Contact75 web

75 2011

2 FEATURE INDEPENDENT CONTRACTORS IN THE GUN

3 FEATURE FOREIGN INvESTmENT – A kEy DRIvER IN AUSTRAlIA’S FUTURE GROwTH

4 lEgislATion FAIR ENTITlEmENTS GUARANTEE – PROTECTING EmPlOyEE ENTITlEmENTS

5 FEATURE TRUST STREAmING – PART 1

6 CliEnT PRoFilE wESTERN ImAGING GROUP

7 ADVoCACY – BUDGET UPDATE TAx PAYER AlERT

8 WHAT’s nEWTAx DiARY

Swinburne University and Pitcher Partners are undertaking a two and a half year project which explores the dynamics that shape planning amongst family businesses. In particular, the project aims to understand the uncertainty and delay around family business succession planning, clarify the dynamics which inform succession planning and develop effective strategies directed toward orderly succession planning.

The statistics surrounding family business are impressive. Family firms account for 70-80% of Australian businesses, and make up $4.3 trillion of business value. In the next decade, approximately $3.5 trillion of that value is expected to change hands as the baby boomers pass on their businesses. Surveys of businesses routinely report that the issue of succession is fraught and that over 50%

of business owners intending to retire over the next ten years do not have an exit strategy in place. The avoidance or delay of decision making by business owners over succession, potentially weakens capital value, leaves family businesses at risk of failure and their stakeholders vulnerable to conflict and uncertainty.

Although there is a substantial knowledge of succession planning in family business research, there has been very little sociological research conducted as to the dynamics, barriers and strategies involved in family business succession planning.

Family business owners and managers often seek help in succession planning from trusted professional advisors, but some of the problems arising from succession planning are not financial or legal, but rather social, involving a complex array of decisions and processes embedded in family communication and decision-making.

The research project will employ a range of data gathering techniques including case studies, interviews and a national survey, all of which will help identify and understand issues such as trust and communication across family businesses. Clients will have the opportunity to participate in the research phase if they so wish.

We await the outcomes of the project with interest, as it is expected that the study will generate better strategies, protocols and policies for the succession planning of Australian family businesses. This information will be invaluable in assisting Pitcher Partners to properly guide clients in the evolution of their businesses in the future and we look forward to sharing the knowledge with you.

Dr Richard Shrapnel Executive Director – Business Consulting Melbourne

A P U B L I C A T I O N E X A M I N I N G I S S U E S F O R O U R C L I E N T S

Why do business owners delay making decisions about the future of their firms and potentially put at risk this most valuable asset?

Taking care of Business

F e a t u r e

Independent contractors in the gun Brad Twentyman

Director – Superannuation Melbourne

The push to limit the number of independent contractors is well under way in the building and construction industry and it appears the commercial cleaning, information technology and transport industries will be the next targets.

In the recent Federal Budget the Government announced it will require certain businesses to report annually to the Australian Tax Office, payments that have been made to contractors and sub-contractors in the building and construction industry with effect from 1 July 2012. The Assistant Treasurer Bill Shorten, claims the new reporting regime will require businesses to report information that is already required to be collected and recorded under existing taxation law. He seems however, to overlook the additional compliance burden that reporting the information will impose.

Following on from the Budget, the Assistant Treasurer released for public comment a discussion paper outlining the new reporting regime. Feedback from the consultation will be used to finalise reporting arrangements.

Proposed regime An example of the proposed reporting regime taken from the discussion paper is set out in the adjacent diagram.

Additional detail is provided in response to common questions being asked of Government:

■ Payments subject to reporting Payments that will be subject to reporting, are payments under a contract that is in whole or in part for the supply of building and construction services. Payments either solely for the supply of goods or materials or payments of salary and wages for employees will not be captured.

■ Entities subject to reporting The entities subject to reporting will include any contractor or subcontractor who is engaged in the building and construction industry, who quotes their ABN to the purchaser and receives a payment for building and construction work.

■ Reporting responsibility Businesses, including sole traders or contractors wholly or principally engaged in the building and construction industry, will be required to report. Private individuals such owner builders will not be required to report.

Government Discussion Paper – Reporting of Taxable Payments for Contractors in the Building and Construction Industry May 2011

WHO?

