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Your knowledge – April 2018

Inside

– SINGLE TOUCH PAYROLL: WHAT YOU NEED TO KNOW
For employers
For employees

– Quote of the month

– SHOULD YOU USE THE NEW SUPER MEASURES WHEN YOU BUY/SELL YOUR HOME?
The pros and cons of using your super to save for your first home
The pros and cons of contributing proceeds from the sale of your home to super

– TAX DEDUCTIONS: THE DANGER ZONES
Investment expenses
Work-related expenses


Single Touch Payroll: what you need to know

Single Touch Payroll (STP) – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – comes into effect from 1 July 2018.

For employers

Employers with 20 or more employees at 1 April 2018 must use standard business reporting-enabled software from 1 July 2018. The head count for ‘20 employees’ includes full-time, part-time, casuals (who worked any time during March), employees based overseas, or on paid or unpaid leave. Directors and independent contractors are excluded from the count. For businesses that are part of a wholly owned group, the total number of employees across the group is used (i.e., if the total number of employees employed by all member companies of the wholly-owned group is 20 or more, all group members must use STP).

STP is currently voluntary for businesses with less than 20 employees although proposed reforms seek to extend the reporting system to all employers by 1 July 2019, regardless of the number of employees.

What must be reported

STP requires PAYG withholding and superannuation contribution details to be reported to the ATO as payments are made to employees or superannuation funds.

When it comes to PAYG withholding, employers will report details of salary and wages paid to employees as well as the PAYG withholding amount at the time the payment is made to the employee. Employers have the option of paying the PAYG withholding liability at the same time, although this is not compulsory.

Payments that must be reported include:

• Salary & wages
• Director remuneration
• Return to work payments to individuals
• Employment termination payments (ETPs) – not compulsory if the employee has died
• Unused leave payments
• Parental leave pay
• Payments to office holders
• Payments to religious practitioners
• Superannuation contributions (at the time the payment is made to the fund).

The Government intends to extend STP to salary sacrificed amounts in the near future although these reforms are not legislated.

An end to payment summaries?

While not compulsory, employers can choose to include reportable employer superannuation contributions and reportable fringe benefit amounts. These payments are reported either at the time the payment is made or through an update event. If these payments are included, the employer will not need to provide payment summaries as employees are able to access their live data through myGov.

If your business does not report through STP or does not finalise its reporting, payment summaries are still required.

New employees

If your business utilises STP, when a new employee joins they have the option to electronically complete a pre-filled Tax file number declaration and Superannuation standard choice form online instead of completing the form for you to lodge with the ATO.

Exemptions

Some exemptions exist for STP for rural employers that do not have access to a reliable internet connection, and employers that employed a group of people during the year for a short period of time, such as seasonal workers.

For employees

While the Government and ATO are promoting STP as a way to improve the efficiency of payroll processes and meeting reporting obligations (i.e., cutting down on duplication of work etc.,), there is also a clear benefit to the ATO and Government in implementing this system. One advantage is that the ATO will have early warning of businesses that are finding it difficult or simply failing to meet their PAYG withholding and superannuation guarantee obligations. This should have a flow on benefit to employees who might otherwise miss out on benefits to which they are entitled.

If you are registered with myGov and your employer reports using STP, you will be able to see your year-to-date tax and super information online.

Quote of the month

“Never give in except to convictions of honour and good sense.”
Winston Churchill


Should you use the new super measures when you buy/sell your home?

From 1 July 2018, new laws come into effect allowing first home buyers to use their super to help buy a home, and at the other end of the spectrum, downsizers to contribute proceeds from the sale of their home to super without many of the normal restrictions.

The pros and cons of using your super to save for your first home

The First Home Super Saver Scheme (FHSS) enables 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. You have been able to make contributions since 1 July 2017 (although the legislation did not pass Parliament until 7 December 2017), but withdrawals cannot be made until 1 July 2018. Note that mandated employer contributions cannot be withdrawn under this scheme, it is only additional voluntary contributions made from 1 July 2017 that can be withdrawn.

If you have a Self-Managed Superannuation Fund (SMSF), you will need to ensure that the trust deed allows for withdrawals under the FHSS to be made. The SMSF must also identify these contributions and report these to the ATO.

When you are ready to buy a house, you can withdraw the contributions along with any deemed earnings (90-day Bank Accepted Bill rate with an uplift factor of 3%), 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 fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset (non-concessional contributions are not taxed).

The upside of the FHSS is the tax benefit. 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 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).

Another upside is that the scheme applies to individuals.So, if you are a couple, you both could utilise the scheme for a deposit on the same home – effectively increasing your cap to a maximum of $60,000.

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.

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.

The home saver scheme can only be used once by you.

The cons of this scheme are mostly administrative. On the investment side of things, using the above example, $6,210 over three years is an upside but may not be a huge upside compared to other investment returns given the administrative requirements of the scheme. But, for many, it may be the best offer available.

Who can use the first home saver scheme?

You must:
• Be 18 years of age or older (to make a withdrawal under the scheme – you can contribute before the age of 18);
• Never had held taxable Australian real property (this includes residential, investment, and commercial property assets)

The pros and cons of contributing proceeds from the sale of your home to super
From 1 July 2018, if you are over 65, have held your home for 10 years or more and are looking to sell, 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 work test requirements, non-concessional contribution caps or total superannuation balance rules. 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.

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 under the CGT rules (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 full 10-year period.

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). The contribution needs 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.

If you have a SMSF contributions made under this scheme need to be reported to the ATO. You should also check the trust deed rules around the acceptance of contributions for members over the age of 65.

The eligibility requirements include:

• The contribution from the sale is made to a complying superannuation fund
• The contribution is equal to or less than the capital proceeds from the disposal of a main residence
• The member or their spouse had an eligible interest in the main residence before the sale
• The member, their spouse, their former spouse, or trustee of the deceased estate held an interest in the house during the prior 10 years
• No prior downsizer contribution has been made


Tax Deductions: the danger zones

A recent Parliamentary Inquiry into Tax Deductions created some fairly sensational headlines about what and how deductions are being claimed – $22 billion worth to be exact.

In Australia, tax deductions are available for expenses incurred in producing assessable income. These are generally work-related deductions or investment related deductions. And, unlike some other countries, these expenses can be offset against taxable income including wages (other countries only allow deductions relating to capital income against capital gains).

In a recent speech, the Tax Commissioner Chris Jordan highlighted that 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 – in the vicinity of, or even higher than the large market tax gap of $2.5 billion – and that’s just for this category of deductions, work-related expenses.”

He went on to say that in this same period around 6.3 million people made claims for clothing expenses totalling almost $1.8 billion. “That would mean that almost half of the individual taxpayer population was required to wear a uniform or protective clothing or had some special requirements for things like sunglasses and hats.” Clearly, that’s unlikely.

While the ATO is doing random audits of taxpayers making claims for work related expenses, the primary problem for the Commissioner is, as he says, that the individual amounts over-claimed are relatively small. The administrative cost of a crackdown is likely to be more than what would be gained. The likely ‘solution’ then is to change what taxpayers can claim.

If you want to see the likely ‘hit list’ of deductions with a potentially short future, then Treasury’s submission to the Inquiry is a starting point:

Investment expenses

Investment related expenses can include management fees for an investment, account-keeping fees, insurance, land tax, depreciation, maintenance expenses, and interest on borrowings used to purchase an income-producing asset. While expenses can be claimed for a wide array of income producing assets, property is where most of the activity is centred.

