Lump sum payments received by healthcare practitioners

The ATO has provided further guidance for healthcare practitioners dealing with lump sum payments from healthcare centre operators.

The Tax Office is concerned with some practitioners who have received lump sum payments and have incorrectly treated the payments as a capital gain. These practitioners have then applied the small business CGT concessions to reduce the capital gain, in many instances reducing it to nil.

The ATO has clarified that a lump sum payment from a healthcare centre operator is more likely to be ordinary income of the practitioner for providing services to their patients from the healthcare centre rather than a capital gain. Practitioners are required to include the full amount of the lump sum payment in their assessable income.

Healthcare practitioners who are considering any arrangements that relate to a lump sum payment for commencing or providing ongoing healthcare services should note that the ATO is looking closely at these arrangements to determine if they are compliant with income tax laws and whether the anti-avoidance provisions may apply.

The Tax Office is aware that some practitioners are using a private ruling that was issued to another taxpayer, however, you can only rely on a private ruling if you applied for it.

Healthcare practitioners entering or planning to enter into an arrangement of this type are encouraged to seek independent professional advice, ask the ATO for a private ruling or make a voluntary disclosure to reduce any penalties. Please contact our office if you have any questions about these arrangements.

ATO to report unpaid debts to credit agencies

The Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO) announced that from 1 July 2017, the ATO will disclose tax debt information of businesses who have not effectively engaged with the ATO to credit reporting bureaus.

The new measure is aimed at enhancing the integrity of the tax system and ensuring businesses who are not compliant do not gain an unfair competitive advantage over those businesses who are.

The ATO will initially pass on unpaid debts from businesses with an Australian Business Number and with a tax debt of more than $10,000 which is at least 90 days overdue.

In addition, the Government will provide $1.6 million to establish a Black Economy Taskforce to develop an innovative, whole-of-government policy response to this problem. Black economy activities disadvantage honest taxpayers, undermine the integrity of Australia’s tax and welfare systems and reduce the amount of revenue collected by governments.

Preparing for the FBT year-end

With the fringe benefits tax (FBT) year ending 31 March 2017, now is the time for business owners to get their FBT affairs sorted.

When calculating FBT liability, employers must gross-up the taxable value of benefits provided to reflect the gross salary employees would need to earn at the highest marginal tax rate (including Medicare levy) to buy the benefits after paying tax.

To calculate fringe benefits taxable amounts, employers must use two separate gross-up rates:

• Type 1: Higher gross-up rate is used where employers (or other benefit providers) are entitled to a GST credit for GST paid on benefits provided to an employee. The type 1 gross-up rate for year ending 31 March 2017 is 2.1463.

• Type 2: Lower gross-up rate is used where there is no entitlement to a GST credit. The type 2 gross-up rate for year ending 31 March 2017 is 1.9608.

The FBT rate for the year ending 31 March 2017 is 49 per cent.

Whether the benefits provided to the employee are type 1 or type 2, only the lower gross-up rate is used for reporting on employees’ payment summaries.

Easier GST reporting for food retailers

Many small food retailers buy and sell products that are both taxable and GST-free. Depending on the point-of-sale equipment used, identifying and recording these sales can be difficult for business owners.

The ATO has introduced a series of simplified accounting methods (SAMs) to make it easier to account for GST and work out the amount of GST that is liable at the end of each tax period.

There are five SAMs to choose from. The SAM you choose will depend on your business’ turnover, the nature of your business and the nature of your point-of-sale equipment (except for the purchases snapshot method).

These methods help you work out the information you need to correctly complete the GST section of your activity statement. However, they can only be applied to sales and purchases of trading stock.

Here is a summary of the five SAMs you can choose from:

1. Business norms

Turnover threshold: SAM turnover of $2 million or less.
How you estimate your GST-free sales and/or purchases: You apply the standard percentages to your sales and purchases.

2. Stock purchases

Turnover threshold: SAM turnover of $2 million or less.
How you estimate your GST-free sales and/or purchases: You take a sample of purchases and use this sample.

3. Snapshot

Turnover threshold: SAM turnover of $2 million or less.
How you estimate your GST-free sales and/or purchases: You take a snapshot of your sales and purchases and use this.

4. Sales percentage

Turnover threshold: GST turnover of $2 million or less.
How you estimate your GST-free sales and/or purchases: You work out what percentage of GST-free sales you made in a tax period and apply this to your purchases.

5. Purchases snapshot

Turnover threshold: GST turnover of $2 million or less.
How you estimate your GST-free sales and/or purchases: You take a snapshot of your purchases and use this to calculate your GST credits.

After electing to use a SAM, you cannot change your method of GST accounting in the first 12 months.

Preparing for contribution cap changes

From 1 July 2017, many of the 2016 Federal Budget super reforms will take place, including the reduction of both the annual concessional and non-concessional contribution caps.

Concessional contributions
Concessional contributions include employer contributions and salary sacrifice amounts. Personal contributions claimed as a personal super contribution deduction also count as concessional contributions.

The concessional (pre-tax) contributions cap will be lowered to $25,000 for everyone. Previously, those aged 50 years and older could contribute up to $30,000 and $35,000 for everyone else.

Individuals who wish to make extra concessional contributions before 1 July will need to check what concessional contributions have been made to all their super funds from 1 July 2016 and arrange for the additional concessional contributions (up to their age cap) to be paid to their super before 30 June 2017.

A new super rule will be introduced effective from 1 July 2018 which will allow individuals with a total super balance of less than $500,000 at the end of 30 June of the previous year to ‘carry-forward’ their unused concessional contributions cap. This allows individuals to access their unused cap space on a rolling basis for five years.

For example, in 2018-19, Tom makes $10,000 in concessional contributions, leaving an unused amount of concessional contribution cap of $15,000. Tom can carry forward for up to five years to increase his concessional contribution cap. In 2019-20, in addition to his normal $25,000 concessional cap, Tom can use the $15,000 of unused cap from the previous year. This means Tom’s total concessional cap for 2019-20 is $40,000.

Non-concessional contributions
Non-concessional contributions include personal contributions for which you do not claim as a tax deduction. All non-concessional contributions made to all your super funds are added together and count towards the cap.

The annual non-concessional (after-tax) contribution cap will be reduced from $180,000 to $100,000. Those aged between 65 and 74 years old can still access this cap, provided they satisfy the work test.

Individuals who make non-concessional contributions with a total super balance greater or equal to the general transfer balance cap for the year ($1.6 million for the 2017-18 financial year) at the end of 30 June of the previous financial year will give rise to excess contributions.

For those under 65 years, you can still bring forward three years worth of non-concessional contributions. However, as the non-concessional cap has lowered to $100,000, you will only be able to bring forward $300,000 in a single year from 1 July 2017 onwards.

To access the non-concessional bring forward arrangement for 2017-18, you must be under 65 years for one day during the first year and you must have a total super balance less than $1.5 million.

The remaining cap amount for years two or three of a bring-forward arrangement is reduced to nil for a financial year if your total super balance is greater than or equal to the general transfer cap at the end of 30 June of the previous financial year.

Transitional arrangements will apply to those individuals who have triggered the bring-forward period in the 2015-16 or 2016-17 financial years but have not fully used their bring-forward before 1 July 2017.

Are your website costs tax deductible?

The ATO has provided business owners with further guidance on the deductibility of website costs in a recent Taxation Ruling.

The Tax Office considers a commercial website as a website which is used in the course of a business, irrespective of whether it is used directly to produce income. This does not include software provided on the website for installation on the user’s device.

Hardware, the right to use the domain name and content available on or incorporated into a website that has independent value to the business are considered separate from a commercial website.

The tax deductibility of a website depends on whether the expenditure on a commercial website is revenue or capital in nature under section 8-1.

Examples of expenditure which are tax deductible in the year incurred include:
– Periodic operating, registration and licensing fees
– Expenditure incurred in maintaining a website
– Modifications to a website that add minor functionality or make minor enhancements to existing functionality
– Domain name registration fees and server hosting costs
– Maintaining a social media presence and updating content mainly for marketing purposes
– ‘Off-the-shelf’ software that is licensed periodically

Costs that are ‘capital’ in nature are generally claimable over a number of years. Examples of capital expenditure include:
– Labour costs that are directly referable to the enhancement of the profit-yielding structure of the business
– ‘Off-the-shelf’ software products where the product provides an enhancement of the profit yielding structure of the business
– Acquiring or developing a commercial website for a new or existing business
– Modifications resulting in structural advantage
– Extended or new functionality

In-house software
Expenditure that is not deductible under section 8-1 may be ‘in-house software’ and deductible under the capital allowances regime. The expenditure may be deducted over 5 years from the time the in-house software is first used or installed ready for use.