Building Co Housing Developer

Bob Plumbing Contractor

1 CREATE AND PERFORM CONTRACT

2 INVOICING

3PAYMENT UNDER CONTRACT

4QUARTERLY BUSINESS TAX OBLIGATIONS

5END OF YEAR BUSINESS TAX OBLIGATIONS

Building Co contracts Bob to install a bathroom

Bob installs the bathroom

Once completed Bob bills Building Co for his services

Bob receives payment for his services

Bob lodges his BAS on a quarterly basis

Bob completes and lodges his income tax return

Bob will pay an income tax liability or receive a refund

Pay PAYG instalments to ATO

Key

Stage Existing Obligations New Obligations

Building Co receives Bob’s invoice (including ABN)

Building Co pays Bob for his services

Building Co lodges its BAS on a quarterly basis

Building Co completes and lodges their income tax return

Building Co will pay an income tax liability or receive a refund

Pay PAYG instalments to ATO

Building Co must record the details of the payment it makes to Bob including Bob’s ABN

Building Co lodges annual report detailing payments to all contractors

■ Frequency Reports will need to be lodged as an annual report in the approved form. The annual report (to be called a ‘Division 405 report’) will contain information that identifies the ‘supplier’ and the building and construction industry payments to the ‘supplier’ in the reporting period.

We understand further consultation is scheduled on the form and method of reporting.

Submission Pitcher Partners will discuss the form and content of its submission with clients. All comments and views would be welcome. For this purpose or for further information on the announcement, please consult your regular Pitcher Partners contact.

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F e a t u r e

Foreign Investment – a key driver in Australia’s

future growth Ben Lloyd Regional Executive Baker Tilly International

Australia’s history of welcoming foreign investment has proved to be a key driver of our development as a nation. Foreign investment provides additional capital for growth, creates new job opportunities and supports existing jobs. It also encourages innovation and skills development, introduces new technologies and promotes healthy competition amongst our industries. The Australian Bureau of Statistics estimated at the end of 2008, that 25% ($100 billion) of foreign direct investment was in mining and 19% ($74 billion) in manufacturing.

In his address to delegates, The Minister described Australia as an economy with “strong fundamentals, low unemployment, strong job creation and a massive pipeline of business investment.” He noted that Australia has much to gain from our growing economic relationship with the Asia-Pacific region and that future growth relies on our continued openness to foreign investment.

“Australia is a globally competitive location to do business and offers a wealth of opportunities for businesses to succeed”, said the Minister.

In particular, he noted “our strong institutions, flexible markets, highly skilled workforce, culture of innovation, sound economic policy, natural resources and proximity”, all of which make us highly sought after by the two major developing economies, India and China. “We are a country which offers diverse business opportunities across a broad range of industry sectors, and we welcome and encourage foreign investment. Australia’s investment climate is a good story and one which we are proud to tell.”

In this encouraging investment climate, Pitcher Partners’ membership of the Baker Tilly network will enhance its ability to provide clients with a recognised global brand, and a leading, closely aligned network of locally owned and managed firms focused on delivering exceptional client service. The Baker Tilly network has 150 member firms in 120 countries worldwide. In the Asia Pacific region, we provide services across 24 countries.

If you would like to know more about how Pitcher Partners can assist you in the region, please contact Ben Lloyd, on 03 8610 5425 or at [email protected]

At the recent 2011 Baker Tilly Asia Pacific Regional Conference in Melbourne hosted by Pitcher Partners, the Hon Bill Shorten MP, Assistant Treasurer and Minister for Financial Services and Superannuation, emphasised Australia’s “very consistent approach” to foreign investment. He told delegates that since 2007, the Government had approved over 1,600 foreign investment business proposals worth around $490 billion.

The Government’s consideration of business proposals is done on a case-by-case basis, and despite the recent speculation surrounding the acquisition of ASX by the Singapore Exchange, (subsequently rejected by the Government), Australia’s foreign investment policy has not changed.

The Government continues to welcome foreign investment because of the benefits it provides the economy. It has actively pursued a framework that will allow for the introduction of competition in Australia’s equity markets, which could include foreign operators setting up markets in Australia, and the commencement of market competition with the entry of Chi-X later this year.

3C O N T A C T

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As also noted in the recently released Federal Budget, the super reforms extend to the ATO and the Fair Work Ombudsman (FWO) receiving additional enforcement powers.

