PFJL. September Dear Client,

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1 PFJL September 2010 Dear Client, We are pleased to supply you with the September 2010 edition of Client Alert, which contains information on a number of important developments including: 1. ATO Keeps a Close Eye on the Cash Economy The ATO has reminded taxpayers that increased data-matching and benchmarking will be used to identify businesses participating in the cash economy. 2. Payment Summaries and Reporting of Incorrect Super Amounts The ATO says some employers have been incorrectly including compulsory super amounts as reportable employer super contributions on their employees payment summaries. 3. Are you insured? Like wills and succession plans, business owners often out off until it is too late the need for a review of different types of insurance. 4. Share Investor, ot a Share Trader The Administrative Appeals Tribunal has found a taxpayer was not carrying on a share trading business but rather it held he was a share investor. 5. ew SMSF Member Verification Process in the Pipeline The ATO has announced that it expects to implement, later this year, a new self-managed super fund member verification process. 6. Excess Super Contributions Assessments Upheld The Administrative Appeals Tribunal has found it did not have the jurisdiction to review a decision of the Commissioner who had refused to disregard (or reallocate) excess super contributions made by two taxpayers. 7. Hazard s of property ownership for SMSF s The ATO issues a warning to SMSF property owners. Our Special Report this edition is on the grey area of the legislation regarding the definition of a contractor. In recent cases, the ATO has been successful in its view that contractors were actually employees for the purposes of the Superannuation Guarantee legislation. Please contact us if you wish to discuss how the points raised in Client Alert specifically affect you Yours faithfully, PETER F J LEWIS Liability limited by a scheme approved under Professional Standards Legislation

2 the report tax news views clues 1. ATO Keeps a Close Eye on the Cash Economy As part of the ATO's approach to managing tax risks, this financial year they will send around 110,000 letters to taxpayers who may be participating in the cash economy. The majority of letters will be sent to businesses reporting outside the 'small business benchmarks' for their industry. Editor: The ATO claims that their small business benchmarks (which they have developed for over 100 industries) help them to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. The letters inform taxpayers that they have been identified as a result of one of the ATO's cash economy indicators, and will encourage them to review their records to ensure they have correctly reported all income, especially cash transactions. In addition, the ATO warns that businesses that fall within the benchmarks should not assume that they are safe from an ATO audit or review. The benchmarks complement the ATO s recently expanded data matching program, and they also use other sources of information to identify those not meeting their tax obligations, including information from other government agencies, trade suppliers, tax returns and activity statements and allegations of tax evasion sourced from the community. Editor: If you receive a letter from the ATO, contact us so that we can assist you to review your records, returns and income, and to advise the ATO if a mistake has been made. 2. Payment Summaries and Reporting of Incorrect Super Amounts The Tax Office says some employers have been incorrectly including compulsory superannuation amounts as reportable employer super contributions on their employees' payment summaries for the income year. Reportable employer super contributions should only include additional super contributions made by an employer, for example, super contributions made on behalf of an employee under a salary sacrifice arrangement. The payments being incorrectly included cover things such as super guarantee contributions and industrial agreement (award) super contributions. TIP: Employees should review their payment summaries and ask for amended payment summaries from their employers if they incorrectly contain compulsory super amounts as reportable employer super contributions. This is important because incorrect amounts included may Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

3 affect eligibility for certain tax concessions and Centrelink benefits, and may cause a liability for the Medicare levy surcharge. TIP: If employers have issued payment summaries to their employees that incorrectly include compulsory super amounts, they can notify affected employees and issue them with amended payment summaries. If employers have also already lodged their payment summary annual reports with the Tax Office, they will need to lodge an amended annual report. 3. Are you insured? One thing that many business operators do not consider or understand is the need for different types of insurance and risks that could cause great pain to your business. Have you considered what would happen if; You were injured and unable to work. What would happen to your business? A disgruntled client takes legal action against you for something that you may or may not have done. Are you covered for any of this? A door to your business slams in a client s face causing them physical harm - unintentionally of course. What can protect you? A fire rips through your workplace or office, destroying equipment and your financial records. Where do you get the money to replace it all? You have an employee who gets injured in a workplace accident? Do you have Workcover? There are various forms of insurance policies that you can utilise to ensure your business continuity if any of the above occurs. You should consider talking to a suitably qualified advisor to ensure that you have an appropriate level of cover. One of Barefoot Accountings first clients was Simon Zwart. Simon has been involved in the insurance game for many years through various roles and businesses. Simon has particular expertise in personal and business insurance in the areas of; Life insurance Income protection insurance Trauma insurance (for cancer, heart attacks and many other critical illnesses) He has a business background and will structure your insurance in the most tax effective way for you. Take the opportunity to give him a call on to discuss the right solution to your risk needs. We recommend his services. 4. Share Investor, ot a Share Trader In a recent case, the Administrative Appeals Tribunal found a taxpayer was not carrying on a share trading business but rather he was a share investor. During the 2007 and 2008 income years, the taxpayer was engaged in the buying and selling of shares. The taxpayer had lodged his tax returns on the basis that he was a share trader for the relevant income years. However, after examining the indicators for such a business, the Tribunal was satisfied that the taxpayer was not carrying on a share trading business. TIP: Shareholders should be aware that the Tax Office has its sights set on share disposals as part of its Compliance Program for It had also issued an alert mid last year warning taxpayers against claiming losses on revenue account when they had previously claimed gains on capital account (Taxpayer Alert TA 2009/12). Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

