the tax rates were increased by 2 per cent to 68 per cent and 49 per cent respectively to

reflect the temporary budget repair levy until 30 June 2017; so that high income earners cannot

avoid the levy by shifting income to their children.

* The tax on eligible taxable income between $417 and $1307 is the greater of (i) 66 per cent of the

excess over $416 and (ii) the difference between the tax on the whole of the taxable income and

the tax on taxable income other than the eligible taxable income.

Eligible

taxable

income, s.

102AD.

Exclusively related

allowable deductions,

appropriately related

and apportionable

deductions, s. 102AD.

Eligible assessable

income, s. 102AE(1).

Prescribed persons, s.

102AC(1). Under 18

and not in a full-time

occupation, or not

incapacitated for work.

Excepted

assessable

income, s.

102AE(2).

Excepted persons,

s. 102AC(2).

Taxed at ordinary rates, with first $18 200

zero-rated.

LESS =

Assessable income consists of ordinary income

and statutory income

Ordinary income is income according to ordinary

concepts

Statutory income is income that is assessable by

virtue of a specific provision in the income tax

legislation

Assessable Income – General Framework

income according to ordinary concepts include

three categories:

income from rendering personal services

including employment income;

income from carrying on a business; and

income from property - rent, interest, dividends

Assessable Income – General Framework (cont.)

(1) Salary, wages – constructive receipt

(2) Allowances, earnings, tips, directors and jury

fees

Allowances (travel allowance, car allowance, tool

allowance) generally subject to income tax except

if Living-Away-From-Home Allowance (LAFHA)

Individual Payment Summary – source document

Assessable Income Section

(3) Employer Lump Sum A payments

unused LSL accrued after 15 August 1978 due to

genuine redundancy, invalidity or early retirement

unused AL because of genuine redundancy, invalidity or

under an early retirement scheme

unused LSL accrued after 15 August 1978 and before 18

August 1993 not because of redundancy, invalidity, early

retirement, or

unused AL accrued before 18 August 1993 not because

of redundancy, invalidity or early retirement

Lump Sum B – pre 16 August 1978 unused LSL – 5%

Assessable Income Section (continued)

UNUSED ANNUAL LEAVE AND LONG-SERVICE LEAVE PAYMENTS

• These are not treated as ETPs and are taxed according to the table below:

Type of

leave

Actual

date

Amount

assessable

Maximum rate of tax

(excluding

Medical levy)

• Long

service

leave

Accrued to 15.8.78

16.8.78 to 17.8.93

5%

100%

Marginal rate

30%

18.8.93 onwards* 100% Marginal rate

• Annual

leave

Accrued to 17.8.93 100% 30%

18.8.93 onwards* 100% Marginal rate

* If in respect of a genuine redundancy payment, early retirement scheme payment or invalidity segment

of an eligible termination payment or superannuation benefit, tax is capped at 30 per cent.

(4) Employment termination payments (ETP)

Paid within 12 months and in consequence of termination

of employment

Life benefit ETP and death benefit ETP

Tax treatment - taxable & tax-free components – table

Genuine Redundancy Payments (taxable portion)


ETPs

• An ETP is a payment received by a person:

– in consequence of the termination of that person’s employment (a life benefit termination payment).

– after another person’s death, in consequence of the termination of the other person’s employment (a death benefit termination payment).

• ETPs cannot be rolled into a super fund, but instead must be taken as cash.

• An exception is where the payment is deemed a ‘transitional termination payment’ which the employee directs should be paid into a super fund.

DETERMINING AN ETP

The employer payments listed here are ETPs The employment payments listed here are not ETPs

• Unused rostered days off

• In lieu of notice

• A gratuity or golden hand shake

• Compensation for loss of job

• Compensation for wrongful dismissal

• Because of the employee’s invalidity

• Genuine redundancy and approved retirement

scheme payments in excess of the tax-free

amount

• Certain payments after the death of an employee

• Unused annual leave and/or leave loading

• Unused long service leave

• Salary, wages and allowances owing to the employee for

work done or leave already taken

• Compensation for personal injury

• Payment for restraint of trade

• An advance or loan

• Genuine redundancy and approved early retirement

scheme payments that are within the tax-free amount

LIFE BENEFIT TERMINATION PAYMENT• Consists of two components: tax-free and taxable.

