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End of Financial Year: Tax tips for students*

It’s time to prepare and lodge an income tax return with the Australian Taxation Office (the ATO). Taxes are a complicated topic, there is a lot of (sometimes misleading) information, and students might wonder whether they actually need to lodge a return. Mark Morris, Professor of Practice in Taxation here at LBS, sums up the most important tax questions you’ll need to consider as a university student studying in Australia.

First of all, if the income tax deducted from a student’s job exceeds the total income tax payable for the tax year, a student can obtain a refund of overpaid tax by lodging an income tax return. It might also be that students are legally required to lodge a return and pay tax where insufficient income tax been retained from their salary, or where they derive other categories of assessable income on which they owe tax.

Are you an Australian tax resident?

If you were born in Australia and continue to live here, you will be regarded as an Australian resident for income tax purposes.

However, for international students to recognise that being a resident for Australian tax purposes is quite different to being a permanent resident for Australian immigration purposes, and that they may sometimes unknowingly be an Australian tax resident. As a broad rule of thumb, the ATO takes the view that living in Australia for six months is a period which is generally consistent with a person residing here for tax purposes. If you are unsure whether you are an Australian resident for income tax purposes you should contact the ATO or a registered tax agent.

Tip: Remember that being a resident for Australian tax purposes is quite different to being a permanent resident for Australian immigration purposes.

What happens if you’re an Australian tax resident?

On the upside, you’ll be entitled to a tax free threshold. This means you won’t pay any income tax for the year ended 30 June 2018 if your total taxable income is $18,200 or less.

What’s more, you may be eligible for a refund. Say you worked part-time, earned a salary from which income tax was deducted by your employer, and your total taxable income was $18,200 or less, then you’d be able to receive a refund of any tax withheld from your salary income.

On the downside, you’ll be subject to tax on all your assessable income for the year ended 30 June 2018 – regardless of where you earned it. For example, as an international student, you’ll need to include both your Australian salary income and any interest income earned in a bank account held in your home country.

And if insufficient income tax has been withheld from your salary, or if you’ve earnt other assessable income on which you owe tax, you’ll be legally required to lodge a return to pay tax. In addition, Australian residents are subject to a 2 per cent Medicare levy, but only where your taxable income exceed certain thresholds.

Tip: The tax your employer withholds is known as a Pay As You Go (PAYG) withholding. Look for it on your payslip.

What do I need to lodge a tax return?

Everyone who lodges an income tax return needs a tax file number (TFN). If you’ve been employed, you’ve probably already been issued a TFN. If for some reason you’re lodging a return but don’t have a TFN, you’ll need to apply for one from the ATO, either directly or by using a registered tax agent.

Next, you’ll need to collate information to prepare your income tax return. This information includes things like your:

  • payment summary, a statement your employer issues at the end of each financial year to show how much income they paid you and how much tax they withheld
  • bank statements showing any interest you’ve earned
  • dividend slips, to show payments made by companies you have shares in
  • invoices and receipts.

Assuming you have a TFN and your tax return is relatively simple, you can prepare and lodge your income tax return on-line using the ATO’s myTax product. In case your tax return is more complicated, contact a registered tax agent to ensure you identify all your entitlements and to ensure that your income tax return is correctly prepared.

Tip: If you expect to receive a tax refund, you’ll also need to have your bank account details on-hand to nominate where your refund will be deposited.

What types of income need to be included in your return?

When you prepare your tax return, you’ll need to declare all the assessable income you’ve earned this financial year. Income is more than just ‘money’ – it can come from a range of sources, such as:

  • Salary and wages, as a full-time, part-time or casual employee
  • Allowances and bonuses
  • Tips and gratuities, such as those earned while working in hospitality jobs
  • Fees received as an independent contractor
  • Business income (but not income earned from a hobby)
  • Government payments and allowances like Newstart Allowance, Youth Allowance, Austudy payments and others
  • Income from bank interest
  • Dividend income
  • Distributions received from a family trust or as a partner in a partnership, and
  • Capital gains on the sale of assets – a highly complex area requiring specialist expertise.

What type of work-related deductions can you claim?

Your total assessable income can be reduced by what the ATO calls ‘deductions’. Deductions are amounts you can claim for any expenses you’ve incurred to make that income. They come in three main forms: work-related deductions, self-education expenses and personal deductions.

You can also claim an amount for the decline in value over time (‘depreciation’) of certain assets, like a computer, in relation to how much it’s been used to help earn your assessable income.

Some of the more common types of deductions you might be able to claim are:

  • Work-related subscription and union fees
  • Protective clothing and compulsory work uniforms
  • Home office expenses (if you’re required to work at home after hours, and you keep a diary listing the hours you worked at home, for a minimum of four weeks)
  • Work-related phone and internet costs, and
  • Travel expenses between worksites (but not for travel between home and work).

You might also be entitled to claim a deduction for the cost of tools of trade, briefcases and calculators costing less than $300, to the extent that you use them for work.

Tip: Take care when claiming deductions for work-related expenses, as this is an area that’s closely scrutinised by the ATO. You can’t claim an expense that your employer reimbursed you for. And you’ll need written records of the expenses you’ve incurred (such as invoices, receipts and bank statements).

When are self-education costs allowed?

If you’re studying a course that will maintain or improve your skills in your current occupation, you can claim the costs of study as a self-education expense. You can also claim the costs of course fees, textbooks, stationary, travel costs and the depreciation of items like laptops, tablets and printers. Accordingly, you can’t claim study costs if you’ve not yet started a particular career. For example, as an undergraduate student, you can’t claim costs associated with obtaining your initial academic qualification. The same logic applies if you’ve decided to change careers – you can’t claim the costs of studying a new area of expertise. You also can’t claim Higher Education Loan Program (HELP) repayments.

