2014 lodgement changes

From 1 April 2014 taxpayers will be required to provide their financial institution account (FIA) details when lodging fringe benefit tax returns.

From 1 July 2014 taxpayers will be doing the same for tax return lodgements, even if the details have been provided before.

These requirements were first put in place for individual tax return lodgements and took effect on 1 July 2013.

Providing FIA details will allow the ATO to issue any resulting refund by electronic funds transfer to the FIA that is nominated.

Electronic funds transfer is the fastest and most secure way for taxpayers to receive their refund. It is convenient for both the ATO and the taxpayer and it ensures the refund is paid directly into a nominated bank, credit union or building society account. Alternatively, taxpayers can speak with their tax agent about using their trust account, if they operate one.

It is important that taxpayers ensure their FIA details are correct when lodging as this will help to prevent delays in receiving their refund, and also ensures that their money does not go into the wrong account.

Division 7a in detail

Business owners sometimes borrow money from their own company for a variety of personal and financial reasons. However, there can be an issue with tax law compliance if the proper steps are not carried out in treating the transaction correctly.

Division 7a is an integrity measure of tax legislation that comes into effect when there is a loan by a company to the business’ owners and associates, i.e. the shareholders of the company. Associates are broadly defined and can include family members and other related entities.

Specifically, this tax law covers any monetary benefits including:

-payments made to a shareholder (or associate) by a private company, including transfers or uses of property for less than market value

-loans made without specific loan agreements

-debt forgiveness

These transactions may come under the Division 7a provisions and as such are treated as assessable unfranked dividends to the shareholder or associate, and are taxed accordingly.

An assessable unfranked dividend means that there are no franking credits available to the recipient, so the franking tax offset will not apply and the recipient will have to pay tax on the dividends at the usual marginal rate.

However, there a few instances in which Division 7a will not apply:

-if the payment is made to a shareholder or associate who is also an employee of the company, than the dividend may be treated as a fringe benefit instead.

-to payments of genuine debts

-if the loan is entered into formally with a written agreement outlining minimum interest rates and maximum term criteria. However, minimum yearly re- payments of the loan are required in order to avoid the amount’s being treated as dividends arising in later years.

-payments or loans excluded by virtue of other tax provisions

Tax certainty after death for super funds

Recent government amendments have provided tax certainty for superannuation funds upon the death of members in receipt of a superannuation income stream.

This amendment effectively allows a superannuation fund trustee to dispose of pension assets on a tax-free basis to fund the payment of death benefits.

Also, the meaning of ‘superannuation income stream benefit’ now allows the superannuation fund to continue to be entitled to the earnings tax exemption in the period of the member’s death until their benefits have been paid out by:

-paying them out as a lump sum

-and/or commencing a new income stream

This is subject to the benefits being cashed as soon as possible following the member’s death.

This amendment also allows the tax-free proportion of that superannuation income stream to be used in calculating the tax components of those benefits.

Reduced super concessions under Division 293 tax

A tax may apply to individuals with high incomes to reduce the amount of concession paid on their super contributions. This tax is known as Division 293 tax.

Division 293 tax was introduced to reduce the concession on superannuation contributions for individuals with income greater than $300,000 per annum.

Under Division 293 of the Income Tax Assessment Act 1997 tax will be payable on certain contributions made from 1 July 2012.

If an individual’s income for surcharge purposes, plus their low-tax contributions are greater than $300,000, they may be liable to pay an extra 15 per cent tax on their taxable contributions.

For individuals who are members of a defined benefit fund Division 293 tax may be calculated on notional contributions, which are not capped.

There are also modifications to the contribution calculation for constitutionally protected state higher level office holders or Commonwealth justice.

To calculate whether an individual has income and low-tax contributions greater than $300,000 the ATO will be looking at:

• income reported on the individual’s income tax return, including:

-taxable income

-total reportable fringe benefit amounts

-net financial investment loss

-net rental property loss

-amounts on which family trust distribution tax has been paid

-super lump sum taxed elements with a zero tax rate.

• contributions reported in their member contribution statement
• self managed super fund annual return.

The ATO will begin issuing Division 293 tax notices of assessment for the 2012-13 financial year to affected individuals from early February 2014.

Division 7A

The ATO is continually monitoring Division 7A as it has been recognised as a high risk area of tax.

Division 7A tax applies to all loans, advances, and other credits made by private companies to shareholders, or their associates.

It is important to consider any tax consequences under Division 7A. For example, if:

-shareholders or associates have extracted profits from a private company during the year other than by dividend

-a shareholder or associate uses an asset of the private company and does not pay the company for its use or pays less than an arm’s length amount

-intra group loans have been made by a private company