• Tax-free component

– Not assessable and not exempt income. It is the amount that consists of either/both the invalidity component and the pre-July 1983 component.

– Invalidity component formula:

Amount of termination payment × Days to retirement/(Employment days + Days to retirement)

Where:

• days to retirement is the number of days from the day on which the person’semployment was terminated to the last retirement day; and

• employment days is the number of days of employment to which the payment relates.

– Pre-July 1983 component formula:

Step 1. Subtract the invalidity segment (if any) from the employment termination payment

Step 2. Multiply the amount in step 1 by the fraction

ETP - PAYG withholding

23

The ETP cap amount was $195,000 for the year ended 30 June 2017 and is

$200,000 for the year ended 30 June 2018 (indexed)

Income

component

derived by the

payee in the

income year

Age of person at

the end of the

income year in

which the payment

is received

Component subject

to PAYG

withholding

Rate of

withholding

(including

Medicare

Levy)

Life benefit ETP –

Taxable

Component

- Early retirement

- Genuine

Redundancy

- Compensation

for unfair

dismissal, etc.

Under preservation

age

Up to the ETP cap

amount

32%

Preservation age

and over

Up to the ETP cap

amount

17%

All ages Amount above the

ETP cap amount

47%


24



Whole of income cap amount is $180,000 (not indexed)

Income component derived

by the payee in the income

year

Age of person at

the end of the

income year in

which the payment

is received

Component

subject to PAYG

withholding

Rate of

withholding

(including

Medicare Levy)

Life benefit ETP – Taxable

Component

- Golden handshake

- Non-genuine redundancy

- Severance pay

- Gratuity

- In lieu of notice

- Unused sick leave

- Unused RDO’s

Under preservation

age

Up to whole of

income cap

amount

32%

Preservation age

and over

Up to whole of

income cap

amount

17%

All ages Amount above

whole of income

cap amount

47%


25





year

Age of person at

the end of the

income year in

which the payment

is received

Component

subject to PAYG

withholding

Rate of

withholding

(including

Medicare Levy)

Death benefit ETP paid to

dependants

All ages Up to ETP cap

amount

Nil

All ages Above ETP cap

amount

47%


26





year

Age of person at

the end of the

income year in

which the payment

is received

Component

subject to PAYG

withholding

Rate of

withholding

(including

Medicare Levy)

Death benefit ETP paid to

non-dependants

All ages Up to ETP cap

amount

32%

All ages Above ETP cap

amount

47%

8.3.5 STEP 3: PAYG WITHHOLDING (3)

• Source: Australian Taxation Office, Tax Table for Employment Termination Payments (NAT 70980)

Date of birth Preservation age

Before 1/7/60 55

1/7/60–30/6/61 56

1/7/61–30/6/62 57

1/7/62–30/6/63 58

1/7/63–30/6/64 59

After 30/6/64 60

REDUNDANCY AND RETIREMENT PAYMENTS

• Genuine redundancy payment

– Payment made in consequence of the dismissal of an employee because their position is genuinely redundant.

• Early retirement scheme payment

– Payment made to an employee whose employment is terminated under a scheme approved by the Commissioner for the re-organisation of an employer’s operations.

REDUNDANCY AND RETIREMENT PAYMENTS (cont’d…)

• Taxation treatment

– Both payments receive the same tax treatment. Taxation depends on whether the payment has both a tax-free amount and an assessable amount which can be treated as an ETP.

