Forum Replies Created
Contract,
If the payment is for payment of services or “personal exertion” and you are an Australian Resident for tax purposes then you are assessed on income from all sources (regardless of where the income is earned). You should consult a good accountant and determine whether the income is covered by Australian taw laws.
Let’s assume that it is and you haven’t paid tax overseas and the country is not party to a double-tax agreement (see your accountant about this). Yes you can shift the money to an offshore account (Guernsey, Channel Islands, Jersey, Cayman Islands, Vanuatu are all popular offshore banking destinations). However the ATO has taken an interest in offshore arrangements and if you “loan” the money back to your company then the ATO is going to ask “where did the funds originate from” and want some damn good answers.
A lot of people have also transferred funds to offshore accounts, setup a credit card in the offshore account and then used that credit card for purchases, etc. The tax office has taken a keen interest in this area and is currently auditing a number of tax havens and requiring people to explain funds held offshore.
Even if the offshore tax haven is one that is generally not co-operative with the ATO (and the British Isles tax havens have been very complying so a good chance you will get caught if using one of them) then they can look at your expenditure patterns and ask some reasonable expenses. e.g. if you recently purchased a Porsche (easy to trace through registration of your vehicle) and you have an assessable income of $50K then the ATO will want to know how you are going to support the lease payments or how you managed to pay cash for the item.
My personal advice is to pay tax on this income and not try to avoid tax. It is fraud and heavy penalties and goal sentences can apply.
Finally a “great accountant” does not write off tax. They will assist you in determining your assessable income, allowable deductions and ensuring that you pay the correct amount of tax. They will assist you in legally minimising your tax. If however you have few allowable deductions and you have not setup a tax friendly structure (e.g. a family trust) then they can help you in future planning but they will not assist you in obtaining a refund where one is not due or write off the tax. It is a common misconception that the “best accountants” will get you the greatest deduction. It all depends on your circumstances, record keeping and structures.
Some good news on the Bankruptcy Laws front. The latest reforms have been withdrawn.
The assumption is that property will continue to make such capital gains. As the economists are saying property is now at a historically high level i.e. around 9 times earnings and we know that this is not sustainable. Either one of two things are going to happen (or maybe a combination of both). Prices will decrease so that affordability is increased or prices will remain stable until wages increase and again affordability increases. So if you have a negatively geared property purchased now and it makes no gains for 5 years then it would have been better if the funds stayed in a debenture at a rate of around 8%.
I have been an advocate for some time of realising your gains while the market is high. That time is now. Obviously you need to determine the cost of holding the investment and ensure that you make a reasonable return on your investment after outgoings and including the tax effect.
I think now is the best time to sit back and wait. I cant believe how many people are still investing in the market. But then again I said the same thing during the tech boom. Well I guess that is why I am in the 2% they keep talking about.
Shaun,
I trust that you are being facetious. The bestest buddy ever is something I would sign for charity but “who i couldnt have gotten where i am without your help”. Well unless this is true there is no way I would be signing such a clause. I don’t know if you realise but making such a statement and signing it would legally enable you to take action against Steve for a share of profits. If he did sign it then he has admitted that you contributed signficantly to his success. I really think that you are putting totally unrealistic expectations on him if you are indeed serious. Anyway I wouldn’t be signing any such statement. Just be happy with a signed copy and the proceeds going to Charity. I mean the next bid will have you stating “and any proceeds from the sale of the book going to Shaun”
[rolleyesanim]
It seems like this is a new puzzle. Aussiemike has won the book by correcting an incorrect variable. WrapAttack is the rightful winner by using the correct variables. Initially Aussiemike has won, then wrapattack wins as well. But WrapAttack doesn’t want his book and offers it to Mel or auction. Meanwhile Aussiemike offers his book to WrapAttack and in the meantime Steve is auctioning Wraps book which is really Mels book and Wraps book is Mikes old book. This is a great puzzle Steve.
Steve,
More than happy for my book to go to Auction as well with the proceeds to the Smith Family. They do a wonderful job. Sounds like a good idea.
Hey Steve you can’t even give your book away. This is hysterical.
Given that I seem to have won and the judges decision is final I would like to award my prize to WrapAttack. At the time of posting they came up with the correct answer.
Ive had to change my clients figures so many times I’m just used to it. Seriously though congrats WrapAttack.
I figured that Steve had made a mistake and just taken 1/4 as being 0.5 and therefore used 2.5% to determine the selling costs.
I agree that -1,505 is technically the correct answer but that wasn’t an option. So like all good accountants I just played with the variable I figured was incorrect.
I do think the person that said -1,505 should get the prize as they are correct.
I get the answer to be E
Initial Purchase Price 400,000.00
Plus : Closing Costs 20,000.00
Plus : Selling Costs @ 2.5% 10,950.00Cost Base of Asset for Tax Purposes 430,950.00
Sales Proceeds 438,000.00
Capital Gain 7,050.00
Note : Not subject to 50% CGT
Discount as held for less than
12 monthsLess : Cost of Property for 12 months 9,650.00
Amount included in Assessable Income -2,600.00
Terry,
The changes to the Bankruptcy Laws are frightening. Did you read Brett Davies Lawyers recent newsletter ?
