Aston Ryan Malcolm Accountants Auditors and Financial Advisors

Unfortunately, the problem it highlights is that, sometimes, deposits that are too high are not 'deposits' for GST purposes. If it's not a deposit, the business may have to pay GST to the Tax Office on the full purchase price of the goods sold in their next BAS. That can create real problems.

Deposits and the GST Act

If a business receives a deposit, as such, there is normally no GST payable until the sale goes through or the deposit is forfeited.

However, if the amount paid is not a 'deposit':

for suppliers that account on a non-cash basis, the whole of the GST is attributable to the tax period in which the 'deposit' is received; and
for suppliers that account on a cash basis, GST is attributable on the amount of the 'deposit' received in the tax period.

A deposit must be reasonable

For a deposit to be what is called a "security deposit" for the purposes of the GST Act, the amount of the deposit must be reasonable.

It is the Commissioner’s view that for a deposit that exceeds 10% in a purchase contract to be accepted as a security deposit, suppliers must be able to show that they are at a higher risk of significant losses in the event of default.

Example: Payment not a deposit as the amount is unreasonable

Mary wants to purchase a new mattress from Furniture Pty Ltd and chooses one that is priced at $660.

The salesperson advises her that she must provide a deposit of $220 before her order will be taken. It is made clear that if she cancels the order prior to delivery, she will forfeit the entire $220.

The payment is one third of the purchase price, which is considered unreasonably high in the circumstances given that it is a standard stock item. The ATO does not consider it to be a deposit.

If the supplier accounts on a non-cash basis, the GST payable of $60 is attributable to the tax period in which the amount is received. If the supplier accounts on a cash basis, the GST payable of $20 is attributable to the tax period in which the amount is received.

Management fees to service entity deductible

In a recent case, the Administrative Appeals Tribunal held that a taxpayer could claim a deduction for the payment of management fees of $1.165 million to a related company, even though:

the payment reduced the taxpayer's taxable income in that year to nil;
a written agreement about the arrangement was not executed until the following income year; and
the majority of the fees were also paid in the following income year.

The directors of the taxpayer company were concerned about protecting the company’s assets, as well as legitimately limiting tax.

As a result, they decided to establish another company that would provide management services to the taxpayer for a sizeable fee.

The taxpayer claimed a deduction in the 1996 income year for a fee of $1.165 million due to the service company, even though it only paid approximately $50,000 of that in that income year, and a written service agreement was not executed until November 1996.

Nonetheless, the Tribunal was satisfied that:

the taxpayer entered into an oral agreement prior to the end of June 1996 committing it to pay the fee to the related entity;
the fee payable was calculated at the end of June 1996, and that the taxpayer became obliged in June 1996 to pay the full amount, even though the whole amount was not paid over immediately; and
a desire to protect assets was the taxpayer’s principal motivation in agreeing to the establishment of the service company arrangement. Therefore, the management fees of $1.165 million were deductible in the 1996 income year.

Fuel Tax Reform introduced

The Government will be implementing and phasing in a new fuel tax credit system from 1 July 2006.

Under the reforms, the existing multi-layered system of fuel tax concessions will be replaced by a single system, providing fuel tax credits claimable via the business activity statement (BAS) in a similar way that input tax credits are claimed.

How will the new fuel tax system work?

From 1 July 2006,

all fuels used in commercial and household electricity generation and fuels used for heating will be effectively free of fuel tax; and
all fuels, including petrol, used on-road in vehicles with a gross vehicle mass of over 4.5 tonnes will be eligible for fuel tax credit equal to the difference between the fuel tax rate and the road user charge.

All fuels used off-road for all business purposes will become free of fuel tax over time.

FBT: Per km rates for vehicles other than cars

The following are the rates to be applied where the cents per kilometre basis is used to calculate the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car for the FBT year commencing 1 April 2006:

Engine Ratecapacity per km

0 – 2500cc 40 cents

Over 2500cc 48 cents

Motor cycles 12 cents

This method can only be used where there is extensive business use of the vehicle.

FBT: Benchmark interest rate

The benchmark interest rate for the FBT year commencing 1 April 2006 is 7.30% p.a – replacing the rate of 7.05% that applied in 2005/06.

FBT: Record keeping exemption

The small business record keeping exemption threshold for the FBT year commencing 1 April 2006 is $6,391, replacing the amount of $6,223 that applied in the previous FBT year.

Reducing Government Red-tape

The Government has announced a number of actions to reduce the regulatory burdens on business (in response to recommendations regarding these burdens), which include:

an increase in the minor fringe benefits exemption threshold from $100 to $300, effective from 1 April 2007; and
an increase in the fringe benefits reporting exclusion threshold from $1,000 to $2,000, effective from 1 April 2007.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances.

If you require further information regarding the above please contact Dennis Malcolm, Michael Ryan, Greg Cusack or Marita James on (03) 9551 2822 for their expert advise.