Tip: To see some specific examples of when you can and can’t claim self-education expenses, check out Taxation Ruling TR98/9.

What personal deductions can you claim?

You can claim donations of $2 dollars or more to a deductible gift recipient (for instance, a charity like the Australian Red Cross) provided you’ve kept copies of receipts for any gifts made. You can also claim a deduction for any fee paid to a registered tax agent during the year ended 30 June 2018 for the cost of managing your tax affairs. However, in a unique twist, this deduction is held over until the following year – a good incentive to do your tax return in the financial year ending 30 June 2019!

Tip: For gold-coin donations (like those you drop into a collection bucket), you can claim a deduction equal to your contribution up to $10 without a receipt.

What tax offsets can you claim?

Tax offsets are different to deductions. While deductions can reduce your assessable income, tax offsets are directly applied as a credit to reduce your tax payable. And sometimes, for certain tax offsets, the tax credit received might be more than your tax payable – which could even result in a refund!

The most common tax offsets you can claim:

  • Beneficiary tax offset: may be available if you receive Newstart Allowance, Youth Allowance, Austudy payments or certain other Commonwealth education or training programs.
  • Franking credit tax offset: If you’re a shareholder in an Australian company, you might be eligible for the franking credit tax offset. When a company pays you a franked dividend, the company may pass on a tax credit for tax it’s paid on its income. Such a tax credit can be claimed as a franking credit tax offset.
  • Small business income tax offset: if you’re a student who’s also running a business, you might be entitled to the small business income tax offset. This equates to 8 per cent of the income tax payable on the portion of your taxable income that’s ‘total net small business income’, provided the aggregated turnover of the business is less than $5 million.

Tip: The small business income tax offset is quite complex, so seek specialist advice if you intend to claim them.

Where do I go for help?

If you think you need to lodge an income tax return, get in touch with the ATO or take a look at their valuable information for individuals. If you’d prefer to get independent tax advice, find an accountant who’s not only a tax expert, but also a registered tax agent, to ensure they’re legally authorised to provide such services.

And if you’re entitled to a tax refund – go get what is yours!

 

Mark Morris La Trobe Business School Professor of Practice

Mark Morris is Professor of Practice in taxation at LBS. Prior to this role Mark held various senior roles in chartered accounting and industry, and has been a frequent speaker and author on tax matters. Mark has degrees in Law and Commerce and majored in Accounting. He is a registered tax agent, a member of CPA Australia and the Taxation Institute and has been admitted to practice as a solicitor in Victoria.

 

This blog post was originally published on NEST. Read the original article.

*Disclaimer: La Trobe University has used reasonable care and skill in compiling the content of this general commentary. However, it should not be relied upon as advice in any circumstances, and no warranty is provided by either the University or the author concerning the accuracy and completeness of these materials. Accordingly, we disclaim all and any liability to any person in respect of reliance on any of the matters raised in these materials, and professional advice should be sought from an appropriately qualified registered tax agent where required.

 

“Where will the tax jobs be in 2020?”

Mark Morris La Trobe Business School Professor of Practice
By Mark Morris

It’s a vexing question for those planning a career in tax.

In my 30 plus years in the profession I have never seen it face so many challenges simultaneously.

The most obvious change is of course digital disruption.

In part this is because the automatic exchange of data is about to balloon as information is transferred in real time as computers talk to each other in a common language using standard business reporting.

But it is also because of the investment being made around the world by Governments and business to effectively leverage their use of big data to make more informed decisions. This is even extending to the development of cognitive computing systems such as IBM’s ‘Watson’ system which can be applied to analyse unstructured data to provide answers to specific questions.

As a corollary much of the traditional tax compliance and process work will gradually diminish as data is collected, exchanged and analysed differently.

However, there are an array of other impending changes including, amongst others, a more informed and savvy public; greater cross border transactions as part of a more integrated world economy; increased offshoring especially of compliance work; more complex tax laws to prop up increasingly competitive tax regimes; a growing reliance on consumption taxes worldwide to provide a more stable revenue base; and an evolving international digital economy where labour, finance, and knowhow are mobile to an unprecedented degree.

Given this mix no-one can predict with absolute certainty where the tax jobs are going to be in 2020.

Nonetheless I believe there are some clear pointers as to how you can best plan a career in tax.

Firstly, the importance of being able to analyse big data in a meaningful way is becoming rapidly crucial to both revenue authorities and professional firms of all sizes.

From the ATO’s perspective it is their growth area as witnessed by the recent creation of their Smarterdata business unit which is not only focussed on analysing data but challenging paradigms as to how the ATO conducts its operations.

Increased globalisation has also heightened the need for businesses of all sizes to be transfer pricing compliant and develop defensible positions based on finding the most comparable data.

Accordingly, tax professionals wishing to augment their tax technical skills by developing business analytics expertise could well consider enrolling in a course such as the Master of Business Analytics and Graduate Diploma in Business Analytics run by La Trobe University’s Business School as the combination of such skills will be in high demand in coming years.

Secondly, if compliance work goes down rest assured the taxation laws will not become any easier.

Whilst many talk about deregulation the tax rules have only become more complex especially for governments worldwide struggling to plug a revenue shortfall.

One only has to witness the complexity of our general anti-avoidance provisions to realise how inordinately complex our tax system has become particularly the recent amendments which will supposedly crack down on international profit shifting.