$41.7 billion in rental expenses were claimed in 2012-13 against $36.5 billion of rental income. Two thirds of taxpayers with rental income in this same period made a loss (totalling net rental losses of $12 billion). Negative gearing is popular. As an investment strategy, negative gearing makes sense if the expected capital gain when the property is sold exceeds the rental losses over the life of the investment. However, there is little doubt that the ability to reduce personal income tax using investment property losses is an attractive and viable strategy for high income earners.

The Grattan Institute’s submission to the Inquiry flags two potential scenarios. First is quarantining losses against investment income only. That is, you would lose the ability to offset investment losses against salary and wages and instead could only offset these against capital profits or gains. Or, an alternative strategy is that taxes on gains and losses could be aligned so that if you were entitled to a 50% reduction on a capital gain, you would only be entitled to an equivalent deduction for expenses.

When it comes to convincing voters that cutting back on deductions is a good thing, investment related deductions are generally targeted as they are not as transparent and are generally attributed to more affluent members of the community (although this is not an accurate picture as many self-funded retirees and Mum & Dad property investors will tell you).

With the next election just around the corner, it’s unlikely we will see a major overhaul in the very near future. The path of least resistance is to reduce the discount on capital gains available to individuals, trusts, and superannuation funds. It’s more likely however that the regulators will continue to whittle away deductions rather than making wholesale changes – as we have already seen with the recent changes impacting residential investment property – while relying on the ATO to reign in excessive claims.

Work related expenses

At $19.7 billion, work-related expenses accounted for nearly two thirds of total deductions claimed by individuals in 2012-13. The most common claims were for car expenses ($8 billion or around 40%), followed by $7 billion in ‘other expenses’ comprising home office costs and tools, equipment and other assets. Work related travel expenses counted for $2 billion, uniforms $1.6 billion, and $1.1 billion for work related self-education expenses. Unsurprisingly, if you follow the money you can see that the pattern of expense claims closely follow the ATO’s compliance focus and activities.

By comparison, New Zealand does not allow work related deductions (but they have a top personal tax rate of 33%). In other countries, the range of deductions that can be claimed is much narrower. In the UK for example, only certain occupations can claim work related expenses and then generally this is at a flat rate. Taxpayers have the ability to claim outside of the flat rate but only after passing stringent tests. The tests require that the item must be ‘wholly, exclusively and necessarily in the performance of an employee’s duties’ and be an expense typical for the industry. That is, the item is only deductible if it is likely to be incurred by every holder of that form of employment (it is not enough that one employee, or a subset of employees, happens to incur the expense).

It would be a bold and confident Government that removed the ability for many taxpayers to claim a tax refund. As with investment expenses, it is more likely that deductions will be slowly whittled away.

Read more

Your knowledge – March 2018

Inside
- THE ATO’S FBT HOT SPOTS
  Motor Vehicles – using the company car outside of work Utes and commercial vehicles – the new safe harbour to avoid 
  Car parking
  Living away from home allowances Salary sacrifice or employee contribution?

- POWER AND INFLUENCE
  The other business influencer that can make or break you

- GST ON PROPERTY DEVELOPMENTS
  The big changes for developers and purchasers 
  For the purchaser
  For the developer (vendor)

- WILL YOUR BUSINESS BE AUDITED?
  How the ATO identifies audit targets

The ATO’s FBT Hot Spots

The Fringe Benefits Tax (FBT) year ends on 31 March. We’ve outlined the key hot spots for employers and employees.

Motor Vehicles – using the company car outside of work

Just because your business buys a motor vehicle and it is used as a work vehicle, that alone does not mean that the car is exempt from FBT. If you use the car for private purposes – pick the kids up from school, do the shopping, use it freely on weekends, garage it at home, your spouse uses it – FBT is likely to apply. While we’re sure the old, “what the ATO doesn’t know won’t hurt them” mentality often applies when the FBT returns are completed, it might not be enough. The private use of work vehicles is firmly in the sites of the Australian Tax Office (ATO).

Private use is when you use a car provided by your employer (this includes directors) outside of simply travelling for work related purposes.

If the work vehicle is garaged at or near your home, even if only for security reasons, it is taken to be available for private use regardless of whether or not you have permission to use the car privately. Similarly, where the place of employment and residence are the same, the car is taken to be available for the private use of the employee.

Finding out that a car has been used for non work-related purposes is not that difficult. Often, the odometer readings don’t match the work schedule of the business. These are areas the ATO will be looking at.

Utes and commercial vehicles – the new safe harbour to avoid FBT

When an employer provides an employee with the use of a car or other vehicle then this would generally be treated as a car fringe benefit or residual fringe benefit and could potentially trigger an FBT liability.

However, the FBT Act contains some exemptions which can apply in situations where certain vehicles (utes and other commercial vehicles for example) are provided and the private use of the vehicles is limited to work-related travel, and other private use that is ‘minor, infrequent and irregular’.

One of the practical challenges when applying the exemption is how to determine if private use has been minor, infrequent and irregular. The ATO recently released a compliance guide that spells out what the regulator will look for when reviewing the use of the exemption.

The ATO has indicated that in general, private use by an employee will qualify for the exemption where:

  • The employer provides an eligible vehicle to the employee to perform their work duties. An eligible vehicle is generally a vehicle for commercial purposes. The requirements are very strict and guidance on this is published on the ATO website.
  • The employer takes reasonable steps to limit private use and they have measures in place to monitor this – this might be a policy on the private use of vehicles that is monitored using odometer readings to compare business kilometres and home to work kilometres travelled by the employee against the total kilometres travelled.
  • The vehicle has no non-business accessories – for example a child safety seat.
  • The value of the vehicle when it was acquired was less than the luxury car tax threshold ($75,526 for fuel efficient vehicles in 2017-18 and $65,094 for other vehicles).
  • The vehicle is not provided as part of a salary sacrifice arrangement; and
  • The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip, they travel no more than 750 km in total for each FBT year for multiple journeys taken for a wholly private purpose and, no single, return journey for a wholly private purpose exceeds 200 km.

If you meet all these specifications, the ATO has stated that it will not investigate the use of the FBT exemption further. However, the employer will still need to keep records to prove that the conditions above have been satisfied and to show that private use is restricted and monitored.

Car parking

We all know how expensive commercial car parks can be. The ATO has noticed that where car parking benefits are being declared (that is, where an employer provides parking to an employee), the value of what is being declared is significantly less than what you would expect to pay.

Common errors include:

  • Market valuations that are significantly less than the fees charged for parking within a one kilometre radius of the premises on which the car is parked;
  • Using parking rates or facilities not readily identifiable as a commercial parking station;
  • Rates charged for monthly parking on properties purchased for future development that do not have any car parking infrastructure;
  • and Insufficient evidence to support the rates used as the lowest fee charged for all day parking by a commercial parking station.

Rates charged for monthly parking on properties purchased for future development that do not have

Living away from home allowances

Living Away From Home Allowances (LAFHA) continue to cause confusion for both employers and employees.

A LAFHA is an allowance paid to an employee by their employer to compensate for additional expenses they incur, and any disadvantages suffered because the employee’s job requires them to live away from their normal residence.

As a starting point, FBT applies to the full amount of the allowance that has been paid. However, if certain strict conditions can be satisfied the taxable value of the LAFHA fringe benefit can be reduced by the exempt accommodation and/or food component.

