AJML ACCOUNTANTS UPDATE – NOVEMBER 2012 NEWSTART AND AUSTUDY AND DEDUCTIONS
Deductions for Austudy, Abstudy, Newstart Allowance and Youth Allowance Recipients
This change is the consequence of a High Court decision made on the 11 November 2010, following the case of Commissioner of Taxation vs. Anstis, which has been decided that some of the fees incurred by the University student who is in recipient of Youth Allowance are allowable deductions.
DOES IT APPLY TO ME?
If you received Newstart Allowance, Youth Allowance, Austudy or Abstudy from the government either currently or after 30 June 2006 from the Australian government, and also satisfied the following criteria, then you may be eligible to claim deductions for the corresponding income.
ALLOWABLE TAX DEDUCTIONS FOR NEWSTART ALLOWANCE OR YOUTH ALLOWANCE
You are eligible for a deduction for each year you lodged a tax return if:
You received Newstart Allowance or Youth Allowance for job searching and included the allowance as income in your tax return
You included the allowance in your assessable income during the financial year.
you incurred the expense during the year in seeking paid work, which includes meeting the
requirements of your Employment Pathway Plan
you have not claimed the expense as deductions before
the expense is not of a private or domestic nature, and
you have written evidence to support your claim for the expense
WHAT CAN YOU CLAIM?
You can claim a deduction for expenses that directly relate to you seeking paid work, which includes meeting the requirements of your Employment Pathway Plan.
short-term travel costs – such as travel to job interviews
training courses, including self-employment training, assistance and text books
phone calls you make seeking paid work
You cannot claim for expenses that:
relate in only a general way to seeking employment – for example, conventional clothing
are of a private or domestic nature – for example, conventional clothing, grooming and meals.
ALLOWABLE TAX DEDUCTIONS FOR AUSTUDY, ABSTUDY OR YOUTH ALLOWANCE FOR SUPPORT WITH STUDYING
You are eligible for a deduction for each year you lodged a tax return if:
you received Austudy, ABSTUDY or Youth allowance to study and included the allowance as income in your tax return
you incurred study expenses, and
you did not claim a deduction for these expenses.
WHAT CAN YOU CLAIM?
Some of the general expenses you can claim are:
The cost of text books
Home study expenses
The decline in value of your computer (you can only claim the study-related proportion, not the proportion used for private purposes)
You cannot claim contributions you, or the Australian Government, make under HECS-HELP or repayments you make under the Higher Education Loan Program (HELP) or the Student Financial Supplement Scheme (SFSS).
RECORDS TO KEEP
You must have written evidence to support your claim. Some examples are:
receipts or other documents showing expenses such as training course fees, and textbooks
receipts, documents and diary entries for travel expenses.
AJML ACCOUNTANTS UPDATE – SEPTEMBER 2012 GST AND COMPLIANCE
GST, ATO audits and compliance
An investigation by the Australian National Audit Office of how the ATO manages cases of serious non-compliance has found “significant scope for improvement”.
The Auditor acknowledges the ATO had been successful in achieving a high rate of successful prosecutions, but it says practices need to be improved. Estimates vary, but experts put the cost of serious fraud and evasion somewhere between $18 billion and $122 billion.
GST COMPLIANCE PROGRAM
The Australian Tax Office will receive $ 420 million for increased business visits and presence on the streets, targeting non-active companies that are registered but not paying GST.
A crackdown on companies who do not paying goods and services tax and small business doing business for cash will raise a combined $3.7 billion for state and federal budgets over the next four years.
The GST compliance program, innocuously titled “Working together to increase voluntary compliance” will focus on business activity statement, fraudulent GST refunds, systematic under-reporting of GST liabilities, non-lodgment of GST returns and non-payment of GST debts.
There will be $6.5 million in capital funding for the ATO to buy additional capacity to store and analyze data that is obtained from external agencies.
While the crackdown is designed to catch tax dodgers, the budget papers argue it will also encourage voluntary compliance and level the playing field for honest businesses.
The hard line on small business follows a period of relative leniency during the global financial crisis in which the ATO cut SMEs some slack.
The ATO has in recent years focused much of its attention on high-profile, high-net-worth individuals. Project Wickenby, launched four years ago, has been targeting tax fraud via offshore tax havens.
