New labels in the 2019 SMSF annual return
The SMSF annual return for 2019 has a number of new questions and labels that SMSF practitioners and trustees need to be aware of.
In previous years, the ATO advised trustees that the question in the annual return regarding whether Part B of the audit report was qualified could be answered with a “no” if the only reason the auditor qualified Part B was because they could not confirm the information provided to them (for example, opening account balances).
The ATO advice for this year is that this is no longer the case, and that trustees’ answers must correctly convey the auditor’s written opinion.
The 2019 SMSF annual return will also need confirmation that Part A of an audit report is qualified. Part B of the auditor’s report gives the auditor’s opinion on the fund’s compliance with super laws and Part A of the report gives the auditor’s opinion on whether the fund’s financial statements are fairly presented (that is, there are no material misstatements).
Trustees are now required to answer “yes” if the audit report was qualified at Part A and/or Part B, regardless of the auditor’s reasons for the qualification.
The ATO says the change is designed to give it more information to help it build a more complete risk profile of the SMSF population. “This information is only one of the factors we would take into account in making a risk assessment of the fund,” the ATO says. “We would not generally raise a fund audit or review a case based solely on a qualification of Part A of the auditor’s report.”
The ATO says that if a trustee receives a qualified audit report from their auditor, its advice is to rectify any issues if possible and/or make a voluntary disclosure. “If we do commence an audit, we will take your disclosure into account in determining any enforcement action and the appropriate level of remission of administrative penalties,” it says.
Other SMSF annual return changes
LRBA amounts: A new label has also been added to the Member section of the return in order to allow the trustee to report outstanding LRBA amounts for each member — which the ATO says will be used for statistical purposes only.
“You should report the outstanding loan balances for all LRBAs, and not just those that would have been caught by the proposed changes for total superannuation balance purposes,” it says. “The reported amounts will not be used in calculations of a member’s total superannuation balance.”
The ATO says it will accept any reasonable method in calculating these amounts, however suggests one methodology in particular as it aligns with proposed changes under subsection 307-231(3) of Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (see under schedule 4 of the above, under “307-231 Limited recourse borrowing arrangements”).
Cryptocurrency: In the Assets section of the return, cryptocurrencies (which were previously reported at the “Other overseas assets” label) now have a dedicated label. And although bitcoin is the commonly recognised asset in this case, other digital assets that have the same characteristics should be included. (These charactertistics are set out in TR 2014/25.)
Downsizer contributions: The Member section now also has provision to report downsizer contributions. The total value of all downsizer contributions made by the member in 2018-19 will be reported at the “Proceeds from primary residence disposal” label and the date the downsizer contribution was received by the fund will be reported at the receipt date label.
More TPARs (taxable payments annual reports) due soon
Operators in some Australian industries as well as select government entities are required by the ATO to lodge a taxable payments annual report (TPAR). These reports let the ATO know about payments that are made to contractors for providing services. Contractors can include subcontractors, consultants and independent contractors, and they can be operating as sole traders (individuals), companies, partnerships or trusts.
The TPAR system was initially introduced to address longstanding compliance issues the ATO had identified in the tax affairs of contractors in the building and construction industry.
Tax compliance issues that were identified included non-lodgement of tax returns, income being omitted from tax returns that were lodged, non-compliance with goods and services tax (GST) obligations, failure to quote an Australian business number (ABN), and use of an invalid ABN.
Building and construction service providers have been required to lodge TPARs since 1 July 2012, and operators in this industry are expected to lodge a TPAR by 28 August each year covering payments made over the most recent financial year (for example, the TPAR due in August 2019 will report payments made from 1 July 2018 to 30 June 2019).
But the system has since been extended to include other industries. Initially these included cleaning services and courier services, and later was extended to road freight services, IT service providers, and security, investigation or surveillance services.
The periods covered, and the due dates for each, are as follows:
- Cleaning services: for contractor payments from 1 July 2018 (first report due by 28 August 2019)
- Courier services: for contractor payments from 1 July 2018 (first report due by 28 August 2019)
- Road freight services: for contractor payments from 1 July 2019 (first report due by 28 August 2020)
- Information technology (IT) services: for contractor payments from 1 July 2019 (first report due by 28 August 2020)
- Security, investigation or surveillance services: for contractor payments from 1 July 2019 (first report due by 28 August 2020).
What needs to be reported
Operators in each of the industries covered need to report payments made to contractors that provide those services to each industry.
The details that are required about contractors are generally contained in the invoices (or grant applications in the case of government bodies) that a business receives from them.
