November 2006 Newsletter

From everyone here at ARM we would like to thank you for your continued support over the past year and we wish you and your families a very Merry Christmas and a safe and prosperous New Year.

Welcome to the final edition of our 2006 Newsletters, we will resume distributing them from February 2007.

We hope you find the following information of benefit to you and your Organisation.

ACCOUNTING AND TAXATION MATTERS

FINANCIAL PLANNING

Investor Focus November Issue

FINANCE AND LENDING

ARM Finance News

HUMAN RESOURCES

Employee Entitlements

ARM TEAM AND OFFICE MATTERS

Practice Update November Issue

The Australian Taxation Office (ATO) has again signalled that work related expenses (WREs) are at the top of its audit list.

During the 2005/06 tax year they contacted more than 226,000 individuals that they considered at risk of not complying.

They have found a number of common mistakes as well as false claims or claims which cannot be substantiated.

WRE claims on 2006 returns

For 2006 tax returns, they will review a range of claims including expenses for:

motor vehicles;
self-education;
home-office; and
travel.

Specific occupations to be targeted

Each year a number of occupations are selected for specific focus because they have above average WRE claims, a high number of WRE claimants or because the ratio of WRE claims are high compared with the salary and wages received.

For the 2006 tax return their focus will be on:

employee business professionals;
hospitality industry service workers;
factory hands, store workers and process workers;
mechanical, automotive and electrical tradespersons;
information technology professionals; and
mining site employees.

A New South Wales Court has recently held that a director of a company was entitled to rely on an “honesty” defence in the Corporations Law, so he was not required to personally pay the company's unpaid taxes.

The ATO had issued the director with a 'director’s penalty notice', which made him liable for over $300,000 in taxes that were withheld from payments by the company (which ran a soccer club) but never paid to the ATO.

The court did not accept the director's argument that he should not be liable for the unpaid taxes because he was more involved with the operational side of the company (the soccer activities) than with the finances.

However, he was entitled to rely on the “honesty” defence in the Corporations Act 2001.

This allows a court to grant relief where a director is or may be liable in respect of 'negligence, default or breach' but that person has acted honestly.

The court thought relief was appropriate in this case and, therefore, the director was excused from default and relieved of liability to personally pay the taxes under the director’s penalty notice.

The ATO has confirmed that an individual taxpayer can claim a deduction for interest on a loan where:

the taxpayer carries on a business as a sole trader;
the business is the taxpayer’s only source of income; and
the taxpayer incurs interest on money borrowed to pay their income tax in respect of that business income.

This means that sole traders and companies are treated the same when they borrow to pay their tax.

Note: The Tax Office has not changed its view that where partners in a partnership borrow to pay their personal income tax, the interest remains non-deductible.

A super fund is no longer required to cash the benefits of a member (e.g., pay them out as a lump sum or pension) simply because the member has reached a certain age.

From 10 May 2006 to 30 June 2007, trustees of super funds no longer have to compulsorily cash a member’s benefits where:

the member is aged between 65 and 74 and does not meet the current 'work test'; or
the member is aged 75 or over.

This means that members in these circumstances (subject to the rules of the fund) can delay cashing their benefits until the government’s changes to the superannuation system are fully implemented.

Note: Funds are still required to cash a member’s benefits upon their death.

ASIC has urged Australians to check if they have any unclaimed money in forgotten bank accounts, as it now holds a record $204 million in money from almost 161,000 forgotten bank accounts.

Money may have been transferred from a bank, building society or credit union to the Commonwealth Government (i.e., ASIC and consolidated revenue) if the account:

had not been used for over 7 years; and
contained a balance of $500 or more.

Searching for unclaimed bank money is easy and free: simply perform an instant search for unclaimed money in the relevant name on ASIC’s consumer website FIDO at http://www.fido.asic.gov.au.

If a person finds an amount belonging to them, all they need to do is apply at the local branch of their bank for its release.

Most people think that they will never have to pay capital gains tax (CGT) when they sell their home.

However, the ATO has reminded taxpayers carrying on a home-based business that they may have to pay CGT when they sell their home, even if:

they do not claim deductions for occupancy or running expenses;
they have never claimed a deduction for any interest on money borrowed to buy their home;
they owned their home outright before they started using any part of it to produce income; or
they have started a business from home but have not yet made a profit.