Funding the planned crackdown on GST is complicated because while the federal government must spend millions on beefing up the ATO’s resources, about $2 billion of the extra revenue will be GST and flow back to the states.
GST VS INCOME TAX
But in the course of scrutinizing business activity statements and GST, the ATO expects to unearth many other rorts on company profits and income tax and this is expected to produce an extra $1.7 billion in non-GST receipts.
The total amount spent on administration by the ATO on the GST crackdown will be about $337 million, but the federal government says almost all that cost will be deducted from its transfer of GST to the states.
The budget papers say the exact arrangements for funding the crackdown are yet to be settled with the states, but the deal will be based on an existing GST administration performance agreement.
It is understood that state governments have encouraged the crackdown by the ATO to combat what they see as a rise in non-compliance.
A relatively minor change to rules on financial supply under GST affecting companies that sell goods on credit is also expected to help fight tax avoidance, although its main purpose will be to cut red tape for small business.
The ATO is to get $420 million to target GST avoidance.
The TAX Office is to buy more capacity to store and analyze data
Crackdown is expected to encourage voluntary compliance.
AJML ACCOUNTANTS UPDATE – OCTOBER 2012 LAFH Changes
Living Away From Home Allowance (LAFHA) Changes
The Assistant Treasurer, Bill Shorten, has released a consultation paper in November 2011 proposing a fundamental reform to how Living Away From Home Allowance (LAFHA) and other associated benefits will be taxed from 1 July 2012 for temporary residents.
OLD RULE WITH LAFHA AND FBT
Currently the Fringe Benefits Tax Assessment Act 1986 (FBT Act) provides concessional taxation treatment for benefits provided to employees compensating them for additional accommodation and food expenses incurred due to them being required to temporarily live away from home from their usual place of residence in order to perform their employment duties.
If you structure your expenses appropriately, these benefits may be exempt from fringe benefits tax (FBT) and in the case of LAFHA, the amounts paid are not taxable in the hands of the employees.
Amanda has been transferred from Sydney to Melbourne for a term of 3 temporarily for work purposes and her employer is assisting her by giving her $400 allowance per week to assist her with accommodation while in Melbourne. Amanda only uses $300 on rental expenses and spends the
remainder $100 on movies and other entertainment.
The $400 is considered to be LAFHA because Amanda has ‘lived away from home’ in order to work in Melbourne, hence it is considered to be FBT and taxable on the employer, not Amanda.
THE CHANGE: LAFHA IS NO LONGER A FRINGE BENEFIT
Under the proposed changes in the consultation paper, the FBT Act will be amended to remove LAFHA as a fringe benefit altogether and instead will be included as assessable income for the employees unless:
They are permanent residents or temporary residents maintaining a home in Australia which they are living from for work; and
Expenses relating to accommodation and for food above a statutory amount can be substantiated.
If the expense is actually a reimbursement not an allowance, which means that the employee is reimbursed for out-of-pocket expense, then the new LAFHA rules wouldn’t apply.
A temporary resident is considered to be maintaining a home in Australia for their own use when that home is available for their personal use and enjoyment at all times, which includes an owned or rented unit of accommodation defined under the FBT Act.
The vast majority of temporary residents will fail this test and will not qualify for concessional tax treatment.
If the proposed change is enacted, it will be applied to both new and existing arrangements effective 1 July 2012.
Following example 1 and assuming that the new LAFHA rules has come into place, Amanda will have to declare $400 received from the employer as assessable income and $300 rent as deductions, given that she can substantiate all her expenses by means of receipts/invoices or transactions from her bank statements.
Similar to Example 2, but Amanda is getting reimbursement for her rental expenditure, meaning that she pays for her rent first then her employer reimburses her the money, in this case the employer would have incurred the expense. Amanda does not need to worry about the matter in her tax return.
For the complete consultation paper, please go to the following website: http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2235
AJML ACCOUNTANTS UPDATE – NOVEMBER 2012 am i running a business
Are you running a business?
BUSINESS V.S. HOBBY
There is no simple answer to whether you are in business or not, it depends upon the facts in each case. However, you can use the following questions to help you determine whether your activity is actually a business:
Does your activity have a significant commercial purpose or character?
Do you have more than just an intention to engage in business?