The details for each payee include the:
- ABN (where known)
- name (business name or individual’s name)
- total amounts for the financial year of the
- gross amount paid (including GST plus any tax withheld)
- total GST you paid them
- total tax withheld where ABN was not quoted.
The information provided in a TPAR provides the ATO with information that allows it to identify contractors who have:
- not included all their income on their tax return
- not lodged tax returns or activity statements
- not registered for GST where they are required to do so
- quoted the wrong ABN on their invoices.
It also allows the ATO to help individual contractors (sole traders) by pre-filling information about these payments into their tax return. There is no requirement for businesses to provide their contractors with details of the information reported, however contractors are within their rights to request this information.
If an invoice received from a contractor includes both labour and materials, whether itemised or combined, the total amount of the payment may need to be reported, unless the labour component is only incidental. The ATO says that a payment for labour is considered to be incidental if the labour component “is immaterial to the actual supply”.
There are some payments that are not required in the TPAR. These include:
- payments for materials only
- payments for incidental labour
- unpaid invoices as at 30 June each year
- PAYG withholding payments
- payments within consolidated groups
- payments for private and domestic services.
Are you eligible for the small business income tax offset?
The small business income tax offset (also known as the unincorporated small business tax discount) can reduce the tax a business pays by up to $1,000 each year. The offset is worked out on the proportion of tax payable on business income.
To be eligible, a taxpayer must be carrying on a small business as a sole trader, or have a share of net small business income from a partnership or trust, and have an aggregated turnover of less than $5 million.
The rate of the offset is 8% up to the end of the 2019-20 income year, but will increase to 13% for 2020-21 and again increase to 16% for 2021-22 and then remain at that level.
The ATO calculates the offset using information from the business’s tax return, with the offset amount shown on the notice of assessment.
The ATO’s Small business income tax offset calculator can work out the income amounts to be used to work out the tax offset, and will inform the taxpayer where to include this information in their tax return. It doesn’t work out the tax offset; this is done by the ATO when it processes the tax return. A taxpayer can also access the calculator from within myTax.
The net small business income is the sum of the assessable income from carrying on a business minus any deductions. If net small business income is a loss, it is treated as zero, and the taxpayer will not entitled to the offset.
A taxpayer should not include the following income amounts in working out net small business income:
- net capital gains made from carrying on a business
- personal services income (unless they were a personal services business)
- salary and wages
- allowances and director’s fees
- government allowances and pensions
- interest and dividends unless it’s related to a business activity
- interest earned on a farm management deposit.
They should also not include the following deductions in working out net small business income:
- tax-related expenses such as accounting fees
- gifts, donations or contributions
- personal superannuation contributions
- current year business losses, which are not deductible this year under the non-commercial loss rules
- tax losses from prior years (unless they are deferred non-commercial losses).
If the total net small business income is greater than, or equal to, taxable income, the offset will be 8% of the business’s basic income tax liability for the year.
On the road: ATO black economy crackdown starts
The ATO is expected to visit around 10,000 small businesses in the 2019-20 financial year in a wide-ranging crackdown on black economy activities.
Already ATO officers are on the road and over June-July headed to the Northern Territory as part of a nationwide crackdown on the black economy. Queensland and Victoria are also pencilled in to be visited by ATO officers. Assistant Commissioner Peter Holt said that the ATO is particularly concerned about businesses that are not registered for pay-as-you-go (PAYG) withholding or GST.
“Businesses who pay cash in hand, or fail to lodge income tax returns or business activity statements, get an unfair advantage and make it harder for other businesses who are doing the right thing,” Holt says. “By detecting and addressing this behaviour, we’re helping to ensure a level playing field for honest small businesses in the NT.”
In the Sunshine Coast region, the focus will be on particular industries. Around Maroochydore, for example, the focus is to be on:
- cafes, restaurants and takeaway food services
- building, pest control, agricultural and gardening services
- personal care services
- legal and accounting services
The ATO has previously visited businesses in Cairns, Broadbeach, Caloundra and Sunnybank and will expand the program in 2019-20 financial year.
In Victoria, the ATO is focused on:
- building, pest control and gardening services
- transport support services
- automotive repair and maintenance
- postal and courier pick-up and delivery services.
Industries in focus include:
- cafes, restaurants and takeaway food services
- computer system design and related services
- other personal services
- architectural, engineering and technical services.
As part of the visits, the ATO will also be visiting tax practitioners of small businesses in these areas as part of its early intervention strategy. It says these visits will help it better understand the drivers behind tax agent behaviour and provide education and support to encourage willing participation of their clients in the tax and super systems.
Prior to the visits, local businesses and tax professionals are invited to attend a one-hour information session that will explain the purpose of the visits, what to expect if visited, and how to avoid common mistakes.