YEAR END RESOURCES LIVE CHAT: QUESTIONS AND ANSWERS - CPA Australia

YEAR END RESOURCES
    LIVE CHAT: QUESTIONS AND ANSWERS

INTRODUCTION
A recent live chat provided members with an opportunity to ask questions about year end
resources and completing tax returns for 2017-18.
CPA Australia’s panel of experts were:
•   Keith Clissold FCPA, Principal of H.G. Mayer & Co
•   Phil McCann FCPA, Principal of McCann Taxation Services
•   Mark Morris CPA, Principal of Morris & Associates
•   Gavin Swan FCPA, Director of Absolute Accounting Services
•   Gavan Ord, Manager of Business & Investment Policy, CPA Australia

2017 STATISTICS
As at 26 June 2018, 15.6 million returns for the 2017 financial year have been lodged with the ATO.
Of that number, 6.36 million returns have been lodged by agents via PLS and 5.23 million returns have been
lodged by agents via ELS.
Compared to the same date in 2017, the number of returns lodged by agents is up 93,000 or just under 1 per
cent.
Of the returns lodged, 11.46 million have resulted in a refund, with the average refund being $3600.

WORK-RELATED EXPENSES
The 2018 Federal Budget included measures to improve the integrity of the tax system, with a focus on claims
made by taxpayers and their agents.

The Australian Taxation Office (ATO) has flagged a crackdown on claims for work-related expenses (WREs),
suggesting a significant loss to revenue from taxpayers overclaiming small amounts.
You should ensure that any unreimbursed claims for WREs, car expenses and travel expenses are correctly
allowable on the basis that such expenses were incurred in gaining or producing salary and wages income or
other payments subject to the PAYG withholding regime (including any work-related claims below $300).
Where items are used both for work or business purposes and for private purposes (e.g. use of a mobile phone or
home computer) it is also necessary to apportion deductions so that a deduction is only claimed for the business
portion of the expense.
In addition, all claims for WREs must be substantiated by way of evidence such as invoices, receipts and credit
card statements.
Care should be taken in claiming such deductions as the ATO is increasing its scrutiny of WRE claims and is using
data analytics to detect deductions which are unusual or abnormally high relative to other persons in the
taxpayer’s occupation or profession.
The ATO App reminds taxpayers to retain receipts so check with clients whether they use the app.
•   CPA Australia WRE guidance
•   WRE podcast
•   TPB webinar recording – Acting lawfully in your client’s best interests
•   ATO app

NEW CPA AUSTRALIA RESOURCES
CPA Australia has introduced two substantiation resources for members to use with clients:
• substantiation checklist, which can be found at Appendix A in the tax planning pro forma client letter
• client substantiation letter and declaration
The substantiation checklist is quick reference guide for clients as to what kinds of substantiation documentation
will be required at income tax meetings, whether they are individual taxpayers or a sole trader, company, trust or
partnership carrying on a business.
The client substantiation letter and declaration asks clients to confirm that their tax agent has advised them that
they must be able to demonstrate that they have incurred any expense claimed for income producing purposes
and that they need to satisfy substantiation legislation in relation to work, car and business travel expenses.

YEAR END RESOURCES FOR 2018
CPA Australia provides members with the following resources to guide you in the preparation of 2018 returns.
•   Company tax return checklist
•   Individual tax return checklist
•   Individual tax return workflow
•   PSI or PSB self-assessment checklist
•   Residential rental property checklist
•   Rental property schedule

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•   Home loan reconstruction spreadsheet
•   Tax planning checklist
•   Tax job sheet
•   Tax workpapers
•   Superannuation fund return preparation checklist
•   Superannuation fund workflow sheet
•   Trust tax return preparation checklist
•   Division 7A checklist
•   Division 7A: UPE checklist
•   Master tax guide 2018
•   Master GST guide 2018
•   Australian FBT compliance guide 2018
•   Australian taxation law 2018
You can find the above resources on CPA Australia’s Year End page.
CPA Australia checklists have been designed so that they can be customised to meet your needs. Please note that
the checklists have been written to cover most circumstances so some care should be taken when customising.
In addition, CPA Australia provides many pro forma ATO and client letters, including a Tax planning client letter
and letters for PAYG and BAS lodgments.
You can find these pro forma letters on our tax client letters page.