Common errors include:

  • Mischaracterising an employee as living away from home when they are really just travelling in the course of their work.
  • Failing to obtain the declarations required from employees who have been provided with a LAFHA.
  • Claiming a reduction in the taxable value of the LAFHA benefit for exempt accommodation and food components in circumstances that don’t meet the criteria.
  • Failing to substantiate accommodation expenses and, where required, food or drink. Verifying accommodation expenses is important as the ATO will look closely for scenarios where employees are paid an allowance but go and stay with friends or relatives or stay somewhere cheaper and pocket the difference. The expense actually has to be incurred and substantiated.

Salary sacrifice or employee contribution?

One issue that frequently causes confusion is the difference between the employee salary sacrificing in order to receive a fringe benefit and making an employee contribution towards the value of that fringe benefit.

Salary sacrificing for a fringe benefit

To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (e.g., before the period in which they start to perform the services that will result in the payment of salary etc.).

Where an employee has salary sacrificed on a pre-tax basis towards the fringe benefit provided – laptop, car, etc., they have agreed to give up a portion of their gross salary on a pre-tax basis and receive the relevant fringe benefit instead.

As a starting point, the taxable value of the fringe benefit is the full value of the expense paid by the employer.

The employer recognises a lower cost of salary and wages provided to the employee as their ‘cost saving’, which results in lower PAYG withholding and superannuation contribution obligations, but they still recognise the full value of the fringe benefit as part of their taxable fringe benefit which is subject to FBT.

The employee recognises that they have a reduced amount of salary and wages, and a non-cash benefit in the form of the fringe benefit.

What is an employee contribution?

An employee contribution is made from post-tax income and will often form part of arrangements relating to car fringe benefits. The employee recognises the gross salary and wages as income in their tax return. However, the payment of an after-tax employee contribution would generally have the effect of reducing the taxable value of the fringe benefit that was provided to them by the employer.

The employer would still be subject to the ‘standard’ PAYG withholding and superannuation contribution obligations in relation to the gross salary and wages amount.

The ATO is looking for discrepancies with contributions paid by an employee to ensure that these have been treated consistently for income tax and GST purposes as well as on the FBT return. This is really an issue for the employer and a discrepancy may mean that there is an FBT exposure or that the employer has paid less GST or income tax than what they should have.


Power And Influence

The other business influencer that can make or break you

Did a Kardashian really just wipe US $1.3bn off the share price of Snapchat?

A tweet from Kylie Jenner saying “sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad” is being credited as the catalyst for an 8% drop in Snap* Inc’s share price.

While the price clawed back 2% that same day, and Jenner softened her commentary with another tweet saying, “still love you tho snap … my first love,” the effectiveness of Snapchat’s strategic direction had already been judged by its own social media jury.

The share price of Snap rose to a high of US$20.75 from AU$14.06 with the release of the update but had been buffeted by negative feedback. The share price had been gradually falling since 16 February. Jenner’s tweet made that decline a much sharper decent.

When an influencer has 24.5 million followers on Twitter, anything she says penetrates faster than mainstream media. Jenner’s Snapchat commentary attracted over 300,000 likes and over 64,000 comments. While it is ironic that a Kardashian dropped the share price of a product that has been her rocket to fame, it demonstrates the speed at which trend based businesses can rise and fall. Remember Pokemon? Nintendo went from its core user base to a world wide trend. After rising to massive heights in 2016 the use of Pokemon has declined rapidly. The lesson is to have a strategy to capitalise on the trend and sustain it for as long as possible, and never forget your core client base – your core still needs to be there when the trend is over.

It’s common for businesses to work through a list of external influencers and stakeholders to manage risk. Normally, the list considers Government regulation, environmental factors such as location, competitors, and changes in the marketplace but the cycle of impact of external influences has become much shorter. It’s unusual to have a celebrity in the mix but the positive impact of a celebrity adopting your brand is undeniable.

Jimmy Choo credits Princess Diana’s stylish influence as a catalyst for taking the brand from simply beautiful to desirable – a trend that has not significantly diminished. Kaftan designer Camilla became globally recognised after Oprah Winfrey wore her colourful designs. And, when Kate Middleton wears a Topshop outfit it sells out almost immediately.

The problem for businesses whose products become a trend is that trends go both ways – exponential growth and sharp decline. You are either in the spotlight or you’re not.

* Snapchat’s parent company


GST on property developments

The big changes for developers and purchasers

If a Bill currently before Parliament passes, from 1 July 2018, purchasers of new residential premises or new residential subdivisions will need to remit the GST on the purchase price directly to the ATO as part of the settlement process.

This is a significant change from how GST is currently managed with the developer collecting the full proceeds and remitting GST to the ATO in their next BAS (which can be up to three months after settlement). The reforms are aimed at preventing developers from dissolving the business before the next BAS lodgement to avoid remitting the GST.

For some developers there will be a significant cash flow impact because the purchaser will be required to pay 1/11th of the full sale price to the ATO, even if the developer’s GST liability on the sale would be less than this (e.g., where they can apply the GST margin scheme). In these cases developers will need to seek a refund from the ATO.

The reforms apply to the sale or long-term lease of:

  • new residential premises (other than those created through a substantial renovation and commercial residential premises); or
  • subdivisions of potential residential land.

For the purchaser

If you are purchasing a new property affected by the changes after 1 July 2018, you will need to pay 1/11th of the full sale price directly to the ATO at settlement.

The vendor must supply you with a notification advising that the payment is required and the amount that is to be paid.

For the developer (vendor)

From 1 July 2018, the vendor will no longer collect and remit GST on the purchase price of the residential premises. Instead, the vendor must notify the purchaser in writing that the GST needs to be paid to the Commissioner and advise the amount that must be paid. The amount to be paid is simply 1/11th of the full sale price, regardless of whether the vendor is eligible to apply the margin scheme to reduce the GST liability associated with the transaction. In general, this notification will need to include:

  • the name and ABN of the entity that made the supply;
  • when the purchaser is required to pay that amount to the Commissioner (generally settlement date); and

where some or all of the consideration is not expressed as an amount of money (e.g., sale of property for cash plus another property) – the GST-inclusive market value of the consideration that is not expressed as an amount of money.

Vendors that fail to provide this notification face fines of up to $21,000 per event.

The vendor will receive a credit for the amount that has been paid by the purchaser to the ATO (if the amount was simply withheld but not paid these amounts cannot be claimed). If the vendor’s net amount for the tax period is in a credit, a refund will be made.

It’s expected that the new rules will generally be incorporated into the settlement process but it is something that developers and purchasers will need to be across for any affected property with a settlement date of 1 July 2018 onwards.

If you are developing property and are concerned about the impact of the reforms, please contact us.


Will your business be audited?

How the ATO identifies audit targets

The ATO is very upfront when it comes to their compliance activity.

Every year they publish small business benchmarks that outline what a typical business ‘looks like’ in different industries. If your business falls outside of those benchmarks, the ATO is likely to take a closer look at why that is.

Falling outside of the benchmarks might not indicate a tax related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry. If your business does fall outside of the benchmark however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment.

The ATO look at:

  • cost of sales to turnover (excluding labour)
  • total expenses to turnover
  • rent to turnover
  • labour to turnover
  • motor vehicle expenses to turnover
  • non-capital purchases to total sales, and
  • GST-free sales to total sales.

For example, for a veterinary practice with a turnover between $300,001 and $800,00, the cost of sales to turnover ratio is expected to be between 25% and 29% (averaging at 27%), and average total expenses are 78%. The cost of labour to turnover ratio is between 21% and 29% and rent is between 5% and 8%.

The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.