Going forward what clients will require of their advisers is the ability to work with them in disseminating such complexity and providing viable commercial solutions.

Accordingly, the way in which tax is taught at both an undergraduate and postgraduate level must radically change so that students not only absorb the complexity of the tax law but develop the interpersonal skills to service clients and build referral networks in a more global economy.

This is one of the key reasons why blended learning is being introduced by the Business School as it is encouraging students to not only develop better analytical capacities but also to work in teams to collaboratively resolve issues just like they will be required to do in the workplace.

Finally, whilst the future is daunting in some respects it is critical to remember that accountants repeatedly top the list of most trusted adviser to clients. If you are overwhelmed with change so are your clients and if you need to adapt to changing circumstances so will many of them.

Keeping your clients close will be more important than ever before as will the need to provide timely, accurate and value added services and the willingness to be adaptive and agile.

Mark Morris is a Professor of Practice in Taxation at La Trobe University’s Business School where he teaches both undergraduate and postgraduate taxation and actively contributes to broader industry engagement initiatives between the Business School and the tax profession and other key stakeholders.

Mark also Co-Chaired the ATO’s ‘Future of the Tax Profession 2016’ working group with Colin which comprises senior representatives from the ATO, professional bodies, software developers and practitioners concerning the implementation of the ATO’s standard business reporting initiative.

He has over 30 years experience in senior tax roles in chartered accounting, industry and professional bodies including his former long-term role as Senior Tax Counsel with CPA Australia.

 

TEN TAX TIPS FOR STUDENTS? [1]

Mark Morris La Trobe Business School Professor of Practice

By Mark Morris

Few student welcome the prospect of preparing and lodging an income tax return with the Australian Taxation Office (the ATO).

However, where the income tax deducted from a student’s job exceeds the total income tax payable for the tax year the only way in which a student can obtain a refund of overpaid tax is by lodging an income tax return.

Of course, other students will be legally required to lodge a return and pay tax where insufficient income tax been retained from their salary, or where they derive other categories of assessable income on which they owe tax.

We have developed ten tax tips to help you decide whether you need to lodge an income return for the year ended 30 June 2017, and how to prepare a return if you have too.

1. Are you an Australian tax resident?

The first step is to work out if you are an Australian resident for Australian income tax purposes.

If you were born in Australia and continue to live here, you will be regarded as an Australian resident for income tax purposes as this is the country in which you reside.

However, it is important for international students to recognise that being a resident for Australian tax purposes is quite different to being a permanent resident for Australian immigration purposes, and that they may sometimes unknowingly be an Australian tax resident.

Very broadly, an international student may be regarded as residing in Australia if they are here for such a period of time that their behavior reflects a degree of continuity, routine or habit that is consistent with residing in Australia.

Whilst it is a question of fact in each case as a broad rule of thumb the ATO takes the view that living in Australia for six months is a period of time which is generally consistent with a person residing here for tax purposes.

For example, in one of the ATO’s binding public taxation rulings it held that an overseas student who came to Australia to attend a pre-arranged 4-year university course was an Australian resident even though he left after 6 months to return to his home country following a family illness as his living and working arrangements whilst in Australia were consistent with someone whose pattern of behavior was that they resided in Australia[2].

Accordingly, if you are unsure whether you are an Australian resident for income tax purposes you should contact the ATO or a registered tax agent to obtain more clarity as to whether or not you are an Australian resident in working out your tax rights and obligations.

2. What happens if you are an Australian tax resident?

Assuming you are regarded as an Australian resident for tax purposes what are some of the key tax implications you need to consider.

On the plus side you will be entitled to a tax free threshold which will mean that you do not pay any income tax for the year ended 30 June 2017 if your total taxable income was $18,200 or less.

Accordingly, if you worked part time and derived salary income from which income tax was deducted by your employer you will be able to obtain a tax refund of any Pay As You Go (PAYG) tax retained from your salary income if your total taxable income was $18,200 or less.

In practice, most individual resident taxpayers will also usually be entitled to a tax credit being the low income tax offset which means that no tax will typically be payable if that person’s taxable income is below $20,542. However, the amount of this this tax offset reduces tax payable but is not in itself refundable.

On the negative side you will be subject to tax on all your assessable income for the year ended 30 June 2017 regardless of where it was sourced. For example, an overseas student would need to include both their Australian salary income and any interest income earned in a bank account held in their home country.

In addition, Australian residents are subject to a 2% Medicare levy but only where their taxable income exceed certain thresholds.

By contrast a non-resident is only taxable on assessable income which has an Australian source being generally locally derived investment income. However, such income will be subject to tax at a rate of 32.5% for any taxable income derived up to $87,000 as there is no tax-free threshold for non-resident individuals.

3. What do I need if I want to lodge a return for the 2017 year?

Most students who have been employed would have already been issued a tax file number which is a prerequisite for every individual lodging an income tax return.

If for some reason you are lodging a return but do not have a tax file number you will need to apply for one from the ATO either directly or by using a registered tax agent.

You should then collate all the records and information you will need to prepare you income tax return including, amongst others, any payment summary, bank interest statements, dividend slips, invoices and receipts.

Assuming you have a tax file number you may consider preparing and lodging your income tax return on-line using the ATO’s myTax product if your tax affairs are reasonably simple. Further details on myTax can be found here.

Otherwise it may be prudent to contact a registered tax agent to ensure you identify all your entitlements and to ensure that your income tax return is correctly prepared.