How to work out how much of a capital gain is taxable

In most cases, the proportion of any capital gain which is liable to CGT would reflect:

the proportion of the floor area of the home which has been set aside for business; and
the period of time it has been used for this purpose.

However, the calculation of the capital gain may use a 'market value substitution rule' if the taxpayer started using their home for business purposes for the first time after 20 August 1996.

Editor: If you operate a home business and would like CGT advice regarding your home, please contact us.

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

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ATO Key Dates for December 2006, January 2007 and February 2007

01 Dec 06	Income tax	Income tax payment due date for companies and superannuation funds which were taxable large/medium business clients in the immediate prior year.
01 Dec 06	Income tax	Income tax payment due date for companies and superannuation funds which were required to lodge by 31 October 2006.
14 Dec 06	Reasonablebenefit limits	Reasonable benefit limits (RBL) reporting – all RBL reportable benefits paid in November 2006 must be reported to the Tax Office on or before this date.
21 Dec 06	Activity statements	November 2006 monthly activity statements: final date for lodgment and payment.

01 Jan 07*	Superannuation	Superannuation guarantee quarter 3 commences.
14 Jan 07*	Reasonablebenefit limits	Reasonable benefit limits (RBL) reporting – all RBL reportable benefits paid in December 2006 must be reported to the Tax Office on or before this date.
15 Jan 07	Income tax	Due date for lodgment of income tax returns for companies, superannuation funds and trusts which were taxable large/medium business clients in the prior year and are not required earlier.
21 Jan 07*	Activity statements	December 2006 monthly activity statements: final date for lodgment and payment.
21 Jan 07*	Activity statements	Quarter 2 (October–December 2006) consolidated instalment activity statements: final date for lodgment and payment by a head company of a consolidated group.
21 Jan 07*	Activity statements	Quarter 2 (October–December 2006) activity statements containing a monthly GST obligation: final date for lodgment and payment.
28 Jan 07*	Superannuation	Last day for superannuation guarantee contributions to be made to a superannuation provider for quarter 2 (1 October–31 December 2006). If an employer does not make the minimum superannuation guarantee contributions for quarter 2 by this date, they must pay the superannuation guarantee charge and lodge a Superannuation guarantee charge statement – quarterly (NAT 9599 ) with the Tax Office by 28 February 2007. The superannuation guarantee charge is not tax deductible.

14 Feb 07	Reasonablebenefit limits	Reasonable benefit limits (RBL) reporting – all RBL reportable benefits paid in January 2007 must be reported to the Tax Office on or before this date.
21 Feb 07	Activity statements	January 2007 monthly activity statements: final date for lodgment and payment.
28 Feb 07	Superannuation	Due date for lodgment of Superannuation guarantee charge statement – quarterly (NAT 9599) and payment of the superannuation guarantee charge for quarter 2 (1 October–31 December 2006) if the minimum superannuation guarantee contributions were not made on time. The superannuation guarantee charge is not tax deductible.
28 Feb 07	Activity statements	Quarter 2 (October–December 2006) activity statements: final date for lodgment and payment, including electronic lodgments.
28 Feb 07	GST instalments	Quarter 2 (October–December 2006) instalment notices – forms S & T. Final date for payment and, if varying instalment amount, lodgment.
28 Feb 07	Income tax	Income tax return lodgment and payment due date for companies and superannuation funds which were not due at an earlier date.
28 Feb 07	Income tax	Income tax return lodgment and payment due date for companies and superannuation funds which are new registrations.
28 Feb 07	Income tax	Income tax return lodgment due date for large/medium business trust clients that were non taxable in the prior year (includes new registrants).

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Investor Focus November Newsletter

Funding a Grandchild’s Education

As Australia’s education system becomes more “user-pays,” grandparents are increasingly bearing the financial burden for their grandchildren’s education.

The potential expense can be enormous and can go into the hundred’s of thousands of dollars for a full private school and university education. At a lesser level, it is common for grandparents to set aside say, $10,000 or $20,000 as part of estate planning to pay the grandchildren’s HEC’s debts, meet university fees (upfront payments get a discount), or to finance career training courses.

Why consider an imputation bond for education funding?

they are designed to accumulate “tax-paid” lump sums for specific life-event and estate planning objectives, such as a dedicated investment for education financing;
they are “set-and-forget” because for the Bond’s pre-10 year investment accumulation phase, and over its post-10 year period - there is no personal taxation or capital gains tax (“CGT”) implications, nor any tax reporting obligations, and
grandparents have many product structuring options. Importantly, a Bond can be set up to vest after a grandparent’s death, whilst during life the grandparent controls the investment just in case there is a change of mind about a grandchild.

