ATO Warns of Common Division 7A Errors

The ATO reminds shareholders of private companies that understanding how Division 7A of the tax legislation applies is crucial to avoiding costly tax consequences when accessing the company's money or other benefits.

While Division 7A can complex, most errors the ATO sees that result in its application are simple in nature, including:

• Shareholders not recognising that a company's money is not their money, and they cannot access it for personal use without tax consequences;

• Loans being made without complying loan agreements; and

• Applying the wrong benchmark interest rate when calculating Division 7A loan repayments.

These errors are often the result of common myths about Division 7A and how it works.

To support taxpayers' understanding of their tax obligations when managing private company money, the ATO has launched new content 'Division 7A Myths Debunked' on its website.

Taxpayer Alert

Tax File Numbers are being compromised more often than ever. We remind you that the privacy around your personal details, including your tax file number and myGov accounts, are of the utmost importance.

Our business continues to update our protections to keep your information safe, but there are many ways to also protect yourself.

• Any correspondence from the Tax Office contains confidential information, including payment slips. Keep this in mind when receiving these documents.

• Change your passwords often, including your myGov and Tax Office logins, as well as our client portal.

• Dispose of documents securely.

• Do not share your drivers licence, passport, Medicare card or any documentation with your tax file number without good reason.

• Do not email personal details unless secured.

• Royal Cornell, the Tax Office and your bank will not send through email links. Do not supply information, unless you know these are secure.

ATO Warning Regarding Prohibited SMSF Loans

Loans to members continue to be the highest reported contravention of the superannuation laws that the ATO sees in auditor contravention reports.

Self-Managed Super Funds (SMSF) trustees should remember that they cannot loan money or provide other forms of financial assistance to a member or relative, and if they do, they can incur a penalty of up to $18,780. They may also be disqualified as a trustee.

SMSF trustees also cannot loan money to a related party, such as a business, where the value of the loan exceeds 5% of the value of the fund's total assets, as this is a prohibited 'in-house asset' investment.

If the SMSF's in-house assets exceed 5% of the total value at the end of the financial year, the trustee must plan to reduce their in-house assets to less than 5%, which must be implemented by the end of the following financial year.

If a trustee has made a prohibited loan from their SMSF, the loan must be repaid as soon as possible.

Christmas Parties & Gifts

Year End Staff Parties

With the holiday season underway, many employers will be planning to reward staff with a celebratory party or event. However, there are important issues to consider, including the possible FBT and income tax implications of providing 'entertainment' (including Christmas parties) to staff and clients.

FBT and 'entertainment'

Under the FBT Act, employers must choose how they calculate their FBT meal entertainment liability, and most use either the 'actual method' or the '50/50 method', rather than the '12-week method'.

Using the actual method

Under the actual method, entertainment costs are normally split up between employees (and their families) and non-employees (eg clients). Such expenditure on employees is deductible and liable to FBT. Expenditure on non-employees is not liable to FBT and not tax deductible.

Using the 50/50 method

Rather than apportion meal entertainment expenditure on the basis of actual attendance by employees, etc, many employers choose to use the simpler 50/50 method. Under this method (irrespective of where the part is held or who attends) 50% of the total expenditure is subject to FBT and 50% is tax deductible.

However, the following traps must be considered:

• Even if the function is held on the employer's premises, food and drink provided to employees is not exempt from FBT;

• The minor benefit exemption* cannot apply; and

• The general tax travel exemption (for travel to or from the employer's premises) also cannot apply.

*Minor benefit exemption

The minor benefit exemption provides an exemption from FBT for most benefits of 'less than $300' that are provided to employees and their associates (eg family) on an infrequent and irregular basis.

The ATO accepts that different benefits provided at, or about the same time (such as a Christmas party and a gift) are not added together when applying this $300 threshold.

However, entertainment expenditure that is FBT-exempt is also not deductible.

Example: Christmas Party

An employer holds a Christmas party for its employees and their spouses - 40 attendees in total. The cost of food and drink per person is $250 and no other benefits provided.

If the actual method is used:

- For all 40 employees and their spouses - no FBT is payable (ie if the minor benefit exemption is available), however the party expenditure is not tax deductible.

If the 50/50 method is used:

- The total expenditure is $10,000, so $5,000 (ie 50%) is liable to FBT and tax deductible.

Christmas Gifts

With the holiday season here, many employers and businesses want to reward their staff and loyal clients/customers/suppliers.