Regardless of how you lodge your return you will need to disclose full bank account details when preparing your income tax return if you expect to receive a tax refund.

4. What types of income need to be included in your return?

As discussed, as an Australian resident you will be taxed on all of your assessable income wherever it is derived.

Some of the more common types of assessable income include the following:

  • Salary and wages (whether as a full-time, part-time or casual employee);
  • Allowances and bonuses (where received during the 2017 income year);
  • Tips and gratuities (such as those received working in hospitality jobs);
  • Fees received as an independent contractor under a contract for service;
  • Any business income derived during the year (not being income derived from carrying on a hobby);
  • Australian government payments and allowances including, amongst others, Newstart allowance, youth allowance, AuStudy payments and certain other educational and training allowances;
  • Interest income;
  • Dividend income (including the amount of any franking credit tax offset for any franking credit attached to a dividend paid by an Australian resident company);
  • Any distributions received as a beneficiary from a family trust or as a partner in a partnership; and
  • Capital gains arising from the disposal of certain CGT assets (which is a highly complex area requiring specialist expertise).

The total of such assessable income may be reduced by eligible deductions which may take the form of work-related deductions, self-education expenses in certain circumstances and personal deductions.

5. What type of work-related deductions can you claim?

You may be entitled to claim a deduction for expenses directly incurred in the course of gaining or producing your assessable income. However, you will not be able to claim an outright deduction which is capital in nature although you may be able depreciate certain capital assets like a computer over time for tax purposes where it has been used for the purpose of gaining or producing assessable income. In addition, you will not be entitled to claim a deduction for expenditure which is private in nature such as the cost of conventional clothing (e.g. suits) purchased for work purposes.

Some of the more common types of deductions you may be able to claim are as follows:

  • Work-related subscription and union fees;
  • Protective clothing and certain work uniforms (including compulsory work uniforms required by your employer);
  • Home office expenses (where you are required to work at home after hours and have a separate room allocated in your home study for that purpose);
  • Employment related telephone mobile and internet costs; and
  • Travel expenses between worksites (but excluding travel between home and work)).

You may also be entitled to claim a deduction for the cost of tools of trade, briefcases and calculators costing less than $300 to the extent to which you use it for work-related purposes.

However, you will only generally be able to claim any work related expenses costing $300 or more if you have retained all the relevant invoices and receipts.

6. When are self-education costs allowable?

Broadly, self-education expenses are only deductible to the extent that the course of study undertaken will either maintain or improve your skills in your current occupation.

Accordingly, you will not be entitled to claim the costs of your course if you’ve not yet embarked on a particular career. Nor will you be able to claim such costs if you have decided to change careers and have incurred such expenses in studying a new area of expertise.

However, you will be able to claim a deduction for self-education expenses where the study or training you are undertaking is likely to enhance your chances of promotion or increase your income earning capacity in your existing occupation.

Further details as to when self-education expenses are allowable or not are set out in Taxation Ruling TR98/9 which can be downloaded here.

Eligible self-education costs include, amongst others, course fees, textbooks, stationary, travel costs and the depreciation of items such as laptops, tablets and printers. However, it is necessary to add back $250 of any self-education expenses as being non-allowable.

Finally, any Higher Education Loan Program (HELP) repayments are non-deductible.

7. What other personal deductions may be allowable?

Donations of $ 2 dollars or more to a deductible gift recipient (e.g. a charity like the Red Cross) will be allowable provided you have kept copies of receipts for any gifts made.

You can also claim a deduction for any fee paid to a registered tax agent during the year ended 30 June 2017 for the cost of managing your tax affairs. However, any amount paid to a registered tax agent to assist you in in preparing your 2017 income tax return will only be deductible in the year ended 30 June 2018.

8. What tax offsets can you claim?

Whilst tax deductions may reduce assessable income tax offsets are directly applied as a credit to reduce tax payable.

Certain tax offsets may also result in a refund to the extent that the tax credit exceeds tax payable.

The most common tax offsets that a student may claim include the beneficiary tax offset, the franking credit tax offset and the small business tax offset.

A beneficiary tax offset may be available where a student receives a Newstart allowance, youth allowance, Austudy payments and certain other Commonwealth education or training programs.

The calculation of this offset can be complex but this offset may not only reduce tax payable on the amount of Government benefits received but also assessable income received from other sources.

Further details on the beneficiary tax offset can be found here.

A resident company may pass on a tax credit for tax it has paid to shareholders when it pays such shareholders a franked dividend. Such a tax credit can be claimed as a franking credit tax offset which may also result in a tax refund where the franking credit exceeds tax payable.

Finally, where a student is also carrying on a business that individual may be entitled to the small business income tax offset for the year ended 30 June 2017 being 8% of the income tax payable on the portion of an individual’s taxable income that is ‘total net small business income’ provided the aggregated turnover of the business is less than $5million.

However, an individual is only able to claim one small business tax offset for an income year irrespective of the number of sources of small business income derived by that individual and the maximum amount of the offset is capped to $1,000 per year. The application of this offset is also quite complex and specialist advice should be sought if you intend to claim it.

9. What are some of the potential traps to watch out for?

There are special rules to discourage adults from splitting income with their children (i.e. minors) aged under 18 at the end of the year unless that minor is engaged in a full-time occupation, receives a carer allowance, disability support pension or double orphan pension or a person who is disabled or a beneficiary under a special disability trust.

Where the minor is subject to these special rules, penalty tax rates apply to such children receiving dividends, interest, rent, royalties or a family trust distribution.