4 5. ew SMSF Member Verification Process in the Pipeline The Tax Office has announced that it expects to implement, later this year, a new self-managed super fund (SMSF) member verification process, which is designed to enable authorised APRAregulated super funds and other authorised entities to confirm whether or not the member requesting a rollover is actually a member of the SMSF. The new process adds another plank to efforts by the Tax Office to deter schemes which seek to obtain illegal early access to or release of superannuation. The first plank, which has been in operation since January this year, involved upgrading the SMSF registration process so that new SMSFs may not be displayed on the Super Fund Lookup (SFLU) Website for up to seven days while the Tax Office carries out a risk assessment of the SMSF. TIP: The new process is expected to make processing member rollovers from superannuation funds to SMSFs more efficient and secure. However, it would be important for the Tax Office to be notified quickly of any SMSF membership changes. For example, it would be prudent to ensure name changes are appropriately dealt with before a rollover is attempted by a member. 6. Excess Super Contributions Assessments Upheld The Administrative Appeals Tribunal has found it did not have the jurisdiction to review a decision of the Commissioner, who had refused to make a determination to disregard (or to reallocate) excess nonconcessional superannuation contributions made by two taxpayers. This was because the Tribunal was of the view that the making of the Commissioner's discretion is independent of the issuing of the assessments. TIP: Super investors can apply to the Commissioner to disregard or reallocate excess contributions for a financial year. However, the Commissioner's discretion is limited to special circumstances outside the control of the investor. 7. Hazard s of property ownership for SMSF s The ATO has warned that an SMSF holding property could be sued if someone is injured or dies because of faults in that property. The ATO provided a recent example of a property owner being held liable for the death of an electrician on their premises when replacing an old solar hot water system with a new one. Therefore, if trustees own property in their SMSF, they should make sure they are aware, to the best of their ability, of any hazards on their property and, if any hazards do exist, they should have them fixed. They should also consider having an insurance policy in the SMSF to cover the property and public liability. Where the property was acquired with a limited recourse borrowing under with new borrowing laws, the ATO recommends that the trustees speak with their advisors on requirements for holding any insurance. Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

5 special report tax news views clues ARE CO TRACTORS REALLY EMPLOYEES FOR SUPERA UATIO GUARA TEE (SGC) PURPOSES The Superannuation Guarantee Assessment (SGA) Act states that if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract. In a recent case in the Administrative Appeals Tribunal, the employer was liable for current and retrospective SGC. The problem is there is no conclusive definition of who or what an independent contractor is. The fact that an agreement might state that someone is a contractor is considered to be merely a label by the court, and is not in itself conclusive. Where the contractor primarily supplies their personal labour, the dividing line between an employee and a contractor is difficult to define. An independent contractor is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor: is paid for results achieved provides all or most of the necessary materials and equipment to complete the work is free to delegate work to other entities has freedom in the way the work is done provides services to the general public and other businesses is free to accept or refuse work, and is in a position to make a profit or loss. The AAT emphasised the following points in reaching its decision that the workers were employees rather than independent contractors: The substantial degree of control exercised by the company over how the work was to be completed; The lack of freedom of the workers to delegate or sub-contract the assignment; The fact that the workers were not employed to produce a result, but were instead paid for their time (this is called the results test, which is a key test in other areas of tax law to determine if someone is a contractor or employee) The use of an interposed company structure is often seen as a way of overcoming this problem on the basis that it is not possible for a company to be an employee. Please be aware that these determining factors will also apply to workers compensation insurance and payroll tax. Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval

6 The ATO has released a decisions tool that is designed to help payers determine whether an individual worker is engaged as an employee or independent contractor. It will give a decision based on answers to some simple questions. The ATO have provided the following information to assist you in deciding if you have SGC and other liabilities for contractors:- Is your worker an employee or a contractor? Factors to consider Control over work Independence Payment Commercial risks Ability to delegate Tools and equipment Employee The employer has an implied right within industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit. An employee performs work for the employer in accordance with an employment contract. Payment is often based on the period of time worked, but an employee can also work on piece rates or commission. An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee. An employee performs the work personally and generally cannot subcontract the work to someone else. The employer, except when specifically agreed otherwise, usually provides tools and equipment. Contractor A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their own discretion. A contractor performs services as specified in a contract with the payer and provides additional services only by agreement. Payment is dependent on the performance of the contract services. A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense. Unless otherwise specified in the contract, a contractor can subcontract or delegate the work. Generally, a contractor provides their own tools and equipment. We recommend that, if you employ contractors, you review the arrangements and consider whether you have any liability in relation to superannuation guarantee payments, payroll tax or workers compensation insurance. Please contact this office if you have any concerns or if you would like to discuss any of the above in more detail. Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval