Rule-Making Processes of the ATO - Essay Example

THE REVIEW PROCESSED AND RULE MAKING PROCESSES OF THE ATO by Student’s Name Code + Name of Course Institution City/State Professor Date The Review Processed and Rule Making Processes of the ATO In Australia, a small business refers to a business that employs less than two individuals. Small business groups include micro business, non-employing business, and other small businesses (Australian Bureau of Statistics 2009). Micro businesses employ less than five individuals, including non employing businesses. Non-employing business are partnerships or sole proprietorships without employees. Other small businesses include those than employ five or more individuals, however not more than twenty. Small businesses usually have various distinctive organizational or management characteristics such as principal decision making by the managers or owners; independent operations and ownership; close control by managers/owners who are the main contributors of business capital. Barkoczy (2012) defined a small business as an individual’s, partnership, trust, or company that undertakes business activities. The Australian Taxation Office (2009) dictates that to qualify as a small business entity “the employees of the business must be less than 20 people, the aggregated turnover must be least than $2 million, and the maximum net asset value must be least than $6 million” (par. 1). In this case, Buzz and his brother Fuzz run the small business in consideration. The business is a courier service whereby the brothers deliver or pick up goods for their clients. The brothers have one particular client who has a large distribution business, though this distributor does use other couriers, as there is too much work for Buzz and Fuzz. The two brothers work from Fuzz’s garage, which has been converted into an office. The brothers own three vehicles, which they use for the business. The office equipment, the vehicles, and other utilities used in the business are worth about $800,000. The brothers reckon they had a turnover of about $1m last year, though their expenses were considerable, particularly petrol and vehicle maintenance costs. Broadly, this is a small business as it has a cumulative return of less than $ 2million for the previous income year. Buzz and Fuzz small business is thus required to be compliant with the Australian Tax Office (ATO). The Australian Taxation Office is in charge of managing the Australia’s taxation system, superannuation and excise, Goods and Services Tax (GST), superannuation and excise. Being a small business, the two businesspersons stand to gain from possible tax deductions. As a small business entity, Buzz and Fuzz can claim a depreciation deduction in case they hold depreciating assets that have a relevant connection with running the business that is used to derive assessable income. When running a small business, the simpler depreciation rule applies. The small business has various depreciating assets such as motor vehicles. The small business premise-Fuzz garage-may qualify for a tax deduction under the capital works provisions. Business tax break is calculated using a 50% rate. Provided the business satisfied the income year eligibility criteria, the two owners can claim as tax break as a tax reduction for the income year. To qualify for a 50% deduction, a business must be “ a small business entity for the income year in which it commits to the investment, put the asset to use or claim the tax break; commit to investing in the asset between 13 December 2008 and 31 December 2009”. Also it has to “meet its 'new investment threshold', and; first use the asset or have it installed ready for use, or bring the asset to its modified or improved state, on or before 30 June 2010” (Australian Taxation Office, 2009, par. 18). The business can also get tax deductions from the running costs of the motor vehicles. According to the Australian Taxation Office (2011), sole-proprietorship and partnerships can get a tax deduction for the running costs of business purposes vehicles (large vans or trucks, smaller vehicles such as panel vans, wagons or utes which have been modified for business purposes or in situations where private use is only for home to work travel and other minor uses). The two businessmen can claim a depreciation tax deduction in case they hold depreciating assets that have an important association with running the business that is used to derive assessable income. Depreciation assets (such as motor vehicle, plant and equipment, electrical tools, and furnishing) are assets that have narrow efficient life and can practically be projected to decline in worth (because of their constant use) over the duration that it will be used to derive the assessable income. The depreciating asset cost can include the buying price and transport costs to take the depreciating asset to the business premises and the installation costs. Under the general deductions, the two businessmen can also deduct from their assessable income any outgoing or loss that is essentially gained in undertaking a business with the aim of generating or gaining calculable income. Nonetheless, a direct correlation has to exist between the expenditure and the business assessable income, and the business has to have incurred expenditure in the course of generation (Australian Taxation Office 2011). The type of business expenses or type of loss and outgoing that qualify for a tax deduction are car expenses and telephone calls, advertising expenses and costs from recruiting employees, depreciation and trading stocks, land taxes and insurance premium rates, cost of providing fringe benefits to employees, borrowing expenses, interest on borrowings and bad debts (Australian Taxation Office (2011). Tax related expenses, and legal expenses, lease or rent of the business premises, operating a commercial website; maintenance and repair to the business premises and wages or salary and super contributions qualify for a tax deduction. Buzz and Fuzz can claim tax reduction because they had considerable expenses, particularly petrol and vehicle maintenance costs. The small business can also benefit from tax deduction on borrowing expenses. Borrowing expenses or costs such as loan establishment charges, legal charges, and mortgage insurance are tax deductible if the purpose of the loan is to earn assessable income. Money lost by theft can enable the business to