– Tax-free amount is calculated by the formula:

Base amount + (Service amount × Completed years of service)

TAX-FREE CALCULATION

• Having isolated the amounts of the ETPs that are genuine redundancy payments, we can apply the tax office formula to the amounts

• Tax-free amount 2016 = $9,780 plus $4,891 for each year completed



Item 4 of IITR– ETP

• Do not show at this item genuine redundancy payments under threshold

• Defined in s 83-175 ITAA 97 and TR 2009/2 and see cases

• Non-assessable non-exempt income up to threshold

• 2016:

• (2016 - $9,780) base amount, plus

• (2016 - $4,891) for each whole year of service

• 2017:

• (2017 - $9,936) base amount, plus


• 2018:

• (2018 - $10,155) base amount, plus


NOTE - Excess is taxed as an ETP

31

(9) Attributed personal services income (PSI) –

supplementary section of ITR (14)

(10) Gross interest (including some children’s accounts

if funds used as though they are not the children’s

funds)


http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s83.175.html

http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR20092/NAT/ATO/00001&PiT=99991231235958

(11) Dividends

Deemed dividends – Section 109 & Division 7A

Franking / imputation credits - integrity measures

(Qualified Person Test – 45-day holding period rule)


(12) Employee share schemes – separate disclosure

Division 83A – upfront taxation or deferral

$1,000 exemption if upfront, but only if income <

$180K

Deferral up to 7 years, but only if:

real risk of forfeiture; or

Salary sacrifice up to $5,000 value

Taxpayers should receive an ESS statement from

their employer

New rules for small start-up companies – no upfront

income tax liability, only CGT on sale


Total supplement income / loss – supplementary

section of ITR

Total income or loss disclosure


General deduction - section 8-1 Rules for work related expenses – Section 8-1

(“incurred” - TR97/7)

Written evidence requirements

Allowable Deduction Section

Allowable Deductions

Deductions• s 8-1 : General deductions

• s 25 : Specific deductions

• s 26 : Restricts or denies deductions

• Misc: Gifts, entertainment, uniforms etc


General Deductions: Div 8

• 2 positive limbs

• Non –business income

• Business income

Taxation

s.8-1(a)1st Positive limb – Non-business income: s: 8-1 (a)

•You can deduct from your assessable income any loss or outgoing to the extent it is incurred in gaining or producing your assessable income

•eg: salary, rent, dividends, royalties, interest


s.8-1(b) 2nd Positive limb – Business income: s: 8-1 (b)

•You can deduct from your assessable income any loss or outgoing to the extent it is necessarily incurred in carrying on a business for the purposes of gaining or producing your assessable income


s.8-1 Terms“to the extent” allows taxpayer to

claim part of expense

- it is not all or nothing,

it can be part

“incurred” for accrual basis taxpayers

- totally committed to the

payment

Note for SBE taxpayers and taxpayers (such as small professional practices) operating on a cash basis; deductions are only allowed when paid


s.8-1(2) Exclusions• 4 Negative limbs: s 8-1 (2)

You cannot deduct a loss or outgoing...to the extent that it is:• ...capital, or capital in nature;

• ...private or domestic nature;

• ...incurred in relation to gaining or producing exempt income, or non-assessable non-exempt income;

• a provision of this Act prevents you from deducting it


s.8-1(2) Exclusions1st Negative limb - Capital expenses

Generally one–off and not recurring in nature and they give a lasting advantage

• e.g. feasibility studies, purchase of capital assets, plant & equipment

• Rent is an ongoing expense whereas buying a property is a capital expense


s.8-1(2) Exclusions2nd Negative limb - Private or Domestic Expenses:

Private expenses relate to a person• e.g. Food, clothing, child care costs, home-to-work-travel, holiday travel

Domestic expenses relate to a person’s homee.g. rates & taxes on a private residence, home telephone costs, electricity and heating

costs


s.8-1(2) Exclusions

3rd Negative limb - Expenses incurred in producing exempt income

E.g. expenses incurred in earning Army Reserve income are not deductible as the income is exempt


s.8-1(2) Exclusions4th Negative limb - Expenses disallowed by the ITAA

E.g. Fines, penalties, bribes, entertainment expenses

ATO Crackdown on Work-related Deductions

• This year the ATO is paying close attention to what people are claiming as 'other' work-related expense deductions.

• Clients need to show:• they spent the money themselves and were not reimbursed

• the expense was directly related to earning their income

• they have a record to prove it.