As of 1 July 2011, the ATO will have stronger powers to ensure companies comply with their superannuation requirements through:

■ An extension of the Directors Penalty Notice (DPN) regime to include unpaid superannuation entitlements; and

■ Improving the capacity of the ATO to conduct proactive compliance activity and investigate worker’s complaints.

These amendments would see an increase in the personal liability of Directors for unremitted superannuation contributions. Employees who are employed by unincorporated entities will also see their entitlements ranking improve under the proposed reforms. The reforms propose the aligning of the priority of employee entitlements under the Bankruptcy Act 1966 with the priority provisions encompassed under the Corporations Act 2001.

For more information consult your local Pitcher Partners’ contact.

L e g i s l a t i o n

Andrew Yeo Partner – Business Recovery & Insolvency Melbourne

The Federal Government’s “Protecting Workers’ Entitlements package” has been designed to increase the level of legislative protection for employee entitlements when their employer goes into liquidation through the implementation of three key initiatives:

1. Introduction of the Fair Entitlements Guarantee Legislation. This proposed legislation is designed to protect employee entitlements including:

■ Redundancy (up to a maximum of four weeks for each year of service);

■ Annual Leave;

■ All Long Service Leave; and

■ Up to three (3) months of unpaid wages.

The proposed Fair Entitlements Guarantee will replace the existing General Employee Entitlements and Redundancy Scheme (GEERS).

2. Amendments to increase compliance and recovery measures against company directors in relation to superannuation.

3. Administrative changes to strengthen the ATO’s powers to prosecute directors personally for unremitted employee superannuation as well as increasing the powers of the Australian Securities and Investments Commission (ASIC) to fight Phoenix activities.

The Fair Entitlements Guarantee will not apply to:

■ The portion of income earned above the annually indexed rate of $108,300.00; and

■ Directors or other ‘excluded employees’ of the employing company such as spouses, children or relatives.

The Federal Government also proposes that under its “Securing Super” reforms, employees will receive:

■ Information on their payslips about the amount of superannuation actually paid into their super account; and

■ Quarterly notification from their superannuation fund if regular payments cease.

These proposed reforms should tighten the mechanisms associated with the timely payment and disclosure of all super payments, although we have concerns that employees could become alarmed unnecessarily because of the usual time delay in remitting contributions.

Fair Entitlements Guarantee – Protecting Employee Entitlements Andrew Yeo

Partner – Business Recovery and Insolvency Melbourne

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discuss in Part Two of this article. Critically, as resolutions or records need to be in place by 30 June 2011 for dividends and 31 August 2011 for capital gains, this does not leave a lot of time for trusts to consider the proper application of these new provisions, and put in place documents to comply with these provisions.

On that note, the ATO has indicated that, in the event of an audit or review, it will not apply its long standing administrative practice of allowing trustees until 31 August to pass resolutions distributing the income of a trust for a prior income year. Accordingly, due care must be taken before 30 June 2011 to comply with the requirements of the new provisions. Indeed, it will be a critical issue for distribution statements and resolutions for the year ending 30 June 2011 to comply with the new provisions. We would strongly recommend seeking advice as to these requirements, especially where a trustee is seeking to stream capital gains or franked dividends.

Part Two of this article, which will appear in the next issue of Contact, will examine some of the many compliance problems that arise under the new provisions, including: expense and loss allocation requirements; dealing with prior year capital losses; asset revaluation reserves, requirements for preparing accounts; dealing with contracts that straddle year-end; and the operation of the CGT market value substitution rule.

For further information please refer to our Tax Bulletin at www.pitcher.com.au/53/Bulletins, or consult your local Pitcher Partners contact.

F e a t u r e P a r t 1

Trust StreamingConsiderable uncertainty regarding the ability of Trustees of discretionary trusts to stream different classes of income has now been removed for capital gains and franked dividends. The Government has released legislation that will allow two classes of income to be streamed through a trust, being capital gains and franked dividend income. The legislation is scheduled to have effect from 1 July 2010.

The new provisions will allow Trustees to specifically allocate capital gains and franked distributions to nominated beneficiaries, provided they are made specifically entitled to the amounts under the terms of the trust. However, to access these provisions, the Bill critically requires written records to be in place by 30 June 2011 for dividends and by 31 August 2011 for capital gains.

In the absence of a Trustee’s resolution or appropriate records allocating income in this way, the ATO’s practice of allocating income proportionately across all beneficiaries will apply.

Example:

To demonstrate the application of the new provisions, assume that a trust derives a capital gain of $10,000 (which is discounted for tax purposes to $5000), and other business income of $10,000 (which results in a taxable amount of $15,000 due to timing differences). Therefore, assume that the total trust law (accounting) income is $20,000 and the total taxable income is also $20,000.

The trust may wish to stream the taxable capital gain to beneficiary A (e.g. an individual) and the taxable other business income to beneficiary B (e.g. a company) under the new provisions contained in the Bill. In this case, each beneficiary would receive a cash distribution of $10,000 or

50% of the total distribution, however they would be attributed the taxable amount referable to the streamed income only. Assuming the individual rate of tax paid is the top marginal rate, the total tax payable would be $6,825.

Under the proportionate method (i.e. where the trust does not stream), this would mean that beneficiary A and B would be allocated 50% of the total taxable income (or $10,000 each), being a combination of 50% of the capital gain ($2,500) and 50% of the business income ($7,500) each. Furthermore, beneficiary B (being a company) would lose access to the discount component of the capital gain and would be taxable on another $2,500. The tax payable in this case would be $8,400, an increase of $1,575 or 23%

While the above example seems simple, the provisions are mechanical and complicated, leaving significant opportunities for error. Furthermore, the new provisions do not support the ability to stream other classes of income, including: interest income; unfranked dividends; rental income; business income; royalties and foreign income.

Due care must be taken

In many cases, the results under the new provisions can be far different from those under the ‘old’ rules – which we will

Alexis Kokkinos Executive Director – Tax Consulting Melbourne

5C O N T A C T

C l i e n t P r o f i l e

Western Imaging Group is an independent, comprehensive, private radiology practice located in the western Sydney suburb of Blacktown. Since 2005, the practice has provided a variety of diagnostic services to patients, including X-ray, ultrasound, mammography, barium studies, biopsies and CT referrals.

In late 2010 Western Imaging was able to offer to patients, the first Fonar Open UPRIGHT® Multi-Position MRI. Developed by Dr Ray Damadian of the Fonar Corporation in New York, the man accredited with the development of the conventional lie down MRI, this machine is one of only 140 in the world and the only one of its kind in Australia. It has no tunnel and allows the patient to walk in,

then sit, stand or place themselves in whatever position is most appropriate and comfortable for imaging.

The new open and upright design means the patient is not enclosed in any way, so there is no claustrophobia – they can even watch television while being imaged.

The MRI allows imaging of any part of the body, and enables the patient to be placed in a weight bearing position which reproduces pain and other symptoms. This allows a more accurate diagnosis and better targeted treatment, with reduced health costs for both the patient and the government funded health system.

“The added benefit is that the MRI provides improved access to a greater range of patients, including those suffering from claustrophobia, obesity or who are children. It allows the referring doctor to see the whole picture rather than just part of it, which is the case with

conventional lie down MRI’s, and therefore provides a more accurate diagnosis”, says Dr Matthew Lee from Western Imaging Group.

Pitcher Partners NSW has been providing business advisory and compliance services to Western Imaging Group since December 2009 on a range of issues including business advice on the expansion of the practice, financing of new equipment, due diligence of other radiology firms and review of existing operations. Since 2005, we have also undertaken comprehensive risk reviews and assisted in the development of appropriate succession plans.

Pitcher Partners are delighted to have Western Imaging Group as a key client and to be able to work with the principals of this successful enterprise to support their future growth and business evolution plans.

Western Imaging Group David Staples

Partner – Private Clients Sydney

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Ray Cummings Director – Tax Consulting Melbourne

Some Not for Profits to lose charity status

The crack down on unrelated commercial activity for the not for profit sector in the Federal Budget, will see a reassessment of the charitable status of entities based on a new definition of a charity which will see some organisations losing their charitable status.

New measures will also see the establishment of a new Australian Charities and Not for Profit Commission (‘ACNC’). One of the Commission’s roles will be to re-assess the charitable status of entities and then instigate the removal of tax concessions for income for those organisations whose activities are deemed not for altruistic purposes.