Do you have a purpose of profit as well as a prospect of profit?
Is there repetition and regularity to your activity?
Is your activity carried on in a similar manner to other businesses in your industry?
Is your activity planned, organized and carried on in a business-like manner?
Does your activity have characteristics of size, scale and permanency?
Would it be true to say your activity is really better described as a business, rather than a hobby, recreation or sporting activity?
Each time you answered ‘yes’ to the questions above, it increases the probability that you are in business though no one indicator is decisive, they must be considered in combination and as a whole.
WHY DOES IT MATTER?
It matters because it may affect whether:
any money you receive from the activity is assessable income
you are entitled to an Australian business number (ABN), and
You can or must register for goods and services tax (GST).
HOW DOES THE QUESTION OF WHETHER MY ACTIVITY IS A BUSINESS AFFECT MY TAX?
There are numerous areas in which people carry out activities, often in a small way, which may constitute a business. These include, for example, gardeners, tradesmen, and couriers.
If you are carrying on a business:
any money you earn from this activity is generally assessable for income tax
you are generally entitled to claim tax deductions for any allowable expenses you incur in earning this income, and
If your activity results in a loss, you may be entitled to offset this loss against other income or carry it forward to offset against future income, and therefore reduce the income tax you might have to pay in the future.
Common areas where people carry out activities which may be a hobby rather than a business include hobby farming, motor car/bike racing, and hobby ceramics.
Jack walks dogs in his neighborhood at the cost of $10 per hour per dog and he advertises on the local newspaper. In this case Jack is running a dog walking business because he is making money and he intends to make more money by advertising on the local newspaper.
John also has two dogs himself and the dogs bred puppies. John sold the puppies and he made a profit. John is not running a business because there is no pattern of dogs breeding and the profit is too small.
If your activity constitutes a hobby or recreation:
any money you earn from this activity is generally not assessable income
you are not entitled to claim tax deductions for any expenses you incur in carrying out this activity, and
If your activity results in a loss, you are not entitled to offset this loss against other income or carry the loss forward.
AJML UPDATE – Federal Budget 2011-2012 Centrelink
Here are some items that are included within the 2011-2012 year Federal Budget, published on 10 May 2011.
Please note that the changes outlined in this summary are proposals only at this stage, and will not take effect until the passage of relevant legislation.
Personal Tax Rates
There are no changes to the tax rates, but there is the introduction of the Flood Levy which applies to individuals with income over $50,000.
Minors are no longer entitled to low income tax offset on unearned income.
Dependent Spouse Rebate
The Government announced it will phase out the tax offset for dependent spouses aged less than 40 (ie born on or after 1 July 1971) “to help encourage more Australians into paid employment”. This change will mean taxpayers with a dependent spouse aged less than 40 years will no longer be eligible for the dependent spouse tax offset (DSTO) from 1 July 2011.
Exceptions: The change will not affect taxpayers whose dependent spouse is a carer, who is an invalid, or permanently unable to work; and taxpayers with children (eligible for Family Tax Benefit B), or eligible for the zone, overseas forces or overseas civilian tax offsets. Dependent spouses with children are not affected by this measure because they receive Family Tax Benefit B.
The discount available for students electing to pay their student contribution up-front will be reduced from 20% to 10%.
The bonus on voluntary payments to the ATO over $500 will be reduced from 10% to 5%.
These tax reforms will be available to all small businesses, including sole traders and businesses operating through trusts, partnerships and companies.
This new proposal is in addition to the Government existing tax reforms for small businesses to be introduced in 2012-13 that allow:
an immediate write-off of all assets valued at under $5,000 (up from $1,000 presently)
a write-off of all other assets (except buildings) in a single depreciation pool at a rate of 30 per cent); and
a reduction in company tax rate to 29 per cent for incorporated small businesses.
The small business company tax rate will drop to 29% from the 2012-13 year.
Car fringe benefit rules – flat 20% valuation rate to apply
The Government announced that it would implement the Henry Tax Review Recommendation that the current statutory formula four-tiered rate scale method for valuing car fringe benefits be replaced with a single statutory rate of 20%, regardless of the number of kilometres travelled.
Apply to only new contracts entered into after 7.30 pm on 10 May 2011.
