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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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PAYG System Advice for Employers

PAYG System Advice for Employers

In Australia, employers are required to assist their employees in meeting their taxation and superannuation obligations. The ATO has implemented a system which employers can use to make this task easier, known as PAYG, or Pay As You Go tax withholding. The PAYG system enables employers to use their existing payroll system to automatically deduct amounts from payments made to the following:
• Employees and staff
• Contractors or other temporary workers
• Businesses which do not quote an ABN on their invoices or receipts.

Bear in mind that the PAYG system is not the same as payroll tax, which is a separate state-level tax. PAYG is used to enable easier and more efficient withholding and reporting of income so that it can be used to meet an employee’s end of period tax liability. They may then claim deductions or discounts for which they are eligible, and this amount is deducted from the PAYG withheld amount and returned to them.

PAYG Registration
Employers, or others who may need to withhold tax from payments, are able to register for the system online through the ATO’s business portal, or by phone. Your registered BAS or tax agent can also assist you in setting up the PAYG system for your business, ensuring that you meet your obligations and that the system is appropriately geared to your business structure.

Employers or businesses required to withhold tax are required to establish their PAYG registration before they make any payments on which tax needs to be withheld. This means that if you are in the opening stages of starting a businesses, you will need to set up your PAYG account before you are able to pay any employees or businesses which do not quote an ABN.

What Sort of Payments Require Me To Withhold Tax?
Payments made to workers, one-off payees, and some other businesses are the most common types of payments which require tax to be withheld via the PAYG system. These requirements differ depending on the nature of the employment relationship or business structure that you use to employ workers; for example, if you run a small business and hire workers as independent contractors, you generally do not need to use the PAYG system to withhold tax on their payments, unless they actually request that you do so as part of their contract.

For tax purposes, contractors are seen as independent and to be running an enterprise of their own. This means that they are required to report their own income and pay the required amount of tax for that income, minus any relevant deductions or discounts.

Regular employees, those whose employment is governed by an employment contract and are not independent from your business, generally need to have tax withheld on their pay using the PAYG system. Employees are not seen as independent from your business, and are not carrying on an enterprise of their own or capable of delegating their work to others as part of their employment contract.

Other Payments Which May Require PAYG Withholding

If you operate your own business as a partnership, or by yourself as a sole trader, and you draw payments from the business to contribute to your income, this is not assessed as a wage, and therefore you do not need to withhold tax on these payments. These payments will need to be reported as income, however, and you pay tax on drawings through your income tax return.

Some other forms of payment, besides wages payed to employees and some other workers, require you to use PAYG to withhold tax on the payments. These additional payments that require your use of the PAYG system include the following:
• Interest, dividends, and royalties which you pay to someone who not a resident of Australia
• Income from an investment, paid to someone who has not provided a Tax File Number (TFN)
• Payments to annuities and superannuation income streams
• Payments or wages for Australian residents who are currently working outside Australia
• Payments made to the beneficiaries of certain trusts
• Payments made to residents of foreign nations for the purpose of entertainment, gaming, sports, and construction.

PAYG and Employee Wages
If you have set up a business and would like to hire employees or workers, you will first need to register for the PAYG system. If you are registered, you then need to ensure that those you hire have a tax file number. If your new employees do not yet have a TFN, you can provide them with a Tax File Number declaration which they then deliver to the ATO.

For some employees, you may need to ask them to complete a withholding declaration. This declaration is used to organize the withholding amounts for some employees with special conditions, such as:
• Those who have a Higher Education Loan Program debt, i.e. a university or education debt, or Trade Support Loan as well as Financial Supplement Debt.
• Those who wish to claim certain tax offsets for which they are eligible.

PAYG Summary

The PAYG system is used to assist employers and others who hire workers that pay tax in meeting their obligations. This system can be set up online, or you can have your accountant set up the system for you. Your accountant can also assist you in arranging the other details, such as employee TFN information and any relevant withholding declarations.
As always with regard to tax, it is very important that you keep detailed records of your payments and the details of your PAYG registration. If your business ceases to employ workers, you should withdraw from the PAYG system. If you are unsure of whether or not you need to withhold tax on some payments and not others, then you should speak to your accountant or tax professional today to obtain clarification and ensure that you meet your obligations. Meeting your tax obligations to employees or workers is an important part of taxation compliance, and is monitored closely by the relevant regulators. Ensure that your business does not encounter unnecessary disputes or difficulties by arranging your PAYG and other employment obligations at the earliest opportunity.

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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Tax Compliance – Selling Commercial Property

Tax Compliance – Selling Commercial Property

Tax compliance must be considered when selling commercial property in order to ensure that the transaction is as beneficial and efficient as possible.

