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Archives for August 2017

Newsletter August 2017 edition

Does superannuation offer an avenue to help downsizers and first home savers? The Government seems to think so. Late last month the detail of the housing initiatives announced in the Federal Budget were released for consultation. We explore what’s on offer and the implications.

Super concessions for downsizers
If you are over 65, have held your home for 10 years or more and are looking to sell, from 1 July 2018 you might be able to contribute some of the proceeds of the sale of your home to superannuation

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing non-concessional contribution caps – $100,000 subject to your total superannuation balance – or age restrictions. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

red-house-image-2

The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the 10 year period being tested.

The rules also take into account changes of ownership between two spouses over the 10 year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10 year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple) but must only come from the proceeds of the sale. The contribution/s need to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

Using super to save for your first home
Saving for a first home is hard. From 1 July 2018, the first home savers scheme will enable first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after tax contributions) of $15,000 a year within existing caps, up to a total of $30,000.

When you are ready to buy a house, you can withdraw those contributions along with any deemed earnings in order to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the super fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset.

For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the First Home Super Saver Scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

To access the scheme, home savers must be 18 years of age or older, and cannot ever have held taxable Australian real property (this includes residential, investment, and commercial property assets). Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

As with the concession for downsizers, the first home saver scheme can only be used once by you.

While the capacity to voluntarily contribute to the first home savers scheme started on 1 July 2017 (with withdrawals available form 1 July 2018), it’s best to wait until the legislation is confirmed by Parliament just in case anything changes.

Main residence exemption removed for non-residents
The Federal Budget announced that non-residents will no longer be able to access the main residence exemption for Capital Gains Tax (CGT) purposes from 9 May 2017 (Budget night). Now that the draft legislation has been released, more details are available about how this exclusion will work.

Under the new rules, the main residence exemption – the exemption that prevents your home being subject to CGT when you dispose of it – will not be available to non-residents. The draft legislation is very ‘black and white.’ If you are not an Australian resident for tax purposes at the time you dispose of the property, CGT will apply to any gain you made – this is in addition to the 12.5% withholding tax that applies to taxable Australian property with a value of $750,000 or more (from 1 July 2017).

Transitional rules apply for non-residents affected by the changes if they owned the property on or before 9 May 2017, and dispose of the property by 30 June 2019. This gives non-residents time to sell their main residence (or former main residence) and obtain tax relief under the main residence rules if they choose.

Interestingly, the draft rules apply even if you were a resident for part of the time you owned the property. The measure applies if you are a non-resident when you dispose of the property regardless of your previous residency status.

Special amendments are also being introduced to apply the new rules consistently to deceased estates and special disability trusts to ensure that property held by non-residents is excluded from the main residence exemption.

The rules have also been tightened for property held through companies or trusts to prevent complex structuring to get around the rules. The draft amends the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to circumvent the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.

The residency tests to determine who is a resident for tax purposes can be complex and are often subjective. Please contact us if you would like to better understand your position and the tax implications of your residency status. Simply living in Australia does not make you a resident for tax purposes, particularly if you continue to have interests overseas.

What everyone selling a property valued at $750k or more needs to know

Every vendor selling a property needs to prove that they are a resident of Australia for tax purposes unless they are happy for the purchaser to withhold a 12.5% withholding tax. From 1 July 2017, every individual selling a property with a sale value of $750,000 or more is affected.

To prove you are a resident, you can apply online to the Tax Commissioner for a clearance certificate, which will remain valid for 12 months.

While these rules have been in place since 1 July 2016, on 1 July 2017 the threshold for properties reduced from $2 million to $750,000 and the withholding tax level increased from 10% to 12.5%.

The intent of the foreign resident CGT withholding rules is to ensure that tax is collected on the sale of taxable Australian property by foreign residents. But, the mechanism for collecting the tax affects everyone regardless of their residency status.

Properties under $750,000 are excluded from the rules. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they have a market value of less than $750,000. If the parties are dealing at arm’s length, the actual purchase price is assumed to be the market value unless the purchase price is artificially contrived.

If required, the Tax Commissioner has the power to vary the amount that is payable under these rules, including varying the amounts to nil. Either a vendor or purchaser may apply to the Commissioner to vary the amount to be paid to the ATO. This might be appropriate in cases where:

• The foreign resident will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
• The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
• Where they are multiple vendors, but they are not all foreign residents.

If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser.

The withholding rules are only intended to apply when one or more of the vendors is a non-resident. However, the rules are more complicated than this and the way they apply depends on whether the asset being purchased is taxable Australian real property or a company title interest relating to real property in Australia.

Please contact us if you need assistance navigating the foreign resident CGT withholding rules or are uncertain about how the rules are likely to apply to a transaction.

The Tax Commissioner’s hit list

darts-board-image-1


Every so often the Australian Taxation Office (ATO) sends a ‘shot across the bow’ warning taxpayers where their gaze is focussed. Last month in a speech to the National Press Club, Tax Commissioner Chris Jordan did exactly that. Part of the reason for this public outing is the gap between the amount of tax the ATO collects and the amount they think should be collected – a gap of well over 6% according to the Commissioner.

“The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud. In 2014-15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant,” the Commissioner stated.

Individuals – the hit list
• Claims for work-related expenses that are unusually high relative to others across comparable industries and occupations;
• Excessive rental property expenses;
• Non-commercial rental income received for holiday homes;
• Interest deductions claimed for the private proportion of loans; and
• People who have registered for GST but are not actively carrying on a business.
W,Q

While small in value, the ATO are also concerned about the amount of people who appear to be claiming deductions by default for items such as clothing expenses. In 2014–15, around 6.3 million people made a claim for $150 for work related clothing – the level you can claim without having to fully substantiate your expenses. Those 6.3 million claims amounted to $1.8 billion in deductions.

Small business – the hit list
• Those deliberately hiding income or avoiding their obligations by failing to register, keep records and/or lodge accurately;
• Businesses that report outside of the small business benchmarks for their industry;
• Employers not deducting and/or not sending PAYG withholding amounts from employee wages;
• Employers not meeting their superannuation guarantee obligations;
• Businesses registered for GST but not actively carrying on a business;
• Failure to lodge activity statements; and
• Incorrect and under reporting of sales.

If your business is outside of the ATO’s benchmarks, it’s important to be prepared to defend why this is the case. This does not mean that your business is doing anything wrong, but it increases the possibility that the ATO will look more closely at your business and seek an explanation.

Private groups – the hit list
• Tax or economic performance not comparable to similar businesses;
• A lack of transparency in tax affairs;
• Large, one-off or unusual transactions, including transfer or shifting of wealth;
• A history of aggressive tax planning;
• Choosing not to comply or regularly taking controversial interpretations of the law;
• Lifestyle not supported by after-tax income;
• Treating private assets as business assets; and
• Poor governance and risk-management systems.

Property developers – the hit list
• Developers using their SMSF to undertake or fund the development and subdivision of properties leading to sale;
• Where there has been sale or disposal of property shortly after the completion of a subdivision and the amount is returned as a capital gain;
• Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain;
• How profit is recognised where related entities undertake a development (i.e., on the development fees as well as sales of the completed development);
• Whether inflated deductions are being claimed for property developments;
• Multi-purpose developments – where units are retained for rent in a multi-unit apartment, to ensure that the costs are appropriately applied to the properties produced.

These are just a small sample of the ATO’s area of focus. Other areas include tax and travel related expenses and self-education expenses. We’ll guide you through the risk areas pertinent to your individual situation but if you are concerned about any of the ‘hit list’ areas mentioned, please contact us.

Quote of the month
“The Entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”
Peter Drucker

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained

kingstonknight-small-logo

Level 14, 1 Queens Road, Melbourne, VIC 3004
PO Box 33003, Domain LPO, Melbourne, VIC 3004

T: +61(0)3 9863 9779
F: +61 (0)3 9863 8010
E: admin@kingstonknight.com.au
W: www.kingstonknight.com.au

Read more

Super concessions for first home savers and downsizers

Does superannuation offer an avenue to help downsizers and first home savers? The Government seems to think so. Late last month the detail of the housing initiatives announced in the Federal Budget were released for consultation. We explore what’s on offer and the implications.

Super concessions for downsizers
If you are over 65, have held your home for 10 years or more and are looking to sell, from 1 July 2018 you might be able to contribute some of the proceeds of the sale of your home to superannuation

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing non-concessional contribution caps – $100,000 subject to your total superannuation balance – or age restrictions. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

red-house-image-2

The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the 10 year period being tested.