qualify tax relief to help offset the loss under the Tax Act. To qualify for a tax deduction under this Act, a loss caused by misappropriation by employee, stealing, theft, larceny, embezzlement, and defalcation (misappropriation by a trustee). Such money is tax deductible only if the money was previously part of the assessable income for an income year of for a previous income year. For instance, if the auditor discovers that one of the brothers stole business takings that had been included as part of the quantifiable returns in the previous financial year, the loss is a tax-deductible expense. Legal costs are also tax deductible. Legal expenses accrued when the brothers consult a lawyer on various legal matters associated with running their business. The need for referral usually arise when dealing with complicated tax law matters and having to comply with all the red tape that is associated with running a business. Provided such legal expenses are not private, capital, and domestic in nature, the businessmen can claim various types of deductible legal expenses, for instance, those relating to borrowing, lease documents, tax as well as discharging a mortgage. Interest is tax deductible- a sole trader managing a business is entitled to a reduction for interest gained on funds acquired to pay income tax. Interests’ payable on loans used to finance the purchase of shares that pay dividends is also a tax-deductible expense. Any taxpayer is also entitled to an additional tax deduction under the temporary investment allowance. It is also regarded as the general business or small business tax break. The businessmen can also claim tax deductions in respect to the expenses that they incur in deriving their assessable income. For expenses to be deductible under the general deduction provisions, the two have to show a necessary and pertinent link between the expenses incurred and earning assessable income. They may claim expenses such as fees (from actuaries, accountants, legal costs, investment advice, advice for audits, tax agents) as well as disability and death premiums. Buzz and Fuzz can thus claim deductions for most of the expenses that they incur in undertaking their business and they can generally claim; an immediate reduction for costs that are required for the day to day running of the business; a depreciation reduction for various assets such as motor vehicles, computers, tools and other machinery. They can however not make deductions for expenses such as domestic or private expenses, loans made by the business, money that they borrow or draw from the business as business owners. Under the income tax law, individuals who carry on businesses can generally claim deductions for expenses they incur in undertaking the business, however they have to have essentially paid or made an obligation to spend the money. The expenses also have to be related to the business-the businesspersons have to be able to show why they needed to spend the funds to carry on their businesses. The common claims that most businesses claim are electricity, decline in depreciating assets (depreciation), bank charges and fees, business travel (away from home), advertising, employee wages, electricity, transport and freight, trading stock, super contributions for the workers, repairs, leasing or renting business premises, registered tax agent fees. Also, phone expenses, motor vehicle expenses, interest on borrowed money, home office expenses, leasing or hiring plant and equipment as well as the costs of all fringe benefits provided by the business as well as fringe benefit tax that the business incurs (Australian Taxation Office 2011). Taxable income is either calculated under cash receipt or accruals basis. The best derivation method for Buzz and Fuzz small business is the accrual basis. The earnings or accrual basis takes into consideration money due however not yet paid to the business. The business owners usually have a legal right for demanding payment, for instance, when they invoice a customer for the services they have rendered. The accrual method is usually more suitable when running a large-scale business and when the business has employed numerous people to service the customers and when the business has a turnover of more than one million. The major difference between the cash receipts and accrual basis is the time at which expenses and income are recognized and recorded. Under the cash receipts method, income is recognized when the it is earned or received whereas the expenses are recognized when the cash is paid. As result, the accrual method only recognizes income (entail creating assets, for instance accounts receivable) and expenses when the business incurs them (this entails creating liabilities, for instance accounts payable. This method is usually considerably accurate when it comes to net income as it matches expenses and incomes. It is more important in measuring business performance. With this method, the business records all business deals in the books when the cash actually changes hands, meaning when cash is paid to the business from the clients or paid out by the business for services such as purchases. This method is not suitable for businesses that sell products on store credit and sends the bill to the client later. There exist no provision for recording and tracking money from the customers at a particular time in the future. Cash payment or receipt can take the form of check, cash, electronic transfer, credit card or any other means employed to pay for the items sold. Cash receipts method is not suitable for Buzz and Fuzz small business as business owners are only supposed to record the purchase of goods or supplies that will be sold later when the owner actually pay cash. When the owners purchase products on credit to be paid later, the operation is not recorded until the cash is essentially paid out. The cash receipt account is usually the best method for start out business. Most small businesses managed by a small group of partners or a sole proprietor employ this method as it is not complicated. However, when the business grows, the owners usually find it essential to switch from accrual accounting to track revenues and expenses more accurately. Cash receipts method is useful in tracking cash flow; however, it is not effective in matching earned revenue with the expenses incurred. Under the accrual method, Buzz and Fuzz would be able to record all the distribution