Where such income is between $417 and $1,307 tax will be paid on the excess of income over $416 at a rate of 68% whilst any amount of such income in excess of $1,307 will be subject to tax at a rate of 47%.

10. Where do I go for help?

If you believe that you required to lodge an income tax return or that you may wish to lodge a return in order to obtain your tax refund, you may wish to either contact the ATO or look at their website for more details at www.ato.gov.au

Should you want to get independent tax advice then try to locate an accountant who has the tax expertise to makes sure you lodge a correct income tax return but make sure that the accountant is also a registered tax agent who has been legally authorised to provide such services.

And if you are entitled to a tax refund go get what is yours!

[1] Latrobe University has used reasonable care and skill in compiling the content of this general commentary. However, it should not be relied upon as advice in any circumstances, and no warranty is provided by either the University or the author concerning the accuracy and completeness of these materials. Accordingly, they disclaim all and any liability to any person in respect of reliance on any of the matters raised in these materials, and professional advice should be sought from an appropriately qualified registered tax agent where required.

[2] Refer to Example 8 of Taxation Ruling TR98/17.

Watch: LBS Professor of Practice Mark Morris speaks about changes in the world of Australian taxes on CPA-Australia Panel

MM_CPA
Recently, La Trobe Business School’s Professor of Practice Mark Morris was invited speak on a high-level panel regarding the new Standard Business Rerporting (SBR)-enabled practitioner lodgment service. The panel was hosted by CPA Australia. This new service will replace the old Electronic Lodgement Service (ELS). Along with ATO Assistant Commissioner Andrew Watson and Keith Clissold FCPA, Mark spoke about what it means for these changes to be put through from a practitioner’s perspective, why they are necessary and what this means for the future of the accountancy profession. The panel was moderated by Gavan Ord, Manager Business Investment Policy, at CPA Australia.

Watch the segments in full on YouTube.

LBS Professor of Practice Profiles – Mark Morris: “I always wanted to teach.”

Mark Morris La Trobe Business School Professor of Practice
From early 2015, La Trobe Business School has introduced a team of Professors of Practice, staff with extensive industry experience. As one of the first Business Schools in Australia to pioneer this concept, LBS’s goal is that the Professors of Practice will provide their students with professional and practical insights into the business world, and that they will form a connection between industry and LBS students, contributing to the students’ business knowledge and employability.

Appointed as one of the Department of Accounting’s Professors of Practice, Mark Morris’s extensive tax experience in industry is a considerable resource to LBS and to the university. “I think I have a very unusual career,” he says, “in that I have been exposed to most facets of tax in virtually all market segments since I joined the profession over 30 years ago.”

Starting out in the big four accounting firms, Mark moved on to be the Tax Manager for Foster’s Brewing Group Ltd. After this, he spent eight years as the Tax Counsel at Mobil Oil Australia Ltd and then worked as the Group Tax manager at GM Holden Ltd. Thereafter he was a Tax Principal with two mid-market chartered accounting firms before ending up as the Senior Tax Counsel at CPA Australia for more than nine years.

At CPA Australia, Mark’s role involved consulting with Treasury and the Australian Taxation Office on the design, interpretation and administration of all Federal taxation laws, including liaison with a diverse range of members over a wide array of issues. Mark was also heavily involved in providing media comment on pressing issues, through both traditional and new media, either as a direct commentator or by presenting the organisation’s views on tax developments.

Mark has also presented at numerous professional forums about contemporary issues impacting the tax profession and the broader community “I am fortunate that I have garnered a wide range of experience and knowledge across various environments which I can bring to the table to the La Trobe Business School,” Mark comments, “And I always wanted to teach. So, this seemed like a great opportunity to share my insights with students who I hope benefit from some of my professional experiences.”

Having worked with a number of LBS students, Mark recognises that students need an adaptive skillset in today’s job market more than ever. According to him, being able to bring practical examples of what happens in the real world into the classroom is one of the main tasks of a Professor of Practice. Mark comments: “I try to provide insights as to what they will find in the workplace wherever I can, because this is exactly the kind of knowledge that can give them an edge to stand out from the crowd. With the rise of Big Data, new technologies, outsourcing and a competitive market, graduates need to have a clear strategy when it comes to their skillset, their personal branding, and their industry connections.”

In Mark’s opinion, having the Professors of Practice in place adds further value to LBS and helps to build bridges between industry, students, and the broader community. “We create plenty of meaningful research at La Trobe Business School. If we can combine this intellectual resource with engaging teaching methods we can hopefully infuse our students with a greater commercial skill set as well as a strong theoretical foundation, which can make an enormous difference for graduates and future employers.” Mark says. “In that sense, being a Professor of Practice is a terrific role, because not only do we get to be very creative in our teaching, but we can also actively add value through our industry experience and connections. And when we create and reinforce strong relationships with several professional organisations – as La Trobe Business School has done – students will be able to get relevant work experience, while employers benefit from a pair of extra hands on deck. In this type of situation, everybody wins.”

 

Everybody’s talking and no-one says a word: contemporary tax reform in Australia and small business

Mark Morris La Trobe Business School Professor of Practice
By Mark Morris

One of the more enduring and pithy songs that the late John Lennon composed during his years outside the public eye was the witty and jaunty ‘Nobody told me (there’d be days like these)’ which lyrically kicks off with the ironic observation that ‘Everybody’s talking and no-one says a word’.

