Is the Taxman becoming Father Christmas? Don't bet on it!

We heard before Christmas that voluntary tax returns won’t be far away as it is one of the key recommendations of the much anticipated Henry Tax Review.

It is proposed that taxpayers will receive a one page summary from the ATO which will show your income together with a standard deduction for necessary work expenses. If you are happy with the ATO’s calculation they you simply tick a box and get your refund. Sounds good in theory for those with basic tax returns and don’t want the hassle of filling out a return.

But does anyone seriously trust that the taxman will look after us? Do you really think the ATO will be Father Christmas when granting refunds?

Of course not.

Just consider the taxpayers who spend alot for work related expenses such as car, study, home office, internet, phone, subscriptions and conferences. They will miss out if they simply accept the standard deduction. We don’t even know what the “standard deduction” is exactly going to be anyway as Dr Henry has hinted it will be based on your income and occupation.

So it is likely to be based on an average for a particular occupation. Which begs the question as to which occupation would have the highest work related expenses claim? I would guess someone in a sales and marketing who receive car allowances and use their own car to see clientele. So why don’t we all become sales and marketing people and get a big deduction as well??

And remember an average is just that an average … people who spend more than the average will miss out whilst those under the average will be happy. Don’t shortchange yourself simply be being lazy as it could cost you thousands.

And what happens with inflation? Does the “standard deduction” increase for inflation? Or does it stay at the same level like a lot of other standard tax figures (eg $300 no receipts figure) have been over the years?

So will accountants lose work as a result of this? Basic preparers such as ITP and H & R Block will lose out but they have lost over 2.2 million in business in the past decade with the introduction of the Tax Pack and E-Tax. It is very unlikely that other qualified accountants will suffer. If a tax return is complex then you will still need help with an accountant – so those returns with business income, rental property or capital gains you won’t get any benefit from the proposed change.

In fact I think my business will make a lot of money by charging a fee if we can find discrepancies in the taxman’s calculations. Perhaps our slogan will be … “We will do your tax for free if we can’t get you back more!”

The last three years the ATO have been trialing a pre-filling report where information such as salary, interest, dividends and managed fund distributions can be downloaded. This will no doubt form the basis of the proposed one page document. But this information is based on the provision of tax file numbers and also the reporting to the ATO by the respective institution. It takes a good four months to get information that is close to accurate but it rarely is 100% accurate. There are missing PAYG Payment Summaries, missing bank accounts, missing shares and the like. I can’t see much improvement in the future.

What do you intend on doing? Will you trust the taxman and accept his verdict or will you still prepare your own tax return as normal?

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Mr Taxman's Top Twenty Tax Tips for 2009 - Nos 1-10

Times are tough so every dollar saved counts. Last week I provided the first ten of my top twenty tax tips for this financial year. This week I now provide you with my Top Ten Tax Tips for 2009. Remember that tax planning should be 365 days per year not just one month. These strategies are just as useful on 1 July.

10. Tax effective investments - These investments have copped a lot of bad press in recent weeks thanks to Timbercorp & Great Southern debacles, but you shouldn’t assume all are guilty by association. They generally have 100% tax deductibility (look for ATO Product Ruling). Unlike investments in shares or properties, if you invest say $50,000 in these types of investments you will get a tax deduction for $50,000. Will help with levelling out the tax on any capital gains made. Returns in this sector over the past decade have been better than other asset classes and would sit nicely in any diversified portfolio.

9. Education Tax Refund -Don’t miss out on this new tax rebate which gives a 50% refund on certain education expenses up to $750 expenditure for each primary school child and $1,500 for each secondary school student.

8. Realise capital losses - With the slump in the stock market this year, it is an opportunity to reduce the tax on gains made earlier in the year by selling a few non-performing shares. ATO was warned against "wash sales" where you sell shares & buy them back straight away. For those with self managed super funds (SMSFs) it is a great chance to transfer these shares into a lower taxed environment & potentially only pay 10% tax on future gains.

7. Keep your receipts - With the ATO increasing their audit activity this year yet again it is important that you keep your receipts. The ATO motto is no receipt = no deduction so you could be costing yourself $$$ by not keeping those dockets!

6. Prepay interest - Prepaying interest 12 months in advance before year end on your rental property or margin loan is an excellent strategy for those that will have a lower income next year due to factors such as maternity leave or redundancy.

5. Salary sacrifice/contribute into super - For those under 50 years of age you can contribute up to $50,000 per year into super & only pay 15% tax. This figure increases to $100,000 if you are over 50. Ultimately it is your money and you can build up your net wealth quicker instead of paying up to 46.5%. A great tax deduction for those in business.

4. Car log book - If you use your car for work purposes, then the best method to claim for it is the log book method. Purchase a log book from the newsagent, fill it out for 12 weeks & keep all costs associated with the running of your car including petrol, rego, insurances, servicing, repairs, lease payments, batteries, tyres, etc. You can start your log book now and roll it over into the next tax year. The hard work is worth it as deductions can be in the thousands and you only need to do a new log book every five years unless you change your job or car.