People who use their vehicle for a significant amount of work-related travel will still be able to use the “operating cost” (or “log book”) method to ensure their car fringe benefit excludes any business use of the vehicle.
Self-education deduction against Youth allowance payments denied
From the 1 July 2011, the tax law will be amended to disallow self-education expenses against all Government assistance payments. The change is being introduced in response to the 2010 High Court decision in FC of T v Anstis 2010 ATC.
However, individuals who receive Youth Allowance (Student) will be able to claim a deduction for expenses incurred in gaining their payment for the 2010/11 income year.
For each of the years 2006/07 to 2009/10, the Commissioner has determined that he will administer the law to allow eligible taxpayers to receive an automatic deduction of $550 or make potentially higher claims if the relevant self-education expenses can be substantiated.
Superannuation: Alternative for excessive concessional contributions up to $10,000
This measure will apply in respect of 2011-12 or later years, and only for the first year, commencing from 2011-12, in which a breach occurs.
The Government will provide eligible individuals who breach the concessional contributions cap by up to $10,000 (non-indexed) with a one-off option to request that these excess contributions be refunded to them. This new refund option will only apply to first time breaches from 1 July 2011, and only for the first year, commencing from 2011-12, in which a breach occurs
Federal Budget 2011-2012 -Centrelink
Family Tax Benefit, Baby Bonus and related changes
From 1 January 2012, the new maximum rate of FTB Part A for 16-17 year olds in high school will be increased from the current $52.64 per fortnight to $214.06 per fortnight, an increase of around $4,200 per year. For 18-19 year olds in school, the rate will be $3,741 per year. This will align with the 13-15 year old rate and ensure assistance for families does not drop when children turn 16. The increases to FTB Part A will only be available for families where their teenager is in fulltime secondary study, or equivalent.
From 1 January 2012, the Government will lower the maximum age of eligibility for FTB – Part A from 24 to 21. This will bring FTB-Part A into line with the reduction in the Youth Allowance age of independence to 22 from 1 January 2012.
The primary income limit for the following payments will stay the same as the 2010-11 financial year:
FTB Part B,
dependency tax offset,
Baby Bonus eligibility
Paid Parental leave
The annual end of year FTB supplements will be held at the current levels for the next 3 years. The FTB supplements will be fixed at the current 2010-11 levels of $726.35 per annum per child for FTB Pt A and $354.05 per annum for FTB Pt B until 1 July 2014.
Youth Allowance will continue to be available for 16 to 19 year olds who are independent, away from home or not in full time secondary study, and for people aged 19 years and older. All Youth Allowance recipients aged 16 to 19 on 1 January 2012 will have the option to remain on Youth Allowance.
Deferral of Paid Paternity Leave start date
The Government is to defer the implementation of Paid Paternity Leave by 6 months, from 1 July 2012 until 1 January 2013. The measure will provide eligible working fathers, and other partners who are providing full-time care or sharing the child’s care, with 2 weeks paternity leave paid at a rate equivalent to the national minimum wage for children born on or after 1 January 2013.
any parent who started receiving Parenting Payment after July 2006 moves off this payment and onto Newstart Allowance when their youngest child turns eight years old (for single parents) or six years old (if the parent is partnered).
Parents who have been receiving Parenting Payment since before July 2006 cease to be eligible for this payment when their youngest child turns 16.
As of 1 July 2011, any new children born to these recipients will be treated the same as children whose parents started receiving Parenting Payment from July 2006.
From 1 January 2013, eligibility will cease when their youngest child turns 12 or 13 in 2013, or 12 in subsequent years. Parents whose youngest child is 13 years old before 1 January 2013 are not affected by these changes.
The majority of affected parents will be eligible for Newstart Allowance and will continue to have participation requirements.
Changes for the unemployed
Jobseekers who have been on income support for at least two years are classified as ‘very long term unemployed’. Assistance to them will be in the form of tougher obligations and a new wage subsidy of up to $5700 to support employment of them.
From 1 July 2012, Learn or Earn requirements will be extended to unemployed 21 year olds who do not have a Year 12 or equivalent qualification. This means they will need to participate in education and training full-time, or participate in study, training and other approved activities until they attain Year 12 or equivalent. Other approved activities include paid work, participation in approved programs, voluntary work or Work for the Dole activities.
