BONUS Article; Regulatory Roundup – August 2017

ATO announces what’s new in pre-filling

The ATO has published what pre-fill information is available for this Tax Time. It says the pre-filling service can cross-check information with data held by the ATO. This will help ensure the accuracy of returns.

The pre-filling service 2017 includes the following updates and new data:

  • reportable fringe benefits and working holiday maker data from payment summaries
  • work-related expense messages indicating if you made higher than expected claims last year (only available in our tax pratitioner portal)
  • primary and non-primary production closing stock amounts (only available in the portal) and private health insurance tax claim codes (only available in our portal) from prior-year tax returns
  • message for some government payment types
  • investment company capital gain deductions from dividend income
  • share of early stage investor tax offset, foreign resident capital gains withholding and exploration credits from managed fund distributions
  • net rental property loss and share of early stage investor offset from partnership distributions income
  • address and contract information from property transfers
  • interest offset account indicator for net farm management deposits or repayments
  • removal of type of policy from Medicare levy surcharge
  • repayable amounts for student start-up loans
  • additional data from the myDeductions app uploaded by you (again only available in the tax practitioner portal).

Remember, the pre-filling service only reflects the information received by the ATO at the date you request the data. The ATO reminds taxpayers that it expects most pre-filling information to be available by mid-August.

The secret life of TFNs

Tax file numbers (TFNs) are so much an everyday element when dealing with tax and the ATO that many practitioners and ordinary self-preparers won’t give it a second thought when tax return software responds with an “invalid” when a TFN is entered.

The common thought will be that it’s human error, so naturally one’s first reaction will be to check the numbers your client gave you, followed by making sure you c-a-r-e-f-u-l-l-y re-enter the numbers.

Most of the time the problem will be fixed and it’s business as usual, but here’s a passing thought — how does the tax return software know what is, and what is not, a valid TFN?

And remember, its validity or otherwise is not dependant on matching those numbers with someone’s name and/or birthday and/or address and so on. These identifiers are used to cross-check a person’s identity of course, but the initial validity of a TFN is known via another factor — the “TFN algorithm”.

This verification algorithm is embedded in each unique TFN and is also known as a check digit algorithm. Essentially the veracity of the sequence of numbers that make up each TFN is based on the fact that one of the digits (the last one in this case) depends on the other digits.

It’s not magic, but just to maintain the fun let’s take an element from the magician’s playbook… think of a number between 10 and 12, and keep that in mind.

To make the algorithm work, a fixed weighting is applied to each number of the TFN. In order from the left, these weightings are 1 4 3 7 5 8 6 9 10. As with a lot of these things, the rest is best explained using an example.

Let’s take the following TFN; 123 456 782. Now multiply each digit by the weightings, in order.

1 x 1 = 1, 2 x 4 = 8, 3 x 3 = 9, 4 x 7 = 28, 5 x 5 = 25, 6 x 8 = 48, 7 x 6 = 42, 8 x 9 = 72 and 2 x 10 = 20.

Now, add those results together. 1 + 8 + 9 + 28 + 25 + 48 + 42 + 72 + 20 = 253. Now, remember that number you were keeping in mind? If the total you arrived at is a multiple of 11, you’ve got yourself a true TFN.

To check for yourself, try the above with your own TFN.

The check digit algorithm is not generally disclosed and was kept in the ATO’s vault for decades, but in more modern times the algorithm has had to be shared with many external entities such as software developers, who are generally required to sign a confidentiality agreement.

Base penalty amounts can be reduced (or increased)

The ATO says its base tax penalty amount may be increased (s284-220) or reduced (s284-225). The base penalty amount may be increased where the taxpayer hinders the ATO, but it also may be reduced in the following circumstances.

Voluntary disclosure

The voluntary disclosure to the Commissioner of a tax shortfall will result in a reduction of the base penalty amount applicable to the shortfall.

Any voluntary disclosure that is made by a taxpayer before being told that an audit is to be conducted will reduce the base penalty amount by 80% if the shortfall is greater than $1,000 or is a scheme shortfall amount or to nil if the shortfall is less than $1,000.