Read more

Your Knowledge – February 2018

Inside
- New data breach laws come into effect
  The new data breach rules – who is affected and what you need to do.

- Directors on ‘hit list’ for not paying employee super
  New legislation will give the ATO the power to seek criminal penalties for Directors who fail to pay superannuation guarantee.

- What’s changing in 2018
  The changes coming in from 1 January 2018.

New data breach laws come into effect

New data breach rules in effect from 22 February 2018 place an onus on business to protect and notify individuals whose personal information is involved in a data breach that is likely to result in ‘serious harm’.

In October last year, almost 50,000 employee records from Australian Government agencies, banks and a utility were exposed and compromised because of a misconfigured cloud based ‘Amazon S3 bucket’. AMP was reportedly one of the worst affected with 25,000 leaked employee records. ITNews reports that the data breach was discovered by a Polish researcher who conducted a search for Amazon S3 buckets set to open, with “dev”, “stage”, or “prod” in the domain name. One contractor appears to be behind the breach.

In October 2016, the details of over half a million Red Cross blood donors were inadvertently exposed after a website contractor created an insecure data backup. In the US, a massive data breach exposed the credit records (including social security records) of over 145 million Americans – all because an IT worker didn’t open an email about a critical patch for their software.

Regardless of how good your existing systems are, data breaches are a reality either through human error, mischief, or simply because those looking for ways to disrupt are often one step ahead. But it’s not all about IT, there have been numerous cases of hard copy records being disposed of inappropriately, employees allowing viruses to penetrate servers after opening the wrong email, and sensitive data on USBs lost on the way home.

Who is covered by the data breach scheme?

The Notifiable Data Breach (NDB) Scheme affects organisations covered by the Privacy Act – that is, organisations with an annual turnover of $3 million or more. But, if your business is ‘related to’ another business covered by the Privacy Act, deals with health records (including gyms, child care centres, natural health providers, etc.,), or a credit provider etc., then your business is also affected (see the full list). Special responsibilities also exist for the handling of tax file numbers, credit information and information contained on the Personal Property Securities Register.

What you need to do

It’s important to keep in mind that complying with these new laws means more than notifying your database when something goes wrong. Organisations are required to take all reasonable steps to prevent a breach occurring in the first place, put in place the systems and procedures to identify and assess a breach, and issue a notification if a breach is likely to cause ‘serious harm’.

Taking all reasonable steps – assessing risk

The Privacy Act already requires organisations to take all reasonable steps to protect personal information. The new data breach laws merely add an additional layer to assess breaches and notify where the breach poses a threat. For example, if you have not already, you should assess issues such as:

  • How personal information flows into and out of your business. For example:
  • What information do you gather (including IP data from websites)
  • What information do you provide (for example, do you provide information on your clients to third parties?)
  • Where private information is stored – map out what systems you use, where these systems store data (if cloud based, your data may be held in a foreign country), what level of security is provided within those systems, and what level of access each team member has (and what they should have access to for their role)
  • How private information is handled by your business across its lifecycle and who has access at each stage (not just who is accessing the information for their work but who ‘could’ access this information)
  • Possible impacts on an individuals’ privacy (risk assessment)
  • The policies and procedures in place to manage private information, including risk management and mitigation, whether these are adhered to, and actively managed
  • The policy review process – review policies and procedures at least annually but again with the introduction of new systems and technology. Remember, you can’t just have a policy sitting somewhere, it needs to be actively reinforced and adopted by team members
  • Instate new project protocols for ensuring privacy where personal information is at risk
  • Document everything including your reviews and procedural updates even if nothing changed. If there is ever an issue where your business’s culpability is assessed, your capacity to prove that you took all reasonable steps will be important.

When it comes to data breaches, all organisations must have a data breach response plan. The data breach plan covers the:

  • Actions to be taken if a breach is suspected, discovered or reported by a staff member, including when it is to be escalated to the response team
  • Members of your data breach response team (response team), and
  • Actions the response team is expected to take.

The Office of the Australian Information Commissioner provides sample breach response plan.

Identifying a serious breach

So, what is a serious breach? A breach has occurred when there is unauthorised access to or disclosure of personal information or a loss of personal information that your business holds. Whether a breach is serious is subjective but may include serious physical, psychological, emotional, financial, or reputational harm. If a breach occurs, you need to think through how that information could be used for identity theft, financial loss, threats to physical safety (for example someone’s home address), job loss, humiliation or reputational damage, or workplace bullying or marginalisation.

If you suspect a breach has occurred, your business is obliged to take “reasonable” and “expeditious” action regardless of whether you think it is serious or not (under the NDB scheme you have a maximum of 30 days to assess the damage and respond but in general, the first 24 hours is often crucial to the success of your response). Ignorance is not a defence. A lack of systems to identify system breaches fails the Privacy Act’s requirement to take all reasonable steps to protect personal information. As soon as a breach is identified anywhere in the business, whether it is IT based or physical, steps need to be taken – even if it is simply noting that no further action is required.

If you suspect a data breach has occurred that may meet the threshold of ‘likely to result in serious harm’, you must conduct an assessment. Sounds simple right?

But the problem for business is often that there are initially no definitive answers about the extent of a breach or its seriousness for the assessment to take place. Take the example of a retail business with an online store. A hacker exploiting an unpatched vulnerability in your customer relationship management (CRM) system gains access to the customer database for your online store, which includes customer purchase histories and contact details. IT calls you and tells you there is a problem but can’t tell you how, what customer records are affected, and if the records have been compromised. You don’t want to scare your customers by advising of a breach but you don’t know that yet. What do you do? The first step is generally to contain the damage – isolate or shut the affected system down to prevent further potential loss – then assess the scenario quickly – not just because of the NDB scheme but because your business’s reputation is on the line.

Notifying a breach

If a breach is assessed to potentially result in serious harm, you are obliged to advise affected individuals and the Australian Information Commissioner. You have the option to:

  • Notify all individuals whose personal information is involved in the eligible data breach
  • Notify only the individuals who are at likely risk of serious harm
  • Publish your notification, and publicise it with the aim of bringing it to the attention of all individuals at likely risk of serious harm.

You advise the Australian Information Commissioner of a serious potential breach using the Notifiable Data Breach statement — Form.

And it’s not just Australia. Does your business have international connections?

Data breaches are common and many countries have moved to ensure that the personal information of individuals is protected. If your business operates overseas or has customers overseas you need to be aware of the requirements in those countries.

Most US states have compulsory data breach requirements. The European Union’s General Data Protection Regulation (GDPR) comes into effect from 25 May 2018. If you operate through a local distributor in the European Union or have direct supply into those countries then it’s likely your business will be caught by the Regulation.

– END –


Directors on ‘hit list’ for not paying employee super

Proposed legislation would see the ATO pursue criminal charges against Directors who fail to meet their superannuation guarantee (SG) obligations.

An analysis by Industry Super Australia submitted to the Economics References Committee into Wage Theft and Superannuation Guarantee Non-compliance, indicates that employers failed to pay an aggregate amount of $5.6 billion in SG contributions in 2013-14. On average, that represents 2.76 million affected employees, with an average amount of over $2,000 lost per person in a single year. The ATO’s own risk assessments suggest that between 11% and 20% of employers could be non-compliant with their SG obligations and that non-compliance is “endemic, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur.”

At present, under reporting or non-payment of SG is usually discovered when the employer misses the quarterly payment schedule or from the ATO’s hotline.