I am sure John would be plunged into despair that I invoke this lyric when discussing contemporary tax reform in Australia but it does resonate with me somewhat given the Turnbull Government appears to have retreated from major systemic tax reform whilst the Opposition is largely focusing on tinkering with reform to superannuation concessions, negative gearing and interest deductions claimed by multinationals.

However, neither party appears to be currently proposing any new substantial measures to simplify the Australian income tax regime for small business or to provide that sector with any meaningful incentives during a period of real economic malaise.

Accordingly, whilst the Government often refers to small business as being the engine room of the economy, and the Opposition proudly boasts on its website that it stands up for the middle class, neither party has currently proposed any fresh tax initiatives that either cut red tape or improve cash flow for small businesses.

In my view there are at least 4 tax policy ideas that could help revitalize the small business sector which should be considered in either the framing of the 2016 –17 Federal Budget or developing the small business taxation framework for the next elected government.

Whilst such reform proposals may not offer the systemic tax reform Australia desperately requires, they would nonetheless reduce the burgeoning compliance burden imposed on small business without triggering a major blow out to our seemingly entrenched Federal Budget Deficit.

These 4 initiatives can be summarized as follows:

1. Increase eligibility to be a small business entity

Under the existing tax law a small business entity is subject to a raft of concessions where that entity carries on a business and its ‘aggregated turnover’ is less than $2 million. Such concessions include, amongst others, accelerated tax depreciation relief and a lower company tax rate of 28.5% if the company is a small business entity.

As the $2 million threshold was effectively put in place from the 2007 tax year there is a strong case to argue that the threshold should be increased to at least $3 million to both reflect inflation over the intervening 9 years and to bring more entities within the small business entity framework.

The former Treasurer Mr. Hockey flagged that this was the next logical step when presenting to the Australian Chamber of Commerce and Industry’s Business Leader’s Summit on 17 August 2015 but noted that such an initiative was subject to Budgetary constraints. Following the appearance of the Cabinet Secretary Mr. Sinodinos on the ABC’s Insider’s program on 20 March 2016 it appears that the Government is also currently considering the merits of some type of company tax relief.

To the extent such an initiative is a cost to the Budget it could be funded by additional revenue raised by tightening superannuation tax breaks for high income earners as it is more imperative to grow the small business sector now rather than retain superannuation concessions for the wealth.

Such measures could include superannuation contributions being taxed as income in the hands of individuals at their marginal rates albeit subject to a 15% refundable tax offset rather than be taxed at a flat 15% rate.

Deloitte recently championed a variant of this proposal in its publication “Shedding light on the debate – Myth busting tax reform” which it suggested would generate a reform dividend of around $6 billion in the 2016-17 year.

Accordingly, if this change was made some corporate tax relief for small to medium sized companies appears achievable.

2. Redesign Division 7A

As any tax adviser servicing the SME market will tell you the most problematic and invidious set of provisions impacting small and medium-sized taxpayers are the provisions set out in ‘Division 7A’.

Essentially, Division 7A was introduced to automatically treat any payment, loan or debt forgiveness by a private company to a shareholder or an associate of a shareholder as an unfranked deemed dividend paid out of the company’s profits (assuming no stipulated exemptions were available).

Unfortunately these provisions have become inordinately complex over time following various tranches of technical amendments which have also brought trust distributions within the scope of these provisions.

The biggest problem area is the application of Division 7A where loans have been made by a private company to a shareholder or associate.

For example, the most common breach of Division 7A is where a private company makes a loan to an associated trust purely for business purposes but the loan to the trust is treated as an unfranked deemed dividend because it is either not in writing or the interest rate charged is below the annual benchmark interest rate. Prima facie this means that the amount of the loan may be regarded as a deemed dividend even though the borrower did not obtain any private benefit from the company which was the original underlying intention of Division 7A.

The Board of Taxation issued a comprehensive report to the Federal Government in November 2014 setting out how the Division 7A loan rules could be simplified, including proposing new criteria that would allow greater flexibility in terms of loan arrangements whilst providing sufficient rigour to crack down on disguised distributions of profits to shareholders and associates.

It also proposed that loans owed to private companies by associated trusts in the form of unpaid trust distributions could be taken outside the scope of Division 7A which would relieve such trusts from having to raid their working capital or sell assets to fund the payment of such distributions. The Board even set out measures to fund the impact of such a change as trusts electing this option would forego their entitlements to reduce any capital gain on the disposal of future assets (other than goodwill) under the 50% CGT Discount.

Regrettably the recommendations of this review were to be subsumed into the Federal Government’s White Paper on Tax Reform which has now been consigned to history even though Division 7A reform is still chronically required.

Implementing the Board’s measured recommendations would materially assist both business and their tax advisors in complying with the tax laws and markedly improve productivity.

3. Simplify the small business CGT concessions

If you ask anyone who advises on the small business CGT concessions they will invariably tell you that accessing them can often be like winning a lottery for taxpayers who can successfully navigate the myriad of different rules that must be met in in order to extinguish or reduce a capital gain on the sale of their business.
The most contentious aspect of the small business CGT concessions is the $6 million maximum net asset value test. Indeed, virtually all of the major cases litigated over the past year concern compliance with this test which is poorly understood by taxpayers and is highly subjective in nature. This test must be met if the entity cannot otherwise meet the $2 million aggregated turnover test.

Essentially, the $6 million asset test involves determining the market value of all CGT assets held by the taxpayer and any related connected entities and/or affiliates reduced by any related liabilities.

Compliance with the test is quite counterintuitive as you have to include CGT assets which are outside the scope of the CGT rules such as pre-CGT acquired assets, depreciating assets and trading stock.