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Investor Focus Newsletter

Granny Flats & Centrelink

Are you or your parents thinking of selling the family home and changing your living arrangements to live with a relative?

Consider the ‘granny flat interest or right’ and how it may affect homeowner status and level of age pension.

What is a granny flat interest and how is it established?

If you live in accommodation without being the legal owner, but have the right to the accommodation for life or have a life interest in another person’s private home, the ‘granny flat’ rules may apply. Some examples of granny flat accommodation are where:

The title of your principal residence has been transferred to a relative but you retain the right to live there for the rest of your life.

You have provided funds to build a granny flat on a relative’s property and have the right to live there for the rest of your life.

You provide some or all of the funds used to purchase a property registered in a relative’s name and you have the right to live there for the rest of your life.

Generally this type of accommodation is arranged with a relative but could also be with a friend. Centrelink recommends that a legal document be drawn up by a solicitor to give evidence of the life interest, although there is no requirement in the legislation to do so.

Deprivation and the test of reasonableness

The value of a granny flat interest is generally the same as the amount paid for it. Centrelink looks at whether the amounts of money or assets transferred for the granny flat interest are reasonable or if you have paid too much. Centrelink will apply a special test (quasi actuarial valuation) comparing the value of the property or money exchanged with a ‘reasonable value’. The reasonable value is determined by multiplying the combined married pension rate (regardless of marital status) by a conversion factor based on age at next birthday*. For married couples the age of the younger partner is used to determine the conversion factor. Any amount paid in excess of the reasonable value is considered to be a deprived asset and deemed for five years.

A copy of the conversion factor tables can be obtained by visiting www.facs.gov.au/guide/ssguide/4646o.htm

Home ownership

The value of the granny flat interest is called the Entry Contribution (EC). The amount of the EC determines whether the client is a homeowner or non-homeowner, as follows:

If the EC is more than the ‘extra allowable amount’ (EAA), then the granny flat resident is a homeowner.

If the EC is less than the EAA, then the granny flat resident is a non-homeowner.The receiving spouse has never been gainfully employed (the condition of release cannot be met if an arrangement under which gainful employment cannot come to an end).

The EAA is the difference between the homeowner and non-homeowner assets test thresholds, and as at 1 April 2006 is $113,500. The EC is counted as an asset for a non-homeowner, but is asset-test exempt for a homeowner.

Example

Joan is a widow aged 70, a homeowner, and is currently receiving a part age pension. Sue, her daughter, is divorced with two children and struggles financially. She is concerned about her mother living alone and would be pleased to have her mother move in with her. Joan decides to sell her home and purchase an apartment. After settling in to her new apartment, she gifts $300,000 to Sue.

Joan informs Centrelink of the changes and is dismayed to learn that she has lost her part pension. Unfortunately, Joan was unaware of Centrelink’s deprivation (gifting) rules which apply to her $300,000 gift to Sue.

Now let’s look at what Joan could have done and maintained her part age pension:

Joan agrees to live with Sue, sells her existing home and pays Sue $300,000 for the right to accommodation for life in Sue’s home (no construction is needed).

Centrelink will apply the test of reasonableness to determine whether the amount Joan paid Sue is reasonable. The reasonable amount threshold for Joan is $270,524 ($21,694 x 12.47).

As Joan has paid Sue $300,000, $29,476 (calculated as $300,000 — $270,524) has exceeded the threshold and will be treated as gift by Centrelink. Joan has not made any previous gifts and is entitled to gift $10,000 in the current financial year. Centrelink will add $19,476 to Joan’s financial investments and this amount will be asset tested for five years from the date of gift and subject to deeming. As the amount Joan paid for her granny flat interest is more than the EAA of $113,500, she will be considered a homeowner and the amount of her entry contribution is not counted as an asset.

*$21,694 is the combined married pension rate and 12.47 is the conversion factor for a person whose age at next birthday is 71.

For more information please contact Michael Ryan and the team at Focus Financial Planning.

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ARM Finance News

With the government recently increasing interest rates by 0.25%, and the likelihood of further rate rises consideration should be taken in locking in or fixing interest rate of your loan. The new standard variable interest rate is at now 7.57% which has risen from 7.32%. The fixed interest rates you should take into consideration should be 1 – 5yr fixed rate. These rates are still well below the standard variable rate for example the 1 year fixed rate is currently 6.99% or the 5 year fixed at 7.19%. For comparison lets take for example over the life of a loan (30 Years) based on $200,000, if you had the standard variable rate the repayment would be per month $1408.00 and the total payments for the life of the loan would be $506,880.00 compared to locking in the one year rate at 6.99% your monthly repayments would be $1329.00 per month and for the life of the loan $478,440.00 that would mean you would save $28,440. If you would like some information on what best option suits you please contact our office for a free consultation.

