News Update March 2012

Welcome to the Simeoni Monthly News Update.

This month we look at the following topics:
- Is the Tax Commissioner One of Australia's Most 
  P
owerful People?
- 5 Simple Ways to Manage Your Tax Downwards
                                                
- Quote of the Month
                                

March News Update

Is the Tax Commissioner one of Australia's Most Powerful People? 

What powers are invested in the ATO and how far they can really go?

Last month, the Government announced that they intend to give the Commissioner of Taxation up to 60 days to hold activity statement refunds – including GST and other indirect taxes such as luxury car tax, wine equalisation tax, etc. - while verifying the claims made.  For many businesses, waiting for up to an extra 60 days for the refund will have a major cash flow impact.

The issue got us thinking about the Commissioner’s powers in general and why they would need to be extended when they seem so extensive already.  The Commissioner’s powers and approach are well documented and their view is that “If a tax debtor does not pay by the due date and does not contact us, we assume they are not going to pay.”  The underlying message is clear, pay your tax or we will take action.  You are expected to pay the ATO even if that means going into further debt or giving the Commissioner security against assets.

But if you don’t pay, what can the Commissioner do about it? 

Without notice, the Commissioner can:

• Issue a 'garnishee' notice to someone holding money on your behalf
– for example a bank. For salary and wage earners, the tax office can require your employer to take part of your salary until your debt is paid.  This is generally limited to a maximum of 30% of your salary.  If you are a business, the ATO can go as far as accessing your merchant facility if you have a credit owing.
   
• Prevent you leaving the country.
 
• Impose a freezing order – for example, on your bank accounts.   That is, without notice the tax office can freeze and then if required strip your accounts, particularly where they believe you have alternative sources of income.

• Issue writs or warrants of execution, or warrants of seizure and sale. 
For example, they can force you to sell certain assets to pay your tax debts.

• Liquidate your company or bankrupt you.  Most taxpayers don’t believe how strongly the tax office will act.  The number of ATO wind-ups increased by 116% between the 2010 and 2011 financial years.   That is, the tax office forced 1066 businesses to close last financial year.  The tax office would argue that in many cases, the wind up forces the inevitable, and prevents further debt being incurred either to the ATO or other parties.

A trigger for hostile action by the ATO appears to be where they consider the taxpayer (or their income) to be a flight risk – for example, where you have overseas sources of income and support.

But, it might not stop there.  The funding for Project Wickenby ends next year.  Under this joint project, the tax office has been able to share information across Government bodies such as the Australian Crime Commission and Australian Federal Police, to pursue tax evasion – effectively using the powers invested in these agencies for a single purpose.  Now, the tax office is seeking to extend their investigative powers.  

On May 16, 2011 Treasury canvassed ATO “defensive measures” in a submission to Cabinet.  Further law reform proposals are expected this year.  Reportedly, the defensive measures include various coercive powers:

• greater use of telecommunications interception powers;
• expanding the definition of money in anti-money laundering laws;
• greater information exchanges with foreign governments;
• strengthened international debt recovery measures; and
• reciprocal recognition of foreign tax debts.

While much of the discussion is centred on inter-agency information sharing, the implications will extend well beyond this.  The message for everyone is make sure you are on top of your paperwork.  If the ATO has queries or suspects something is not right, you need to be able to respond.  The longer you take or lack of evidence will only escalate the situation. 

5 Simple Ways to Manage Your Tax Downwards

Look at any company that is in financial trouble and you will probably see the Tax Office as one of the larger creditors.  The reality is that we all pay a lot of tax - some of it income tax, some withholding tax, PAYG instalments and GST. 

There are two fundamental principles to managing taxation:

1. Don’t pay any more than you have to; and
2. Don’t pay it before you need to.

Famously, the late Kerry Packer told a Senate enquiry, “Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!”

The first principle is about maximising after tax profits; the second is about maximising your cash flow. Here are some ways to achieve these principles in practice:

• Make your entity structures work for you – we have differential tax rates across individuals, companies, trusts and super funds.  As your business grows you will make increasing use of entity structures to manage risk, business efficiency, and tax. Where you have a mix of entity structures or individuals in your business then you should be aware of the tax rates that apply to each entity. Y our tax planning should seek to maximise the use of lower tax rates.  It doesn’t make sense paying tax at 46 cents in the dollar when you could be paying 30 cents, 15 cents or even less.

• Don’t pay costs in after tax dollars if they could be paid with pre tax dollars – some expenses can be structured in a way that improves their tax efficiency. One example is life insurance – something that we either already have or should have.  If you own life insurance in your personal name you will pay for it in after tax dollars.  Hold it through your superannuation fund and it should be paid in pre tax dollars. There are lots of different examples and every dollar saved counts.

 Don’t forget the children – there’s no getting away from it – kids are expensive. If you add up what they cost, you start to understand where some of your money is going. If you have a family trust within your structure that either operates your business or is a shareholder of your business, then it is likely that income will flow into that trust. Where the trustee appoints some of the income of the trust to children they might pay either no tax or a reduced rate of tax. You’re spending the money anyway so why not counter balance part of it with the tax savings.

• Get your GST registration right – if you are a small business entity with a turnover under $2 million per annum then when you registered for GST you elected to account on a cash or accruals basis. This choice will not change the amount of tax that you pay but it will change the timing of that payment. If you are managing your cash flow closely then ideally, you don’t want to have to pay GST before you collect it.  There is no one size fits all here.  Sometimes, if your debtors exceed your creditors, then being registered on a cash basis will be more cash flow effective.  Where creditors exceed debtors, accruals might be the way to go. You need advice on this one.

• Know where you are up to in the current year – where you are paying tax instalments, the amount or the rate is determined by your last tax return lodged.  If current year profits are tracking under the previous year, then it is likely that you are paying more in tax instalments than is necessary.  You have the right to vary them downwards if this is the case.  If there is a material difference; don’t wait for another year to get the tax benefit flow through.  Adjust it now and preserve your cash flow.

These are all quite simple strategies but they have one thing in common.  They will all put more money in your bank account. Talk to your us today and get the right advice on what you can do.

 

 

 Quote of the Month


“Government's view of the economy could be summed up in a few short phrases:
If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Ronald Reagan

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PO Box 725, Five Dock, NSW, 2046
P: (02) 9370 0400 | F: (02) 9370 0444 | E: simeonico@simeoni.com.au
 

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