transactions offered to the client in the book, even when cash does not change hands. For instance, when they delivery products on credit, they would be able to record the business immediately and enter it into the accounts receivable account until they receive the payment from the client. When they purchase products for the office or other business operations, they would be able to enter the transaction immediately into accounts payable account until they are in a position to pay out the cash. It would be an important method for matching expenses and revenues given that the business revenue is amounting to 1 million. One of the drawbacks of this method is that the business incomes statements may look good even though there is not cash in the business bank accounts, because revenue is recorded when a transaction takes place and not when cash is collected. Nevertheless, the small business completes a lot of jobs on a daily basis and thus revenue should be recorded when the job is completed even if the client has not yet paid the cash. The business can employ the accrual method to monitor cash flow on a weekly basis to ensure that they have adequate cash for operating the business. The small business is complex, it is evident that its annual gross receipts are many and hence requires accrual accounting instead of cash receipt basis. The payment cycles maybe longer given that the business makes numerous deliveries on a single day and hence the client maybe unable to pay for every single delivery. The accrual method will deliver a better insight of the business fiscal standing. Buzz & Fuzz small business might be able to obtain various tax benefits or deductions, which are allowed by the Australian taxation government. The small business deductions are those concessions or tax deductions that the business might benefit from such as goods and services tax, fringe benefits tax, capital gain tax, income tax, and business activity encouragement (Barkoczy 2012). The small business might also obtain various tax deductions offered by the ATO and are an option to justify GST on a cash basis. Such tax advantages to the small business usually reduce the amount of income tax payable by the business under section 13-1 ITAA97 and are important in reducing the business income tax liability. Under section 159J ITAA36 “taxpayers might refund the tax ascertained for the income year if he/ she has gives the repairs for a person who is a resident and the taxpayers might refund the tax for the income year if the assessable income is less than $60,000 or refund $1,200 if the assessable income year is more than $30,000”. Under Division 301 ITTA97 and subdivision 290-D, the small business may receive a tax offset in an income it contributes to an RSA or superannuation fund. Under subdivision 61-J ITAA97, the business might also receive a tax offset of 25% on the income tax liability if the total turnover is less than $ 75,000 (Barkoczy 2012). According to Australian Taxation Office (2009) “taxpayers are not allowed to refund any unused tax offset or bring forward it into the later income year or shift it to another taxpayer under the Subdivision 61-J (section 61-500 – section 61-525) of the Income Tax Assessment Act 1997 (ITAA 1997)” (par. 4). The simplified depreciation rule also offers tax deduction benefits to the small businesses. This rule is defined as “an option to the regular capital payment rules to work out deductions for most depreciating assets under section 40-30(1) as an asset that has a limited ‘effective life’ and can practical be likely to refuse in value over the time for example, land, trading stock or intangible assets” (Australian Taxation Office 2009). Prepayment deduction are also another benefit for Buzz & Fuzz small business. Taxpayers using pre-payment schemes are able to acquire the benefit of upfront for expenses on things that were provided over several years (FC of T v Raymor (NSW) Pty Ltd 90 ATC 4461). The small business may benefit from pre-payment schemes. According to the Australian Taxation Office (2009), “taxpayers might be able to deduct pre-paid expenditure fully in the year if they are acquired as non-business expenditure and the spread expenditure is sustained under certain agreements such as the prepaid expenses must $1,000 or prepaid expenses are not share out and is under tax shelter arrangements over the appropriate service period.” The period has to be less than one year and not later than the income year last day under Section 82 KZM ITAA 36. Buzz and Fuzz small business can qualify as a personal service business. As a PSB, the business would be able to obtain considerable tax advantages when it comes to claiming very imperative business deductions, which serve to reduce the assessable income. As a result with a suitable tax planning, the small business may derive timing deductions or benefits by increasing deductions, reducing assessable income, reducing tax rates and increasing tax offsets into the subsequent years (Barkoczy 2012). As a PSB, all entities and individuals earning a personal service income will be affected by the alienation measure except if the income is accrued from undertaking a PSB under subsection 86-15(2) TR 2001/8. According to Barkoczy (2012), to carry out as a PSB undersection 87-15 (2), there are four personal services business tests that the small business has to meet, these are the business premises test, employment test, unrelated clients test and results test. More than 80% of the business personal service income comes from one source and hence the small business fulfills one of the tests based on the situation. Buzz & Fuzz can maximize possible deductions under tax legislation be setting up its business as a PSB whereby there exist different types of deduction provided by the Taxation system. The small business may be able to obtain various deductions on the business itself. Reference Australian Bureau of Statistics 2009, Small Business in Australia, Viewed May 20 2013, http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/1321.0 Australian Taxation Office 2011, Tax basics for small business: Information about your tax obligations and entitlements, NAT 1908-07.2011. Australian Taxation Office 2009, Personal services income for companies, partnerships and trusts, NAT 72510-05. Barkoczy, S 2012, Core Tax legislation and study guide, CCH Australia Limited. FC of T v Raymor (NSW) Pty Ltd 90 ATC 4461 Read More