3. 30%/50% investment allowance - If your business needs to get some new equipment then take advantage of this great tax break of an extra 50% deduction for small business (or 30% for large businesses). Be careful that this is not a 50% cash rebate. You need to multiply the deduction by your marginal tax rate to get the cash flow benefit. Beware of potential FBT for cars purchased via companies and don’t just spend or get into further debt for the sake of a tax deduction. Also note that even if you order & pay for it this year, you only get the tax deduction in the financial year that you first get use of the new asset. Eg if delivery is on 1 July then tax deduction is in 2009/10 year not 2008/09.

2. Super co-contribution - If your (or your spouse’s) income is under $30,342 and you contribute $1,000 post tax into your super fund the government will match it with a further $1,500. It amazes me how few people actually take advantage of this great benefit. Free money!

1. Action - Ok you have got some great tax strategies, now it is time to take action. I get frustrated when people say “oh yeah, I remember you telling me that but I just didn’t get around to it” or “I forgot”. Wrong answer. Use the Nike Principle and just do it! You will be surprised how many slackos there are that simply miss out on easy money despite how simple these strategies are.

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Mr Taxman's Top Twenty Tax Tips for 2009 - Nos 11-20

I always get asked for a tip or two, particularly around tax time each year. So over the next 2 weeks I will provide my top twenty tax tips for 2009. Please note that not all of the tips will be applicable to you or your business and you should consult your own adviser/s to assess your own particular needs before implementing any of them. Remember that effective tax planning should be over 365 days per year, not merely the few weeks before 30 June.

20. Private health care – if you are single & earn over $70,000 (or a couple earning over $140,000) then you should know by now that for 99.7% of us it is probably cheaper to get basic hospital cover to avoid the 1% Medicare levy surcharge. Note that you do not need to get ancillary cover (ie dental, physio, acupuncture, chiro, etc) although I reckon that this is where all the value is with private cover these days.

19. Travel diaries – if you travel more than 5 days interstate or do any overseas travel for business then you need maintain a travel diary to substantiate your claim. The diary must be quite detailed and record dates, places, times and duration of activities and travel. Keep business cards of who you see & if possible, make a presentation/report to your work.

18. Get a great accountant – Great accountants are like quantity surveyors ... they know where the boundaries are. By not using an accountant, you could be paying too much in tax or you could be leaving yourself open to a visit from the ATO auditors. And their fees are tax deductible! If you are looking for one then drop me a line.

17. Medical expenses – there is a rebate for out of pocket medical expenses (ie the gap) over $1,500 – they must be provided by a registered medical practitioner (ie a doctor & not physio or chiro unless referred by them) & also includes prescriptions. In tough times, people generally get sick so if you are close to the $1,500 threshold you may want to bring forward some costs (such as new glasses, visit to the dentist) before 30 June & get an effective 20% discount from the taxman. It may even be worthwhile to register for the Medicare Safety Net.

16. Depreciation schedule – if you have bought a rental property this tax year, and it was built after 1985, then it is definitely worthwhile organizing a depreciation schedule from a quantity surveyor now. It takes about 3-4 weeks to organize & costs around $500-600 but you get the benefits back tenfold with tax savings via increased depreciation claims.

15. Scrap obsolete stock & plant – got some old plant or stock that your business simply can’t sell? Then physically write it off before 30 June & get a tax deduction for it this year.

14. Income splitting – it amazes me how many smart business people are really dumb when it comes to reducing tax. Too often I see rich businessman with high income taxed at 46.5% also paying 46.5% tax on interest or dividend income which could be in put in their lower taxed spouse (0% or 16.5%) or company (30%).

13. Write-off bad debts – like obsolete stock, for a business to get a tax deduction on its bad debts it must physically write off the debt prior to 30 June. Note that the debt must have been originally shown as income in order for the write off to be allowed.

12. Defer income & bring forward expenses – it is always a good idea to try & defer your taxable income to next financial year. If you have expenses such as professional membership subscriptions due on 1 July, pay them before 30 June to reduce this year's tax. For those in business you may want to defer your invoicing til next tax year.

11. Don’t spend purely for a tax deduction – there are so people that get caught out at this time of the year in spending money purely to get a tax deduction. Remember that it is a play on marginal tax rates. If you are running a business via a company then you are only getting 30% back. If you want a $100,000 tax deduction before 30 June my accounting practice will gladly invoice you & accept payment. But you will only get $30,000 tax benefit & the transaction has cost the business $70,000. So don’t get caught out by the fancy marketing of retailers in coming weeks. Always think of my A-B-C motto … Absolute Bloomin’ Cash.

Does your business do any tax planning?

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Accountants charging "handling fees"? What a joke!

I almost choked on my dinner last night when I heard that there are accounting firms out there charging a $45 “handling fee” for their part in forwarding on the $900 stimulus payment. What on earth are they thinking?