To encourage young people to take up work, all Youth Allowance (other) recipients will from 1 July 2012 be able to keep more of what they earn, with the income free level to be increased from $62 a fortnight to $143 a fortnight. Further, the Working Credit limit will be increased three and a half fold from $1000 to $3500.
Currently persons turning 21 are eligible for Newstart Allowance. From 1 July 2012, Youth Allowance (other) will be extended to 21 year olds. This measure will remove the incentive for them to be on unemployment benefits rather than studying full-time. 21 year olds who are on Newstart Allowance, or who have applied for it, by 1 July 2012 will not be affected by the change.
New service delivery
People will be able to access Centrelink, Medicare and Child Support services through a single website www.humanservices.gov.au and phone number (13 24 68).
Tax planning 2012-2013
Tax planning 2012-2013
The following were the main items announced in the most recent Federal Budget which might affect you in the current 2013 financial year.
TAXATION OF ETP TAX OFFSET
The Government will limit the availability of the ETP offset from 1 July 2012. Only the part of an affected ETP that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the EIP tax offset.
INCREASED FAMILY TAX BENEFIT
From 1 July 2013 Family Tax benefit Part A will increase for all eligible families. For families on the base rate the increase will be $100 for families with one child and $200 for families with two or more children. For those on the maximum rate the increase will be $300 for families with one child and $600 for families with two or more children..
TRIPLING THE TAX FREE THRESHOLD
The Government has announced that the tax-free thresholds will triple from the current $6,000 to $18,200, effective as at 1 July 2012. Therefore, all taxpayers with income under $80,000 will receive the cut. The tax-free threshold will further rise to $19,400 in 2015-16.
SCHOOLKIDS BONUS TO REPLACE EDUCATION TAX REFUND
The Schoolkids Bonus will replace the Education Tax Refund from 1 July 2012, and the families that are eligible for the refund will receive the full education tax refund amount in July 2012 as a transitional arrangement.
The bonus will be made in two equal instalments in January and July each year commencing January 2013. Every family with a child at school will be guaranteed $410 per annum for each primary school student and $820 per annum for each secondary school student. There will be no longer the need to keep receipts as proof of expense, or wait until tax time.
CHANGES TO TAX RATES FOR NON-RESIDENTS
The Government will adjust the personal income tax rates and thresholds that apply to non-residents’ Australian income to a higher rate compared to the current year, applying from 1 July 2012.
REMOVAL OF THE CGT DISCOUNT FOR NON-RESIDENTS
The Government will remove the 50% CGT discount for non-residents on capital gains accrued after 8 May 2012. The CGT discounts will remain available for capital gains accrued prior to this time where non-residents choose to obtain a market valuation of the assets as at 8 May 2012.
CONSOLIDATING THE DEPENDENCY OFFSETS INTO ONE
The Government will consolidate eight dependency tax offsets into a single streamed lined and non-refundable offset that is only available to taxpayers who maintain a dependant who is genuinely unable to work due to carer obligation or disability.
The offsets to be consolidated are the:
Housekeeper (with child)
Child-housekeeper (with child)
Invalid relative and
Parent/parent-in-law tax offsets
The new consolidated offset will be based on the highest rate of the existing offsets it replaces, resulting in an increased entitlement for many of those eligible for this measure which will take effect from 1 July 2012.
MATURE AGE WORKER TAX OFFSET TO BE PHASED OUT
The Governemnt will phase out the mature age worker tax offset from 1 July 2012 for taxpayers born on or after 1 July 1957.
MEANS TESTING THE NET MEDICAL EXPENSES TAX OFFSET
The Government will introduce a means test for the net medical expenses tax offset (NMETO) to limit the amount of claims the taxpayer makes in the tax return, effective from 1 July 2012.
COMPANY LOSS CARRY-BACK
The Government has allowed companies to carry back losses for one year to in the 2012-2013 income year and two years for 2013-14 and later years. Companies will be able to carry back up to $1 million of losses each year, available to company’s revenue loss only and limited to a company’s franking account balance.
AJML ACCOUNTANTS UPDATE – FEBRUARY 2012 GST for SME part 1
Goods and Services Tax for SMEs – Part 2
GST FREE SUPPLIES
You don’t include GST in the price of product or services you sell that are GST free, but you can still claim credits for the GST included in the price of your taxable purchases that you use to make GST free sales.
