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How transfer pricing actually works – and why it’s abused

Multinational tax avoidance is proving to be a sore point for Australians. You’ve heard about the big players – Facebook, Google, Apple – and there is speculation they might be engaging in dodgy transfer pricing practices.

What is transfer pricing?
When two companies that are part of the same group trade with each other, they need to establish a price for that transaction. That amount is the transfer price.

Say an Australian-based subsidiary of Facebook buys something from a France-based subsidiary of Facebook. The price Australia pays for its purchase is the transfer price.

Transfer pricing is necessary. The two parties being separate legal entities have to establish a commercial contract. It is not illegal, and does no harm by itself. Transfer MISpricing, however, may do harm for government revenues. […]

Regulator Roundup – September 2019

ATO takes aim at ‘you-scratch-my-back’ auditing arrangements
It has long been an accepted standard that the auditor of an SMSF needs to be independent of that fund, and be a third party entity to the SMSF. This requirement is written into the legislation.

There have of course been breaches of this requirement, and instances where auditors and/or fund trustees have suffered administrative penalties or even disqualification for non-compliance in this area.

The more blatant breaches of the requirement to use a third party auditor involve someone auditing their own SMSF, or the fund of close family members. But another concern for the ATO relates to auditors who enter into arrangements that reflect that old idiom “you scratch my back, I’ll scratch yours”. The ATO has labelled these as reciprocal auditing arrangements.

It says that such arrangements arise where two or more auditors, each with their own SMSF, agree to audit the other’s fund. The ATO likens the situation to the scenario of a two-partner practice where one partner takes on the work of auditing an SMSF of which the other partner is trustee. […]

New labels in the 2019 SMSF annual return signals ATO’s risk profiling of trustees

The SMSF annual return for 2019 has a number of new questions and labels that SMSF 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. […]

Regulator Roundup – August

GST obligations to be included under the director penalty regime
The strengthening of the director penalty regime has seen director penalty notices (DPNs) extended to superannuation guarantee obligations from 1 March 2019.

Now it looks like DPNs for GST are set to take affect from 1 October 2019 on the back of recent legislation, Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, which lapsed at the dissolution of Parliament in the lead up to the last federal election, but has just been revived.

Schedule 3 to the bill allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances. This also applies to LCT and WET as these taxes are jointly administered with the GST.

The estimates regime (Division 268 in Schedule 1 to the TAA 1953) enables the Commissioner to estimate unpaid amounts and to recover the amount of those estimates from taxpayers. The new legislation extends this regime to include GST. […]

If you think the ATO got it wrong, here’s what you can do

You are allowed to take issue with the ATO if it disagrees with your self-assessment of your tax position.

If you believe the ATO’s assessment is incorrect, the first step is straight forward and fairly informal. You contact us and we start making inquiries. If it still seems the assessment is wrong, or if you can provide us with extra information that may change it, we can lodge an amendment with the ATO.

But if the ATO disagrees, we can lodge an objection on your behalf (in other words, we can disagree with the disagreement). We can also object if the ATO amends an assessment and has taken a different stance to us on particular things (for example, we thought you were eligible to claim a deduction but were allowed only part of it). […]

ATO expects many laundry claims will be hung out to dry

This tax time, the ATO, as usual, has nominated some tax claim hot spots that it will be paying attention to — and which you should approach with caution when claiming these deductions.

For example, the ATO has already flagged that it will be checking returns for taxpayers who take advantage of the exemption from keeping receipts when spending less than $150 on laundry expenses. The ATO believes that too many people are claiming this without actually incurring the expense.

In an announcement issued 4 June, the ATO said that for last financial year around six million taxpayers claimed work-related clothing and laundry expenses that totalled about $1.5 billion. It said that 25% of all laundry and clothing claims were exactly at the record-keeping limit. […]

Regulator Roundup – July

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. […]

Main residence CGT exemption when there is no “residence”

Main residence CGT exemption when there is no “residence”

There is a concession in the CGT rules that can allow a taxpayer to treat a property as their “main residence” even though it does not yet have a habitable dwelling.

It is a widely recognised fact that an exemption to capital gains tax (CGT) applies to a taxpayer’s principal or main residential property. What is less well known is that the period when this main residence CGT exemption applies can be extended to cover the time it takes to finish construction (or complete repairs to) of the physical residence on the property.

So even if there is no actual dwelling on a block, the vacant land can start to be treated as a taxpayer’s “main residence”. This is commonly referred to as the “building concession” or sometimes the “four year rule” for reasons that are outlined below. […]

Regulator-roundup – June 2019

EOFY last-minute tax planning tactics for individuals
This financial year is almost over, but there are still tactics you may be able to employ to make sure you pay the right amount of tax for the 2018-19 year. While the best strategies are adopted in July (that is, as early as possible in a financial year and not at the end), it’s worth remembering proper tax planning is more than just sourcing bigger and better deductions. The best tips involve assessing your current circumstances and planning your associated income and deductions.

Not all of the following tips will suit your specific situation, but should provide a list of possibilities that may get you thinking along the right track. […]

Regulatory Roundup – May 2019

When are digital products ‘connected with Australia’ for GST purposes?
With the purchase of digital products such as the streaming or downloading of movies, apps, and e-books and so on becoming exponentially more popular, it is timely to examine the recently-introduced law that applies GST to digital products and services imported by Australian consumers.

Effective 1 July 2017, GST now applies to digital products and other services imported by Australian consumers. Affected supplies that are caught by the new law include not only the streaming or downloading of movies, music, apps, games, e-books, online supplies of software, digital trade journal/magazine subscriptions and other digital products, but also offshore services such as website design, publishing services, consultancy and professional services (such as legal advice, architectural services and so on). […]