DEALING WITH EARLY LODGERS
If you have clients who have their tax returns prepared within the first two weeks of a new financial year, there
are a few approaches you can use to reduce the risk of amendments. You also need to remember that not all
income shows in the pre-fill early in the tax season.
•   Check last year’s tax return
•   Rerun the previous year’s portal report and look for any anomalies (e.g. interest)
•   Check the bank account that the tax return is deposited into
•   Ask your client to bring in pay slips to see if there are any variations
•   Have a conversation with your client before you meet, get them prepared for the meeting, ensure that they
    have everything they needed to bring with them.
Whilst the pre-fill is a good tool to use in the preparation of tax returns, and we recommend that all tax
professionals utilise it, it is not the only resource available to you.
The pre-fill will note if your client’s WRE claims for 2017-18 are high compared with other taxpayers in similar
occupations and income ranges.
The ATO App reminds taxpayers to retain receipts so check with clients whether they use the app.

CLIENT SUBSTANTIATION DECLARATION
You are not obligated to ask client’s to sign a substantiation declaration, however, we would recommend asking
client’s to sign it as signing it makes the client more aware of their obligations.

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Using a substantiation declaration with clients does not absolve you of your reasonable care obligations when
preparing a tax return.
Not every client is a good client, and accepting what a client says without question can make accountants liable to
a range of adverse claims and reputational damage.
You can find out more about your reasonable care obligations from the following resources:
•   Webinar recording: Understanding the TASA Code of Professional Conduct
•   Webinar recording: Client verification and engagement
•   Webinar Q&A: Client verification and engagement
•   Get client documentation right and avoid tax disputes

SIGHTING CLIENT’S RECEIPTS
You are not obligated to sight all of a client’s original receipts related to their tax return.
Paragraphs 10-12 of the TPB’s Information Sheet on Reasonable Care to Ascertain a Client’s State of Affairs says:
“The obligation to take reasonable care does not mean that the care taken needs to be perfect. It is sufficient that
the registered agent acts in a way that is consistent with how a reasonable person, possessing the required
knowledge, skill and experience of a registered agent, objectively determined, would act in providing tax agent
services or BAS services.
Where a statement provided by a client seems credible (and for existing clients is consistent with previous
statements) and the registered agent has no basis on which to doubt the information supplied, the registered
agent may discharge their responsibility by accepting the statement provided by the client without further
checking.
In this case, the registered agent is not just accepting what the client tells them or gives them at face value.
Rather, the registered agent is exercising their professional judgment based on the information previously
provided by the client and the nature of the client themselves, and making a decision that further checking is not
required in the particular circumstances.”

QUESTIONS AND ANSWERS
What is to be done in the case of an employee who has left the business and did not sign the statutory
declaration for statutory cost method. There was no declaration in the previous year. Will the 20% rate still be
applied?
I would suggest to the employer to send (if possible) to the former employee & see if they will sign. If the
employee doesn't sign it, we feel the employer is within his rights under normal (common sense) circumstances
to use the 20% rate, especially as we now have a standard 20% rate for all car fringe benefits valued under the
statutory formula method.
If my employer pays meal allowance of $16 per night what can I claim?
Assuming you are talking about an overtime meal allowance, refer to the ATO guidelines on the reasonable limits
in TD 2017/19. It was $29.40 in 2016/17 and is $30.05 for 2017/18.

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Expenses can be claimed without written evidence if an overtime meal allowance has been paid, if it is to enable
the employee to buy food and drink in connection with overtime, payable under an award and the total of the
claim is considered reasonable by the ATO.
As travel cannot be claimed on residential rentals (owned by individuals), can it go to the cost base?
No. Section 26-31 specifically provides that travel expenses will also be excluded from being included in the cost
base or reduced cost base of the residential premises. Moreover, such travel expenditure will also be non-
deductible under the blackhole deductibility rules under Section 40-880. Accordingly, there is no tax relief for
such travel expenses from 1 July 2017.
Has anyone found a way to deal with the lack of access to old software when changing providers? Other than
continuing to pay for the old software?
Most software providers provide a conversion facility, but you would need to, for a period of time, pay for the old
software until you've either converted the information or printed necessary reports.
Can you claim interest expenses when building a rental property?
You can't claim the interest until rental income commences, but you can capitalise interest on funds borrowed to
acquire an asset in its cost base for CGT purposes. So, the answer is no, not for construction.
Follow up question: So, this is new? In the past you could, on the proviso that you were doing it for investment
purposes?
Well, not strictly for rental properties. During the construction phase, you need to capitalise interest expenses.
Claiming interest for 'investment' purposes can still happen, for example, for a share trader.
The relevant ruling is TR 2004/04 which at para 9 states: ‘It follows from Steele that interest incurred in a period
prior to the derivation of relevant assessable income [the build phase] will be 'incurred in gaining or producing
the assessable income' in the following circumstances:
• the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude
  to those activities
• the interest is not private or domestic
• the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into
  account the kind of income earning activities involved, that the necessary connection between outgoings and
  assessable income is lost
• the interest is incurred with one end in view, the gaining or producing of assessable income
• continuing efforts are undertaken in pursuit of that end.
Please also note the proposal in the 2018-19 Federal Budget to deny deductions for expenses associated with
holding vacant land from 1 July 2019. This measure proposes to deny deductions such as interest costs on land
which is not genuinely held for income-producing purposes.
How does the arrangement between a service trust and a company work? Is there a set percentage of
commission to be transferred from the service entity to a company?
It is necessary to ensure that any service fees paid by a company providing professional services to a related
service trust are based on market value rates. In this context, it is important to note that the Full Federal Court's
decision in Federal Commissioner of Taxation v Phillips (1978) 8 ATR 783 does not stand for the proposition that
the calculation of service fees using the particular mark-ups in that case will always be treated as deductible
under s. 8-1. In determining whether the service fees paid are deductible, the contractual benefits conferred on

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the professional services firm under the service entity arrangement must be sufficiently connected with that
firm’s income earning activities or business so as to be commercially realistic.
Whilst there are no commercial rates that automatically apply the ATO has issued a guidance product, Your
service entity arrangements, which provides practical guidance as to whether the fees charged under a service
arrangement are commercially realistic and reasonably connected to the business carried on by the professional
practice. In particular, it sets out a range of ‘safe harbour’ commercial rates that could be applied as a mark-up on
the cost of providing particular services as well as higher indicative rates that may alternately be used in assessing
the risk of a service entity arrangement being audited. Service trust arrangements should be reviewed to
determine whether the arrangement implemented is compliant with the guidance set out in the booklet and to
gauge the likelihood of the arrangement being potentially audited by the ATO.
Does the depreciation limit of $57,581 need to be reduced to $52,346 for those who are registered for GST?
The $57,581 is already ex GST, so there is no need to reduce the amount. See the ATO website for more
information.
How can you apportion phone and internet expenses when clients have a monthly plan with unlimited calls,
downloads and internet usage?
You need a log book and/or client notes to show how you worked out the percentage to claim the work-related
use portion of the cost. You can use a detailed bill, but it might not be available, so show a reasonable calculation
and/or estimate, verifiable to the work being performed.
Does the $25,000 personal superannuation contribution cap include your employer's super guarantee
contribution?
Yes, it does.
Under the new rules on depreciation for rental properties (not allowing depreciation on existing assets in the
property), can a secondhand asset separately purchased by the landlord be claimed? For example, a landlord
bought a secondhand television to be used in his rental property (and has a receipt).
The new rules provide that any asset previously used cannot be claimed, so the answer to the secondhand
television question is no.
Follow up question: So, a new television would be OK?
Yes, that is correct.
Further follow up question: I think it may be any asset that has been previously used in that property only. If
you purchase a secondhand dishwasher yourself and then install it into the rental property, then it can be
claimed. I think. Wouldn’t it be better to say, ‘Any asset you did not directly purchase yourself cannot be
claimed’ (such as those passed to you automatically when you bought the property secondhand).
Please refer to section 40-27 as any depreciating asset which has been previously used for a non-taxable purpose
cannot be depreciated when used in a residential rental property where the asset was acquired post 9 May 2017.
Do all SMSFs whose members received an income stream before June 2017 need to lodge transfer balance
account reports?
Transfer balance account reports are based on account balances, not whether you are in an income stream.
You should check the ATO website on event-based reporting to give you an idea of the timing of reporting
required.