The rules also take into account changes of ownership between two spouses over the 10 year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10 year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple) but must only come from the proceeds of the sale. The contribution/s need to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

Using super to save for your first home
Saving for a first home is hard. From 1 July 2018, the first home savers scheme will enable first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after tax contributions) of $15,000 a year within existing caps, up to a total of $30,000.

When you are ready to buy a house, you can withdraw those contributions along with any deemed earnings in order to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the super fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset.

For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the First Home Super Saver Scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

To access the scheme, home savers must be 18 years of age or older, and cannot ever have held taxable Australian real property (this includes residential, investment, and commercial property assets). Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

As with the concession for downsizers, the first home saver scheme can only be used once by you.

While the capacity to voluntarily contribute to the first home savers scheme started on 1 July 2017 (with withdrawals available form 1 July 2018), it’s best to wait until the legislation is confirmed by Parliament just in case anything changes.

Main residence exemption removed for non-residents
The Federal Budget announced that non-residents will no longer be able to access the main residence exemption for Capital Gains Tax (CGT) purposes from 9 May 2017 (Budget night). Now that the draft legislation has been released, more details are available about how this exclusion will work.

Under the new rules, the main residence exemption – the exemption that prevents your home being subject to CGT when you dispose of it – will not be available to non-residents. The draft legislation is very ‘black and white.’ If you are not an Australian resident for tax purposes at the time you dispose of the property, CGT will apply to any gain you made – this is in addition to the 12.5% withholding tax that applies to taxable Australian property with a value of $750,000 or more (from 1 July 2017).

Transitional rules apply for non-residents affected by the changes if they owned the property on or before 9 May 2017, and dispose of the property by 30 June 2019. This gives non-residents time to sell their main residence (or former main residence) and obtain tax relief under the main residence rules if they choose.

Interestingly, the draft rules apply even if you were a resident for part of the time you owned the property. The measure applies if you are a non-resident when you dispose of the property regardless of your previous residency status.

Special amendments are also being introduced to apply the new rules consistently to deceased estates and special disability trusts to ensure that property held by non-residents is excluded from the main residence exemption.

The rules have also been tightened for property held through companies or trusts to prevent complex structuring to get around the rules. The draft amends the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to circumvent the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.

The residency tests to determine who is a resident for tax purposes can be complex and are often subjective. Please contact us if you would like to better understand your position and the tax implications of your residency status. Simply living in Australia does not make you a resident for tax purposes, particularly if you continue to have interests overseas.

What everyone selling a property valued at $750k or more needs to know

Every vendor selling a property needs to prove that they are a resident of Australia for tax purposes unless they are happy for the purchaser to withhold a 12.5% withholding tax. From 1 July 2017, every individual selling a property with a sale value of $750,000 or more is affected.

To prove you are a resident, you can apply online to the Tax Commissioner for a clearance certificate, which will remain valid for 12 months.

While these rules have been in place since 1 July 2016, on 1 July 2017 the threshold for properties reduced from $2 million to $750,000 and the withholding tax level increased from 10% to 12.5%.

The intent of the foreign resident CGT withholding rules is to ensure that tax is collected on the sale of taxable Australian property by foreign residents. But, the mechanism for collecting the tax affects everyone regardless of their residency status.

Properties under $750,000 are excluded from the rules. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they have a market value of less than $750,000. If the parties are dealing at arm’s length, the actual purchase price is assumed to be the market value unless the purchase price is artificially contrived.

If required, the Tax Commissioner has the power to vary the amount that is payable under these rules, including varying the amounts to nil. Either a vendor or purchaser may apply to the Commissioner to vary the amount to be paid to the ATO. This might be appropriate in cases where: 

• The foreign resident will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
• The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
• Where they are multiple vendors, but they are not all foreign residents.
 
If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser.

The withholding rules are only intended to apply when one or more of the vendors is a non-resident. However, the rules are more complicated than this and the way they apply depends on whether the asset being purchased is taxable Australian real property or a company title interest relating to real property in Australia.

Please contact us if you need assistance navigating the foreign resident CGT withholding rules or are uncertain about how the rules are likely to apply to a transaction.

The Tax Commissioner’s hit list

darts-board-image-1


Every so often the Australian Taxation Office (ATO) sends a ‘shot across the bow’ warning taxpayers where their gaze is focussed. Last month in a speech to the National Press Club, Tax Commissioner Chris Jordan did exactly that. Part of the reason for this public outing is the gap between the amount of tax the ATO collects and the amount they think should be collected – a gap of well over 6% according to the Commissioner.

“The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud. In 2014-15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant,” the Commissioner stated.

Individuals – the hit list
• Claims for work-related expenses that are unusually high relative to others across comparable industries and occupations;
• Excessive rental property expenses;
• Non-commercial rental income received for holiday homes;
• Interest deductions claimed for the private proportion of loans; and
• People who have registered for GST but are not actively carrying on a business.
W,Q

While small in value, the ATO are also concerned about the amount of people who appear to be claiming deductions by default for items such as clothing expenses. In 2014–15, around 6.3 million people made a claim for $150 for work related clothing – the level you can claim without having to fully substantiate your expenses. Those 6.3 million claims amounted to $1.8 billion in deductions.

Small business – the hit list
• Those deliberately hiding income or avoiding their obligations by failing to register, keep records and/or lodge accurately;
• Businesses that report outside of the small business benchmarks for their industry;
• Employers not deducting and/or not sending PAYG withholding amounts from employee wages;
• Employers not meeting their superannuation guarantee obligations;
• Businesses registered for GST but not actively carrying on a business;
• Failure to lodge activity statements; and
• Incorrect and under reporting of sales.

If your business is outside of the ATO’s benchmarks, it’s important to be prepared to defend why this is the case. This does not mean that your business is doing anything wrong, but it increases the possibility that the ATO will look more closely at your business and seek an explanation.

Private groups – the hit list
• Tax or economic performance not comparable to similar businesses;
• A lack of transparency in tax affairs;
• Large, one-off or unusual transactions, including transfer or shifting of wealth;
• A history of aggressive tax planning;
• Choosing not to comply or regularly taking controversial interpretations of the law;
• Lifestyle not supported by after-tax income;
• Treating private assets as business assets; and
• Poor governance and risk-management systems.

Property developers – the hit list
• Developers using their SMSF to undertake or fund the development and subdivision of properties leading to sale;
• Where there has been sale or disposal of property shortly after the completion of a subdivision and the amount is returned as a capital gain;
• Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain;
• How profit is recognised where related entities undertake a development (i.e., on the development fees as well as sales of the completed development);
• Whether inflated deductions are being claimed for property developments;
• Multi-purpose developments – where units are retained for rent in a multi-unit apartment, to ensure that the costs are appropriately applied to the properties produced.

These are just a small sample of the ATO’s area of focus. Other areas include tax and travel related expenses and self-education expenses. We’ll guide you through the risk areas pertinent to your individual situation but if you are concerned about any of the ‘hit list’ areas mentioned, please contact us.

Quote of the month
“The Entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”
Peter Drucker

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained

kingstonknight-small-logo

Level 14, 1 Queens Road, Melbourne, VIC 3004
PO Box 33003, Domain LPO, Melbourne, VIC 3004

T: +61(0)3 9863 9779
F: +61 (0)3 9863 8010
E: admin@kingstonknight.com.au
W: www.kingstonknight.com.au

Read more

Auditor’s Report

Auditor’s Report

Following the engagement of an auditing and assurance practitioner to examine the financial statements issued by a listed company, a lengthy audit process commences for full-year statements in order to produce a standardized interpretation of their validity. This enables shareholders and other stakeholders to form sound judgements based on the level of assurance provided to them by the auditor at the conclusion of their work.

Following the audit’s completion, the auditor will produce an auditor’s report that details their opinion on the company’s financial position based on financial statements and other sources of information. The most common kind of auditor’s report is referred to as a review report, or unmodified report, which means that the auditor did not come across any evidence to suggest that the company’s financial statements present anything other than a fair and truthful depiction of the company’s financial position, and that all statements were compliant with relevant regulatory and accounting requirements.

Also known as clean or unqualified auditor’s reports, such a report is the most common variety issued by auditors following their work on the financial statements of a listed company. This is at least partly due to the fact that company management often becomes aware of problems or potential problems before the report is released, and makes the required adjustments in-line with the auditor’s findings.