ATO Crackdown on Work-related Deductions

ATO guide to the 5 most common Tax Time mistakes:

• leaving out some of their income – maybe forgetting a temp job or money earned from the sharing economy

• claiming deductions for personal expenses – home to work travel, normal clothes or personal phone calls

• forgetting to keep receipts or records of their expenses

• claiming for something they never paid for – often because they think everyone is entitled to a ‘standard deduction’, and

• claiming personal expenses for rental properties – either claiming deductions for times when they are using their property themselves or are claiming interest on loans used to buy personal assets like a car or boat.

ATO Crackdown on Work-related Deductions Commissioner has identified the top 10 tax myths and misunderstandings:

• The first and main myth is that everyone can automatically claim $150 for clothing and laundry, 5,000 kilometres at 66 cents for car related expenses, or $300 for work-related expenses, even if they didn’t spend the money.

• Commissioner states that these are just record-keeping exemptions that provide relief from the need to keep receipts in certain circumstances.

• However, they are not an automatic entitlement or a “standard deduction” for everyone.

• While you don’t need receipts for claims under $300 for work related expenses, $150 for laundry and 5000 kilometres, you still must have spent the money, it must be related to earning your income, and you must be able to explain how you calculated your claim.

• Another myth is that taxpayers believe that if they use a tax agent, the tax agent will take responsibility for any deductions claimed.

ATO Crackdown on Work-related Deductions The other myths that the Commissioner raises are:

• “I don’t need a receipt, I can just use my bank or credit card statement”. This is only the case if the statement shows what was purchased and who the supplier was.

• “I can claim makeup that contains sunscreen if I work outside”. This is only the case if the primary purpose of the product is sunscreen, the cosmetic component is incidental, and the taxpayer works outdoors in the sun.

• “I can claim my gym membership because I need to be fit for work”. This is only the case is taxpayer is required to maintaining a very high level of fitness, for which they are regularly tested.

• “I can claim my work clothes because my boss told me to wear a certain colour”. This will nonly be the case if clothing is a uniform that is unique and distinct to your employer, or protective or occupation-specific clothing that you required to wear to earn your income.

• “I can claim all of my capped phone costs”. Unless taxpayer only uses phone for work, they will have to apportion the cost.

General deduction - section 8-1

(D1) Work related car expenses – substantiation

methods

NOTE - Must be incurred and nexus with income Cents per km method (limited to 5000kms) / 66c per km

12% of original value (abolished from 1/7/2015)

One-third of actual expenses (abolished from 1/7/2015)

Logbook method

Decline in value in respect of cars

Depreciation car cost limit – currently $57,581

Allowable Deduction Section

(D2) Work related travel expenses Must be incurred and nexus with income

Relevant for “non-car” travel

Home/work travel - exceptions

Travel records – domestic and overseas

Allowable Deduction Section (continued)


Travel ExpensesGenerally travel to/from home/work is not deductible subject to

the following exceptions:

• Deductible if the home is the place of business

• Deductible if required to transport bulky equipment and no storage at work

• Deductible if travel between workplaces

• Deductible for employee on call if employee can show work begins at home

(D3) Work clothing, laundry and dry-cleaning

expenses – compulsory, non-compulsory,

protective, etc

TR 98/5 – laundry expenses; TR 97/12 –

clothing, uniform and footwear expenses; TR

2003/16 – protective clothing


Tax Developments 2018 / 2019

Clothing claims - Clothing claims put through the wringer this Tax Time

• Commissioner has said that this year ATO will focus on work-related clothing and laundry expenses.

• Last year around 6 million people claimed work-related clothing and laundry expenses, with total claims adding up to nearly $1.8 billion.

• These claims are nearly 20% over the last five years.

• Around a quarter of all clothing and laundry claims were exactly $150 and the Commissioner is concerned that some taxpayers think they are entitled to claim $150 as a standard deduction, even if they don’t meet the clothing and laundry requirements.

• This $150 limit is a rule regarding record-keeping, not what can be claimed.