A primary taxation consideration for those seeking to sell or dispose of commercial premises is capital gains tax, depending on whether you have incurred a capital gain or a capital loss. You are likely to experience one of the two, as it is very unlikely that a commercial property will sell for the exact value at which it was previously purchased by the vendor. If the property is sold for an amount that is greater than the amount the vendor payed for it, a capital gain is incurred by the vendor.

A capital gain, that is, the amount of profit derived from the disposal of certain assets, is subject to the capital gains tax (CGT). CGT discounts are available to trusts, small businesses, and individuals.

It is likely that a GST liability will also be incurred during the sale, as sale prices generally attract GST. If you are registered for the GST or required to be registered for it, you may be able to claim GST credits in relation to the sale amount. If you have a GST liability, you may be able to calculate it using the margin scheme; this scheme allows you to calculate the GST you owe as one-eleventh of the marginal value derived from the sale. That is, not one-eleventh of the overall sale price, but one-eleventh of the difference in value between what you paid for the property and the amount you sold it for.

Commercial property sold as part of the sale of a going concern, that is an operational business enterprise, generally does not attract a GST liability on the sale price.

Capital Gains Tax (CGT)
For taxation purposes, the marginal difference the value at which an asset was purchased and the value at which it was later sold, is known as either a capital gain or capital loss. A capital gain is incurred when the asset is sold for an amount greater in value than the seller paid for it, that is, they made a profit on the sale. For our purposes, a capital gain is a profit made on the sale of a capital asset.

A capital loss is incurred when an asset is sold for an amount which is less than the seller paid for it, that is, they made a capital loss on the sale.

When a property is sold, it is likely that the seller has incurred either a capital gain or a capital loss on the sale. If a net capital gain is made for the income year, this attracts capital gains tax (CGT), which you pay as part of your tax return. If a net capital loss is incurred for the income year, you are able to have the capital loss carried forward into future income years where it can be used to decrease your capital gains liability.

An important concept in the calculation of capital gains and losses and the subsequent tax requirements is the cost base. In this context, the cost base refers to the difference between what it cost to acquire and improve a property, and the amount obtained following its disposal. The value of claimed or eligible tax deductions are not included in calculations of a property’s cost base. This means that if you perform capital works such as the construction of additional features or improvements, and these works are eligible for deduction from your tax bill, that the value of these works is not included as part of the cost base used to determine capital gains and losses.

Premises Acquired Before 20 September 1985 – This is the date on which capital gains tax came into effect, so if a property was acquired before this date there is no requirement to calculate or report any capital gain or loss incurred following the sale of the property. Somewhat confusingly, however, any additional improvements that count as capital improvements made to the property after that date still attract capital gains tax if a gain or loss is made on their value during the property’s sale.

Capital Gains Tax: Discounts and Concessions
Existing legislation allows individuals who own a property (including as partners in a couple) to claim a fifty percent discount on any capital gain incurred during its sale. This discount also applies to capital gains incurred by trusts, but not those incurred by companies.

Small businesses that own the property they use as a business premises have access to four small business CGT concessions. If the sale of such a business premises results in a capital gain, small businesses are able to use one of these concessions to reduce their capital gain:
Capital gain rollover: A capital gain made on the sale of the business premises may be deferred until the gain is crystallized. This means that, if you were to purchase a new business premises with the amount obtained from the sale of your previous business premises, you are able to defer any capital gain until you sell the new business premises.
Retirement exemption: For those over the age of 55, capital gains from the sale of property are exempt from CGT to a lifetime maximum of $500,000. For those under the age of 55, this concession may be obtained and the conceded amount must be paid into a retirement savings account or superannuation fund that meets the ATO requirements.
15-year exemption: For small businesses that have owned the business premises for 15 years or more, capital gains will not be assessed if the small business owner is either permanently incapacitated, or over the age of 55 and planning to retire.
50 percent active asset reduction: If your small business premises qualifies for an active asset reduction, any capital gain incurred during its sale may be reduced by 50 percent.

GST Liability Incurred Following the Sale of Commercial Premises
As stated at the beginning of the page, the sale of any commercial property generally results in a GST liability. Commercial premises include property that is used to operate a business or enterprise.
In the event that a commercial property is leased to a commercial tenant at the time of sale, the sale may be treated as a GST-free supply of going concern.

Using the Margin Scheme to Calculate GST Liability

If the sale of a commercial property results in a GST liability, you may be able to use what the ATO calls the margin scheme to calculate the amount of GST owed on the sale price. In this context, the margin is the difference between the amount received for the sale of a property, and either the amount that was paid for the property by the seller or a suitably appropriate property valuation.

