Overview of Tax at UNSW for Corporate Finance & DSFP

Anne Harvey – Group Tax Manager, Corporate FinanceEric McCallum – Group Tax Accountant, Corporate Finance

24 August 2012

Objectives

• Taxes applicable• When does GST apply• GST Codes• What is FBT• What does Taxable Value mean• How is FBT calculated• Types of benefits which attract FBT• When is FBT charged• Update on NFP

UNSW Tax status

• Charitable institution established and run for charitable purpose -

Education• Income Tax Exempt• Some GST concessions

Non commercial activities – no GST on sale, claim GST credits on purchase

Fundraising events – treat sales as Input taxed, no GST claimed

• DGR – entitled to receive income tax deductible gifts

Taxes

Payroll Tax

• Reports run from HR System Salaries and wages, Allowances Superannuation Exemptions – Maternity Leave, Severance pay, Workers Compensation

• Report from GL Contractor payments subject to PRT Allowances - Travel, overtime meal

• Other inclusions FBT (1/12th of last FBT Return, adjust in Annual Reconciliation)

Summarise into OSR reporting format State based tax – NSW (5.45%), ACT(6.85%), Qld (4.75%), SA (4.95%),Vic, WA,

NT Monthly return and payment due 7th next month Annual return for July – June year due 21st July – reconcile for year, include

any adjustments, e.g. Contractor exemptions, Travel allow, Actual FBT, overseas

Grouped with controlled entities – NSG, NSi

When is it applicable?• Taxable supply

for consideration in course of furtherance of

carrying on enterprise connected with Australia registered or required to be

registered not GST free or input taxed

• Taxable sales price includes GST pay GST on sales claim GST on purchases 1/11th of Total invoice/sale price

When is it not applicable • GST free sales

Basic food - meat, milk, bread, fruit and vegetables

Most education, child care, health

Most exports – goods within 60 days

Can claim a input tax credit on purchases

• Input Taxed sales Residential property Financial transactions Cannot claim GST credit

When does GST apply?

How Does GST work?

Supplier

Raises Tax

Invoice

Purchaser

Receives Tax

Invoice

Sponsor

UNSW

Recipient

• BAS – Return due to ATO showing Sales and Acquisitions. Reported as Taxable, GST free, Input Taxed, Non Deductible

• Monthly return due 21st of following month• 22 NS Financials Queries are run each month to obtain the

required data.• Around 50K transaction lines per month• GST codes determine the reporting line of each transaction

on the BAS return• GST paid/claimable reconciled to GL before BAS is lodged • FBT instalments are paid quarterly on BAS• GST on imports through Customs, under deferral scheme,

charged to BAS and claim as ITC

Completing BAS

• Mixed Supplies – need to enter Taxable items and GST free items on separate lines with GST code (Telstra bills, Cabcharge, Hotels, Qantas, basic food)

• Use GST code from PO - check if agrees to Tax Invoice• Relying on default GST codes in EMS (Business purpose and

expense type)• Tax calculated by the system does not agree to GST on Tax

invoice – may need to split lines• Deposits – claiming GST on deposit. Adjust on final Tax

invoice (security deposits vs. part payment)• Credits from prior month. Check GST charged on Invoice.

Common GST Mistakes

If Taxable Supply UNSW still have to remit 1/11th of total amount to ATO.

Loss of revenue received by UNSW – only 10/11ths.

Audit risk – inadequate processes and controls

Penalties and Fines

Reputational risk

BAS amendments and ATO risk matrix

Risk to UNSW if GST Not charged

• Accommodation for student during semesters is input taxed residential accommodation and falls outside the definition of commercial residential premises.

• Demolition and construction costs include GST and to the extent that a building is used to make input taxed supplies the GST “Input Tax Credits” on the demolition and construction costs cannot be claimed.

• The GST legislation allows for the non-commercial operations of charities to be GST free where certain criteria are met. In the case of student accommodation the amount charged to students must be below 75% of the market value for the non-commercial criteria to be met.