This is for those that are interested.
There is a very naughty business called Casualife Furniture run by the Guss family. It builds up lots of ATO debt. They then voluntarily wind up their insolvent company. Not to worry. They just start another one – and do it all over again. Casualife touts itself as a “family company for almost 20 years”.
True to form, the latest Guss family business, Casualife, was clocking up lots of unpaid taxes. They were having a good time.
What does the ATO do about that?
Rather than sit on the sidelines the ATO decided to get in first and wind up the company. But the company was solvent. It was making lots of profit – as one would expect when you don’t bother to pay your tax. How could the ATO wind it up?
Obviously, the ATO couldn’t apply for winding up on the grounds of insolvency. However, when shareholders have an argie-bargie they often use the Corporations Law to wind up the company if it is “just and equitable”.
I have never seen it used by a non-shareholder. It was ingenious. Brett Davies Lawyers often headhunts the cream from the ATO, so I am now hunting down the bright spark who formulated this strategy.
Anyway, the ATO said that it is “just and equitable” to wind up the solvent Casualife because of “commercial morality” and in the “public interest”.
The Guss family were flabbergasted. Never had they known the ATO to be so rude. In disgust they wrote a big cheque to the ATO. They then innocently told the court that the ATO was no longer a creditor.
Last month the court still ordered that Casualife – a profitable company – be wound up. Thus history was made. The judge said:
“The history discloses a disdain for the obligation to pay tax and commercial morality in the conduct of a business. The Deputy Commissioner’s lack of confidence in the defendants’ likely observance of their taxation obligations is well justified in the circumstances. For that reason and also because it would be fair to do so, it is appropriate to order winding up. If the defendant companies were not wound up they would continue operating in the public domain under the same Guss control who would, I find, continue to engage by these entities in the same type of impugned conduct. I am also of the view that it is in the public interest and conducive to commercial morality that the companies be wound up, both to prevent the perpetration of further commercial immorality and for the benefit of having the companies under the control of a liquidator.”
WrapAttack,
I have expanded my response. I am not quite sure what you mean when you say you paid it ? Are you saying that you paid the stamp duty when you transferred the share ?
WrapAttack,
A few issues:-
1. Although the company tax rate is 30% and any capital gains are assessed at that rate companies are also not entitled to the 50% CGT discount. Trusts are entitled to the 50% CGT discount. This could have a significant tax impact. For example if you had a capital gain (after allowing for incidental costs,etc) of $100K and you held the property for more than twelve months the following CGT would apply:
Company $100K x 30% = $30,000 CGT
Trust $100K x 0.50 = $50K to be distributed to the benefeciaries. Let’s assume that it is distributed to a sole beneficary on the top tax rate of 47% then the tax payable will only be $23,500.Therefore under a company structure it results in a disadvantage of $ 6,500.
I do agree that if you plan on purchasing and selling the property within 12 months (as you mention in your email) then a company structure will provide better tax advantages. However once the asset is held for more than 12 mths then this structure is not advantageous from a tax perspective.
2. The rate of duty payable will usally be the general rate of duty. Considering that the company owns land then it will be under the land use sentitlement which means an entitlement to occupy land within NSW conferred through an ownership of shares in a company or an ownership of units in a unit trust scheme, or a combination of a shareholding or ownership of units together with a lease or licence. The dutiable value will therefore be the value of the property. This is provided that the shareholders have a right to occupy the property.
If the company memorandum does not entitle the shareholders to occupy the property then it will be a straight share transfer and the duty will be at the lower share duty rates. Note however that the office of state revenue will revalue the shares. So if your company has two shares worth $2 and it holds property worth $300K then it will deem the shares to be worth $300K i.e. each share will be worth $150K and duty calculated on this amount.
3. Everyone should also be aware of the recent changes to the Bankruptcy Laws. Things have changed dramatically and the protection that trusts used to provide is being dramatically reduced.
Sounds reasonable to me. My hourly charge out rate when I was in practice was $250 per hour. Given that you had a few phone conversations (say 3 @ 10 minutes each that accounts for 1/2 hr and then another 1/2 hr discussing the trust situation with the lawyer and preparing relevant correspondence would equate to an hour on top of the hour you spent in their office). 2 hours in total. If you were my client you would have been billed the same amount.
A lot of people complain about the costs but keeping up-to-date with tax legislation, accounting regulations, trust, company, partnership and superannuation law is expensive. This cost is then reflected in the hours of study and time charged to clients.
I think this fee is reasonable provided that the advice you received was relevant, current and within the scope of your requirements.
Mel,
Certainly not claiming you are evading tax but just a warning for those that think they can understate their tax or commit fraud or evasion and get away with it. Those days are coming to an end.
And if the Tax Office does find that you have committed fraud they can refer it to the appropriate authorities e.g. Police, Centrelink, etc and appropriate action can be taken.
