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Newsletter December 2006

To reduce the compliance burden, the government has announced that it will amend the integrity rules concerning distributions by private companies in Div 7A of the Income Tax Assessment Act.

Div 7A prevents private companies from making tax-free distributions of profits to shareholders (or their associates). Unless they come within specified exclusions, advances, loans, and other credits to shareholders (or their associates) are treated as assessable dividends paid to the shareholders. When a deemed dividend arises under Div 7A, the private company’s franking account is debited and the deemed dividend is taxable in the hands of the shareholder, but without access to a franking credit to offset the tax paid by the company.

The government will reduce the double-penalty by removing the automatic debiting of the company’s franking account when a deemed dividend arises. Further, the Commissioner will also be provided with a discretion to disregard a deemed dividend where there is evidence that a taxpayer has attempted to comply with Div 7A but they made an honest mistake and efforts have been made to rectify the mistake.

The government has announced that it will reduce the minimum contribution threshold for tax deductible contributions to fund raising events from $250 to $150.

If a deductible gift recipient holds a fundraising dinner, a deduction is allowed for the donation component of the cost of the dinner, the actual food component is not a deductible expense. For example, if a fundraising dinner cost $1000, but the market value of the dinner was $100 participants will be entitled to a $900 tax deduction. Under the proposed changes, the government will increase the value of the minor benefit allowed from 10% of the contribution (but not exceeding $100) to 20% of the contribution (but not exceeding $150).

These changes will apply from 1 January 2007.

According to the Tax Office, a taxpayer who has incurred a loss or made a net capital loss for an income year should retain records relevant to the ascertainment of that loss for longer than the record retention prescribed under income tax law.

 In particular, the taxpayer should retain the relevant records until the later of:

• the end of the statutory record retention period, or
• the end of the statutory period of review for an assessment for the year of income when the tax loss is fully deducted or the net capital loss is fully applied.

The Tax Office has said that it can help taxpayers affected by the drought by;

• allowing more time to lodge activity statements or tax returns without penalty,
• allowing additional time to pay tax debts without incurring charges for arranging tax debts to be paid in instalments,
• remitting penalties or interest that may have been imposed,
• fast tracking refunds. 

The Tax Office says that it is not in the position to extend lodgement and payment deadlines across the board but it will take a sympathetic approach by working one-on-one with individuals and businesses to help them out during their time of hardship.

Recent changes have been introduced which will narrow the range of assets on which non-residents will be subject to Australian capital gains tax. Non-residents will only be subject to CGT on the following five categories of assets, referred to as ‘taxable Australian property’:       

• Taxable Australian Real Property, being real property situated in Australia or mining, quarrying or prospecting rights where the minerals, petroleum or quarrying materials are situated in Australia,
• Indirect Australian real property interests (essentially non-portfolio interests in an Australian or foreign entity whose assets are principally comprised of Australian real property),
• An option or right to acquire any of the above, and;
• Asset, held by an individual, which has been subject to an election to defer recognition of the gain or loss when the individual ceased to be an Australian resident.

In general entertainment of clients is a non deductible expense and entertainment of employees is subject to fringe benefits tax.

 For the Christmas party where the food and drink is less than $100.00 for each worker, and the other incidental costs such as taxis to or from the venue are less than $25.00 per head, and the Christmas party is not part of on going entertainment for employees then the Christmas party will be regarded as a minor, infrequent and irregular benefit and therefore will not be subject to FBT.

All the Partners and staff at Wearne & Co, wish you a very Merry Christmas and a safe and Happy New Year.

 The offices of Wearne & Co will be closed from Friday 22^nd December 2006 and will be re-opening Monday 2^nd January 2007.