Unmodified Auditor’s Report
It is important to remember that an auditor usually conducts a full analysis, or audit, of the full-year or end-of-year financial statements issued by a company or other entity, and that this is required by law in Australia. It is standard practice for the practitioner appointed to conduct the full-year audit to also conduct a mid-year review and provide ongoing consultation with company management and directors.

Following the mid-year review, which is at best a limited assurance measure, management and/or stakeholders may consult the practitioner to make adjustments based on the findings of their review. This regularly results in the end-of-year audit report being unmodified, because the company has addressed any relevant matters that could influence the level of assurance resulting from the report with assistance from the assurance practitioner following the mid-year review.

The issuing of an unmodified auditor’s report is effectively an indication that the auditor did not become aware of any information in the financial statements that could indicate that they present anything other than a fair and truthful indication of the company’s financial position, in-line with accounting standards set by the peak body as well as relevant legislation.

Important Sections of an Unmodified Auditor’s Report
The auditor may include additional sections in the report, such as other matter and emphasis of matter paragraphs. It is important to remember that these additional paragraphs, if they occur, do not indicate that the auditor has come to an adverse conclusion or that they have identified limitations in the company’s financial statements. These additional sections are regularly included in auditor’s reports where the auditor decides that users would benefit from a more comprehensive understanding of certain information which they consider to be fundamental to the interpretation and understanding of the financial statements.

The type of information included in these additional sections is specific to the position of the company that has been audited, and therefore will differ between reports and between companies and entities. The inclusion of additional paragraphs such as other matter and emphasis of matter paragraphs is not indicative of adverse conclusions, which are instead set out in a modified auditor’s report. We will further explain what constitutes a modified auditor’s report in later paragraphs, but first, let us view a few examples of what might be found in emphasis of matter or other matter sections of an unmodified auditor’s report.

Other matter paragraphs – These sections may draw the reader’s attention to inconsistencies in the company’s reported position and attempt to explain these inconsistencies. This is not an indication that the auditor has reached an adverse conclusion that affects the level of assurance available to stakeholders, it is merely a professional practice designed to obtain consistency in the information available to stakeholders.

For example, an other matter section of an unmodified auditor’s report may state that certain information included in a listed company’s annual report does not match all of the conclusions from the audit of financial statements. This might be an inconsistency between figures listed in an operational review and those included in the financial statements analyzed by the auditor. When included in an other matter section, this inconsistency is not considered to be a serious issue that should affect the decisions taken by shareholders or other stakeholders, but it is something that relevant parties should be aware of.

Emphasis of matter paragraphs – An emphasis of matter section on an unmodified auditor’s report seeks to clarify an important point, such as concern about a company’s ability to continue trading. This section is included where the relevant matter has been disclosed as required in financial statements analyzed during the audit process. This is an indication that the company has been truthful in its disclosure of important financial details, but that these details are deserving of emphasis and a heightened degree of scrutiny by stakeholders when making relevant decisions.

Modified Auditor’s Report
An auditor or assurance practitioner will issue a modified auditor’s report in the event that they believe the relevant financial statements include a misstatement or misstatements of key material. That is, the auditor believes that the financial statements provide an inaccurate or incomplete view for stakeholders when taken at face value.
An auditor may also release a modified auditor’s report in the event that they are unable to compile the evidence required to form an opinion, perhaps due to missing or misstated information in the financial statements that they have audited.

Generally, there are three main types of modified auditor’s report, which differ in the implications they carry for forming an opinion relating to assurance. These opinion statements are grouped into adverse opinion, disclaimer of opinion, and qualified (except for) opinion.

These different types of opinion that may be contained in the modified auditor’s report have important implications for the users of the report, and so the key differences between these types of opinion are explained below.
Adverse opinion – Adverse opinion indicates that the auditor has reasonable grounds to believe that information presented in the entity’s financial statements do not constitute a fair and truthful view of the entity’s financial position, and/or the financial statements do not comply with accounting standards. An auditor is likely to issue a statement of adverse opinion when they believe that the entity’s financial statements contain misstatements of key information that negatively affect the level of assurance available to stakeholders. For example, if a listed company has not applied the appropriate/required financial reporting techniques in the preparation of their financial statements, the auditor is likely to issue a statement of adverse opinion.

Disclaimer of opinion – A disclaimer of opinion is issued by the auditor in the event that they are unable to reach a definitive conclusion in regard to whether or not the financial statements offer a fair and truthful depiction of the entity’s financial position. This may be a result of the auditor being unable to gather sufficient evidence required to form an opinion on content or nature of the financial statements, therefore disclaiming their professional opinion. It is important to note that this does not indicate that the entity responsible for the financial statements has engaged in negative conduct, it merely indicates that the auditor lacks the means of reaching a conclusive opinion on the financial statements and their implications for stakeholders. For example, the entity’s information system used for financial reporting may have malfunctioned, resulting in the loss of key data required by the auditor to reach a definitive conclusion.

Qualified opinion – Also known as an except for opinion, qualified opinion is issued in the event that the auditor believes the financial statements provide a fair and truthful depiction of the entity’s financial position, and that they comply with accounting standards, except for a specific component or matter included in the financial statements. The issues that result in a qualified opinion statement being issued by the auditor are then described in more detail in separate sections of the auditor’s report, enabling stakeholders to inform their own decisions on the matter/s.
Examples of circumstances where the auditor may present a qualified opinion include:
• The entity’s management has included a view of an asset’s value in their financial statement which differs from the view taken by the auditor, but besides this the financial statements provide a truthful depiction of the entity’s financial position.
• The auditor is unable to verify a particular component of the financial statements, but is able to verify the other components and is satisfied that they are free of misstatements.

How To Tell If an Auditor’s Report Has Been Modified
For those who need to know whether or not the auditor’s report has been modified, the answer lies in the document’s ‘opinion’ section. This is where the auditor includes their personal view of the information contained in the financial statements, in line with the above types of opinion. If no opinion section is included, then the auditor’s report has not been modified.

The opinion section is found towards the end of the document, where the auditor usually includes their details and signature. This is where the auditor makes their concluding remarks, and there should be a statement here to qualify whether the auditor believes that the entity’s financial statements offer a truthful and fair depiction of the entity’s financial position.

Once again, it is very important to look for sections titled other matters etc. Even if the auditor’s report is ‘clean’ or unmodified, there may still be certain clarifications to take into account. These are stated under specific matter sections of the report.

Does an Unmodified Auditor’s Report Mean the Entity Is in Good Shape?
Auditor’s reports are designed to convey whether or not an entity’s financial statements are in-line with accounting standards and relevant legislation, so that stakeholders may form an opinion with the appropriate degree of confidence. Auditor’s reports are not designed to identify whether or not an entity is profitable or successful, they merely confirm whether or not stakeholders are able to use the entity’s financial statements to make assessments of the entity’s performance.

If the auditor’s report is unmodified, then the financial statements released by the entity are in fact an accurate depiction of their financial position. This position may be good or bad, all the relevant information will be in the financial statements available to shareholders.

Auditors are often involved in assisting management with financial affairs such as assumptions of going concern etc. This information is then used in the preparation of financial statements, but cannot be used as a conclusion on the financial wellbeing or solvency of the entity.

Auditor’s Reports Summary

In conclusion, auditor’s reports are designed to provide shareholders with a conclusion regarding the degree to which they can trust an entity’s financial statements. If an auditor’s report does not include modifications, or areas where the auditor is obliged to state their opinion in regard to the information contained in the financial statements, then the information in those statements can usually be used to form an educated opinion.

This is a vital part of the assurance process, and understanding the details contained in opinion sections or other modifications is vital to forming a position of confidence in an entity’s position. Just because an auditor’s report does not contain modifications, it is not appropriate to conclude that the entity must be profitable or even viable. The purpose of an auditor’s report is, after all, the convey to stakeholders whether or not the information contained within the entity’s disclosed financial statements provides an accurate and fair depiction of their financial position.

An auditor’s opinion, stated in a modified auditor’s report, can be used to identify areas of potential concern for shareholders and things they might do to rectify these concerns.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at admin@kingstonknight.com.au.

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What Does an Auditor and Reviewer Do?

What Does an Auditor and Reviewer Do?

Australian law requires some types of entity to undertake a comprehensive process of financial reporting, review, and auditing to ensure that financial statements comply with standards and legislation. As part of this process, entity’s such as listed companies and non-listed companies over a certain size are required to have their mid-year financial statements reviewed by a financial professional qualified to undertake reviews and audits of financial statements.

These entities are required to submit their full-year financial statements for a more thorough examination, known as an audit of financial statements, which is also conducted by an audit and review practitioner.