For example if you state that you have a $100K income and they then issue you with an amended assessment for $100K and you then come back and so ohh that was a mistake I overstated my income they can refer this to the police as it is bank fraud or if your wife was receiving Child Care Benefits they may refer it to Centrelink for you to explain further to them. It can be nasty. I have seen it happen quite recently.
Yes and i certainly wouldn’t advise telling the ATO to go and jump.
Remember an administrative penalty of 20 penalty units ($2,200) applies if a taxpayer fails to provide ALL reasonable facilities to a taxation officer who is authorised by taxation law to have access to places, premises, books and other information (TAA Sch 1 sec 288-35 ). These access powers are very broad. Just look at the Citibank case.
Refusal or failure to duly keep or provide information, or give access to it, also constitutes an offence that renders the taxpayer liable to prosecution . If a prosecution is instituted, however, no administrative penalty is payable. (Great but you have committed a criminal offense – how nice)
For many years the ATO has not had the resources to clamp down on the things that they are now looking at. I am aware of many business owners who are facing amended assessments, penalties and interest for incorrect claims. The Tax Office has equipped its arsenal and many are going to feel the pain of their might very shortly. If your records are in order and you have sought professional advice then you should be fine but if you have tried to evade tax then be careful. The matching software the ATO has installed in recent years is state of the art. It matches Land Titles Office records to personal, trust, company and partnership returns. They have software that matches interest from all financial institutions to your personal tax return. The software is sophisticated and so are there methods. If you have made a mistake then be up-front, be honest and they can reduce your penalty. If you are defiant and tell them to get stuffed be prepared for harse penalties if you are wrong, and also an audit of all your last five years return (at your expense!!!)
Krazy is talking about the Australian version of Monopoly which came out 1985. Prior to that Australians had the London version of the game. I think there are over 50 different countries for Monopoly now. Great game.
Mortgage Advisor,
I would seek a private ruling from the ATO on this one.
You may be caught out under a few provisions:-
-the period of interest outgoings before the derivation of relevant assessable income is not so long that the necessary connection between outgoings and assessable income is lost;
(The ATO may consider 2 years to be too long)
-the interest is incurred with one end in view, ie the gaining or producing of assessable income; and
(technically this is not the case for you. The end view is to use this as your PPOR. Even if you don’t tell the ATO of this in seeking your ruling – which you wouldn’t because they will knock back the claim – then they may look at when you move into the property (in the future) and then claim that your original intention was to do such a thing and then they will knock back the interest deduction.
-continuing efforts are undertaken in pursuit of that end.
(again your reason was to buy other IP’s. Probably not sufficient reason for the ATO. They will want to know what efforts have been taken to to make this an income producing property – e.g. discussions with builders, quotations, negotations with council – all those things go towards helping this)
So a private ruling would let you know either way what your position would be.
Sooshie,
If you have trouble finding one that agrees then go elsewhere. They are not up-to-date and are not worth the money you are spending on them.
The relevant Taxation Ruling is TR 2004/4.
This ruling deals with the deductibility of interest on borrowed funds incurred before the commencement of, and after the cessation of, business activities. The ruling follows the High Court decision in Steele’s case (99 ATC 4242), and the Full Federal Court decisions in Brown’s case (99 ATC 4600) and Jones’ case (2002 ATC 4135).
As a general principle, the ruling states that the deductibility of interest is determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put. Where the interest is on revenue account, the fact that the borrowed funds may be used to purchase a capital asset does not alter this conclusion.
Following Steele’s case, the Commissioner says that interest incurred before the derivation of assessable income will be deductible under sec 51(1) of ITAA 1936 or sec 8-1 of ITAA 1997, provided that:
-the interest is not preliminary to the income earning activities;
-the interest is not private or domestic;
-the period of interest outgoings before the derivation of relevant assessable income is not so long that the necessary connection between outgoings and assessable income is lost;
-the interest is incurred with one end in view, ie the gaining or producing of assessable income; and
-continuing efforts are undertaken in pursuit of that end.Where interest has been incurred after the relevant borrowings (or assets representing those borrowings) have been lost and relevant income earning activities have ceased, the outgoing will still have been incurred in gaining or producing assessable income if the outgoing was productive of assessable income of an earlier period. This is a question of the nexus between the outgoing and the income earning activities. The Commissioner says that interest will not fail to be deductible merely because:
-the loan is not for a fixed term;
-the taxpayer has a legal entitlement to repay before maturity the principal with or without penalty; or
-the original loan is refinanced, whether once or more than once.However, the nexus will be broken if the taxpayer:
-keeps the loan on foot for reasons unassociated with the former income earning activities; or
-makes a conscious decision to extend the loan in such a way as there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred.In particular, the Commissioner considers a legal or economic inability to repay suggests that the loan was not kept on foot for purposes other than the former income-earning activities.
Where borrowed funds are lost and there is a penalty for early repayment of the borrowings, the penalty will be deductible as if it were interest.
The Commissioner’s previous ruling on this matter (TR 2000/17) is withdrawn with effect from 9 June 2004.
