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Monday, July 25, 2005
 
Documentation and compliance critical for SMEs

It pays for small business to be tax compliant, say CPAs.

Record keeping and compliance includes having appropriate commercial contracts and review systems for all appointments, outsourcing arrangements and transactions.

A report recently released by CPA Australia says there is a direct link between poor record-keeping and the likelihood of an adversely amended tax assessment where a small business has been subjected to a tax audit. CPA Australia's Small Business Policy Adviser, Judy Hartcher, said that the report, Record-Keeping: Its Effect on Tax Compliance, proves that it pays for small business (SMEs) to have a good system in place, not only in the event of a tax audit, but also from a strong business management perspective.

Ms Hartcher said it was crucial for small business to have a correct system in place to avoid future tax compliance problems. Correct record management could potentially save business thousands of dollars in the event of a tax audit, when hefty fines can be imposed on those who have made mistakes in their tax reporting, whether intentional or not, she said.

The research, conducted for CPA Australia by the University of New South Wales' Australian Taxation Studies Program (Atax), explores the relationship between the record-keeping practices of small businesses and their potential exposure to tax and related business compliance problems. It used a mixture of qualitative and quantitative methodologies and involved tax practitioners, small business owners and managers, and ATO auditors.

The report also found that:
  • SMEs which had been audited recently by the Tax Office were more likely in the future to prepare more comprehensive sets of accounting reports as a result of the audit.
  • SMEs which had been recently audited were far more likely to view tax compliance as the main reasons for record-keeping than those small businesses that had not been exposed to an audit.
  • One-third of tax practitioners were not confident in the accuracy of clients' record keeping systems, but 80% believe the systems are adequate for tax compliance.
Both SMEs and accountants saw cost savings and improved accuracy in computerising record keeping.

The report emphasises the need for SMEs to properly document and record all their commercial dealings and arrangements. Please contact us if you would like to obtain a legal audit of your current business arrangements.


Friday, July 22, 2005
 
At call loans to small business to be treated as debt

In a press release issued on 15 July 2005, the Minister for Revenue and Assistant Treasurer, Mal Brough, announced changes to simplify the debt/equity tax rules (Division 974 of ITAA 1997) for related party "at call" loans made to small companies. Small business will now have only one test to apply in determining whether the debt/equity rules apply to their at call loans.

Originally changes were to apply to companies which had capital gains tax (CGT) assets with a net value of $5 million or less and annual deductions in relation to the loan of $100,000 or less. However, further consultation with industry has helped to simplify the rules further. "As a result of these consultations and further consideration by Government, the proposed changes will now apply to companies with an annual turnover of less than $20 million. This is a much better outcome for small businesses," Mr Brough said.

The amendments will take effect from 1 July 2005 to coincide with the end of the transitional rule for related party at call loans.

For private companies with related party at call loans that can't take advantage of the proposed changes because their turnover exceeds the $20 million limit, the Government will allow a further opportunity of reducing their compliance costs. This will apply where:
  • the terms of an at call loan are changed so it will be treated as debt for income tax purposes, and
  • the change to the loan is made between the end of the income year in which the company failed the $20 million turnover test and the earlier of the company's due date for lodgment of its tax return and the actual lodgment date.

A private company may elect to have such a loan treated as a debt interest from the start of the year of income in which it failed the turnover test.

Mr Brough also announced that amendments to the material change provisions of the debt/equity rules will ensure that where before 30 June 2005 an at call loan was changed so as to be treated as debt, it will continue to receive debt treatment after that date.

For a copy of the Minister's press release, No 2005/063, 15 July 2005, go here