Blending the old with the new

Imputation Bonds innovatively combine the long-established taxation benefits of an insurance bond with a modern investment platform offering 19 fund choices. Its unique investment structure enables diversification across a wide range of top performing Managed Funds. In addition, investors can switch between its 19 Investment Portfolios without personal tax or Capital Gains Tax (CGT) consequences because this is done under an insurance bond umbrella. This is a major advantage over competing Master Fund structures.

Education funding strategies for grandchildren

Strategy 1 – Grandparent Transfers the Bond to a Grandchild for Education Funding

Under this strategy, the grandparent sets up and controls the Bond during its accumulation phase until it reaches a particular level or certain date (e.g. child’s age), and then transfers the Bond to the intended grandchild who can draw against it to meet education expenses.

Imputation Bonds can be transferred to grandchildren without personal taxation or CGT liabilities whatsoever for either party. The grandchild transferee simply steps into the shoes of the former grandparent Bond Owner with full preservation of the Bond’s tax advantaged status.

Strategy 2 - Estate Planning for Grandchildren

By using the Bond’s nomination feature, grandparents can appoint one or more grandchildren as its beneficiaries to receive a set proportion upon the grandparents’ death. (e.g. 25% each). Investment benefits can then pass for education funding outside of Will and without going through the normal probate and estate procedures. (Bond Nominees can be changed at any time.)

Strategy 3 - Children’s Advancement Bond Feature

A Bond structured in this fashion for education funding will automatically vest in a nominated grandchild (without personal taxation or CGT consequences) when he or she reaches a vesting age set by the grandparent. (The grandchild’s vesting age must be at least 10 years or more and no greater than age 25 years.)

This vesting age might occur after the grandparent’s death, and until that time the grandparent retains full ownership and control of the Bond, including being able to make withdrawals (e.g. perhaps to pay education costs), to switch investments, or even change the grandchild’s vesting age.

Strategy 4 – Structuring a Bond to Continue after a Grandparent’s Death

By establishing a Bond with multiple Lives Insured’s it can be structured to survive the grandparent’s death. Its ownership can continue in the hands of the trustee, executor, or estate administrator and its investment maturity can thereby be set to extend for its full intended Investment Term to coincide with the education and/or career training phase.

Strategy 5 – Grandparent’s “Trustee” Ownership for Education Purposes

Bonds can be held by grandparents as a “trustee”. Here the Bond becomes a trust investment asset, with the trust terms specifying the beneficiaries and “education” purposes being private trust matters for the grandparent. At the time of the required funding, the “trustee” grandparent can simply control draw-downs to meet the education expenses or it is otherwise accessed according to the trust’s terms.

Importantly, because a Bond does not produce distributable or assessable income from year to year, there is no income tax or CGT implications for the grandparent holding a Bond as trustee during its accumulation or post-10 year phase.

Strategy 6 - Children Owning Imputation Bonds

By setting up an Imputation Bond in the name of a child, a grandparent can at the investment’s outset vest its ownership, (and eventually its full control) in that grandchild. Once the child reaches 16 he or she is then free to apply the Bond’s proceeds for education or career training purposes.

From a tax planning perspective, ownership of an Imputation Bond by a child can overcome punitive taxation treatment for children owning investments where part of a child’s income might otherwise be taxed as high as 66% on a Marginal Tax Rate.

Children with Disabilities and Maintenance in Divorce Settlements

Bonds are also ideal for financial provisioning for a child or a loved one with a physical or intellectual disability. They might also be used as dedicated funds to meet costs of financially maintaining children, such as in circumstances of a divorce.

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

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Over the last month ARM Finance Pty Ltd has continued to increase the number of lenders that we can deal with. As a result of this we now have access to a lender that will provide finance to 106%. This allows the client to purchase their own owner occupier property onr investmen property with minimal outlay of funds.

Now we can provide a larger range of personal lending products. These products include consumer finance & car loans, which can be useful in providing to your own clients to provide funding for purchases.

Also available is insurance premium funding helping your business to free up some needed cash flow and allow for a better tax benefit. This is available over a period of 12 months.