Student Accommodation

• The UNSW has engaged a property valuer to determine the market value of the student accommodation to be supplied at Gate2 and the Kensington Colleges in order to ensure compliance with the non-commercial operations of a charity criteria.

• As the UNSW is a charity for taxation purposes meeting the non-commercial operations of a charity criteria means that the supply of student accommodation is GST free, provided charged at less than 75% of market rate.

• The benefits of the accommodation supply being classified as GST free are that the student receive more affordable accommodation and the UNSW can claim GST “Input Tax Credits” on the demolition, construction and on-going costs.

Student Accommodation continued:

• Sale of second hand equipment is a taxable supply and consequently 1/11th of the sale price must be remitted to the ATO.

• As the UNSW is a charitable institution if the sale price of the second hand equipment is less than 50% of the market value then the supply is GST

free, or is less than 75% of the original purchase price paid the supply

is also GST free.

• Given that the original purchase price is often easier to substantiate than the current market value; it may be worthwhile to look up the cost on the Fixed Assets Register prior to negotiating the final sale price.

Sale of Second Hand Capital Equipment

Previously

• GST Act paragraph 9-15(3)(c)• Payment made by GRE to another GRE

is not consideration for GST purpose if payment specifically covered by appropriation under Australian law

Be Appropriation under Australian law Payment made by GRE to GRE Specifically covered by appropriation

No GST – outside scope of GST

New legislation -1/7/2012

• Current requirement to be specifically covered by appropriation removed – (no need to specify GRE recipient by name, or generically)

• If payment by GRE, can be paid to GRE and/or non Govt – not appropriation

• New “non-commercial” test satisfied• Non-commercial activities of GRE not

subject to GST

9-15(3)(c) only apply where payment can only be made to GRE

Non-commercial activities of GRE – No GST

Payment from GRE to GRE, covered by appropriation, non commercial – not consideration – No GST

If payment to GRE for commercial supply-GST

If margin above cost of supply – GST

Appropriations

Appropriations

Consideration(for a supply)

Non-commercial test

Anticipated or actual cost of GRE Supplier making:• the supply, or• any other related supply

Appropriation made by GRE under Aust law to GRE Supplier for making a supply

3rd party payments (monetary and non-monetary)

+≠ ≥

3rd party payments – in connection with, or in response to, or inducement of the supply or any other related supply

Is supply by GRE? – No, not appropriation, out of scope, usual GST rules. If yes …Is payment to Government and Private (co contribution)? If yes …Is there a margin? Yes, failed non-commercial test. GST on Government and non Gov’t supplies.

If determine non commercial – document reasons why

Appropriations

• Where the Grant is consideration for a supply made by the UNSW then the Grant will be subject to GST. If sufficient connection between supply and payment – basic GST rules.

• Since the gross amount received by the UNSW is reduced by the GST payable (1/11th of the receipt), the treatment of the GST should be agreed during the initial negotiations. This will enable both parties to align their GST treatment, minimise the risk of one party being left out of pocket by the GST, and limit any subsequent conflicts.

• Certain grants that are completely unconditional and are not tied to a material supply will be GST free and treated like a donation or gift.

Grants

Grant

1. Can be consideration for a supply

2. Could be made by a private entity to a government entity or vice versa

3. Can be made by an individual, body corporate or legal entity.

4. A competitive Grant could be open to private companies and government related entities

Appropriation

1. Is not part of a commercial transaction and would normally reflect the non-commercial activities of government.

2. Is between government and government related entities.

3. The authority behind an appropriation is to be found in an appropriation Act of Parliament or other legislation.

4. Is only available to government or government related entities.

Difference between Grants & Appropriations

Grants

1. Don’t assume that it is GST free because it is a Grant.

2. It may be necessary to obtain the Grant agreement and review the terms to determine if there is a supply.

3. It is important to review the obligations imposed on the UNSW under a Grant agreement as this may indicate a supply.

4. A competitive Grant available to the private sector is an indicator of a taxable supply.

Appropriations

1. Don’t assume that a GRE to GRE transaction is automatically GST free or outside of scope.

2. Try to determine if there a supply connected to the payment.

3. Estimate the cost of making that supply in order to determine any margin.

4. Determine if the payment is covered by an appropriation Act or other legislation.

5. Can the payment also be made to 3rd parties?

Main Point with Grants & Appropriations

Fringe Benefits Tax - Facts

FBT year 1 April to 31 MarchTax Rate 46.5% - Calculated on Grossed Up Taxable ValueFBT paid by employer – UNSWIncludes benefits under a salary sacrifice arrangementReportable Fringe Benefit included on Payment Summary in June, if >