But the worst problem with the test is determining the market value of CGT assets just before their sale as there are often disputes between the ATO and taxpayers regarding the valuation of assets at that time.

We have even had cases where the sale consideration on a sale of shares between arm’s length parties was held to not be the shares’ market value as that valuation but had to be discounted to reflect the fact that the shareholder selling the shares did not control the company. Try translating that uncertainty to a small business taxpayer, let alone apply it.

As an alternative the subjective $6 million net assets test could be dumped and replaced by a higher aggregated turnover test which is calculated according to objective and transparent criteria. For example, the law could be amended so that an entity could obtain full access to the concessions if its aggregated turnover was less than $3 million but only 50% of the concessions if its aggregated turnover was more than $3 million but less than $4 million.

Sure some asset rich income poor entities would lose out but this tapered test could be readily interpreted by taxpayers and lead to much less uncertainty and disputation.

4. Streamlining the taxation of trusts

As someone who was heavily involved in the review of the taxation of trusts for many years I now recognize that any reform of this area is strewn with challenges, and that the best option is in fact to try and make the existing system work better and remove a range of anomalies.

To give an example of a bugbear, trustees still need to make a resolution before year end as to which beneficiaries will receive a share of the trust’s distributable income (which will in turn determine the beneficiaries’ share of taxable income). Accordingly, trustees need to able to divvy out trust distributions on some basis even though the trust’s accounts are not finalized let alone their tax returns. This is an unsatisfactory state of affairs and still leads to a great deal of confusion in the marketplace as well as being an unduly hectic addition to year end. This could be alleviated if the Government legislated that such a resolution could be completed within 2 months of year end as was former long standing administrative practice.

Different rules also apply to fixed trusts (e.g. unit trusts) and non-fixed trusts (e.g. family discretionary trusts) throughout the tax laws but there is no common definition as to what those terms mean for the purposes of various provisions littered throughout the legislation.

For instance, there are different rules regarding the recoupment of trust losses for fixed and non-fixed trusts as non-fixed trusts are subject to much more stringent rules.

However, the ATO has opined in a Decision Impact Statement on Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 that there are very few trusts that are fixed trusts under the trust loss rules, and that they will be treated as non-fixed trusts in the absence of the Commissioner exercising a discretion to the contrary. In other words the demarcation between the legislative rules has now become blurred and you have to rely on the Commissioner to exercise a discretion to apply the more lenient trust loss rules applicable to fixed trusts.

Not surprisingly a leading mid-market practitioner recently likened his situation to being dumped in a quagmire as you often don’t know how to advise your client as to what they should do.

Finally, there is a lack of consistency between unit trusts and companies when it comes to being able to carry forward and utilize tax losses. Both entities are essentially subject to a continuity of majority ownership test. However, where that test is breached a company can rely on the same business test whereas a unit trust has no fallback equivalent test so that the tax losses are effectively lost when there is a change in majority beneficial ownership of a trust like a unit trust. There does not seem to be any sensible rationale for this distinction going forward especially given the prevalence of unit trusts trading as businesses.

Once again reform of this area has fallen off the radar now that the White Paper on tax reform has been dumped.

Nonetheless the plethora of unresolved issues concerning the taxation of trusts still need to be addressed and rectified.

Given the need to urgently simplify our tax system for small business it is disappointing that there is so much chatter about leadership, tax reform and a more agile economy without any real substantive tax policies for SMEs being advanced or sensibly debated.

As the late Mr. Lennon presciently observed everybody’s talking but no one is saying a word about the real issue.

The reality is that the current Government is correct in noting that Australia does not need any more tax reviews. There are plenty of good ideas out there already. What few leaders want to talk about is the cost of implementing much needed reform which will invariably result in losers as well as winners.

However, until we get that much needed leadership many of us frustrated with the current inertia on tax reform can justifiably mutter to ourselves ‘No-one told me there’d be days like these’.

The Reform We Have To Have: The Superannuation Challenge

Mark Morris La Trobe Business School Professor of Practice
By Mark Morris

Like many baby boomers I am reluctantly coming to terms with the need to bump up my superannuation contributions so that I can fund a reasonable lifestyle in retirement.

However, I find it hard to generate much enthusiasm for the prospect given the tantalising alternatives of an annual trip to London or an upgrade of the family car. Nonetheless the rationalist in me knows it is something I should do.

Accordingly, one of the very last things I want to grapple with when I struggle to make extra superannuation contributions is yet another barrage of tax changes to our superannuation laws.

However, I accept that tax changes to our superannuation regime are now inevitable as the costs of maintaining the existing superannuation rules are unsustainable and difficult to justify in the more straightened times we live in.

In part, this is because Treasury’s 2014 Tax Expenditures Statement vividly illustrates the burgeoning costs of maintaining our current superannuation regime most of which was set in place way back in May 2006 when the country was thriving under the mining boom. For example, Treasury estimated that the cost of maintaining the concessional tax treatment of employer sponsored contributions alone would be $18.1 billion for the 2016-17 year.

At the same time the Turnbull Government needs to urgently find sufficient revenue to finance the cuts in corporate and personal tax rates needed to lift national investment and productivity in a period of falling revenues.

In this context it looks increasingly unlikely that such cuts will be fully financed through an increase in the Goods and Services Tax rate and/or base, especially given the Opposition’s commitment to fight such reforms.

Accordingly, the Turnbull Government is slowly but surely building up its rhetoric on superannuation reform including its oft mentioned references to tax reform which is both fair and equitable.