Again, it is important to understand how gifts to staff and clients are handled tax-wise.

Gifts that are not considered to be entertainment

These generally include a Christmas hamper, a bottle of whiskey or wine, gift vouchers, a bottle of perfume, flowers, a pen set, etc.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

• Gifts to employees and their family members - are liable to FBT (except where the 'less than $300' minor benefit exemption applies) and tax deductible; and

• Gifts to clients, suppliers, etc - no FBT and tax deductible.

Gifts that are considered to be entertainment

These generally include, for example, tickets to attend the theatre, a live play, sporting event, movie or the like, a holiday airline ticket, or an admission ticket to an amusement centre.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

• Gifts to employees and their family members - are liable to FBT (except where the 'less than $300' minor benefit exemption applies) and tax deductible (unless they are exempt from FBT); and

• Gifts to clients, suppliers, etc - no FBT and not tax deductible.

Non-entertainment gifts at functions

What if a Christmas party is held at a restaurant at a cost of less than $300 per person attending, and employees are given a gift or gift voucher (for their spouse) to the value of $150?

Actual method used for meal entertainment

Under the actual method no FBT is payable, because the cost of each separate benefit (being the expenditure on the Christmas part and the gift respectively) is less than $300 (ie the benefits are not aggregated). No deduction is allowed for the food and drink expenditure, but the cost of each gift is tax deductible.

50/50 method used for meal entertainment

Where the 50/50 method is adopted:

- 50% of the total cost of the food and drink is liable to FBT and tax deductible; and

- In relation to the gifts, the total cost of all gifts is not liable to FBT because the individual cost of each gift is less than $300, and as the gifts are not entertainment, the cost is tax deductible.

Know the Rules for Accessing Superannuation

The ATO has reminded Self-Managed Superannuation Funds ('SMSF') trustees that their SMSF must be operated for the sole purpose of providing retirement benefits for its members. This means SMSF trustees can't use funds from their SMSF to pay for personal or business expenses. This is known as 'illegal early access' of superannuation, and severe penalties apply.

The ATO also reminds SMSF trustees that there are rules regarding what they can invest in when dealing with a related party.

The ATO has recently released a factsheet to help SMSF trustees understand the rules on accessing their superannuation, and make sure they (and their business, if any) comply with the rules surrounding SMSF's.

How To Treat Commercial Website Expenditure

It is essential these days for a business to have a website to promote their products or services. Left without guidance following the withdrawal of TR 2001/6 in 2009, business owners have treated website expenditure in many different ways. At least, this was the case until recently. The Australian Taxation Office have now issued ruling TR 2016/3 stating their guidelines on the deductibility of website expenditure.

Generally, expenditure acquiring or developing a website for a business is capital in nature. This means the website is a depreciating asset, classified as software, and can be depreciated and commonly claimed over a period of 5 years. For Small Business Entities under the Simplified Depreciation rules, if the cost is under the threshold, the cost can be claimed in full. If the cost is more than this threshold then the expense is allocated to the General Small Business Pool and depreciated as such. The threshold till the 30 June 2017 is $20,000 and will then return to $1,000.

However, the rules differ if there is an existing Software Development Pool. If the entity uses a Software Development Pool the expenditure must be allocated to this pool, and the Simplified Depreciation rules cannot be used.

Expenditure in maintaining a website can normally be claimed as a deduction. This will involve expenses such as domain registration, server hosting costs and minor enhancements to the existing website. However, if the alteration to the website is significant, it is open to question that the business is improved and the expenditure is likely to be capital in nature. In this case, the expenditure is not deductible but can be depreciated over a period of time. 

Determining Capital vs Revenue

Capital	Revenue
Expenditure incurred in acquiring or developing a commercial website for a new or existing business.
Expenditure on a website where the expenditure represents an improvement to the business and structure.
Labour costs directly referable to the enhancement.	Labour costs incurred as ordinary business expense that doesn’t enhance the business and structure.
Expenditure on software products that provide an enhancement of the structure of the business. This may be depreciable as ‘in-house software’.	Software products expenses that are licensed periodically.
Expenditure for new functionality to a website or upgrade existing functionality of website that adds to the business.	Periodic lease payments if a commercial website is leased from a web developer.
Expenditure incurred to migrate content from old to new website or platform as part of an upgrade.	Expenditure for maintaining a website ie periodic operating, registration, web hosting and licensing fees.
Expenditure to secure the right to use a domain name.	Periodic registration fees for a domain name including initial registration fee.