• While a taxpayer does not need written evidence for claims under $150, the clothing must have been for uniform, protective or occupation-specific clothing

• It must be required to be worn to earn income - taxpayers must show how they calculated the claim.



• Commissioner is reminding taxpayers that they cannot claim a deduction for normal clothing, even if your employer requires them to wear it, or it is only worn to work.

• Commissioner states that for eligible clothing (occupation-specific, protective or uniform and not plain or conventional clothing), a taxpayer can calculate their claim for washing, drying and ironing by the following assuming the claim is less than $150:

• $1 per load if the load is made up only of work-related clothing

• 50c per load if you include other laundry items



Example - Incorrectly claiming for plain clothing

• An advertising manager claimed $1,854 for clothing and laundry expenses.

• Her claim was for clothing purchased at popular fashion retail stores.

• When we contacted her, she said she represented her company at work functions and awards nights and was required to dress a certain way.

• We explained that expenses for conventional clothing are not deductible, even if you are required to wear them for work, and/or only wear them for work.

• The taxpayer’s clothing and laundry claim was disallowed in full, and a penalty for failing to take reasonable care was applied.



Example - Unreasonable calculation of laundry claim

• A car detailer claimed work related laundry expenses of over $20,000 per year over two years.

• When questioned, the taxpayer told us he worked out the laundry expense at the rate of $227 per hour, as he valued his personal time.

• He then made a voluntary disclosure that his claim was excessively high and in no way a reasonable amount to claim.

• The taxpayer’s claims were reduced to $0 in accordance with his voluntary disclosure.

• As he made a voluntary disclosure before our audit progressed, no penalties were applied.

(D4) Work related self education expenses Must be incurred and requires direct nexus with

income


(D5) Other work related expenses union fees;

overtime meals;

attending formal education courses provided by

professional associations;

seminars, conferences or education workshops;

books, journals and trade magazines;

tools and equipment: protective items, such as

sunscreen and sunglasses;

computers and software

home office type expenses

Home and



Home Study ExpensesEmployees can claim running costs of the home if used for work

related purposes

• Electricity, depreciation on furniture and equipment,

Self employed can claim running costs and occupancy costs if home is “place of business”

• Rent, mortgage interest, rates

• CGT implications on sale

(D6) Low value pool deduction (37.5% / 18.75%)

Can include D1-D5 items, rental items and

business items

(D7) Interest deductions

(D8) Dividend deductions

(D9) Gifts or donations

DGR, material benefit rules, etc


(D10) Cost of managing tax affairs ITR, BAS or an IAS preparation, (include travelling and

accommodation costs)

obtaining tax advice and management of taxpayer's tax

affairs and compliance;

lodging an income tax return electronically;

attending to an ATO audit

objecting /appealing assessment or determination (court

or tribunal fees)

NOTE – potential deduction for public officer of company


Supplementary section deductions (from

supplementary section of ITR)

Total deductions

Tax losses of earlier income years (last deduction)



Specific Deductions• Tax related expenses: s 25-5

• Repairs: s 25-10

• Lease expenses: s 25-20

• Borrowing expenses: s 25-25

• Mortgage discharge expenses: s 25-30

• Bad debts: s 25-35

• Loss by theft / embezzlement: s 24-45

• Pensions / retiring allowances: s 25-50

• Payments to associations: s 25-55


Div 26: Non or Partly Deductible Items Fines and penalties: s 26-5

• Not deductible

• Example:

• A truck driver is fined $800 for overloading truck. Fine is not deductible.