New legislation seeks to introduce a series of changes to how employers interact with the SG system and give some teeth to the ATO to pursue recalcitrant employers. The new rules, if passed by Parliament, generally come into effect from 1 July 2018.

The key changes include:

The ATO can force you to be educated about your SG obligations

At present, if an employer fails to meet their quarterly SG payment on time they need to pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement. The SGC applies even if you pay the outstanding SG soon after the deadline. The SGC is particularly painful for employers because it is comprised of:

  • The employee’s superannuation guarantee shortfall amount – so, all of the SG owing
  • Interest of 10% per annum, and
  • An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal SG contributions, SGC amounts are not deductible, even if you pay the outstanding amount. That is, if you pay SG late, you can no longer deduct the SG amount even if you bring the payment up to date.

And, the calculation for SGC is different to how you calculate SG. The SGC is calculated using the employee’s salary or wages rather than their ordinary time earnings.

An employee’s salary and wages may be higher than their ordinary time earnings particularly if you have workers who are paid for overtime.

Under the quarterly superannuation guarantee, the interest component will be calculated on an employer’s quarterly shortfall amount from the first day of the relevant quarter to the date when the SG charge would be payable.

Where attempts have failed to recover SG from the employer, the directors of a company automatically become personally liable for a penalty equal to the unpaid amount.

Under the proposed rules, the ATO will also have the ability to issue directions to an employer who fails to comply with their obligations. The Commissioner can direct an employer to undertake an approved course relating to their SG obligations where the Commissioner reasonably believes there has been a failure by the employer to comply with their SG obligations, and, of course, a direction to pay unpaid and overdue liabilities within a certain timeframe.

Criminal penalties for failure to comply with a direction to pay

Employers who fail to comply with a directive from the Commissioner to pay an outstanding SG liability face fines and up to 12 months in prison. Before hauling anyone off to prison the ATO has to consider the severity of the contravention including:

  • The employer’s history of compliance (superannuation and general tax obligations)
  • The amount of unpaid super relative to the employer’s size
  • And steps taken by the employer to pay the liability, and
  • Any matters the “Commissioner considers relevant”.

The ATO will tell employees if an employer is under paying or not paying SG

The proposed new rules will allow the ATO to tell current and former employees about the failure (or suspected failure) of an employer to comply with their SG obligations. The ATO can also advise the employees what action has been taken by the ATO to recover their SG.

This disclosure cannot relate to the general financial affairs of the employer.

Extension of Single Touch Payroll to all employers

Single Touch Payroll – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – will be compulsory from 1 July 2018 for employers with 20 or more employees. Under the proposed rules, this system would be extended to all employers by 1 July 2019.

In addition, Single Touch Reporting will extend to the reporting of salary scarified amounts.

– END –


What’s changing in 2018?

1 January 2018

  • Vacancy fees for foreign acquisitions of residential land – An annual vacancy fee imposed on foreign owners of residential real estate if the property is not occupied or genuinely available on the rental market for at least 183 days in a particular 12 month period. Foreign owners can avoid the fee by living in the property (or have a family member live in the property), leasing the property, or making it available for rent, for a total of 183 days in a 12 month period. Short term letting arrangements often won’t be sufficient to avoid the levy.
  • CGT concession for investments in affordable housing – The CGT discount will be increased for individuals who choose to invest in affordable housing. The current 50% discount will increase by 10% to 60% for resident individuals who elect to invest in qualifying affordable housing. Non-residents are not

generally eligible for the CGT discount. This change is not yet legislated.

1 July 2018

  • Super concessions for downsizers come into effect – If you are over 65, have held your home for 10 years or more and are looking to sell, 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 – or age restrictions.
  • Using super to save for your first home – 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.
  • GST on low value imported goods – GST will apply to retail sales of low value physical goods ($1,000 or less) that have been imported into Australia and sold to consumers.
  • Who pays the GST on residential property & subdivisions – Property developers will no longer manage the GST on sales of newly constructed residential properties or new subdivisions. Instead, the Government will require purchasers to remit the

GST directly to the ATO as part of the settlement process. This change is not yet legislated.

  • $20k immediate deductions ends – The $20,000 immediate deduction threshold for assets purchased by businesses with an aggregated turnover of under $10 million ends 30 June 2018.
  • Taxable payments reporting system extended to couriers & cleaners – Businesses in the courier and cleaning industries will need to collect information from 1 July 2018, with the first annual report required to be lodged in August 2019.
  • Single Touch Payroll – Single Touch Payroll reporting starts for employers with 20 or more employees. Employers will report payments such as salaries and wages, PAYG withholding and super information directly to the ATO from their payroll system at the same time they pay their employees.
  • Closing salary sacrifice loopholes to reduce super guarantee – Loopholes enabling employers to reduce Superannuation Guarantee contributions by using salary sacrifice contributions will be closed. This change is not yet legislated.
  • Access to reduced company tax rate limited – Limits access to the 5% company tax rate by replacing the existing ‘carrying on a business test’ with a passive income test. Under the new rules, a company will not be able to access the reduced company tax rate if more than 80% its assessable income is passive in nature. This change is not yet legislated.
  • Wine equalisation tax rebate tightened eligibility – Wine producers will be required to own at least 85% of the grapes used to make the wine throughout the winemaking process and brand wine with a trademark.
  • No temporary budget repair levy – The Budget repair levy that imposed an additional 2% to the tax rate for every dollar of a taxpayer’s annual taxable income over $180,000 ends on 30 June 2018.

– END –


Quote of the month

“When you reach the end of your rope, tie a knot in it and hang on.”

Franklin D. Roosevelt


February 2018

Read more

Newsletter October 2017 edition

Tax benefits for investing in affordable housing.

In the 2017-18 Federal Budget the Government announced a series of measures intended to improve housing affordability in Australia. To entice investors, the Government is providing an increase in the CGT discount for individuals who choose to invest in affordable housing.

house-1

The draft legislation enabling this change has now been released so we can see the detail.

There are two aspects to these changes. Firstly, individuals who make a capital gain on residential dwellings that have been used to provide affordable housing can potentially qualify for an additional CGT discount of up to 10%, this could take the total discount percentage from the existing maximum level of 50% to 60%. While the additional 10% CGT discount applies if you meet the eligibility criteria, the 60% discount rate is not automatic – it’s ‘up to’ and the final total discount could be less than 60%.

The increased discount will only be available if the dwelling has been used to provide affordable housing for at least 3 years after 1 January 2018. The 3 year period does need to have been continuous.

The additional discount needs to be apportioned to take into account periods when the individual was a non-resident or temporary resident as well as periods when the property was not used to provide affordable housing over its ownership period.

The second aspect to the rules allows individuals to also access an additional 10% CGT discount on their share of capital gains that are distributed by a certain trust (e.g., managed investment trusts) where the gain is attributable to dwellings that have been used to provide affordable housing for at least 3 years.

Affordable housing is….
There are a few compliance hoops to jump through to be ‘affordable housing’.
• The property must be residential (not commercial)
• the tenancy of the dwelling or its occupancy is exclusively managed by an eligible community housing provider;
• the eligible community housing provider has given each entity that holds an ownership interest in the dwelling certification that the dwelling was used to provide affordable housing;
• no entity that has an ownership interest in the dwelling is entitled to receive a National Rental Affordability Scheme (NRAS) incentive for the NRAS year; and
• if the ownership interest in the dwelling is owned by a Managed Investment Trust, the tenant does not have an interest in the MIT.

Safe harbour for directors of struggling companies.