These requirements are set out in legislation known as the Auditing and Assurance Standards, which lay the framework for financial reporting of financial statements as well as a set of minimum requirements for the regular audit and review of financial statements. The audits discussed here are external audits, which are required by law and involve the engagement of an independent auditor who meets the ethical requirements set by the minimum standards.

Auditors and Reviewers – Are They Independent?
Comprehensive professional and ethical standards ensure that audit and review practitioners are able to operate with bias or external influence. This is ensures that financial statements are reviewed and audited by practitioners capable of forming an independent judgement or conclusion with regard to the financial statements, and can inform stakeholders whether or not these statements provide a fair and truthful depiction of the entity’s financial position.
These standards ensure that auditors and reviewers in independent from the relevant entity’s both in terms of professional practice and in appearance. The assurance process is vital in the function of our capital markets and the economy more broadly, so stakeholders need to be sure that they can trust the advice of an auditor or reviewer and take it at face value when making important decisions.

Different legislation dictates the different auditing and reviewing requirements for different entities. As an example, the Corporations Act 2001 sets out the following requirements for auditors and reviewers of listed company financial statements:
• That the position of lead auditor be rotated every five years
• That auditors are restricted from holding positions on the board of companies whose financial statements they review or audit.
• That the auditor produce a declaration of independence to be issued to the company’s board of directors, and that this declaration of independence be published in the company’s annual report.

The Audit and Review Processes for Listed Companies
The task of assurance practitioners carrying out the auditing and review of listed company financial statements is to identify instances where material has been misstated or is unverifiable. As stated previously, the process is governed by a set of minimum requirements and standard framework for financial reporting and the review or audit of financial statements.

For listed companies, financial statements are released twice-yearly in the form of half-year and full-year financial statements. Mid-year financial statements are required by the legislation to undergo review by a qualified auditing and review practitioner, and it is often the same practitioner who conducts the complete audit required for full-year financial statements.

The auditor/reviewer is engaged prior to the end of the reporting period, and spends much time performing an initial assessment of the listen company’s financial reportage. The practitioner is then required to conduct an assessment on whether they meet the requirements for independence and professional ethics, only after these requirements have been met are they able to agree on the company’s terms of engagement and begin the task of review.

Once the terms of engagement have been agreed upon, the practitioner must take the time to understand the company whose financial statements they are reviewing. This involves a comprehensive analysis of micro and macro factors involved in determining the company’s financial position, so that they are able to later apply this data to their review and audit of the financial statements. It is during this stage that the reviewed will identify and examine any substantial risks for material misstatement that they come across during their examination of the company’s financial position.

Once the reporting period is reaching a close, the practitioner will work closely with company management to reduce the risk of any material misstatements appearing in their financial statements. The work carried out during this stage depends heavily on the nature of the company involved, and whether the work is part of a review or an audit.
Within three months of the reporting period’s close, the practitioner is required to finalize and sign their report, which may then be issued to the relevant stakeholders.

What Constitutes a Material Misstatement?
The purpose of assurance is to reduce the risk of an entity’s financial statements containing information that does not present a fair and truthful depiction of the entity’s financial position. For the purposes of auditing and reviewing, a material misstatement constitutes more than a mere oversight or mistake, it is a significant error or misstatement that may reasonable impact the decision-making process of those using the entity’s financial statements. Misstatements may be identified using qualitative or quantitative methods, as both are capable of identifying significant misstatements.

Qualitative misstatements
– Relate to the nature of individual elements of the financial statements, such as a failure to disclose certain transactions or remuneration payments to management. These misstatements are important for stakeholders to be aware of, because they provide important information about how the entity is being managed.
Quantitative misstatements – Relate to dollar amounts or quantities included in the financial statements, such as revenue amounts (overstated), expenses (understated), and liabilities (missing or not recorded). Such misstatements seriously impact the ability of stakeholders to make informed decisions about an entity.

Fraud Detection

Assurance professionals conducting the audit or review of an entity’s financial statements are required to consider the possibility that fraudulent activity may affect the financial statements, such as by resulting in material misstatements. Therefore, auditors and reviewers must take fraud into account when planning their work and carrying out their review/audit.

It is important to remember, however, that an audit of financial statements is by definition not intended to serve as an investigation into any and all instances of fraud that may have occurred within an entity. It is not unreasonable to expect that an audit would uncover fraudulent activities, though, due to the fact that such activities are likely to result in material misstatements being included on financial statements.

Going Concern Assumption

The assumption that a listed company will continue to engage in business operations for the foreseeable future is known as the going concern assumption. Unless evidence indicates otherwise, it is standard for this assumption to be adopted by assurance practitioners.

Assumption of going concern has a very significant impact on the presentation of a company’s financial statements, and the assumption is outlined in the financial statements presented by management. When conducting the audit, the practitioner will assess the going concern assumption adopted by company management as part of their work.
Going concern assumption does not always apply, as some entities are not a going concern and are subject to different reporting requirements than those that are assumed to be a going concern.

Where the assumption of going concern is adopted, the auditor will gather evidence and perform an assessment of this assumption. Once the assessment is complete, the auditor will produce a conclusion and include it in their final report. Auditors are required to determine whether or not a company that assumes going concern can in fact continue as such for the 12 months from the date on which the auditor’s report is signed.

Events that take place in the future are inherently uncertain, but where concerns over forecast going concern assumption exist, the auditor will include notes in their report that direct users to the relevant elements of the financial statements that have lead them to form this conclusion. It is standard practice for such content to be included in the emphasis of matter paragraph, if one exists, or in the modified opinion section should the auditor reject management’s assumption of going concern.

Where Will I Find an Auditor’s Signature in a Company’s Annual Report?
The Auditor’s report is included in the annual report, and relates specifically to the company’s financial statements in order to provide assurance. For Australian listed companies, the auditor also signs off on the remuneration report which lists payments to management staff.

The auditor is required to ensure that information presented to stakeholders is consisted with the information contained in the financial statements, and that these statements do not contain material misstatements.

Audit Quality
It is difficult to measure or define the ‘quality’ of an audit or the associated report, which is why the auditing, reviewing, and assurance processes are governed by a set of minimum standards and regulated by legislation. This ensures that all audits conducted for Australian entities meet certain standards, and that a certain degree of quality is assumed.

Much of the hard work performed by auditing and assurance practitioners is carried out before an entity’s financial statements are released, so this is perhaps the most important period for quality with regard to the audit. It is during this time that the practitioner works to ensure the finalized financial statements are free of misstatements and provide a true and fair view of the entity’s financial position.

It is the practitioner and their firm who are ultimately responsible for the final quality of an audit, ensuring that they accept liability for mistakes or oversights that make it onto a final report. Seeing as the auditing and assurance process are such an integral part of the healthy functioning of our capital markets, regulators and industry bodies also work to ensure that minimum standards for audits of financial statements deliver a high degree of quality for stakeholders.

Internal and External Audits
External audits are largely what we have been discussing in this article, as they are the core component of the assurance system that we use to deliver confidence to stakeholders. An external audit is conducted by an assurance practitioner who meets the criteria or ethical and actual independence from the entity which they are auditing. Practitioners are engaged by the entity to conduct external audits, in line with regulatory requirements and accounting standards.

Internal auditing is a tool available to an entity’s management which enables them to achieve a comprehensive overview of their financial position, making internal audits an important part of the entity’s internal control system. Internal audits are conducted by a practitioner who is either working directly for the entity, under the supervision and direction of management, or who has been contracted with the task of conducting an internal audit. Internal audits are largely intended to evaluate the effectiveness and adequacy of the entity’s internal control measures and management system.

Other Forms of Assurance
The process of giving stakeholders the opportunity to make a fair and informed decision, or to act with an appropriate degree of confidence in their dealings with an entity, is not limited to auditing and review of financial statements.
Assurance practitioners may perform a range of other activities that are not focused on financial statements, as these are understandably not the sole source of concern and interest for stakeholders. Examples of other assurance practices include:
• Audits of Performance
• Prospectuses
• Compliance with Regulations
• Greenhouse Gas and Emissions Statements
• Sustainability Reports

It is increasingly important for a range of stakeholders to have access to credible and reliable information with which they can judge the impact and performance of the entity in relation to these key areas. For example, the financial statements of a listed company may be in-line with regulatory requirements and accounting standards, and be free of material misstatements, but it would be unwise to form a high-level of confidence on this basis if the company was in breach of other regulatory requirements. All these functions aim to increase the level of assurance available to stakeholders, allowing them to make an informed and confidence decision when they are required to do so.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at admin@kingstonknight.com.au.