While the crackdown applies only to new activities from 10 May 2011, this measure may severely restrict the viability of many charities. For example, where all of the profit from the commercial activity finds its way to altruistic purposes, there may be a need for a build up of cash reserves either as working capital for the business, or to be earmarked for some future initiative of the charity. These funds may become taxable.

This is a serious issue for the not for profit sector, and we envisage that there will be extensive consultation between both the Federal Government and the not for profit sector in the future. Pitcher Partners will be advocating that this issue be handled with care, particularly at this time, when public donations are difficult to come by and Government expenditure is under review.

In the last edition of Contact we focused on the Divison 7A issues concerning trusts with corporate unpaid present entitlements (UPEs), specifically the opportunity for trustees to avoid traditional Division 7A problems by putting those UPEs on investment option terms.

Taxpayers are now reminded that the deadline for trustees to adopt an investment option approach is 30 June 2011.

If this affects you please contact your regular Pitcher Partners contact to discuss the matter as soon as possible.

Tax Payer Alert Decision on treatment of Corporate UPEs must be made by 30 June.

Advocacy – Budget Update

7C O N T A C T

AdelaideTom Verco, Principal 160 Greenhill Road Parkside SA 5063

Telephone +61 8 8179 2800 Facsimile +61 8 8179 2885 [email protected]

MelbourneJohn Brazzale, Managing Partner Level 19, 15 William Street Melbourne VIC 3000


SydneyDavid Young, Managing Partner Level 22, MLC Centre, 19 Martin Place Sydney NSW 2000


PerthBryan Hughes, Managing Partner Level 1, 914 Hay Street Perth WA 6000


BrisbaneNigel Fischer, Managing Partner Johnston Rorke Level 30, Central Plaza 1 345 Queen Street Brisbane QLD 4000


Pitcher Partners, including Johnston Rorke, is an association of independent firms.Liability limited by a scheme approved under Professional Standards Legislation.

www.pitcher.com.au

The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. © Pitcher Partners 2011 PrintPost Approved PP381827/0043

Tax Diary – July, August & September 2011 For comments on this edition or if you wish to be removed from the Contact mailing list please email us at [email protected]

14 July 2011PAYG Payment Summaries to be provided to employees, company directors and office holders.

21 July 2011Lodgement and payment of June monthly BAS/IAS.

Lodgement and payment of fourth quarter PAYG instalment activity statement for head companies of tax consolidated groups.

Contact is printed on paper Certified Carbon Neutral. With 55% recycled fibre it is FSC Mixed Source Certified, sourced from sustainable plantation wood, Elemental Chlorine Free and manufactured by an ISO 14001 certified mill.

28 July 2011Lodgement and payment of fourth quarter superannuation guarantee contributions.

Lodgement and payment of the third quarter BAS/IAS.

14 August 2011Lodgement of PAYG Withholding Payment Summary – Annual Report.

What’s New

21 August 2011Lodgement and payment of July monthly BAS/IAS.

21 September 2011Lodgement and payment of August monthly BAS/IAS.

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Pitcher Partners Association is pleased to announce our 7 New Partners

Pitcher Partners Melbourne – Management ChangesAfter 8 years at the helm, Don Rankin will step down on 30 June 2011, and John Brazzale will take over as Managing Partner of Pitcher Partners Melbourne. John is currently the Partner in Charge of the Tax Consulting Group. Don Rankin will remain as Chairman of the Pitcher

Peter Braine Tax Consulting Melbourne

Rob McKie IT Consulting Melbourne

Sharon Leong Audit & Assurance Perth

Leon Mok Tax Consulting Perth

Dr Richard Shrapnel Business Consulting Melbourne

Gavin Debono Private Clients Melbourne

Mark English Audit & Assurance Perth

Partners Association nationally and stay on the Regional Advisory Board for Baker Tilly in Asia, while remaining as a full time Partner in the Business Advisory and Assurance Division.

Pitcher Partners Perth announces mergerPitcher Partners Perth has merged with the Monash Group, which specialises in

providing audit, business services, management and company secretarial advice. Founder of the Monash Group, Mark English, who joins Pitcher Partners Perth as a Director, has over 30 years experience in Australia and overseas. Mark brings with him fellow Director Sharon Leong and a team of other professional and support staff.

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