Under the margin scheme, GST liability is generally calculated as one-eleventh of the sale margin. Being able to use the margin scheme depends on when the property was purchased, and how it was acquired.

GST Registration
For tax purposes, you might be assessed as conducting an enterprise if you buy, sell, develop, or lease property, even as a one-off. If you are assessed as conducting an enterprise, you are likely to attract a GST liability and therefore might be required to register for the GST.

Whether or not you will attract a GST liability depends on whether you exceed the GST registration turnover threshold.
Sale of Businesses as Going Concerns

When a property is sold and it includes a commercial tenant operating a going concern, it is generally assessed as being GST-free, and the parties to the transaction are able to claim GST credits on transactions involved in buying and selling the property (conveyancing fees, etc.)
In order for the sale to be GST-free, all of the following must be satisfied:
• The purchaser is either registered, or required to be registered, for the GST;
• Payment is made for the supply of the property;
• The supplier continues operating the business until the day of supply;
• The supplier provides the purchaser or a chosen successor with everything required for the continued operation of the supplier’s business;
• Both the supplier and the purchaser have entered into a written agreement which states that the sale is for a going concern.
The following may be included as property in the sale of a going concern:
• A building which has all its space occupied by commercial tenants, and that all of the covenants, agreements, and leases between the supplier and these tenants are included as part of the sale
• A commercial premises which contains the operating framework and assets used in the operation of the business, and
• A building which is occupied by one or more commercial tenants but is partially vacant, so long as the vacant part is actively available and being marketed for lease and all leases are included as part of the sale. If the vacant part of the building is currently being repaired or refurbished, then it may be counted as property in the sale of a going concern so long as other parts of the building are leased to commercial tenants.

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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Renting and Leasing Commercial Property

Renting and Leasing Commercial Property – Tax Compliance

Depending on whether you are the owner (lessor), or tenant (renter), different reporting and or compliance measures will apply to you. This is with regard to income tax and GST, and the deductions claimed on relevant expenses with respect to position as owner or tenant. Income related expenses are calculated according to how you generate taxable income, and deductions from your tax liability are made on the basis of these income-related expenses.

For an owner/lessor, expenses that facilitate the derivation of rental income from the premises are income-related expenses. For a renter/tenant, rent payments themselves are income-related when they are renting their business premises, and therefore rent is an income-related expense.

Owners/Lessors
As the owner of a commercial property which you lease to a tenant or renter, payments received for rent or rent-related payments are included in your personal income. When lodging your personal income tax return, you will need to include the full amount paid to you by tenants in your income statement.

You may be able to claim tax deductions on certain expenses related to the acquisition of rental income from the property you own. These expenses are referred to as income related expenses.

You are able to claim a tax deduction on income related expenses incurred during the reporting period, so long as the property was rented or actively available for rent during that period. You are generally able to claim an immediate deduction for expenses related to the maintenance and management of your commercial rental property, this includes the interest paid on some loans.

Tax deductions on other expenses may need to be claimed over several years. For example, costs of depreciation are calculated over a number of years and claimed for the value of that depreciation at the time the claim is made. Depreciation costs that may be income related for lessors include the depreciation of an asset’s value, such as furnishings and fixtures, as well as some construction expenses that may be assessed as capital works expenses.

As the owner/lessor of a commercial premises, you are generally unable to claim tax deductions on the following:
• The costs of acquiring and disposing of the premises, though these costs may be used to calculate the cost base of the premises when determining any capital gains tax liability.
• Expenses paid by tenants/renters, including amenities like electricity and water, as well as maintenance or other works paid for by renters.
• Expenses with a private component or that otherwise do not relate to the property’s function of deriving rental income.

GST Liability for Owners/Lessors
If you are assessable as operating an enterprise, then you are required to register for GST. The details of this assessment depend on individual circumstances, but if you are involved in the purchasing, sale, developing, or leasing of property and the turnover derived from this exceeds the GST threshold, you will attract a GST liability.
In this case, you are able to claim GST Credits on expenses/purchases that allow you to derive rental income from your commercial property. These rules are the same general rules applying to GST credits for all enterprises, and they allow you to claim credits on GST included in expenses such as conveyancing or agent’s fees.

Renters/tenants

If you are renting a commercial property and using this as your business premises, you may deduct the amount paid in rent from your tax liability. If GST is included in your rent (both you and the owner/lessor are registered or required to be registered for GST) then you are able to claim GST credits for this.
For tax purposes, rent paid on your business premises is an income-related expense, as without it you are unable to carry on your going concern. Likewise for lessors, payments that are necessary in order for you to continue deriving rent income are income-related and potentially deductible.

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

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