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Auditing and Assurance for Listed Companies

Auditing and Assurance for Listed Companies

Listed companies and their shareholders play an enormous role in the Australian and world economy, along with the global economy more broadly. The information that listed companies provide to their shareholders, both current and prospective, is a key driver of capital markets and the broader economy. Without assurance as to the validity of this information, capital markets would not operate as efficiently and predictably as they do.

Auditing and assurance services provided by financial service providers such as Kingston and Knight allow current and prospective shareholders in listed companies to feel secure in the information they are given, and manage their investments accordingly.

In Australia, the auditing and assurance process is set out in best-practice guides issued by CPA Australia. This ensures a standard of practice across the 150,000 strong membership of the nation’s chief financial services body, allowing shareholders in Australian listed companies to feel secure in the knowledge gained from their company’s auditor.

What Does Assurance Mean and Why Does It Matter?

Assurance is a term used to express a conclusive statement that functions to increase the confidence of those receiving information as to the validity of that information. For example, an audience seeking confirmation about the statements issued to them by the company they have invested in may find assurance in the detailed financial audit report issued to them by an independent financial auditor. The information contained in such a report clearly demonstrates the facts relating to the subject matter, and provides a firm basis for opinion be it positive or negative.

The gist of the term assurance is this; assurance allows stakeholders to make an informed decision on some particular subject or in relation to particular matters, sound in the knowledge that all relevant information is accounted for and presented in a verified format.

Assurance matters, because without assurance there can be no confidence. In capital markets and financial systems more broadly, confidence is a key driver of growth and positive outcomes. The work of qualified financial auditors and assurance practitioners allows those taking part in these financial systems to express confidence in the information given to them by listed companies, ensuring that they are in fact making a sound investment based on verified financial evidence.

It is important to note that there are different levels of assurance available to stakeholders, and these levels of assurance depend on the nature of the work performed by their assurance practitioner. Different levels of assurance may result in different conclusions and have a differing effect on the level of confidence available to stakeholders.
The framework for these levels or types of assurance is set out by the peak body for financial auditors and assurance practitioners, ensuring that these professionals always have an answer for stakeholders, even if the answer can differ in the level of assurance it provides.

Levels of Assurance

No Assurance – This is the level of assurance stated by assurance practitioners who are still in the process of compiling or preparing financial statements, and therefore are unable to provide a conclusion for use by stakeholders. If auditing and analysis have not yet been conducted as the relevant financial information is still being compiled, the assurance practitioner is unable to offer assurance. The level of assurance offered at this stage is therefore no assurance.

Limited Assurance – When assurance practitioners reach the stage of conducting their preliminary review, analysis, and inquiries into the financial statements of the listed company, they may be able to provide limited assurance to stakeholders. This means that the assurance practitioner has begun their analysis of the financial statements and other data, and has not yet found evidence for the belief that these statements and data are not truthful and fair. At this stage of the assurance process, the practitioner has only completed the less detailed procedures involved in the overall process and therefore is unable to draw a firm conclusion with which to offer assurance to stakeholders.

Reasonable Assurance – Reasonable assurance is delivered by the practitioner only when they have completed gathering evidence and subjecting the financial information of the listed company to detailed testing and substantiation. This means that an audit of financial statements is complete, and the assurance practitioner has substantial evidence with which to support their statement of assurance. When reasonable assurance is provided, the practitioner is stating their genuine belief that the information contained in the relevant financial statements is a true and fair indicator of the level of confidence stakeholders may take.

Absolute Assurance – This is essentially a guarantee of authenticity issued by the assurance practitioner, stating that their detailed analysis has enabled them to conclude that the information contained in a company’s financial statements is in fact a fair and truthful depiction of that company’s financial position. Once shareholders have received a guarantee of absolute assurance, they may express the appropriate level of confidence and use this to inform their decisions relating to the company.

Why Are Reviews and Audits Required?

Shareholders are usually not intimately involved in the management and operation of the company in which they have invested, meaning that they may not be aware of the true nature of that company’s financial position. This has obvious implications for the stakeholder, meaning that they require an independent, reliable source of financial assurance so that they can assess their investment based on the facts.

For example, shareholders are tasked with the appointment of senior management, so they need a reliable and independent means of analyzing the performance of senior management. This enables them to make an informed decision when appointing management and making other important decisions relating to the company’s operations.
Financial statements are issued by the company, but these need to be subject to audit and assurance processes before shareholders can express confidence (or a lack thereof) in the contents of these statements.

Review of Financial Statements
Conducting a review of the listed company’s financial statements allows the assurance practitioner to offer limited assurance, as the level of analysis and engagement with financial data is not as comprehensive as that of the auditing process.

It is standard practice in Australia for listed companies to release half-yearly financial reports, and for these reports to be reviewed by an assurance practitioner who will later audit the end of year financial statements of that company. A review of these reports enables the reviewed to issue shareholders a conclusion about whether or not the reports offer a fair and truthful view of the company’s financial position.

In essence, the review process is limited to providing limited assurance, as the level of scrutiny placed on the relevant financial data is not as comprehensive as required for a statement of reasonable or absolute assurance.
Audit of Financial Statements

The auditing process involves a highly-detailed and comprehensive level of analysis and evidence gathering designed to substantiate or disconfirm the information contained within a company’s financial statements. This constitutes a process of reasonable assurance, and upon the conclusion of an audit, shareholders will have a reasonable view of the facts relating to their company’s financial position.

Auditors are engaged to deliver their professional opinion on the fairness and truthfulness of the company’s financial statements, and to offer shareholders reasonable assurance if the appropriate conditions are met.

In Australia, auditing of financial statements is conducted in line with the appropriate legislation, as well as the accounting standards set by the industry peak body. This ensures that the audit process is consistent, independent, and constitutes a reflection of best practice as determined by the peak body. These requirements enable the assurance process to continue by providing transparency and consistency that shareholders can rely on form judgements about their company.

Australian laws require listed companies to have their full-year financial statements audited by an approved, independent auditor. This requirement is not limited to listed companies, and other entities and organizations are also subject to regular auditing by law to provide assurance for relevant stakeholders.

Bear in mind that the level of assurance obtained from the auditing of financial statements is reasonable assurance, because an audit is a standardized procedure and therefore cannot apply to each and every transaction and action of each company. There are operational and functional differences between companies that result in the standardized audit procedure being unable to test each and every component of an individual entity’s financial position. Additionally, estimates and judgements are made in financial statements. That is, there are estimates present which cannot be verified discretely or exactly, and may be dependent on future events.

For listed companies, the auditor is usually appointed by an audit committee. The audit committee may consult the auditor at various points throughout the year to obtain their professional advice on matters such as risk, scheduling, and financial reporting. Auditors findings from previous years may be subject to ongoing examination, for example, in light of an event forecast by the auditor coming to fruition.

Once a audit of financial statements has been completed, the auditor usually produces a comprehensive and confidential report that is given to the audit committee. This enables them to form their own conclusions on the level of assurance provided by the audit, and any implications this may have for the board of directors and other shareholders.
It is standard practice in Australia for the appointed auditor to attend the Annual General Meeting of the listed company whose financial statements they have audited. This allows interested stakeholders to obtain any details they may require from the auditor, providing a useful means of clarifying specific elements of the audit and implications thereof.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at admin@kingstonknight.com.au.

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Seven Mistakes Not to Make When Claiming Tax Deductions

Seven Mistakes Not to Make When Claiming Tax Deductions

Each year, the technological resources available to assist the Australian Tax Office in identifying and investigating discrepancies in financial and income reporting become more comprehensive and far-reaching. This enables the ATO to better meet their mandate of ensuring taxpayer compliance with their lawful obligations by being able to more accurately detect false deductions and other tax avoidance methods.

It is not unusual for the ATO to issue warnings around tax time about their growing capacity to detect false expense claims or income reporting, and with an ever increasing amount of data at their disposal, their capacity to do so is set to increase even further.

This is not a warning to high-flying executives or companies seeking to make use of tax loopholes or other avoidance methods, these warnings are issued to all taxpayers and workers. The ATO has the capacity to cross-check a worker or employee’s reported employment expenses with the employer, and they will do so if your claimed expenses exceed the benchmark for your industry or sector. You can check these income and occupation benchmarks online using the ATOs website, or speak to your accountant or registered tax agent.

