March 2005 workshop The (not so) simplified tax system

Transcription

1 March 2005 workshop The (not so) simplified tax system Presented by: Ian Snook Partner William Buck Copyright notice The Taxation Institute of Australia website and all the content downloaded (except Third Party Products*) from the Taxation Institute of Australia website remains the property of the Taxation Institute of Australia and shall not be reproduced, distributed, displayed or disclosed without the written permission of the Taxation Institute of Australia. *Copyright of the Third Party product applies Disclaimer notice The material published in this paper is published on the basis that the opinions expressed are not to be registered as the official opinions of the Taxation Institute of Australia. The material should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

2 Topics to be covered Introduction Elements of STS Entry & Exit Rules Eligibility requirements Proposed Amendments TLA (2004 Measures No.7) Bill 2004 Introduction ANTS & Ralph Became law with effect from 1/7/01 Cash Accounting, Depreciation & Trading Stock all or nothing Only for small business taxpayers Voluntary Amending Acts TLA (No. 5) Act 2002 TLA (No. 2) Act 2004

3 Elements - Cash Accounting General rules Ordinary Income taken to be derived only when received General Deductions, tax-related expenses & repairs taken to be incurred only when paid Received = constructive receipt Specific timing rules still apply Arthur Murray rule does not apply Elements - Cash Accounting Entry Rules Ordinary Income already derived before STS (i.e. debtors) not taxable again Ordinary Income received but not derived before STS (i.e. Arthur Murray) taxable in 1st yr General deductions etc incurred before STS, (i.e. creditors) not deductible again

4 Elements - Cash Accounting Exit Rules Derived but not received amounts (i.e. debtors) assessable in first exit year Incurred but not paid amounts (i.e. creditors) deductible in first exit year No adjustment is made to TI for the last STS year In first exit year have two years of debtors & creditors Elements - Cash Accounting Prepayments Expense is deductible when paid if: Eligible service period is 12 months or less; & Ends before end of next year Excluded expenditure remains outright deductible regardless of ESP

5 Elements Capital Allowances Apply to assets if: STS taxpayer in a year; & Started to use/held for a taxable purpose during or before the year Applies to all assets of the taxpayer (limited exceptions) low cost assets pooled assets Elements Capital Allowances Low Cost Assets Cost is < $1000 Taxable purpose proportion (TPP) of cost = deduction TPP of termination value = assessable income TLA (No. 5) Act 2002 second element costs

6 Elements Capital Allowances Pooled Assets Two Pools General pool - effective life < 25 years Long Life pool - effective life > 25 years Allocating Assets Pre STS assets - TPP of op. WDV STS assets - TPP of cost Elements Capital Allowances Pooled Assets Deductions (generally) Op Balance x Pool rate 30% (or 5%) Acquisitions x Half pool rate 15% (or 2.5%) Disposals TPP of termination value is subtracted from pool balance

7 Elements Capital Allowances Pooled Assets Calculating Closing Pool Value (generally) Opening Balance $X Plus TPP of cost of acquisitions $X Less TPP of disposals ($X) Deduction - Op. Balance ($X) Deduction - acquisitions ($X) Closing Balance $X Elements Capital Allowances Pooled Assets Example - Opening pool balance Car 6,400 (50% x $12,800) Juke Box 1,250 (WDV) Beer Temprites 800 Bar Fridge 250 Bar Stools 0 8,700

8 Elements Capital Allowances Example - continued Juke Box traded in $200 Karaoke Machine bought $5,000 Deductions Opening Balance $8,700 x 30% = $2,610 Karaoke Machine $5,000 x 15% = $750 Elements Capital Allowances Example - continued Closing Pool Balance Opening Balance 8,700 Plus cost of Karaoke machine 5,000 Less trade in allowance (200) deduction - Op. Balance (2,610) deduction - Karaoke machine (750) Closing Balance 10,140

9 Elements Capital Allowances Pooled Assets - Change in bus. use Adjustment required to op. pool balance Reduction factor x Asset value x [present year est. - last est.] Asset value = cost (or WDV if pre STS asset) Reduction factor Elements Capital Allowances Reduction factors general pool Yr after allocated 1. Pre STS asset 0.7 STS asset

10 Elements Capital Allowances Change in business use - example new log book - 80% business Reduction factor x Asset value x [present year est. - last est.] = 0.7 x $12,800 x (80% - 50%) = $2,688 Adjusted op pool balance = $10,140 + $2,688 = $12,828 Elements Capital Allowances Partnership changes TLA (No. 2) Act 2004 provided rollover relief Optional choice made in writing Pool deductions split evenly Additions used by transferor split evenly Additions used by transferee - transferee Relief only if both are partnerships

11 Elements Trading Stock If movement between opening & est. closing stock values < $ don t have to account for the change Closing stock value = Opening Stock value If movement > $ must account for the change & value each item of stock ATO s guidance on reasonable estimates Fact Sheet Nat 7170 Entering & Leaving STS To enter - must be eligible & must notify ATO of choice in tax return Remain in STS unless: choose to stop or no longer eligible Must notify ATO If choose to leave can t re-enter for 5 years (but proposed amendment)

12 Eligibility Requirements To be eligible to be an STS taxpayer for year: must carry on business in the year; & STS av. turnover < $1 million; & depreciating assets < $ 3 million at year end For turnover & assets tests - count turnover of grouped entities Eligibility Requirements Turnover test Turnover = value of business supplies Looking back test - average of: three of the previous 4 income years; or average of the years that were in business Looking forward test - average of: current year and reasonable est. of next two years Part year = reasonable est. of a full year.

13 Eligibility Requirements Turnover test - example Bart & Martin commence business in 2006/07 Turnover for the part year is $450,000 Reasonable estimate for a full year $600,000 Estimated turnover 2007/08 $850, /09 $1,250,000 Must look forward (no previous years) Eligibility Requirements Turnover test example continued STS Av. Turnover for 2006/07 is: $600,000 + $850,000 + $1,200,000 3 = $883,333 STS Av. Turnover for 2007/08: can look back average of one year (2006/07) $600,000

14 Eligibility Requirements Turnover test example continued STS Av. Turnover for 2011/12 Turnovers: 2007/08 $800K 2010/11 $4M 2008/09 $975K 2011/12 $5M 2009/10 $1.3M looking back - 3 of last 4 years excluding current yr would choose 2006/07, 2007/08 & 2008/09 $600K + $800K + $975K = $791K 3 Eligibility Requirements Grouped Entities An entity is grouped with another if: either controls the other; or both are controlled by a third entity; or the entities are STS affiliates

15 Eligibility Requirements STS Affiliates Where: one entity acts in accordance with directions or wishes of the other in relation to the business; or one entity acts in concert with the other in relation to the business Unlikely for separate businesses of a husband & a wife to be grouped Eligibility Requirements Control Companies/Fixed Trusts > 40% rights to income or capital (& voting rights - companies) Partnerships > 40% rights in net income or assets of partnership ATO discretion - > 40% but less than 50% Non-fixed Trusts >$100,000 pa distribution in any of last 4 yrs control of trustee

16 Proposed Amendments TLA (2004 Measures No. 7) 2004 Rollover amendments 25% entrepreneurs tax offset Extending the STS Proposed Amendments Rollover amendments Extend to situations where transferor or transferee are not partnerships Technical amendments that change nothing Start date 1/7/05 (likely)

17 Proposed Amendments 25% entrepreneurs tax offset from 1/7/05 Applies to any entity that is in STS; STS group turnover is < $75,000 25% rebate of tax on net STS income if STS group turnover is < $50,000 Rebate phases out to $75,000 turnover Proposed Amendments Extension of STS Read removal of STS cash accounting from 1/7/05 normal rules regarding derivation of income Transitional rules If in STS for 04/05 can continue with STS cash accounting (but can cease if want) Suspension of 5 yr re-enter rule