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Forewarned is forearmed

Tax time always brings the fear factor and many business owners who want to reduce their tax can make some big mistakes in trying to do last minute tax planning. Around this time, tax schemes become the flavour of the month but they can be traps.

“Small and medium enterprises (SMEs) have to be proactive with their taxation compliance on a quarterly basis, not just on 30 June,” says Sydney-based accountant Maurizio Zappacosta of ZM Partners. “Last minute strategies often only allow desperate ill informed choices, which inadvertently causes disasters.

“Any taxation scheme must be analysed and reviewed from the investment potential and taxation consequences.”
Read between the lines

A dodgy scheme, even offered by an accountant, can have negative consequences with heavy penalties applying for taxpayers participating in such a scheme in order to obtain a tax benefit that turns out to be artificial or contrived.

The base penalty rate is 50% reduced to 25% where the taxpayer has ‘failed to take reasonable care’ to 75% for ‘intentional disregard’.

In addition, a general interest charge (currently around 14.15%) applies from the date the shortfall in tax was originally due. “This could be considerable as it may be a couple of years before the ATO audits the taxpayer,” says Zappacosta.

Don’t get caught!
So how do you know when a scheme is dodgy? The experts suggest that a taxpayer should be concerned if:
  • the transaction involves a tax haven
  • the investment scheme promoted has minimal disclosure and does not have a product ruling from the ATO.
  • the arrangement is designed to defer the tax to another year or to obtain tax-free distributions using related entities. The ATO has issued a recent alert on schemes involving pre-paid service fees between associates and private company loan agreements. (I know it sounds complex, but they often are and that’s how taxpayers get caught!)
  • the arrangement appears contrived and artificial in the way it is executed
  • there appears to be little or no real underlying business or purpose
  • the amount of the tax benefit claimed is excessive compared to its economic return
  • it involves limited or non-recourse funding together with a round-robin flow of funds
  • there is a minimal amount of cash outlay associated with borrowing funds
  • there is the ability to exit an arrangement before net income comes home  to the investor
  • excessive valuations of assets are involved as this is an indicator that an inflated deduction is being claimed
  • tax-exempt entities are being used, such as charities to wash income.
The right advice

“I can’t emphasis enough that whatever is being promoted or proposed, the taxpayer should consult their accountant or financial planner or better still, both,” says Zappacosta. “The best advice I can give is that if the investment you are considering sounds too good to be true it probably is.”

Tough penalties
What can happen if the ATO cracks down on a scheme you’re involved in?

“I have seen cases where the ATO disallows the transaction and the taxpayer will incur a ATO tax debt – the original tax plus penalty plus interest – and then there might be a residual loan from the transaction,” says Zappacosta. “Sometimes this amounts to 200% of the tax if it was assessed normally.”

By the way, some agricultural schemes can be pretty good but do your research and get advice from a trusted accountant or adviser. Make sure you ask for the long-term return from the scheme.

Take the pressure down
But it’s not all bad news. There are things you can do can to reduce your tax and stay within the law.
Here are a few to consider:
  • you can make a superannuation contribution before 30 June. Up to $50,000 can be contributed for individuals aged under 50 and $100,000 for those 50 and over. This year the self-employed will be treated the same way as contributions made by employers, with their contributions being fully deductible as long as they stay within the above limits
  • a company can claim a deduction for directors fees, staff bonuses and commissions that are unpaid at 30 June provided they were ‘definitely committed’ to the expense. It is important to note that you are required to withhold tax to payments made to employees, directors and office holders and failure to withhold may result in penalties
  • review debtors before year end and write-off any bad debts
  • property owners may be able to prepay property expenses and claim a deduction for prepaid expenses up to 12 months in advance.
Get cracking!

One of the great problems for all taxpayers is the fact they leave everything until it’s too late and then their accountant has little or no time to review their situation. If this happens, I recommend you go to the ato.gov.au website and see what help there is there for businesses.

Also get on the Yahoo!7 search engine and type in tax tips and you’ll find a wealth of great ideas for reducing your overall tax bill, but make sure you can justify them.

Early bird savings

If you feel that you’ve missed the boat this year, get in early for next year and plan your taxes based on expected income and expenses. By doing this you’ll be able to afford a nice bottle of bubbly when tax year comes around next year!

Published on: Thursday, June 05, 2008

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