Work-Related Expenses
Claims for tax deductions on work-related expenses are particularly suspect, with the ATO continually advising that it wishes for taxpayers to claim deductions on all the expenses they are entitled to deduct, no more and no less. Guides are issued for specific industries and occupations which list the expected deductions relevant to that kind of income, and the ATO publishes resources on their website to assist taxpayers in identifying the expenses they may be entitled to claim for their specific occupation.

There are three important things to consider when claiming work-related expenses, and if these are not satisfied, you likely are not eligible for the deduction:
• Is the expense directly related to the earning of your taxable income?
• Did you spend the money yourself and not receive a reimbursement? If the expense was already reimbursed by your employer or another stakeholder, they are entitled to claim the deduction and not you.
• Do you have a record to prove that you met the expense for which you are claiming a deduction? Receipts are the gold-standard, but bank statements or other financial records may be used to identify the expense, when it was paid, and who it was paid to.

Rule Number 1: Ensure that your claims are justifiable
If your expense claims appear to be unusually high, it is likely that the ATO will contact your employer and request information about the duties you are required to perform as part of your employment. This means that if you are claiming travel expenses, but it turns out that you live a five minute walk from your place of employment, or if you claim for safety gear despite all the required equipment being provided by your employer, you are likely to have your deductions disallowed.

So not only does the total amount for which you are claiming expense-related deductions need to be within the reasonable limit for your taxpayers with similar circumstances, they also need to be reasonable in relation to your individual circumstances. The ATO has the capacity to obtain more detailed information about your employment and personal circumstances, and will do so if they believe your deductions do not accurately reflect the expenses you are likely to have incurred.

Rule Number 2: Ensure that you haven’t been reimbursed already
While there are certainly cases of fraudulent deduction claims on expenses which were reimbursed prior to tax time by the employer or another stakeholder, this rule is more complicated than the first.
Say for example that you are required to travel interstate to conduct business on behalf of your employer, or to carry out your expected duties. It is likely that the employer will explicitly reimburse you for this expense, as they may be able to claim a deduction on it themselves. If you were to claim such an expense despite already being reimbursed, this is obviously an act of non-compliance with your tax obligations.

In some cases, the line can be less clear. For example, it may state in your employment contract that reasonable travel costs or other expenses are included as part of your salary package. You may have forgotten this, and claimed deductions on expenses that were stated as being part of your salary. If the ATO were to examine your claims and contact your employer, they may disallow your deductions in full when they find out that the expenses were already met.

For this reason, it is very important that you check with your employer about the expenses you incur during the course of your occupation. They may inform you that the expense is already covered by payments made to you, and in this case you would be unable to claim related tax deductions.

In the case of travel, you may take public transport to work every day. If you keep a record of your public transport expenses, and your employment contract makes no mention of reimbursement for transport expenses, then this may be a deduction that you are entitled to claim at tax time.

Rule Number 3: Get Good Tax Advice
As an accounting firm, we understand the important of professional assistance in lodging your tax return and other tax matters. However, it seems to be all too common for new or inexperienced tax agents to make unrealistic promises to some clients about the deductions that they may be entitled to. If you are using a tax agent to lodge your tax return, ensure that they are experienced enough to understand what is likely to be considered an eligible deduction and what is not. There are many cases where tax agents have submitted returns claiming unusually high deductions, which then draws the ATO’s attention to that agent and their clients. If you are unfortunate enough to have engaged an agent who is conducting business of such low standards, you may find that your deductions will be disallowed in full, yet you have still had to pay the tax agent.

By being aware of the other rules on this list, you are better able to identify instances where a tax agent may be trying to see how many deductions they can get away with, not necessarily to your benefit. The task of a registered tax agent is to ensure that you receive all the deductions you are entitled to, no less, but certainly no more. To see tax agents and accounting professionals as money magicians at tax time is to severely understate the importance and complexity of the duties they are required to perform.

Rule Number 4: Keep records to substantiate your claims
It is vital that you keep records of all your expenses and transactions related to claims, or potential claims, which you may lodge at tax time. Keeping these records will enable you to swiftly produce verification in the event of a follow up by the ATO, and even if you are found to be ineligible for the deduction, by keeping adequate records relating to your claims you are demonstrating due diligence and making the ATO’s job easier, potentially reducing your liability. If you are unsure whether or not you are eligible to claim an expense, you can show the records you kept to your tax agent or accountant and they can assist you in claiming the appropriate deductions.

Rule Number 5: Never make claims for private, or mostly private, expenses
If you are unable to demonstrate through the provision of written evidence that your claims relate directly to your earning of income, then they are not eligible claims. For example, if you claim travel expenses after deciding to travel first-class on an interstate rail service, your decision to travel first-class is a private one and is not determined by your employment obligations.

Likewise, if your employer does not provide you with a uniform, but instructs employees to wear neat business-appropriate attire, you may not claim related clothing expenses as these clothes may also be used for private purposes.

Rule Number 6: Understand the basics of what is and is not eligible for deduction
If you understand the fundamentals of tax deductions for income-related expenses as they apply here in Australia, then you are better able to judge what you are and are not eligible to claim. Do your homework before tax time, and speak with your accountant or tax agent about the typical expenses profile for someone with your income and occupation. Check online for resources, such as the ATO guides outlining common deductions by occupation, which you can use to see what you are expected to claim for. You may notice things that you weren’t even aware you could claim deductions on, and therefore find yourself with a more balanced tax return.

If you do not attempt to gain even a basic understanding of these rules, and leave the task of claiming deductions up to the cheapest and most convenient tax agent you can find, you may be in for much more hassle than its worth.

Rule Number 7: Create digital records, and back them up
When tax time approaches, it is a very good idea to create a file on your computer that contains the relevant documentation or records that you will use to verify your deductions claims. These could include electronic copies of your bank or credit card statements, as well as digital invoices and receipts. You can also add notes with the finer details that you may need to provide in the case of a follow up.

Back up your data by uploading it to a cloud-based service, this way you can access it from any device and there is minimal risk of losing it. Being able to provide written records promptly if requested to do so is an important part of meeting your tax obligations, and will assist you in obtaining the deductions you are entitled to receive.

Lodging Your Tax Return

When you lodge your tax return using an automated service such as the ATO’s MyTax system, any claims you make for expense deductions are compared against the claims of other taxpayers in your industry or occupation, as well as those who have a similar income. This comparison is performed automatically, and is shown to you during the MyTax reporting process so that you will receive a warning in real-time if you are claiming an unusually high amount in comparison to those in similar circumstances. Tools such as this are part of the standardization of the entire tax-return system here in Australia, meaning taxpayers are automatically assessed against the information reported by other taxpayers with similar circumstances.

There are also free online tools available to assist taxpayers in calculating the deductions they may be entitled to, such as the MyDeductions element of the official ATO app. You can use this tool to record your expenses as they happen, ensuring that you have a valid record of expenses which you intend to claim deductions for. This alleviates some of your burden at tax time by ensuring that you don’t have to sift through receipts or financial records to find evidence of your expenses.

Your registered accountant or tax agent is here to help. Kingston Knight has extensive experience in tax compliance and tax structuring, ensuring that you receive the deductions you are entitled to and that your tax return is processed as quickly as possible. We can also assist you in collecting and storing the required records, and will advise you if there is any cause for concern in the material you have provided to us. Ensuring your compliance with regulation is one of the greatest ways we can help you as registered tax agents, freeing you from unneeded disputes or follow-up action and allowing you to get on with business while receiving the deductions and discounts that are yours by right.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax and accounting services, or email us at admin@kingstonknight.com.au.

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ATO Audits – What You Need to Know

ATO Audits – What You Need to Know

Australia’s taxation and regulatory framework requires businesses, organisations, and individual taxpayers to comply with various laws and regulatory requirements. Broadly, these requirements relate to the reporting of correct financial information to the Australian Taxation Office in a timely manner, and compliance with requests from the ATO or other regulators for specific information or evidence to substantiate your reporting.

In proceeding with this article, we disclaim our writings and published content as making any legal claims with regard to the views, opinions, and information contained therein. This information is of a general nature, and the topics discussed are subject to variation in given circumstances or situations. Due care has been taken to only include information which is informative and that may serve to assist taxpayers in gaining awareness of their obligations and the regulatory requirements that may affect them.

The ATO may conduct an audit with relation to a number of tax issues, such as income tax, employment tax and employee obligations, Goods and Services Tax (GST), tax deductions, discounts, and concessions, and the production of statements and statutory documents just to name a few. Issues which may trigger an ATO audit or review could include the overstatement of deductions or the under-reporting of income, which both indicate a failure to comply with tax obligations.