If the expenditure on in-house software is incurred through developing computer software, the expenditure may alternatively be allocated to a software development pool and deducted in accordance with the pool rules.

For small business entities that choose to use the simplified depreciation rules and do not allocate the expenditure to a software development pool, the expenditure is deductible:
– immediately where the asset costs less than the instant asset write-off threshold, and
– otherwise, in accordance with the general small business pool rules.

Clarification on ride-sourcing

The Federal Court has recently agreed that ride-sourcing is taxi travel.

For GST purposes, the word taxi means a car (vehicle) made available for public hire that is used to transport passengers for fares.

State and territory laws regulating transportation of passengers contain specific definitions of the term taxi. A vehicle can be considered a taxi for GST purposes, but not for state and territory regulatory purposes.

The ATO defines ride-sourcing as an ongoing arrangement where a driver makes a car available for public hire; a passenger uses, for example, a website or smartphone app provided by a third party to request a ride, i.e. Uber, GoCar and the driver uses the car to transport the passenger for payment with a view to profit.

For those who provide ride-sourcing services, you are most likely to be running a business and therefore, you must:
– keep records
– have an Australian Business Number (ABN)
– be registered for GST, regardless how much you earn
– lodge Business Activity Statements (BAS)
– pay the GST portion of the full fare received from passengers for each trip
– include income from ride-sourcing in your income tax returns.

Rates increase for fuel tax credits

Fuel tax credit rates increased on 1 February 2017. These rates are indexed twice a year, in February and August, in line with the consumer price index (CPI).

The rates vary depending on when you acquire the fuel, what fuel you use and the activity you use it for. Rates may also change for fuel used in a heavy vehicle for travelling on public roads. This is due to changes to the road user charge which is reviewed annually.

If you claim less than $10,000 in fuel tax credits each year, there are now simpler ways to record and calculate your claim. For the BAS period ending 31 March 2016 and onwards, you can:
– Use one rate in a BAS period – the rate that applies at the end of the BAS period
– Work out your litre based on the cost of the fuel you purchased.

To check which rate applies for your business, visit the Australian Tax Office (ATO) website or contact our office. Remember, there are time limits for claiming fuel tax credits, making adjustments and correcting errors – generally, you must claim or amend your claim within four years.

ATO issues bad debt ruling

The Australian Taxation Office (ATO) has issued a ruling that clarifies the circumstances in which a deduction for bad debts is allowable.

To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as bad. A debt exists for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from another either at law or in equity.

The question of whether a debt is bad is a matter of judgment having regard to all the relevant facts. Generally, provided a bona fide commercial decision is taken by a taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad for section 63 purposes. The debt, however, must not be merely doubtful.

Where a trustee in bankruptcy, receiver or liquidator advises a creditor of the amount expected to be paid in respect of a debt, the remainder of the debt (i.e. the extent to which the amount likely to be received is less than the debt) is accepted as bad when the advice is given.

The bad debt has to be written off in the year of income before a bad debt deduction is allowable under section 63. The writing-off of a bad debt does not necessarily require highly technical accounting entries. It is sufficient that some form of written record is kept to evidence the decision of the taxpayer to write off the debt from the accounts.

The debt must have been brought to account as assessable income in any year or, in the case of a money lender, the debt must be in respect of money lent in the ordinary course of the business of lending of money by a taxpayer who carries on that business.

FBT and business vehicles

Business owners who make a car (leased or owned) available for employees to use for private travel may be subject to fringe benefits tax (FBT).

If a car is garaged at or near your employee’s home, even if only for security reasons, it is considered by the ATO to be available for their private use regardless of whether or not they have permission to use the car privately.

Similarly, where the place of residence and employment are the same, the car is considered as private use. Generally, travel to and from work is also private use of a vehicle.

The use of the car is exempt from FBT in some circumstances, i.e an employee’s private use of a taxi, panel van or utility designed to carry less than one tonne if the travel is limited to:
– travel between home and work
– incidental travel in the course of performing employment-related travel
– non-work-related use that is minor, infrequent and irregular

The best way to show the ATO that a car is used for business purposes is by keeping a log book for a period of at least 12 consecutive weeks showing:
– dates of travel
– odometer readings at the start and end of any trips
– the kilometres travelled
– the reason for the trip

Business owners should also keep odometer readings at the start and end of each year, along with details of the operating costs of the car.

Note, company directors are generally considered as employees by the Tax Office, so if directors use the car for private purposes, then FBT could apply.