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A client has a company with shareholder/Director A with 51 shares of $10 shares and shareholder/Director B
with 49 shares of $10 shares. The client sold the business in 2016 and claimed a Small Business Rollover
exemption of $50,000 in that financial year. That company is still active with no assets but is not trading. The
client opened a new corporate entity with shareholder/Director A with 100 shares of $10 each in 2017. The
client invested $500,000 for management rights. The second company is also an active company and is trading.
With shareholder A being a director and shareholder of both entities, can the first company utilise the Small
Business Rollover exemption of $50,000 by way of replacement asset as an investment in the second entity?
Thank you for your query but this will require specific detailed advice as the matter is inherently very complex.
Great care should be taken in addressing any issues associated with the CGT small business concessions as
anecdotally specialists in the area have stated that around 90% of advisers make mistakes. Please note that this
area is currently the subject of legislative amendment
If a client received bitcoin in the form of wages, and after a few months the client sells the bitcoin, is there any
capital gain event in this situation? There was no asset purchased in the first place.
Bitcoin and crypto currencies are treated as an asset for CGT purposes. The initial receipt would need to be
declared for income purposes (wages), but then if sold at a later date, the difference would be a capital gain or
loss as applicable.
Follow up question: If the client has purchased bitcoin for the value of $15000 and then used $3000 of bitcoin
to pay the rates of the house, what will be the tax outcome for the client?
Assuming the house is a main residence, it is non-deductible, and the cost base of your bitcoin will need to be
adjusted accordingly.
Can I claim petrol expenses for a small business?
The short answer is yes, subject to possible substantiation e.g. log book if it’s not a commercial vehicle.
Please confirm that a distribution of trust or partnership income that relates to business operations will not
constitute passive income, and company predominantly received passive income will be taxed at 30% for the
2018 financial year.
Under this scenario, you are correct and it retains its character under the proposed legislative change to apply
from 1 July 2017, however, please note two things:
• the amending Bill relating to Base Rate Entity (BRE) Passive Income is before Parliament as we speak
• please check with your last software provider regarding BRE disclosure on the tax forms.
With regard to travel expense claims for businesses, can travel from home to a shop be claimable?
The answer is no, unless carrying bulky goods or stock.
Follow up question: So travel expenses for a restaurant business are probably nothing much to claim as the
owners stay in the restaurant all the time and most of the stock are delivered to the shop. Can you give some
examples on what type of travel that a business owner can claim?
Any normal business-related travel is deductible. Refer to Section 8-1 of ITAA 1997 and TR 2017/D6.
Can a property owner claim building write off on property purchase after May 2017?
Yes. There are no changes to capital works deductions under Division 43 for income producing purposes.

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With an investment in a joint venture construction, every year the taxpayer gets a share of the loss. But the
taxpayer also borrows to fund the project. Can he claim his interest cost too or does he have to capitalise it in
his investment in the joint venture and claim at the end of the project?
There are many rulings relating to Joint Ventures and they are different to partnerships. So, we recommend that
you undertake some research and, if necessary, obtain independent advice.

FURTHER INFORMATION
Bookmark our Complimentary events page to access our complete list of complimentary live chats and webinars.

For more information please email livechats@cpaaustralia.com.au

Copyright © CPA Australia Ltd (“CPA Australia”) (ABN 64 008 392 452) 2018.

DISCLAIMER: CPA Australia Ltd has used reasonable care and skill in compiling the content of this material. However, CPA Australia Ltd
makes no warranty as to the accuracy or completeness of any information in these materials. The above material is only general in nature
and not intended to be specific to the reader’s circumstances. Further, as laws change frequently, all practitioners, readers, viewers and
users are advised to undertake their own research or to seek professional advice before making any decisions or relying on the information
provided.

July 2018

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