For businesses and other organizations in particular, it is important to ensure compliance and minimize the risk of being audited, as facing an audit is seen as often seen as a sign of misconduct or negligence which has implications for the organization’s reputation. For any taxpayer, failing to comply may result in an enormous and unexpected tax bill which can have dire financial consequences, let alone the impact on professional status and credit viability.

As a business owner or the manager of an organization, or even as an individual taxpayer, maintaining an awareness of the record keeping and reporting requirements set out by the ATO and other regulators can ensure your compliance and reduce the risk of dispute or other action.

What Is an ATO Audit?
An audit is a detailed and comprehensive verification process, designed to assure the tax office that the audited party has complied with their tax obligations. The ATO has a number of methods which is may use to determine when an audit is to be performed on a party’s financial records. Detection systems, including data matching systems and systems that compare data from different public sources, such as government departments, with information obtained through the party’s tax returns or Business Activity Statements (BAS).

These methods may be used to conduct what is known as a risk review, which is basically a comparison of a given party’s financial reports and the standard industry figures or benchmarks. Such risk review processes may identify a discrepancy between the information reported by the party of interest and the data which represents the industry or sector benchmarks. If such discrepancies are identified, the ATO may conduct a review of the party’s financial statements or an audit, which is a more detailed investigation of the party’s financial position.

An ATO review may be the first step in this verification process, and involves an ATO-appointed reviewer checking relevant reports for misstatements or mistakes which may account for the discrepancy. This is why it is vital that all taxpayers keep records relevant to their tax liability, and that these records can be produced for the ATO in the event that a review is ordered.

If the ATO has grounds to believe that a standard review or follow-up would be unable to explain the discrepancies they have identified, or that the relevant party has not acted in compliance with their taxation obligations, they may then trigger an audit in to the party’s financial position.

How are ATO Audits Performed?

The tax office employs officers who specialize in the audit and review of financial information, known as ATO Audit Officers. If you are subject to a review or audit, an ATO Audit Officer may be assigned to examine your financial records and match this against the information that you have reported to the ATO. During this process, the auditor or reviewer may request information such as transaction lists, bank statements, receipts, or other proof of payments. The details may vary depending on the nature of the circumstances and the entity being reviewed or audited, as well as the nature of the discrepancy being investigated.

Following the initial review of this financial information, the appointed reviewer may be satisfied that the discrepancy can be explained by a mistake, or that the discrepancy does not reflect an attempt to avoid tax obligations. In this case, the review may be concluded and the reviewed entity or individual may receive important feedback on how they can minimize the risk of such action occurring again.

Should the reviewer conclude that the discrepancy cannot be explained through a review of financial information, or that the discrepancy indicates a deliberate attempt to avoid tax obligations, the matter may be referred to a department which initiates audits. If this happens, then the review will change into an audit, which is a much more thorough investigation.

What Is Targeted During an ATO Audit?
If the ATO decides that an audit is required to explain discrepancies in the information available to them, they may begin the audit process. This process involves the comprehensive analysis and verification of the audited party’s financial statements and other information. Generally, the focus of the audit will be on the source of the discrepancy which triggered the audit, but an audit should be considered as a thorough and complete examination of your financial position.

The Timeline of an ATO Audit
1. Once an audit has been decided upon as the appropriate method to determine the cause and nature of a discrepancy in financial reporting, you will receive written notification that an audit is underway. This notification may identify an Audit Officer who will conduct an interview with you face to face. You will be advised as to what to expect during this interview, and what information or documentation you may need to give to the interviewer.
2. At the interview, the Audit Officer may identify themselves and state their right to conduct the appropriate investigation, and may inform you about the reason for their investigation. The Audit Officer may provide you with their contact information, and ask that you forward them any questions or queries you have in relation to the audit. The Audit Officer may then spend time forming an understanding of the business, organization, or individual in question, and how it operates with regard to tax compliance and record keeping. This information may provide a blueprint from which the rest of the audit procedure may be derived.
3. Once the audit is underway, the ATO will make requests for any information or assistance they require from you to carry out their investigation. This will continue until they have obtained an appropriate amount of evidence to come to a conclusion on the matter and make a decision. Once the decision has been made, you will be informed of your rights, such as the right to bring a legal representative to the concluding interviews.
4. The final stage involves detailed questions and the answering of these questions, and will allow you to put your own questions to the auditors. Audit Officers may also make visits to business premises, these visits may or may not be announced. When the decision is formalized and the audit concluded, you will receive a written notice informing you of any adjustments made or penalties imposed, as well as the means by which you may object to or challenge the outcome of the audit.

The Importance of Tax Compliance
For businesses, individuals, and organisations alike, the task of tax compliance need not be a difficult one. Depending on the nature of your circumstances, you may need the assistance of a financial advisor or accountant to ensure that you are compliant with your tax obligations. Your accountant can advise you of these requirements and assist you in making the required reports and lodging documents with the ATO.
The best way to ensure compliance is to keep detailed records of your transactions and expenses, particularly if you wish to claim deductions on them. Record keeping can ensure that the required information is on hand should the ATO conduct a follow-up with you.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about auditing and accounting in Melbourne, or email us at admin@kingstonknight.com.au.

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GST Services

GST Services

The Goods and Services Tax is a tax of 10% that applies to most of the goods and services sold to Australian’s consumers. Businesses and organisations with a certain structure and turnover are required to register for the GST, which they then include in the price they charge to consumers for goods or services. If you are required to include GST in your prices, you are eligible to claim GST credits to offset the GST included in goods and services you purchase for your business.

The GST system contains some complex and time consuming registration, reporting, and credit-claiming procedures. Allow us, your accounting advisors and tax professionals, to take the hard work out of GST so you can focus on running your business.

Do I Need to Register for GST?
If you run an enterprise that generates a GST assessable turnover of $75,000 above, then you will need to register for the GST. For not-for-profit organisations, the turnover threshold is $150,000. You need an Australian Business Number (ABN) to register for the GST and claim any credits you are entitled to.

As registered tax agents, we can assist you in registering for the GST, as well as reporting your GST income and claiming GST credits.

Once you have registered for the GST, you will be required to report GST income and include relevant information in your Business Activity Statement, which will be due at certain intervals depending on the size and nature of your enterprise. BAS and other reporting requirements are among the most time consuming and difficult elements of the GST system, but these are easily managed with the appropriate tools, knowledge, and experience.

GST Credits
Once you have registered for the GST, you may be able to claim credits on the GST that you pay to other businesses, such as suppliers or service providers. These credits may allow you to claim the value of the GST your business pays as a refund from the ATO.

Our GST Services
As experienced accountants and registered tax agents, Kingston Knight works with small businesses, individuals, partnerships, companies, trusts, and superannuation funds to ensure that they meet the strict reporting and compliance requirements that apply under the GST system.

One of the most time and labor intensive components for those required to comply with the GST system is the Business Activity Statement (BAS) reporting requirement. Our cloud-based accounting software enables us to take the hard work out of BAS preparation and submission, whilst ensuring that the relevant data are compiled in perfect accordance with the prescribed requirements.

By ensuring that your reporting requirements are met with an efficient and personalized accounting service, you can get on with running your enterprise and doing what you do best.

Our GST Services Include:
• Assisting you in determining your GST obligations, and any adjustments to your business structure or procedures that may assist you in obtaining an optimal tax structure
• Assisting you with GST registration and reporting, including through the compilation and submission of your Business Activity Statement as required
• Assist you in identifying your GST expenditure and claiming any GST credits which you are eligible for.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Fringe Benefits Tax – FBT Advice and Assistance

Fringe Benefits Tax – FBT Advice and Assistance

Also referred to as FBT for short, fringe benefits tax is paid by employers in relation to benefits or other non-income payments or concessions made to employees, as well as the families of employees or associates of the enterprise. Fringe benefits may be incorporated into the wages or salary paid to employees, or they may be offered as extra incentives or bonuses. Another example of circumstances in which an FBT liability exists is when the director of a trust or company receives benefits, bonuses, etc.

Fringe benefits tax is not the same as or included in income tax, they are separate taxes. FBT is only calculated in accordance with the monetary value of whatever fringe benefits are provided, without relation to other income.

Do I Need to Pay Fringe Benefits Tax?
If you provide your employees or their associates with fringe benefits, you might be required to register for and pay FBT. For FBT purposes, the employee in question may be past, current, or future in relation to their employment with you. They may also be the director of a trust or company.