In doing so it rarely refers to the fact that it is easier to sell superannuation reform where the impact of cost savings only hit home at some vague point in the future as opposed to GST reform where increased prices will immediately hit the hip pocket.

You really grasp such reforms are almost fated to occur when the Financial Services Council urge the Federal Government to cut back superannuation concessions for high income earners as they did on January 14. When a peak body representing superannuation and management funds calls for a revamp of superannuation concessions for the wealthy you know that a major overhaul to the superannuation regime is almost certainly on the agenda.

Hence, as there is growing consensus that there needs to be some form of superannuation reform, what policy options are available to effect those changes? Especially if the Federal government wants to generate sufficient revenue to help finance more broad-based tax reform?

In my view the Federal government should consider four major policy changes.

First and foremost there is real merit in revisiting Recommendation 18 of the Henry Tax Review which proposed that the tax on superannuation contributions be abolished, and that superannuation contributions should be taxed as income in the hands of individuals at their marginal rates, albeit subject to a 15% refundable tax offset.

In these circumstances a high income earner subject to the current highest marginal rate of tax of 49% would obtain a 15% tax offset in respect of any employer superannuation contributions made whilst a low income earner on the 19% tax rate would similarly receive a 15% tax offset thereby leading to a more equitable tax treatment of superannuation contributions.

We would therefore avoid the current scenario where a multi-millionaire’s superannuation fund effectively pays 15% tax on contributions received being the same 15% tax rate that would apply to a fund receiving employer contributions made on behalf of a sales assistant deriving an annual taxable income of $40,000.

Deloitte recently championed a variant of this proposal in its publication “Shedding light on the debate – Myth busting tax reform” which it suggested would generate a reform dividend of around $6 billion in the 2016-17 year. Not surprisingly similar changes are also the centrepiece of the recent modelling undertaken by the Financial Services Council in tandem with PWC on possible superannuation reforms.

Second, the Turnbull Government should consider the former Government’s proposal that income derived by a fund in pension mode should only be tax-free up to $100,000 a year with any excess subject to tax at a rate of 15%. Whilst this change was only expected to generate around $350 million back in April 2013 the revenue take from such a proposal could be further increased if transitional relief under that measure was ditched and a more punitive rate than 15% applied to funds generating $300,000 or more taxable income per year.

Third, we should revisit the notion that funds are entitled to a refund for excess imputation credits. It is wholly appropriate that funds should be able to extinguish their 15% tax liability during the contributions phase but another thing altogether to allow them to also get a refund of the 15% surplus franking credits on dividends franked at 30% in the dollar.

Finally, it makes little sense that funds in the contribution phase should only pay an effective tax rate of 10% on any capital gains made, being a one third discount on the 15% tax rate that applies to such funds. In a sense this is a doubling up of concessions as the fund is already subject to a low rate of tax being 15% and does not require an additional CGT concession to encourage investment.

Of course we should all recognise that implementing the above changes will invariably mean that some people are worse off being predominantly high income earners.

As is the case with any tax reform some will lose and will have to wear some grief.

However, such changes are absolutely crucial if we are to sustain a superannuation regime which is both robust and fair, and which will provide the additional revenue needed to finance much needed tax reform.

Put simply, superannuation tax reform is a change we have to have if the country is to prosper.

Seminar: The Future of the Tax Profession

FutureTaxProf
La Trobe University’s Centre for Public Sector Governance, Accountability and Performance (CPSGAP) invites you to attend its Seminar on “Future of the Tax Profession” on Monday 30 November 2015.

Abstract

The seminar will address a number of points including:

  • Digital transformation of the tax regime especially the introduction of standard business reporting
  • The ATO’s reinvention program and the way it is challenging conventional paradigms of tax administration
  • The parallel changes facing the tax profession and its response to various challenges including, amongst others, digital disruption, offshoring, globalisation and a more informed public
  • The roadmap ahead for change with emphasis on adaptiveness and changing skill sets.

Access the event flyer, here.

Speakers

Colin Walker ATO La Trobe Business School La Trobe UniversityColin Walker is an Assistant Commissioner in the Tax Practitioner Lodgment Strategy and Compliance Support group of the Australian Taxation Office (the ATO) and is currently responsible for managing the relationship between the ATO and tax practitioners and other intermediaries in the tax and superannuation system.

Colin has previously held a variety of senior roles with the ATO including the development and implementation of significant new legislative programs including the Tax Consolidations regime, the Review of International Tax, the Childcare Rebate, the former Minerals Resource Rent Tax and the Petroleum Resource Rent Tax.

He also has extensive experience with the International Monetary Fund providing in country technical assistance in tax and customs policy and administration in many overseas developing countries.

Mark Morris La Trobe Business School Professor of PracticeMark Morris is a Professor of Practice in Taxation in La Trobe University’s Business School where he teaches both undergraduate and postgraduate taxation and actively contributes to broader industry engagement initiatives between the Business School and the tax profession and other key stakeholders.

Mark also Co-Chairs the ATO’s ‘Future of the Tax Profession 2016’ working group with Colin which comprises senior representatives from the ATO, professional bodies, software developers and practitioners concerning the implementation of the ATO’s standard business reporting initiative.

He has over 30 years experience in senior tax roles in chartered accounting, industry and professional bodies including his former long-term role as Senior Tax Counsel with CPA Australia.

Seminar

Date: Monday 30 November 2015

Time: 4.00pm – 6.00pm

Venue: Level 20, 360 Collins Street, Melbourne

RSVP: Please respond by Friday 20 November, 5.00pm, via the La Trobe web page.

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