Leave provisions: s 26-10• Deductible when actually paid


Div 26: Non or Partly Deductible Items Assistance to students: s 26-20

• HECS-HELP not deductible to student

• If paid by employer, deductible, but FBT applies

Payments to associated persons / relatives: s 26-35

• Deductible under s 8-1

• Disallowed to extent that it is considered excessive


Div 26:Non or Partly Deductible Items• Club fees and leisure activities: s 26- 45 and 26-50

• Not deductible

• If paid by employer, deductible, but subject to FBT

• Illegal activities: s 26-54• Not deductible to the extent they are incurred in the furtherance of, or directly related to,

activities in respect of which the taxpayer has been convicted of an indictable offence

• Losses or outgoings do not form part of cost base or reduced cost of CGT asset


Other Misc Deductions• Business related capital costs: s 40-880

• Gifts or contributions: Div 30

• Entertainment: Div 32

• Corporate wardrobe and uniform: Div 34

• Self education: s 82A

• Trading stock: Div 70

• Superannuation: Div 290

• Tax losses: Div 36

• Prepayments: 82KZM and 82 KZMA

Spouse Offset (formerly Item T1)

No longer available and is no longer on ITR

Seniors and Pensioners Offset – SAPTO (now Item T1)

- Must be eligible for pension or similar payment, and satisfy income

test

- ATO calculates entitlement and allocates excess to eligible spouse

Australian Superannuation Income Stream Offset (now Item T2)

- Shown on PAYG Payment Summary – Superannuation Income

Stream

Other offsets in Supplementary Section

Offsets Section

(15) Net income or loss from business – includes: Income from being a sole trader or other bus. income

income or a loss from a primary production business

income under a PAYG voluntary agreement

income from which amount was withheld because ABN

not quoted

income from which an amount was withheld because it

was subject to foreign resident withholding

income under a labour hire arrangement

Supplementary Section – Income (continued)

Item 15 - Business Income

• Method of accounting for income• Cash / receipts basis

• Accruals / earnings basis

• Interest and rent normally returned on cash basis

72

Item 15 - Trading Stock• Difference between opening and closing stock must be accounted for

(subdiv 70-C ITAA 97)

• Opening Stock > Closing Stock -> Deductible

• Closing Stock > Opening Stock -> Assessable

• Valuation methods

• Cost, market selling value, replacement value, or special value

• May use different basis for different classes and items

• May use different basis for opening and closing values

• Concessions for small business entities

• Carry on a business + turnover under $2m (s 328-110 ITAA 97)

• May choose to disregard change in value if reasonable estimate of difference is less than $5,000 (s 328-285 ITAA 97)

73

Item 15 – Other types of business income

• Lease incentives• Cash incentives generally assessable

• Non-cash incentives

• s 21A ITAA 36

• IT 2631

• Recoupments (subdiv 20-A ITAA 97)

74




http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s21a.html

http://law.ato.gov.au/atolaw/view.htm?DocID=ITR/IT2631/NAT/ATO/00001&PiT=99991231235958


Item 15 - Business Expenses

• Most expenses are deductible when incurred under s 8-1 ITAA97

• Accrued expenses – TR 97/7, ID 2014/34

• Prepayment rules (part III div 3 sub-div H ITAA36). Note 12 month rule may be applicable

• Bad debts must be written off for deduction to be available (only effective for accruals based taxpayers – see s25-35)

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Item 15 - Depreciation• Division 40 ITAA 97

• Effective life

• Self assess (s 40-105 ITAA 97)

• Determined by Commissioner (TR 2013/4)

• Statutory caps

• Cost (subdiv 40-C ITAA 97)

• First element

• Second element

• Calculating the decline in value

• Prime cost method (s 40-75 ITAA 97)

• Diminishing value method (150% for pre-May 2006 assets per s 40-70 ITAA 97; 200% for post-May 2006 assets per s 40-72 ITAA 97)

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http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR977/NAT/ATO/00001

http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~2014/34~basic~exact&target=JA&style=java&sdocid=AID/AID201434/00001&recStart=1&PiT=99991231235958&Archived=false&recnum=1&tot=2&pn=ALL:::ALL

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82kzl.html



http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR20134/NAT/ATO/00016&PiT=99991231235958





Item 15 - Depreciation

• Low value pools – discussed at Item D6

• Balancing adjustment events

• Subdiv 40-D ITAA 97

• CGT event K7 to the extent of private use

• Small business entities (subdiv 328-D ITAA 97)

• Instant write-off of first and second element expenditure under threshold - $20,000 write-off threshold until 30/6/2018 (now extended to 30 June 2019), then $1,000 after that)

• General small business pool (30% / 15% in first year)

• Rollover relief

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Item 15 - Repairs

• Non-capital expenditure on repairs to plant or premises held for production of assessable income is specifically deductible s 25-10

• A repair involves a restoration of a thing to a condition it formerly had without changing its character.

• What is significant is the restoration of efficiency in function rather than the exact repetition of form and substance.

• Repair involves restoration by replacement or renewal of worn-out or dilapidated part not reconstruction of whole thing, i.e. entirety.

• Thus “improvement” not a deductible repair

• Also, if asset was in disrepair at time of acquisition, then cost of “initial repairs” to remedy those defects is of capital nature and non-deductible

• Also note IT 180 in respect of repairs to rental properties

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(16) Deferred non-commercial losses Non-commercial loss rules prevent deduction of

losses

Losses deductible if one of following tests passed

assessable income test: the assessable income

(including capital gains) for that year from the activity

must be at least $20,000

real property test: the total reduced cost bases of real

property or interests in real property used on a

continuing basis in carrying on the activity must be at

least $500,000


Losses deductible if one of following tests passed

(continued)

other assets test: the total value of other assets (other

than motor vehicles) used on a continuing basis in the

activity must be at least $100,000, or

profits test: the particular activity must have resulted

in taxable income in at least three out of the last five

income years, including the current year

ATI test - $250,000 – above this amount, losses cannot be

offset against salary and wage income


(18) Capital gains CGT events

CGT assets

CGT exemptions

Gains by non-residents

Small business entity capital gains


(21) Rent (Rental schedule) Rental income

Rental expenses, including interest deductionsFrom 1/7/17 specifically excludes travel to residential rental properties

(s 26-31)

Depreciation From 1/7/17 specifically excludes depreciation deductions for second

and subsequent owners of depreciating assets in residential rental

properties

Capital works – no change


POSSIBLE GENERAL DEDUCTIONS• General deduction under s. 8-1 may be available to the following outgoings:

– Interest

o Where borrowed funds are used for an income-producing purpose, the interest will be deductible (provided the negative tests do not apply).

o When applying the negative tests, interest is generally not deemed to be capital in nature, even where borrowed funds are used for a capital purpose.

o Interest tends to be inherently of a revenue nature due to its recurrent nature and failure to secure a lasting benefit FC of T v. Steele 99 ATC 4242.

Intention to derive rent is basis for interest

deduction – Steele v FCT

Where taxpayer purchases property with intention

to derive income, deduction for interest, etc may be

available even if no income derived - Ormiston v

FCT 2005 ATC 2340 and recent 2012 decisions

Deduction of interest under split loan facilities –

Hart v FCT case and other recent cases / rulings


(24) Other income – examples: excess contribution amounts

jury attendance fees

foreign exchange gains

royalties

taxable scholarships, bursaries, grants or other

educational awards

benefits or prizes from investment-related lotteries and

some game-show winnings

income as a author of a literary, dramatic, musical or

artistic work, inventor, performing artist or active

sportsperson


any assessable balancing adjustment when you stop

holding a depreciating asset (for example, because of its

disposal, loss or destruction) for which you have claimed

a deduction for depreciation

payments made to you under an income protection,

sickness or accident insurance policy where the

premiums were deductible and the payments replaced

income

Total supplement income or loss


(D12) Personal superannuation contributions Complying fund

Notice requirement – intent to claim deduction notice

10% rule previously required for self-employed

individuals

Receipt by fund by 30 June

Age requirement – <75 years

Contribution caps – concessional ($30,000 for all

ages) and non-concessional

NOTE – full deduction for all contributions from

1/7/2017 – 10% rule abolished

Supplementary Section – Deductions

(D15) Other deductions – blackhole expenses

(s40-880), forex losses, income protection

insurance premiums, etc

Total supplement deductions

Supplementary Section – Deductions

Conclusion

Wrap up

Questions

Thank you

Individual Income Tax Return Disclosure Issues and Requirements · 2018. 11. 22. · individual is...

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