$2000

FBT is tax on benefits (right, privilege, service or facility) provided to employees & associates (relative, partner/ spouse,

child) by an employer, associate of employer or under an arrangement

with a third party in respect of employment – reward for service

“Employee” includes current, former and future employees

If pay Salary PAYG deduction Employee pays taxIf provide fringe benefit no PAYG deduction Employer pays tax

FBT Calculated on Taxable Value

What is Taxable ValueDetermined by the rules applying to each category of fringe

benefitGenerally the cost of the benefitSome benefits concessional tax, e.g. Motor VehiclesSome reductions and exemptions provided in legislation

GST Impact• Taxable Value based on GST inclusive amount• FBT payable depends on whether entitlement to ITC credit • Can claim Input Tax Credit for GST paid

Important correct GST codes are used and GST amount is correct.

Type 1 Entitlement to ITC

Gross Up rate 2.0647

Taxable Value – incl GST $1000.00* Gross Up rate 2.0647Grossed up TV

$2064.70FBT rate 46.5%FBT cost $960.09

Type 2

No entitlement to ITC

Gross Up rate 1.8692

Taxable Value - no GST $1000.00

* Gross Up rate 1.8692

Grossed up TV $1869.20

FBT rate 46.5%

FBT cost $869.18

FBT Calculation

PRT = $1000 * 1.8692 * 5.45% (NSW PRT rate) = $101.87

• Salary packaged Motor Vehicles or UNSW provided – personal use. • Medical Insurance - inpatriates• Permanent Residency – application, police & medical checks, lawyers fees

(Exempt if to enter Australia on relocation)• Gifts, awards and prizes - $300 or more• Travel for family – SSP, accompany employee on business (exclude

relocation)• VC Child care support• Furniture purchase in lieu of relocation transport/ relocation allowance• Kensington College accommodation and meals – provided to

tutors/employees• Reimburse deferred HECS/HELP fees• Write off Advance - Debt waiver• Outstanding Advance not acquitted within 6 months – Loan• Home phone/ internet – private %• Dual purpose travel – business and private• Entertainment – tax exempt body

Examples of Benefits Incurring FBT

Entertainment v Sustenance

Entertainment – FBT• Social function, farewell• Party, Christmas party• Restaurant meals• Business lunch & drinks • Celebrations, Dinners• Spouse meal of employee

travelling on business• Non travelling employee (when

dines with travelling employee)• Morning, afternoon tea, light

lunches – associates• Leisure or amusement activities• Sporting activities, golf days• Gym membership, sporting club

memberships• Holiday• Theatre/movie ticket• Cruises

Sustenance – no FBT (6611)

• Morning and afternoon tea for employees

• Birthday cake – morning tea for employees

• Light lunches, sandwiches, finger food, salad, juice, etc for employees

• Light breakfast at training seminar – incidental to seminar

• Finger food and light refreshments (with moderate alcohol) immediately after training or CPD seminar – incidental to seminar

• Meal at seminar that goes for over 4 hours

• Meal (with alcohol) while travelling on business - employee

• Tea / coffee – employee• Overtime meal in office

Business Purpose

• Predominantly business undertaken• Considered Incidental to business –

extra day to acclimatise• Weekends during business period, e.g.