FBT also applies to benefits that are not provided directly by you, but by a third party through an arrangement you have made.

The following are all examples of fringe benefits which may attract an FBT liability:
• Giving an employee or their associate a loan at a discounted rate
• Paying the cost of a gym membership for an employee or their associate
• Allowing employees to make private use of work cars
• Reimbursing an employee or their associate for an expense that does not relate to their employment with you, such as school or medical fees
• Giving an employee or their associate access to paid entertainment by giving them free tickets to events
• Making a salary sacrifice arrangement with an employee which includes benefits.

For FBT purposes, it is important to determine a worker’s employment status. Whether someone is employed as a volunteer, contractor, or employee is what determines their employment status in this context. Contractors and volunteers usually do not attract an FBT liability on benefits provided by their employer. Those engaged in ongoing, formal employment are likely to attract an FBT liability if they are provided with such benefits.

If you think you may need to pay fringe benefits tax, but are unsure, speak to your accountant or registered tax agent to seek clarification. The ATO requires employers to assess their own FBT liability for each year, with the FBT year running from the 1st of April to the 31st of March.

FBT Exemptions
As an employer, not all benefits you provide to employees will attract an FBT liability. If the benefit is directly related to the employee’s work or duties as part of their role, it may be assessed as a work-related item and therefore exempt from FBT. The following are examples of benefits that are likely to be assessed as work-related items:
• Tools of the trade
• Computer software or hardware
• Electronic devices including laptops, mobile phones, GPS systems, printers, tablets etc.
• Briefcases or other containers
• Protective clothing.

There are limits on work-related benefits that are exempt from FBT. If you provide a mobile phone, for example, you cannot provide the employee with another FBT exempt mobile phone until the next FBT year. If the original item is broken and a replacement is ordered, the replacement may be exempt from FBT. Exempt items must be things which will primarily be used for work, not private use.

Small businesses were recently granted an extension on the work-related item extension, allowing them to provide more than one work-related item of a particular function within a given FBT year. This means that the above requirements pertaining to the one-item-one-year exemption limit does not apply to small business employers.

Property Fringe Benefits
If you provide an employee or their associate with goods or property at a discount, or for free, this may constitute an assessable fringe benefit that attracts FBT. Examples of property fringe benefits might include:
• Real-estate/real property, such as buildings or land.
• Goods such as appliances, clothes, entertainment products etc.
• Other property, such as bonds or shares.

Residual Fringe Benefits
Residual fringe benefits are those which are the hardest to define, yet still satisfy the criteria required to attract an FBT liability. Remember that for tax purposes, benefits are defined as being any item, privilege, right, facility, service etc. that is not work-related.
Examples of benefits that might be assessed as residual fringe benefits include:
• Provision of services, such as a plumber offering their services free of charge to an employee
• Allowing an employee to make use of items or property owned by the employer, such as a camera or entertainment system
• Allowing an employee to make private use of a work vehicle which is not assessed as a car in relation to FBT, such as a motor scooter or utility.

If you are unsure whether or not you may be attracting an FBT liability through residual benefits, speak to your registered tax agent or accountant.

How Do I Reduce My FBT Liability?

If you believe that you may be providing benefits that attract an FBT liability, you may decide to replace these fringe benefits with other things that do not attract FBT liability. For example:
• By replacing or making-up for the lost fringe benefits with additional wage or salary payments
• Choosing only to provide your employees with benefits that do not attract an FBT liability, such as work-related items
• Replacing fringe benefits with other benefits that your employees would be eligible to claim as deductions on their income tax should they be required to meet the expense themselves
• By using employee contributions to offset the FBT liability. An example of this would be that you require an employee who is allowed to make use of their work car for private purposes to pay the operating costs of the vehicle. Be aware however that employee contributions may be subject to GST and may contribute to your assessable income.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax accounting services, or email us at admin@kingstonknight.com.au.

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Fringe Benefits Tax for Employers

Fringe Benefits Tax for Employers

Also referred to as FBT for short, fringe benefits tax is paid by employers in relation to benefits or other non-income payments or concessions made to employees, as well as the families of employees or associates of the enterprise. Fringe benefits may be incorporated into the wages or salary paid to employees, or they may be offered as extra incentives or bonuses. Another example of circumstances in which an FBT liability exists is when the director of a trust or company receives benefits, bonuses, etc.

Fringe benefits tax is not the same as or included in income tax, they are separate taxes. FBT is only calculated in accordance with the monetary value of whatever fringe benefits are provided, without relation to other income.
Do I Need to Pay Fringe Benefits Tax?

If you provide your employees or their associates with fringe benefits, you might be required to register for and pay FBT. For FBT purposes, the employee in question may be past, current, or future in relation to their employment with you. They may also be the director of a trust or company.

FBT also applies to benefits that are not provided directly by you, but by a third party through an arrangement you have made.

The following are all examples of fringe benefits which may attract an FBT liability:
• Giving an employee or their associate a loan at a discounted rate
• Paying the cost of a gym membership for an employee or their associate
• Allowing employees to make private use of work cars
• Reimbursing an employee or their associate for an expense that does not relate to their employment with you, such as school or medical fees
• Giving an employee or their associate access to paid entertainment by giving them free tickets to events
• Making a salary sacrifice arrangement with an employee which includes benefits.

For FBT purposes, it is important to determine a worker’s employment status. Whether someone is employed as a volunteer, contractor, or employee is what determines their employment status in this context. Contractors and volunteers usually do not attract an FBT liability on benefits provided by their employer. Those engaged in ongoing, formal employment are likely to attract an FBT liability if they are provided with such benefits.

If you think you may need to pay fringe benefits tax, but are unsure, speak to your accountant or registered tax agent to seek clarification. The ATO requires employers to assess their own FBT liability for each year, with the FBT year running from the 1st of April to the 31st of March.

FBT Exemptions

As an employer, not all benefits you provide to employees will attract an FBT liability. If the benefit is directly related to the employee’s work or duties as part of their role, it may be assessed as a work-related item and therefore exempt from FBT. The following are examples of benefits that are likely to be assessed as work-related items:
• Tools of the trade
• Computer software or hardware
• Electronic devices including laptops, mobile phones, GPS systems, printers, tablets etc.
• Briefcases or other containers
• Protective clothing.
There are limits on work-related benefits that are exempt from FBT. If you provide a mobile phone, for example, you cannot provide the employee with another FBT exempt mobile phone until the next FBT year. If the original item is broken and a replacement is ordered, the replacement may be exempt from FBT. Exempt items must be things which will primarily be used for work, not private use.

Small businesses were recently granted an extension on the work-related item extension, allowing them to provide more than one work-related item of a particular function within a given FBT year. This means that the above requirements pertaining to the one-item-one-year exemption limit does not apply to small business employers.

Property Fringe Benefits

If you provide an employee or their associate with goods or property at a discount, or for free, this may constitute an assessable fringe benefit that attracts FBT. Examples of property fringe benefits might include:
• Real-estate/real property, such as buildings or land.
• Goods such as appliances, clothes, entertainment products etc.
• Other property, such as bonds or shares.

Residual Fringe Benefits
Residual fringe benefits are those which are the hardest to define, yet still satisfy the criteria required to attract an FBT liability. Remember that for tax purposes, benefits are defined as being any item, privilege, right, facility, service etc. that is not work-related.

Examples of benefits that might be assessed as residual fringe benefits include:
• Provision of services, such as a plumber offering their services free of charge to an employee
• Allowing an employee to make use of items or property owned by the employer, such as a camera or entertainment system
• Allowing an employee to make private use of a work vehicle which is not assessed as a car in relation to FBT, such as a motor scooter or utility.

If you are unsure whether or not you may be attracting an FBT liability through residual benefits, speak to your registered tax agent or accountant.

How Do I Reduce My FBT Liability?
If you believe that you may be providing benefits that attract an FBT liability, you may decide to replace these fringe benefits with other things that do not attract FBT liability. For example:
• By replacing or making-up for the lost fringe benefits with additional wage or salary payments
• Choosing only to provide your employees with benefits that do not attract an FBT liability, such as work-related items
• Replacing fringe benefits with other benefits that your employees would be eligible to claim as deductions on their income tax should they be required to meet the expense themselves
• By using employee contributions to offset the FBT liability. An example of this would be that you require an employee who is allowed to make use of their work car for private purposes to pay the operating costs of the vehicle. Be aware however that employee contributions may be subject to GST and may contribute to your assessable income.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax accounting services, or email us at admin@kingstonknight.com.au.

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