Contact our office today on:

Phone (03) 9370 9811Fax (03) 9370 9803Email info@armfinance.com.au

or alternatively you can contact one our consultants on:

Graham Lee 0417 115 611 (Commercial, Leasing, Residential)Jeff Messer 0409 217 002 (Commercial, Leasing, Residential)Shane McFarlane 0411 754 091 (Residential, Leasing)

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CCII: Wednesday. 22 February, 2006

Lucy Rowlands, organisational absence psychologist, writes about the scale of absenteeism, and evaluates an innovative approach that is reducing absence by up to 30%.

Scale of absenteeism
Absenteeism is costing Australian business in excess of $7 billion per annum, or around 2% of GDP — that is. around half of Australia’s annual economic growth. Absence levels and costs are rising, not falling. Traditional approaches are failing to address the core reasons of absenteeism, and organisations are looking for new ways to turn strategy into measurable results. Research indicates the average employee takes around nine days sickness absence at a cost of over $5,000 per employee per annum: that is a staggering $5 million for every 1,000 employees. Some industry sectors, such as government, logistics, call centres and manufacturing experience absence rates of around 15 days per annum, at a cost of nearly 23% of payroll.

Management approach
The traditional approach to absence management relies on managers to take responsibility for employee absence. In theory, this makes sense: an employee’s relationship with his/her manager is a lead predictor of absenteeism. However, it does not address the primary reason for absence: ill health.

According to Paul Dundon, managing director of Direct Health Solutions, managers can have the greatest positive impact on attendance if the organisation has the right support systems in place. “Manager-led absence management is good in principle; however, managers are not being set up to succeed”, he says. “Managers are not trained to advise employees on what to do it they are feeling unwell. Independent expert support is required.”

Managers require a unique set of toots, resources and skills to effectively manage and lead attendance. Managers face a vast range of absence scenarios. They therefore require an understanding of better practice principles and behavioural training on how to deal with these issues confidently.

Outsourcing Absence Management
The emerging global and local trend is to outsource absence management from day one. The approach seeks to enhance employee health management, improve compliance, management reporting and management ability to intervene and support employees. Direct Health Solutions has introduced a system to reduce absenteeism by 20% to 40%.

When employees are calling in sick, instead of calling their manager, they call Direct Health Solutions to report their absence. If the absence is due to ill health, they can speak to a qualified medical professional who offers practical medical advice. The company immediately notifies management of the absence via email and SMS, and schedules follow up calls with the employee to offer further medical advice. helping to speed up recovery and return to work.

The company’s HealthAssist service provides employees with access to speak to medical professionals and receive health information for a vast range of health topics.

“By managing absence from day one, we can manage the health and administrative aspects of absence so that line managers are freed up to focus on the behavioural aspects of managing absence”, says Mr Dundon.

Leading organisations in finance, logistics, telecommunications and call centres, have successfully adopted the ‘Day 1’ approach. They have achieved absence reductions of 25%. to 35% over a 12-month period. In financial terms, this equates to a net saving of around $1.5 million per 1,000 employees.

Key to the success of the service is the intelligent data reporting systems developed specifically for absence management. “You can’t manage absence without some idea of what’s causing it”, says Mr Dundon. “Part of the reason absenteeism is rising, not fatLing, is because of a lack of useful management data, inconsistent processes and poor health support to employees.

“Few organisations have put serious thought into turning an absence strategy into results that have an immediate and lasting impact. It is important that employees receive timely health advice for common health issues, and that managers have the tools and information to understand what is causing absence and how to achieve results.”

Conclusion
An absence management strategy is not just about focusing on employee behaviour. It requires an assessment of the factors impacting the workforce ability and motivation to attend work, and the development of targeted tactics and strategies. A comprehensive Absence Management strategy is one that requires a clear organisational policy, with effective support and input from FIR, L&D, Occupational Health, Executive Management and IT.

A good absence management system;

• has a clear absence policy
• captures the causes and patterns of absence, not just the severity rate
• has trained managers in absence management principles
• involves HR and OHS to intervene and support employees when they are unwell
• uses the benefits of new technology and reporting systems
• ensures absence management is promoted by senior management.

To calculate the cost of absence to your business, go to
www.dhs.net.au/absence_cost_calculator.asp.

Direct Health Solutions Media
Email: info@dhs.net.au
Tel: 02 9569 7693

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Changes within Team Member Roles

Unfortunately we farewelled two of our Team Members last month, Michael Forer from Financial Planning and Lilian Tan from our Business Services Team. We wish them both well for their respective futures, Michael is going to be continuing his work in Financial Planning whilst Lilian is looking to head into a new career in Commerce.

Lighter Moments

Highway patrol officer pulls over a Workcover Inspector for doing 68 in a 60 zone.

Workcover Inspector says nothing and cops it sweet.

Policeman finishes writing ticket and proceeds back to his car.

Workcover Inspector in the mean time, gets his digital camera out of bag, photographs the member and proceeds to the police car where he issues the Officer with an $800.00 fine for not wearing his hi-visibility vest when leaving his vehicle in a high traffic area.

Aston Ryan Malcolm, Accountants, Auditors, Financial Advisors, Victoria