Australia’s insolvent trading laws impose harsh penalties on directors of companies that trade where there are reasonable grounds to suspect that the company is insolvent. Criminal and civil penalties can apply personally including penalties of up to $200,000, compensation proceedings by creditors or liquidators, and where dishonesty has been involved, up to 5 years in prison.

safety

You can understand why directors might choose to place a company into administration rather than face personal risk. Section 588G(2) of the Corporations Act imposes personal liabilities if a person is a director at the time the company incurs a debt, and the company is insolvent or becomes insolvent by incurring that debt, and, at that time, there are reasonable grounds to suspect that the company is or would become insolvent. It’s all about timing.

The threat of Australia’s insolvent trading laws, combined with uncertainty over the precise moment a company becomes insolvent have been widely criticised as driving directors towards voluntary administration even in circumstances where the company may be viable in the longer term. And, the very real personal risk is often cited as a reason why experienced directors are unwilling to engage with angel investors and start-ups.

New safe harbour provisions give directors some ‘wiggle room’ where they are attempting to restructure a company outside of a formal insolvency process.

Under the new rules, directors will only be liable for debts incurred while the company was insolvent if they were not developing or taking a course of action that at the time was reasonably likely to lead to a better outcome for the company than proceeding to immediate administration or liquidation. The explanatory memorandum to the amending legislation however clearly states that “hope is not a strategy” when it comes to assessing the reasonableness of the actions taken by directors.

Tolerance levels of the new laws.
The new laws give directors a safe harbour from the civil insolvent trading provisions of the Corporations Act but only where the company is up to date with employee entitlements including superannuation, and has met its tax obligations – normally the first thing to go in distressed companies.

The amendments create a safe harbour for “honest and diligent company directors from personal liability for insolvent trading if they are pursuing a restructure outside formal insolvency.” Directors who merely take a passive approach or allow the company to continue trading as usual during severe financial difficulty, or whose recovery plans are “fanciful”, will not be protected. Directors who fail to implement a course of action, or to appoint an administrator or liquidator within a reasonable time period of identifying severe financial difficulty will also lose the benefit of the safe harbour.

What does all this mean?
The new rules do not soften the requirement for directors to stay informed about the welfare of the company. It merely provides protection where there is a reasonable chance of a turnaround from insolvency. To utilise the safe harbour, directors will need to demonstrate that they took action that “could lead to a better outcome” such as:

Accessing the right information to make timely and informed decisions – engage professional advice to assess the company’s solvency and provide the right information at meaningful time periods. As soon as the company’s solvency is questionable, steps should be taken to ensure further debts are not incurred. The result of this assessment might be that the company is not able to reasonably turnaround its financial position.
Assess if the safe harbour could apply – A decision to utilise the safe harbour provisions should be taken at Board level. Professional advice should be taken to review eligibility and viability of accessing the safe harbour provisions.
Develop a plan – document a plan with measureable and realistic targets. You need to demonstrate that the plan is “reasonably likely to lead to a better outcome” for the company. Any contracts the company has entered into also need to be reviewed as part of that plan.
Measure and adjust – The plan should not only be followed but also regularly assessed and amended where required for changing circumstances. Directors have an obligation to understand the point at which the plan is not working and to work co-operatively with liquidators or administrators. The safe harbour does not protect directors who do not keep tight controls on the viability of a turnaround plan. Keep informed and realistically assess the company’s position.

Can the company incur debt while insolvent?
The safe harbour provides protection for debts “incurred directly or indirectly in connection with” actions taken to turnaround the company. It includes debts taken on for the specific purpose of the restructure such as a professional adviser. Even in circumstances where a company’s solvency is doubtful, incurring debts may be a reasonable course of action to lead to a better outcome, and it may remain in the interests of the company that some loss-making trade should be accepted – for example, incurring debts associated with the sale of assets which would help the business’s overall financial position.

While hindsight might demonstrate that the path taken was the wrong one, directors are protected if they can demonstrate that the course of action was reasonably likely to lead to a better outcome at the time the decision was made. The safe harbour does not protect from debts incurred outside of the turnaround actions.

Solvency is an issue that arises for companies of all sizes; particularly those on a fast growth trajectory. It’s essential that directors have the right information available to them to manage these periods of uncertainty. Employee and tax payments, and tax reporting should never be missed as these are the first sign of deeper problems and likely to trigger further investigation or audit by the regulators. If the company needs help, get help. Hope is not a strategy.

What you need to tell the ATO about your SMSF.

The 1 July 2017 superannuation reforms introduced a new reporting regime for funds. Funds now need to advise the ATO of key events within the fund that impact on retirement income streams (pensions):

NEST-EGG
• When you start a pension
• When you stop a pension or take a lump sum
• When the fund accepts a structured settlement contribution such as personal injury compensation.

Superannuation funds are also required to report the value of existing superannuation income streams at 30 June 2017.

While reporting of these events to the ATO does not formally start until 1 July 2018 for SMSFs, event based reporting still needs to be completed if these events occur from 1 July 2017 – that is, you have a reprieve from the compliance but not the actual reporting.

If we are managing your SMSF’s accounting and compliance, we will track most of these events for you electronically where you have enabled us to access feeds from your SMSF’s bank accounts. If we see any transactions that could meet the reporting criteria, we will be in touch with you to confirm the nature of these events.

Where electronic feeds are not available – if your bank does not support them or where you have opted not to enable the feeds, you will need to let us know about these events at the time they occur.

In addition to the new events based reporting regime, SMSFs are also obliged to report any of the following changes to the ATO within 28 days.

• Fund name
• Fund address
• contact person for the fund
• fund membership
• fund trustees, and
• the directors of the fund’s corporate trustee.

New laws hold franchisors responsible for vulnerable workers

Franchisors and holding companies could be held responsible if their franchisees or subsidiaries don’t follow workplace laws.

workers

The Government has stepped in to protect workers following months of controversial headlines uncovering poor record keeping, questionable workplace practices and exploitation, underpayments, deception, and superannuation guarantee fraud by employers.

The Protecting Vulnerable Workers Bill amends the Fair Work Act to:

Increase penalties for ‘serious contraventions’ of workplace laws
A ‘serious contravention’ of workplace laws occur if someone knowingly contravenes the law and their conduct is part of a systematic pattern. The penalties for breaches vary according to the offence and have increased up to 10 times higher than cases without the aggravating features. A breach is more likely to be a ‘serious contravention’ if:

• there are concurrent contraventions of the Fair Work Act occurring at the same time (e.g., breaches of multiple award terms and record-keeping failures);
• the contraventions have occurred over a prolonged period of time (e.g., over multiple pay periods) or after complaints were first raised;
• multiple employees are affected (e.g., all or most employees doing the same kind of work at the workplace, or a group of vulnerable employees at the workplace); and
• accurate employee records have not been kept, and pay slips have not been issued, making alleged underpayments difficult to establish.

Prevent record keeping failures
Appropriate record keeping is a big part of the new laws to prevent poor employer practices being used as a defence; stymieing employee complaints for lack of evidence. Now, the onus of proof is on the employer to disprove an employee’s compliant.

The penalties for poor record keeping have also increased dramatically – now up to $12,600 for a standard breach and $126,000 for ‘serious contraventions’ by individuals and $630,000 for corporations. Maximum penalties are likely to apply where the employer knowingly falsified records and provided false or misleading payslips.

Hold franchisor entities and holding companies liable
New provisions hold franchisors and holding companies responsible for certain contraventions of the Fair Work Act by businesses in their networks.