If you would like to discuss these new options please contact our office on:

Phone (03) 9370 9811, Fax (03) 9370 9803 or Email 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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EMPLOYEE ENTITLEMENTS - Business Values Newsletter November/December 2006 Issue No. 96

Many purchasers, vendors, business brokers and accountants overlook the issue of employee entitlements when a business is being sold. When a business has employees, the outstanding liabilities relating to the staff have to be paid by someone.

Generally the accepted practice is for the vendor to pay for all of the staff liabilities up to the date of settlement. However, unless this is included in the purchase agreement, under existing laws, the purchaser will have to pay. Whilst this sounds an easy process, a number of major difficulties do exist that should be resolved before the offer and acceptance is completed. If it is left until after the offer and acceptance is signed all sorts of disputes can occur.

OPTIONS
Two options exist for the payment of the employee entitlements.
(1) Pay out staff — Under this scenario, the vendor pays to the staff all their entitlements up to settlement. Thus when the purchaser takes over, the staff have no outstanding leave.

(2) Pay Money to Purchaser — Instead of paying out the staff, the vendor pays the purchaser sufficient money to cover all the outstanding leave entitlements.

Either of these options can be used with the second generally being used. Most staff prefer to retain their outstanding leave so they can use it to go on holiday at a time to suit them. If they are paid out, they may have to wait another year before going on holiday.

EMPLOYEE ENTITLEMENTS
Employees accrue the following entitlements that the vendor and purchaser have to consider:
(I) Annual Leave — This is the most obvious liability and the easiest to calculate. The purchaser should during the due diligence process ensure that current staff records have been maintained. Any disputes between the staff and the vendor in regard to how much leave is owing should be sorted out prior to settlement.

A staff member will become very unhappy if they feel they have been short-changed in their annual leave. If this occurs, the purchaser could easily lose one of their key staff members after taking over the business or be forced into paying out extra money to keep the employee happy.

(2) Sick Leave — This is a difficult issue. For some employees the Award states that they are entitled to be paid’ their sick leave when they leave, even if they have not used it. In these cases the vendor has to pay the outstanding balance of settlement.

For the vast majority of employees, if they resign they are not entitled to be paid their sick leave. Thus a difficult legal situation exists at settlement. The employee has no legal right to seek payment for such leave and, thus the vendor has no legal responsibility at the time. However, the purchaser takes over the legal responsibility for this accrued sick leave in the future if the employee becomes sick.

What should the vendor and purchaser do in this situation? Obviously the vendor wants to pay nothing and the purchaser wants to protect himself. Unfortunately no hard and fast rules exist to cover this situation.

It is fair that the vendor pay something towards the sick leave liability. How much depends upon a lot of factors. For example if the sick leave entitlement is only a $1000 or so, probably the purchaser won’t worry about it. However, what if the contingent liability is much more.

In our experience in these situations the vendor pays between 20 and 50% of the contingent sick leave. This allows for staff who resign and do not incur any such leave costs. The percentage is dependent upon negotiations between the parties and the sick leave history of the staff.

(3) Long Service Leave — Generally staff are entitled to be paid for long service leave once they have worked for ten years. They may not be entitled to this leave until after 15 years, but after 10 years if they resign, they have to be paid on a prorata basis. Thus for staff who have been employed for 10 years or more, the long service leave entitlement can be easily calculated.

The problem occurs for staff who have not reached 10 years service. These staff have no legal right to be paid. However, for a purchaser, if some staff have been employed for 8 or 9 years, this is an important cost that they will need to meet in the future. Terminating such staff to save on Long Service Leave will find the purchaser in court and still paying the Long Service Leave.

For those staff who have less than 10 years service, what is paid for Long Service Leave is a matter of negotiations between the purchaser and vendor. In our experience the following has been used but other arrangements can be negotiated.

0-6 years — no payment
6-8 years — 40 to 50% of entitlement
8-10 years — 80 to 100% of entitlement

(4) Parental Leave — Generally no payment is made by the vendor for parental leave. However, the vendor should advise the purchaser of any staff who are on unpaid parental leave as this person will need to be re-employed when their leave is finished.

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Office Closure

Please note our Office will be closed from midday on 22/12/2006 and will re-open on 8/1/2007

Account Payments

In addition to the regular methods of account payment we offer our clients, we also have an account payment system set up on our web site at www.astonryan.com.au/AccountPayments

This area allows you to pay your account/s with ARM Financial Architects using our secure on-line payment system.

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