Items that are GST free include:
Most basic food
Some education courses
Some medical and health services
Some religious services and charitable activities
Cars for disabled people to use
Water, sewerage and drainage
Sale of business as going concern
INPUT TAXED SUPPLIES
Input taxed supplies are not subject to GST but, unlike GST free supplies, no input tax credit can be claimed for anything acquired or imported to produce such supplies.
Two main categories of input taxed supplies are:
Financial supplies, which includes:
Lending or borrowing money
Granting credit on which interest is due
Guarantees and indemnities
Conducting superannuation and life insurance business
Residential premises include houses, units and flats they do not include vacant land. Properties are residential premises if they are occupied.
Generally, if you buy a property with intention to sell it you may be considered to carry an enterprise. If you are considered to be carrying on an enterprise and your GST turnover meets or exceeds the registration turnover threshold, you will be required to register for GST.
The GST treatment on the sale of residential premises depends on whether they are new, existing residential premises or commercial residential premises. If your residential premise is new, you can claim any GST credits and you are liable for GST on the sale. If you sell existing residential premises, you can’t claim GST credits and you are not liable for GST on the sale. If you sell commercial residential premises (hotels, inns, boarding houses) you are generally making a taxable sale. You can claim GST credits and must pay GST on the sale.
If you rent out residential premises (other than commercial) for residential accommodation, you don’t include GST in the price of the rent and you can’t claim GST credits.
In contrast, renting out commercial premises such as a shop is taxable. If you are registered for GST, you must include GST in the rent you charge.
INPUT TAX CREDITS
GST is borne by the consumer of the goods and services but is collected at each stage of supply. To prevent tax from accumulating, an input tax credit is given to registered entities at each stage of the supply chain. This means that the supplier of the taxable goods and services receives a refund of the GST paid on the inputs used in their supply process.
An entity is entitled to claim an input tax credit on creditable acquisition where:
The entity acquires or buys anything solely or partly for a creditable purpose, which means it is bought for the use of the entity.
The thing supplied is a taxable supply
The entity provides, or is liable to provide, consideration for the supply, and
The entity is registered or required to be registered
AJML ACCOUNTANTS UPDATE – MARCH 2012 GST for SME part 2
GST and Property
If you are dealing with properties (for example, you buy, sell, lease or develop), you may be considered to be conducting an enterprise. If your turnover from these activities is more than the GST registration threshold of $75,000 you may be required to register for GST.
WHAT IS A PROPERTY
For GST purposes, property includes any of the following:
land and buildings
an interest in land
rights over land
a licence to occupy land.
SELLING A PROPERTY
When you sell a property, the sale may be:
taxable – this means you are liable for GST on the sale, and you can claim GST credits for anything you purchase or import to make the sale (subject to the normal rules on GST credits)
GSTfree – this means you are not liable for GST on the sale, but you can claim GST credits for anything you purchase or import to make the sale
(subject to the normal rules on GST credits)
input taxed – this means you are not liable for GST on the sale and you cannot claim GST credits for anything you purchase or import to make the sale
mixed – this is a combination of any of the above.
OFF THE PLAN PURCHASES
An off-the-plan purchase occurs when you enter into a contract to purchase new residential premises before the construction is completed.
Generally, you pay a deposit and sign a contract with the developer. You pay the balance of the purchase price on settlement.
On settlement, you are purchasing new residential premises and the purchase price will include GST.
However, if you sell the contractual right before settlement you are not selling new residential premises, and GST may apply if the sale of the contractual right forms part of your GST registered business.
EXISTING RESIDENTIAL PREMISES
You cannot claim GST credits for anything you purchase for the sale of existing residential premises and you are not liable for GST on the sale.
If you sell residential premises, they are input taxed unless the property is new.
If you own premises and they are used for residential and commercial purposes, GST may apply.
If you purchase existing residential premises, the sale is input taxed, so you cannot claim a GST credit on the purchase.
If you lease residential accommodation, the following applies:
you are not liable for GST on the rent you charge
you cannot claim GST credits for anything you purchase or import to lease the premises.