The taxpayer will generally be taken to have made an honest mistake unless there is information to indicate that the taxpayer did not make an honest mistake. The voluntary disclosure must be made in writing, be signed with the appropriate taxpayer or agent declaration and posted to the ATO.

Any voluntary disclosure that is made after being told that an audit is to be commenced and the Commissioner has been saved significant time or resources by the disclosure, the base penalty amount is reduced by 20%. The Commissioner has the discretion to treat this disclosure as having been made prior to being told about the audit.

However repeated voluntary disclosures by taxpayers or their tax agents will not be automatically entitled to the concession if there is an indication the taxpayer has not made an honest mistake or that the agent has been careless. MT 2008/3 explains this concession in greater detail.

The ATO undertakes many different types of reviews and audits under its compliance program. A “tax audit” is defined in s995-1 of the ITAA97 to mean an examination by the Commissioner of an entity’s financial affairs for the purposes of a taxation law.

Non-material amounts

Penalties will not apply to non material shortfalls that result from a lack of reasonable care where it is evident that the taxpayer and agent (if any) have made a genuine attempt to comply with the taxpayer’s obligations and the taxpayer’s overall level of compliance is satisfactory.

Consideration as to a “material” amount will be based on the size of the shortfall relative to the taxpayer’s turnover and the effect of the shortfall on the taxpayer’s overall liability. The shortfall amount will continue to be payable.

Correcting GST mistakes

In certain circumstances taxpayers can correct GST mistakes on a subsequent activity statement without incurring any penalty [see Correcting GST Mistakes: Fact Sheet (07/2004) (NAT 4700)].

In addition, where a registered tax agent prepares an income tax return and cannot reconcile the GST details in BASs prepared by the client of a bookkeeper, the GST may be corrected by including an adjustment (regardless of the amount) in the next BAS to be lodged following the lodgment of the income tax return. Different correction limits apply, depending on the entity’s turnover. The agent must inform the client or bookkeeper of the mistake and initiate action to prevent future occurrences.

Timing adjustments

Penalties will not apply where income amounts or a supply is accidentally or unintentionally included in a period later than the period in which the amount should have been included. Penalties will apply where it is clear the taxpayer was aware of the proper treatment and sought to gain an advantage.

Amounts in another person’s return

Where there has been no overall tax avoided then penalties will usually not apply if income, deductions, a credit or a supply is included in the wrong person’s return. If some tax has been avoided then the penalty will be based on the net tax avoided.

Share trader or investor, and trading stock versus capital asset

Investment products may be held as trading stock by a taxpayer carrying on a business of share trading or options trading. However, whether a particular parcel should be treated as trading stock must be determined on a case-by-case basis.

Generally, the tax issues facing share traders versus passive investors are summarised below.

Tax treatment of transactions, returns and related items
Event/item Share trader Passive investors
Gain on disposal Sale on trading account Capital gain
Loss on disposal Sale on trading account Capital loss
Dividends received Assessable income

When received but may be accounted for when derived (ie when dividend is declared)

Assessable income

When received

Share acquisition Purchases on trading account

Allowable deduction

Capital cost

No immediate deduction allowed

Broker fees Purchases

Allowable deduction

Capital cost

No immediate deduction

GST on broker fees Financial supply

Reduced input tax credits

Capital cost

No immediate deduction

No reduced input tax credits as no enterprise

Share investment course
pre-ownership
If business commenced then allowable deduction, however nexus must be established Capital cost

No immediate deduction

Share investment course
post-ownership
Professional development

Allowable deduction

Investment expenses

Allowable deduction

Technical books Professional development

Allowable deduction

Investment expenses

Allowable deduction

     
Share trading software Business expense

Allowable deduction
(if not an establishment cost)

Investment expenses

Allowable deduction

Interest on margin loan Interest expense

Allowable deduction incurred to obtain assessable income

Investment expenses

Allowable deduction

Prepaid interest Deduction up to 12 months if s82KZM satisfied Deduction up to 12 months if s82KZM satisfied
Bank charges on margin loan Bank fees

Allowable deduction

Investment expenses

Allowable deduction

Costs to establish loan Borrowing costs

Allowable deduction available over five years

Investment expenses

Allowable deduction available over five years