The Government is concerned that some franchisors have either been blind to the problem of underpayments to workers or have not taken sufficient action to deal with it once it was brought to their attention.

The provisions only apply to responsible franchisors that have a significant degree of influence or control over the relevant franchisee’s affairs. Holding companies are assumed to have control. This means that franchisors and holding companies are held responsible “if they knew or could reasonably be expected to have known that the contraventions would occur, or that contraventions of the same or a similar character were likely to occur and they had significant influence or control over the companies in their network.”

Where franchisors (or their officers) recognise a problem and take action quickly to resolve it, it is unlikely that they will be held liable. This means that affected companies will need to have appropriate systems and monitoring in place to ensure that franchisee’s are acting within the law. This might include ensuring that franchise agreements or other business arrangements require franchisees to comply with workplace laws, establishing a hotline or contact point for employees, and auditing the businesses in the network.

Ban ‘cashback’ from employees or prospective employees
Workers in the 7-Eleven case reported that they were paid correctly but then required to hand cash back to the franchisee or lose their job. The Fair Work investigation found that this practice “was not isolated and was prevalent in a number of 7-Eleven stores.”

Asking an employee for ‘cashback’ so the person can keep their job, or to keep wages below minimum entitlements will always be unreasonable and prohibited. Penalties have increased tenfold for cases where these aggravated circumstances apply.

Powers and penalties of the Fair Work Ombudsman ramped up
During the 7-Eleven investigation, the Fair Work Ombudsman (FWO) expressed frustration at their limited investigative powers. The new laws provide the FWO with similar powers to the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission. The new powers not only bolster information gathering but also provide the FWO with an enforceable power of questioning for the first time.

The FWO can now issue an ‘FWO notice’ requiring someone to give information, produce documents, or attend before the FWO to answer questions.

New penalties also apply for giving false or misleading information, or hindering or obstructing a Fair Work investigation.

The maximum penalty for failing to comply with an FWO notice is $126,000 for individuals and $630,000 for corporations.

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.

Read more

Newsletter September 2017 edition

Should business push a social agenda?


For years we’ve been told that consumers prefer businesses that take a stand on social issues – those that are environmentally and socially friendly. But is that always the case?

Group-photo
Qantas CEO Alan Joyce had a pie shoved in his face at a business breakfast in May 2017 for Qantas’s proactive position on same sex marriage. The protagonist, a 67 year old former farmer claimed that Joyce is, “… very much part of a network trying to subvert the federal parliamentary process around the issue of marriage equality.”

The issue of corporate clout being used to promote social agendas was later attacked by the Minister for Education and Border Protection, Peter Dutton at a Liberal National Party State council meeting stating that, “It is unacceptable that people would use companies and the money of publicly listed companies to throw their weight around.” And, executives like Alan Joyce should “stick to their knitting.”

Then, there were the calls to boycott the airline from tennis legend Margaret Court and others in the community.

Qantas is not alone. Car maker Holden’s sponsorship of the 2017 Gay and Lesbian Mardi Gras (see Out Loud and Proud) and their pledge to support Australian Marriage Equality also came under attack from some consumers threatening to boycott the company.

Threatening to boycott a company is not new although generally it is in pursuit of change. When a business upsets a customer or a group of customers it’s the first thing that’s actioned; after all, consumers vote with their wallets. In 1955, during the American civil rights movement a boycott by blacks and whites almost crippled a bus company. The controversy was sparked after Rosa Parks refused to give up her seat for a white man. The bus service had to desegregate or face bankruptcy. Similar protests were held in stores to desegregate lunch counters. Martin Luther King Jr., knew the power of ‘economic withdrawal’ and used it effectively, calling to “redistribute the pain” to corporate America.

Qantas has not suffered for being at the epicentre of the gay marriage debate. In it’s most recent results the company achieved an underlying profit before tax of $1,401 million – the second highest in its history. The airline has clearly not alienated its customer base. The result however follows three years of pain and restructuring. Joyce attributes the airline’s performance to the diversity of the management team who led the transformation telling The Australian, “…as a gay Irishman running a national carrier it absolutely shows the meritocracy Australia is, and that diversity generated better strategy, better risk management, better debates [and] better outcomes.”

Mr Joyce was named a Companion of the Order of Australia (AC) in the Queen’s Birthday 2017 Honours List for his services to “the aviation transport industry, to the development of the national and international tourism sectors, to gender equity, inclusion and diversity, and to the community, particularly as a supporter of Indigenous education.”

For Holden, the diversity push is aligned to a shift in the type of worker it wants to attract. With the last manufacturing plant closing down this year, its workforce has dramatically changed from manufacturing to design, engineering, administration and sales. Holden’s Managing Director Mark Bernhard states that Holden is working to “to shake off the ‘blokey’ reputation our brand has been saddled with for years.” Diversity is a strategic goal. On its blog, Holden states that 27% of its corporate workforce is now women. The company is aiming to increase this target to 50% within 5 years.

“We know the commercial rationale of becoming more gender balanced, including over 80% of vehicle buying decisions being influenced by women,” Bernhard says. “But, we also have a social responsibility to help move our country forward by lending our voice and influence to issues that matter….I want Holden to be a leader; a leader in our industry, a leader in society, a leader who can change behaviours. If we don’t do it, who will?” Bernhard says.

In August, the German EDEKA retail outlet in Hamburg made a very physical point about racial diversity by stripping the supermarket’s shelves of all goods not produced or sourced in Germany. The result; the shelves were almost bare. Instead, staff made signs saying (translated) “This is how empty a shelf is without foreigners”. The independent supermarket’s bold anti-xenophobia campaign went viral. The company actively promotes a culture of diversity and the campaign has not only reinforced that brand value but attracted positive global feedback. But, the initiative was not without its detractors as the campaign is a month out from Germany’s federal elections.

But what about influence through association? In April, the Catholic Archbishop of Hobart wrote an article for The Australian newspaper commenting that there “is an increasingly insidious presence operating in our corporate sector. This presence is the existence of so-called “diversity” organisations and committees. Far from promoting authentic diversity within our businesses, they have become the means to impose a particular social agenda.” The Archbishop cites scenarios where senior employees were forced to remove themselves from involvement with groups publicly in conflict with their employer’s support of the LGBTI community. While we’re not sure what “authentic diversity” is as opposed to plain vanilla diversity, it’s an interesting debate. What happens if an employee’s public representation and support for an organisation is in conflict with their employer’s public position?

The fundamental rule for any business seeking to embrace a social position is to understand your market. If your business’s social agenda is likely to alienate your market rather than encourage or diversify it, then think twice. If an initiative does not enhance the business’s reputation with its customers, or enhance its culture with existing and potential staff, then why bother? Every initiative needs to have a measureable purpose and be aligned to your business’s strategic direction.

In their book Leveraging Corporate Responsibility: The Stakeholder Route to Maximizing Business and Social Value, authors Bhattacharya, Korschun and Sen experiment with what drives value in corporate responsibility. They found that “well-meaning corporate-responsibility activities can actually harm a company’s competitiveness.” This is primarily the case for businesses perceived as having low product quality. Consumers took the view that these businesses should just focus on their product not other activities. But, for businesses perceived to have high product quality, the corporate initiatives enhanced public perception and the likelihood to buy. The key take outs were:

• Don’t hide market motives – people understand that there needs to be a business case.
• Serve stakeholders’ true needs – set clear objectives and achievable targets, and work together with key stakeholder groups.
• Test your progress – assess initiatives regularly to ensure they foster the desired unity between the business’ and stakeholder goals.