2 week business trip• Day to prepare/ wrap up• Make Flight connections• Due to flight availability/ delays• 1 day Stopover en route – no extra

cost• Day between business meeting

Dual Purpose

• Travel to conference then holiday• Holiday at same or different location• Book Annual Leave days in myUNSW• Family accompanies• Private portion 40% or more of total

days• Travel Allowance only for business days• Frequency of trips• No restrictions on private travel

Flight cost split 50/50 between business and private FBT on 50% private

If employee pays 50% of airfare directly to Travel Agent No benefit No FBT

Travel Benefits

Exemptions

• Minor benefit < $300 and provided infrequently and irregularly – (not for entertainment)

• Relocation – transport, temporary accommodation, removalist

• Work related item – laptop, portable electronic device. Limit 1 item per FBT year – same function

• LSL awards $1000 for 15 yrs, +$100 each additional year

Reductions

• Otherwise deductible – entitled to Income tax deduction if incurred expense, e.g. course fees, professional subscriptions, home internet

• LAFHA – with declaration

Exemptions and Reductions

If expenses charged to the GL account, FBT will be accrued at month end

Accrued FBT v Actual FBT

V

Currently

• FBTAA provides concessional taxation to LAFH benefits

• LAFHA is compensation for additional expenses & disadvantages suffered due to employee being required to live away from usual place of residence in order to perform employment duties

• Required by employer to move• Temporary period – fixed term

contract• Intention to return to live at former

locality• Employee provides a LAFHA

declaration each FBT year

Tax Implications

• Employee Salary Sacrifices for Rent and F&D

• Managed by HR• Rent – No PAYG, No FBT • F&D – No PAYG, No FBT on exempt

statutory amount (i.e. >$42pw per adult up to ATO rate)

• No Payroll Tax - Exempt Fringe Benefit

• LAFHA not subject to SGC• No Workers Compensation -

Exempt Fringe Benefit

Living Away From Home

• Leave LAFHA in FBTAA• Temporary Residents who do

not maintain a home in Australia which living away from for work no longer eligible for LAFHA from 1/10/2012

• Transitional rules for domestic employees living away from Australian home as at 8/5/2012, eligible LAFHA until 1/7/2014 unless material change in employment arrangement

• Domestic employees, contract after 8/5/12, maximum period of 12 months for LAFHA

Eligibility

• Required by employer to live away from Australian residence

• Maintain a home in Australia• Ownership interest in home• Home which living away from

must be available for their personal use and enjoyment at all times

• Cannot be rented out or sublet• Expectation to return to live at

former residence

Living Away from Home Proposed Reforms

Contractors and VN1 Form

• All new Vendors to complete VN1 form – process and system to manage

• VN1 form has questions in relation to the services provided and ABN status

• To assess if employee or contractor• Assess for PAYG withholding, Superannuation and Payroll Tax• Vendor Classification assists in identifying for upfront Payroll Tax

exemption, ongoing Payroll tax assessment or SGC.• If “Refer HR” – needs to be referred to HRC for setting up in HR

system. Cannot be paid through AP.

• Standard UNSW Contact Sole Trader Contractor Agreement Other Entity Contractor Agreement (Company, Partnership, Trust)

Service Provider – Payment for Service

Note: Some Sole Traders may be assessed(VN1 result) to be paid via A.P, if no Superannuation or PAYG obligations

NFP Sector

• 10 May 2011 reforms to NFP sector announced• Creation of Australian Charities and NFP Commission (ACNC) – National

regulator, establish and maintain database of charities, one-stop-shop for charities, oversight on financial and governance practice. Est by 1/10/12.

• Statutory definition of Charity due 1/7/13. Charitable status of entity reassessed against definition. Some entities potentially lose tax exempt status if not meet definition. Ensure focus activities on education or other charitable purposes.

• Reform to better target NFP tax concession. NFP taxed on income of Unrelated commercial activities, where profits not directed back to entities altruistic purposes. Applies from 1/7/12 to new unrelated commercial activities commenced after 10/5/11.

• Restating “In Australia” special conditions. Operate and pursue purposes principally in Australia. Income tax exemptions, DGR status. May place restrictions on overseas operations that could jeopardise tax concessions.

Questions

Further Information

Finance website: http://www.fin.unsw.edu.au/PoliciesProcedures/AccountingManual/FBT.html

Contact: Anne Harvey - Ext 51635. Email: a.harvey@unsw.edu.au

Eric McCallum – Ext 52825, Lucy Lowe – Ext 51204