For more information regarding GST and property, including commercial property, please visit www.ato.gov.au and search for 00198744 and 00797808.
AJML ACCOUNTANTS UPDATE – JUNE 2012 GST AND SECURITY DEPOSITS
GST for Security Deposits
WHAT IS A SECURITY DEPOSIT?
For the purpose of the GST law, a security deposit is an assurance held as security for the performance of an obligation.
When an amount is paid as a security deposit, the special rules set out in Division 99 of GST Act 1999 apply.
HOW DO I ACCOUNT FOR GST ON SECURITY DEPOSITS?
If you make a security deposit, the intention is usually that it will be refunded to you when you meet the obligations to which the deposit relates. The deposit may be consideration for a taxable supply. However, it would be pointless for the supplier to charge GST on the deposit if the deposit is to be refunded, in which case the GST would have to be refunded to the supplier.
However, some security deposits later become incorporated in the consideration for a taxable supply. At some point the deposit ceases to be held as a security deposit and is offset against the remaining consideration that is payable. GST should be charged on such deposits if they become part of the consideration for the taxable supply.
Also, if a security deposit made in relation to a taxable supply is forfeited, GST should be payable on the deposit. The High Court case FCT v Reliance Carpet Co Pty Ltd has further proven this matter.
For these reasons, Division 99 provides special rules in relation to security deposits.
If a security deposit is made, it is treated as not being consideration for a supply (and hence not subject to
GST) unless the deposit is forfeited or is applied towards the consideration for the supply.
If the deposit is forfeited or is applied towards the consideration for the supply, GST is paid on the amount of the deposit. The GST is attributed to the tax period in which the deposit is forfeited or is applied towards the consideration.
Dean paid a security deposit of $5,000 to the landlord for his business premises. Once Dean ends his lease agreement with the landlord Dean will get his security deposit all back.
Dean cannot claim the GST he paid on his security deposit because he got all his security deposit refunded at the end.
Similar to Example 1 but this time Dean forfeited the security deposit because he accidently damaged the business premise. Therefore $3,300 was taken out of his security deposit to repair the damages Dean caused. In this example Dean can claim $300 GST on the deposit (1/11 x $3,300) because he cannot get the deposit back.
Dean entered into a contract with a supplier under which he will pay $500 security deposit on a supply of goods costing $20,000 which will be accounted for as a part of the goods as soon as the balance has been received. Dean can claim back GST on the $500 as soon as he paid the balance of $19,500, and claim back the GST on the entire amount, which is $1,818.18 (1/11 x $20,000).
GST RULING ON DEPOSITS HELD AS SECURITIES
GST Ruling GSTR 2006/2: Goods and services tax: deposits held as security
for the performance of an obligation, is issued to address the Commissioner of Taxation’s views on Division 99 of the GST Act, and for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953. It can be relied on which provides advice on the operation of the GST system.
The taxpayer overpays GST by treating a supply as taxable to a greater extent than required by the law. The current GST percentage is 10%.
AJML ACCOUNTANTS UPDATE – JULY 2012 GST AND PART-PAYMENTS
GST and periodic sales and purchases
WHAT IS A PART-PAYMENT?
A part-payment is an amount that is paid to reduce the balance of the full amount due to be paid under a contract. However, it is not forfeited if the payer defaults on the contract.
As a part-payment is not a deposit held as security, the payment is treated as a payment for a supply when it is received. If the supply is taxable, you must report and pay the GST as outlined below:
WHEN DO I REPORT AND PAY GST ON PART-PAYMENT?
Accounting on a non-cash basis
If you account for GST on a non-cash basis, you report and pay GST on payments (other than security deposits) in the period you:
receive any part of the payment, or
Issue a tax invoice for the payment.
You must report and pay GST for the full value of the supply even if you only receive a part-payment.
Accounting on a cash basis
If you account for GST on a cash basis, you report and pay GST on payments (other than security deposits) in the period you receive it.
Evergreen Blooms enters into a contract with Mortar Constructions to supply flowers to Mortar for $11,000 (including GST). Evergreen receives a security deposit of $500 on signing the contract.
If Evergreen accounts for GST on a non-cash basis, it must:
not report and pay GST on the security deposit unless it is:
applied as a payment for a supply, and
report GST of $1,000 (one-eleventh of $11,000) on any payment it receives under the contract, even if it only:
receives a part-payment for the total amount due under the contract, or
issues an invoice for the amount it is due to receive under the contract.