In every period of social change there is vitriolic debate. Before entering the fracas think about what footprint you are creating for your business and what this might mean if you are on the wrong side of history. Unlike in 1902 when the suffragette movement in Australia won the right for women to vote and stand in Federal elections, what is said and done is not merely recorded on paper – it’s freely available and accessible on the internet for a long time.

ASIC Targets Growing Companies In Audit Crackdown

ASIC is in the midst of a concerted campaign targeting private companies that have outgrown the reporting exemptions.

ASIC requires companies to prepare and lodge a financial report and a directors’ report each financial year, and have the accounts audited unless the company is exempt. Most small companies are exempt from the compliance requirements as are small foreign owned companies in certain circumstances.

asic-audit
Utilising data from the Australian Taxation Office (ATO), ASIC is contacting companies that have moved beyond or not complied with the exemption and are now in breach of their reporting requirements.

If your company has never had to lodge financial reports with ASIC in the past, it’s very easy to breach the rules without realising it. The reporting requirements are hard and fast and ASIC is not overly sympathetic to “oops” as a reason for a breach.

What is a small company?

Small companies are exempt if they satisfy at least two of the following:
• The consolidated gross revenue for the financial year for the company and any entities the company controls is less than $25 million
• The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is less than $12.5 million, and
• The company and any entities it controls have fewer than 50 employees (full time equivalent) at the end of the financial year.

No longer a small company? Then you are a large company and are required to lodge audited financial statements.

Will the auditor want to audit the previous year’s figures when we were still a small company? Yes.

This exemption is for companies not controlled by a foreign entity or disclosing entities.

Failure to lodge annual accounts with ASIC may result in penalties and potentially the company being deregistered.

The rules for foreign controlled companies

Small companies controlled by a foreign company may also be exempt in some circumstances.

For small companies that are not part of a large consolidated group, the directors must resolve to rely on relief provided by ASIC and lodge this resolution (form 384). Timing is everything to be eligible for this exemption, if the right form is not lodged between the period starting 3 months prior to the start of the financial year relief is first applied and ending 4 months after the end of the relevant financial year, the exemption is unlikely to apply.

ASIC warns that, “in most cases, relief is not granted for financial reports that were due in the past”.

Foreign companies that fail to lodge the appropriate financials and are not exempt may be deregistered.

Again, if you have a requirement to lodge financial statements with ASIC, they must be audited.

If you are uncertain about the requirements for your company, please contact us and we’ll work with you to ensure your company is compliant.


Super Guarantee – What Happens When You Get It Wrong

The ATO receives around 20,000 reports each year from people who believe their employer has either not paid or underpaid compulsory superannuation guarantee (SG). In 2015-16 the ATO investigated 21,000 cases raising $670 million in SG and penalties.

sydney-harbour-bridge

The ATO’s own risk assessments suggest that between 11% and 20% of employers could be non-compliant with their SG obligations and that non-compliance is “endemic, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur.”

Celebrity chefs are the latest in a line of employers to publicly fall foul of the rules – one for allegedly inventing details on employee payslips and another for miscalculating wages. But what happens if your business gets SG compliance wrong?

Under the superannuation guarantee legislation, every Australian employer has an obligation to pay 9.5% Superannuation Guarantee Levy for their employees unless the employee falls within a specific exemption. SG is calculated on Ordinary Times Earnings – which is salary and wages including things like commissions, shift loadings and allowances, but not overtime payments.

Employers that fail to make their superannuation guarantee payments on time need to pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement. The SGC applies even if you pay the outstanding SG soon after the deadline.

The SGC is particularly painful for employers because it is comprised of:
• The employee’s superannuation guarantee shortfall amount – so, all of the superannuation guarantee owing
• Interest of 10% per annum, and
• An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal superannuation guarantee contributions, SGC amounts are not deductible, even if you pay the outstanding amount. That is, if you pay SG late, you can no longer deduct the SG amount even if you bring the payment up to date.

And, the calculation for SGC is different to how you calculate SG. The SGC is calculated using the employee’s salary or wages rather than their ordinary time earnings. An employee’s salary and wages may be higher than their ordinary time earnings particularly if you have workers who are paid for overtime.

Under the quarterly superannuation guarantee, the interest component will be calculated on an employer’s quarterly shortfall amount from the first day of the relevant quarter to the date when the superannuation guarantee charge would be payable.

The penalties imposed on the employer for failing to meet SG obligations on time might seem harsh, but they have been designed that way on purpose. This is really money that belongs to the employee and should be sitting in their superannuation fund earning further income to support the employee in their retirement.

F-grade

To recover superannuation guarantee from the employer, the directors of a company automatically become personally liable for a penalty equal to the unpaid amount.

Directors who receive penalty notices need to take action to deal with this – speaking with a legal adviser or accountant is a wqgood starting point.

If you are uncertain about your SG obligations or would like a compliance audit of this and other key risk areas of your business, give us a call.

Director’s fees: What and How To Pay Them

The issue of Director’s fees often comes up – should we pay directors, how to pay, and if we do pay fees how should they be paid? We answer the common questions for private companies.

Can you pay a Director?

Directors who work in the company, executive directors, would generally have an agreed executive remuneration structure that takes into account their service including attending Board meetings (so, generally no extra fees for service outside of the agreed remuneration structure).

For non-executive directors, companies can only pay Director’s fees if the company constitution allows for it or a resolution is passed to make the payments. The resolution to pay directors fees must be made and documented prior to the fees being paid.

These fees are in addition to any agreed expenses such as travel expenses to attend board meetings or in connection with the company’s business.

Tax deductibility of director’s fees

Fees paid to Board members are tax deductible to the company in the year they are paid or intended to be paid. Many Boards pass a resolution to pay Director’s fees just prior to the end of the financial year to claim the tax deduction in that same year. The fees do not necessarily have to be paid prior to the end of the financial year but the Board must have definitely committed to paying them and then the fees paid as soon as practicable.

board-room

Tax on director’s fees

Assuming the directors fees are being paid through an individual contractual arrangement (i.e. the contract is with Mr Smith to act as a director, not with Smith Pty Ltd to provide ‘someone’ as a director, and that happens to be Mr Smith), then the directors fees are treated like salary and wages for the purposes of PAYG withholding. PAYG is required to be withheld from the gross directors fees, reported on the IAS or BAS that is used to report the salary and wages and related PAYG W for that period, and should be remitted to the ATO.

Director’s fees fall within the definition of Ordinary Times Earnings, and superannuation guarantee applies.

Director fees are required to be reported on a payment summary, and are generally reported at item 2 of an individual’s tax return. If they are not reported on payment summaries, it could result in errors in the PAYG withholding annual report, and queries from the ATO regarding the payments.

While the ATO may recognise that there can be a difference in the provision of services by and payments to directors (e.g. the contract may be for ongoing director services and attendance at quarterly board meetings, with payments of director fees to be made once a quarter, not monthly), the PAYG W and superannuation contributions are still subject to reporting and payment by the standard deadlines that apply for all other employees.

The directors fee should also be included in any workers compensation calculation and would generally be captured for payroll tax purposes as well.

Can Director’s fees be paid as super contributions?


Yes, assuming the proper process has been followed (e.g., effective salary sacrifice arrangement has been entered into before the fees have been earned), fees can be paid to the Director’s superannuation fund as a reportable employer contribution to utilise preferential tax rates. This assumes the director is within their contribution limits.

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.

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

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

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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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