I have been involved in accounting firms for the past 20 years & I have always hated when firms tried charging clients a “handling fee” when they get tax assessments and the like from the tax office. As the assessment goes from the ATO to the accountant’s mailbox to reception to partner back to reception & then eventually out to client, the process will take 3 to 4 days. Accountants will defend themselves and say that the ATO gets it wrong from time to time so there is a need to check the assessment. Fair enough 20 years ago when calculations were done manually. But in this day & age of computers and self-assessment, I reckon the ATO are correct in 99% of instances. So that is 3 or 4 days wasted that the client waits patiently for that cheque to arrive to pay for their rego, credit card bill or holiday. My firm has always had a simpler process where we show the client’s address as the mailing address for the ATO. We figure that if it was wrong then the client would contact me & we can sort it out then. And they get their refund cheque 4 days earlier.

So when the “Kev 07” stimulus payment got announced a few months ago there were alot of tax agents - who had their business address and trust bank account as the details for all their clients – that jumped up & down about it being wrong and how it would be a waste of administration resources during a busy time of year. So the ATO listened & told them the process to change the default address to the client direct, together with the client’s bank account. I got the notice from the ATO a few times. The ATO even placed adverts in the newspapers telling the public the same. So put simply it is nothing more than poor practice management for accounting firms to get a ream of $900 cheques arriving in their office. Yet they now have the hide to charge $45 for their poor practices??

I have also been wondering how these firms even came to the $45 figure to charge clients as well. It is hardly rocket science work, so you would be paying the pimply faced teenagers in the office to do it. Now I reckon that even an inefficient office clerk – if they are given 1000 cheques - could get a stimulus payment sent to a client, on average, every 3 minutes. So that’s 20 sent out per hour - or a handy $900 hour’s work! Pretty handy profit margin when you are paying that office clerk under $20 per hour isn’t it!!

The whole “handling fee” just reeks of poor client service (and poor understanding of the current economic situation) by these accountants. Their attempted money grab will backfire badly on them and I can assure you that they will lose alot of clients in the coming tax season. Thanks guys for sending customers our way!

What would you do if your accountant tried to pull this stint? Would you simply pay their $45 fee and shut up … or would you walk? I know what I would do!

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Why Do We All Hate The Taxman?

After talking to so many business people over the years, it is rather interesting that they all seem to have the one thing in common - they all hate the taxman.

But why do you hate the taxman?

After all, the ATO does not set the taxation rules, they simply administer them. It is the Government of the day which sets the taxation rules. On one fateful night back in September 1985, it was Paul Keating who created Fringe Benefits Tax and Capital Gains, not the taxman. It was the Howard government which introduced GST. It is not up to the ATO to abolish or remove tax legislation, but simply apply the law that is in front of them. The taxman is really no different to a policeman.

Should we get upset with the lovely police officer who issues us with a speeding ticket or thank him for save our lives by ensuring safer driving on our roads?

Shouldn't we be getting more upset with all those cash businesses that don't pay their fair share of tax? Or any tax at all?

Hands up if you know of a business that has a "cash price" that is invariably cheaper than their original price. Keep your hand up if you have dobbed that business into the taxman? I can't see that many hands up .. why not? Perhaps it has to do with the Australian way of not dobbing on your mate ... but are they really your mate if their dodgy actions mean that you are paying more tax as a result?

I love it when the taxman pounces on a dodgy character who tries to avoid paying tax.

It is the Federal Treasurer each year, in his budget speech, that sets the tax rates for the following years. Not the taxman. I am sure that if the taxman could set them himself he would reduce them to try & get a higher approval rating. He may even get a few more tickets sold to his ball each year.

If it wasn't for the taxman's efforts over the last few decades in clamping down on the wrong doers who have tried to avoid tax, then we would all be paying alot higher tax.

Did you know that when the taxman makes announcements in June of each tax year in targeting certain industries, that the average tax deductions claim falls by 23%? That is alot of cashflow savings simply by sending out a press release. Does your business have such a success rate with your cashflow when you send out a press release?

When I first started working in tax 20 years ago, I must admit that I was spooked by the taxman. I seemed to spend half the day on the phone listening to the ATO's onhold music and when I finally got through to someone, I would invariably get someone with absolutely no comprehension of the English language & would seem to be keen on simply throwing the book at anyone for getting it wrong. However in 2008, the phone calls are answered significantly quicker & the person at the other end seems alot more friendly and approachable. The internet has made it easier for accountants and business owners to access information from the ATO via its portal. Arranging a payment plan for tax is alot easier too.

Yet the public still hates the taxman and blames him for sending them bankrupt rather than look at their own inadequacy to budget and plan their cashflow for tax payments. If you make the profit then you should expect to have to pay tax. By spending all your cash on personal lavishing as nice cars & travel rather than tax is simply poor management.

I hate paying tax and agree that everyone should legitimately try to legally reduce their tax obligations with smart tax planning. But I don't hate the taxman ...

So why do you hate the taxman?

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