If Evergreen accounts for GST on a cash basis, it must only report and pay GST on the value of any payment it actually receives under the contract.
If the $500 security deposit is forfeited or applied as payment for a supply, Evergreen must report and pay GST on this amount in the period it is forfeited or applied as payment.
More information can be found on GSTR 2000/12 – when lay by sales are to be accountable for GST payable and input taxed supplies.
ATO ID 2005/306 Goods and Services Tax: GST and unclaimed money from the cancellation of lay-by sales stated that unclaimed money is not treated as consideration for a supply made by the entity under section 102-5 of the GST Act.
Alisha Pty Ltd is a retail company and is registered for goods and services tax (GST). It enters into a lay-by agreement with a customer to sell goods. The customer makes an initial payment then fails to make any other payments on the lay-by. The company cancels the agreement and holds the initial payment for the customer to collect.
For purposes of the Unclaimed Moneys Act 1995:
the amount held by the entity will be ‘unclaimed moneys’ if it remains unclaimed by the customer for 12 months or more
businesses are required to pay ‘unclaimed moneys’ to the Registrar, for payment into the consolidated fund, on or before 31 March each year (or a later date approved in writing by the Registrar in any particular case), and
businesses are required to keep records and, in certain circumstances, advertise details of unclaimed moneys.
The entity continues to hold the initial payment for the customer’s collection until the Unclaimed Moneys Act requires the entity to pay it to the Registrar.
AJML ACCOUNTANTS UPDATE – AUGUST 2012 GST Refunds
WHEN THE ATO COMMISSIONER DOES NOT HAVE TO REFUND GST?
Under section 101-65 of Schedule 1 of the TAA the Commissioner need not refund GST in circumstances where:
a business overpays GST on a sale to a customer because the supply was incorrectly treated as a taxable supply when it was not a taxable supply (for example, because it was in fact a GST free supply) and
one of the following conditions is satisfied:
the Commissioner is not satisfied that the overpaid amount has been reimbursed to the recipient of the supply
The recipient of the supply is registered or required to be registered for GST
The ATO has kept part, or all of your refund to apply it against a tax debt that you owe us – this process is known as offsetting.
We may use a credit balance from one of your other tax accounts to pay a tax debt you owe and subsequently receive a payment from you in relation to that tax debt. As a result, your account may be placed in credit and your payment becomes what is called a
voluntary payment, and is not automatically refunded.
The ATO has retained your refund because you haven’t nominated a bank account for us to pay your refund into, or the bank account details you provided are incorrect or incomplete.
The ATO has retained your refund because you have not lodged one or more of your activity statements.
The ATO has retained the refund because we need to check, or verify with you, some details shown on your return or activity statement.
ABC Fresh Seafood Shop, a GST registered company, has accidently charged GST on all fresh seafood sales to all customers. ABC reported the GST collected and paid the ATO. When ABC found out the error, ABC applied to the ATO to have the GST refunded.
The Commissioner does not have to refund the GST because ABC did not reimburse the wrongly charged GST back to the customers.
XYZ Medicines, a GST registered company that supplies medicines to pharmacies, wrongly charged GST on medicines supplied to ZYX Pharmacy, a GST registered company.
The Commissioner does not have to refund the GST because ZYX is also registered for GST, hence ZYX would have already claimed back the GST through ATO on their lodged Activity Statement.
OFFSET AGAINST OTHER DEBTS
The ATO maintains different accounts for various taxes, including income tax, activity statement amounts, and fringe benefits tax. Accordingly, many business taxpayers have a range of different accounts in relation to their various tax obligations. These obligations require separate tax returns or activity statements, and separate payments. Generally, where one of your accounts is in credit – that is, we owe you money – The ATO is required to refund that amount to you. You may, however, receive a reduced refund, or no refund at all for a number of reasons, including:
You have an outstanding debt with the ATO for another type of tax – for example, your activity statement refund may be offset against an income tax debt that you owe.
You have an outstanding debt to another Australian Government department or agency which has required us to pay any refund to them to cover other debts – for example, the Child Support Agency or Centrelink.