Tony Ince, Mostyn Consulting

We have had a number of instances recently where Western Australian based businesses have been assessed for payroll tax in other states. This comes as a result of workers carrying out “services” in those other states.
In every case, the business had simply included those wages in their WA payroll tax returns and paid payroll tax in WA.
Central to this problem is that payroll tax is a state-based tax. Every jurisdiction, while having similar legislation, has its own rates and thresholds. Payroll tax raised in that jurisdiction stays in that jurisdiction. So if a business remits payroll tax in the wrong jurisdiction, it is a win for that state or territory and a loss for the other.
Perhaps spurred on by tightening budgets, we have notice an increase in states querying businesses on where their payroll tax is payable. Note that wages paid to workers performing services overseas can also be subject to payroll tax. Another topic for another time.
The rules on where payroll tax is payable can be complex. In every state and territory, however, it starts with the premise that payroll tax is payable in that jurisdiction on “wages … paid or payable by an employer for or in relation to services performed by a person wholly in this jurisdiction”. Because payroll tax is a monthly tax, the test is a monthly test.
This begs the question, of course, as to where the services are performed. A business based in WA without any branches or other presence in other states may send workers to carry out work in another state. The workers still live in WA and the business has no presence in the other state, so are the services for which the business charges performed in WA or the other jurisdiction? There is some case law on this but the answer is still uncertain and depends largely on the individual facts.
If the services are not performed “wholly” in one jurisdiction, there are a number of tests to determine where the payroll tax is payable. It is not my intention to go through all of these, merely to alert you to the potential problems.
It is also possible that the payroll tax is apportioned. Imagine the issues with this an a monthly basis!!
What is the problem?
So a WA business inadvertently remits payroll tax in WA on wages paid to workers in another jurisdiction. The other jurisdiction becomes aware of the issue and issues an assessment to the WA business. If it is an honest mistake (which almost invariably it is), it is likely that no penalties will be applied. This is usually the case even though the thresholds and rates in the other jurisdiction will be different, meaning that the WA business will have invariably over paid or under paid payroll tax.
The business simply pays the assessment and claims a refund in WA.
This is where the problem arises. The other jurisdiction will issue an assessment for up to six years retrospectively. Because of the sneaky way the WA laws are structured, refunds are usually only available for one year.
So the WA business could find itself significantly out of pocket for a simple misunderstanding of the payroll tax laws throughout Australia.
Note also that every jurisdiction levies payroll tax based on Australia-wide wages. So even though the wages paid in one jurisdiction may be below the threshold, when combined with other wages paid in other jurisdictions, a payroll tax liability may arise.
The concept of where wages are paid in Australia or even offshore can be a tricky area in determining payroll tax liability. It is important to get it right from the start. Once set up correctly, the monthly calculation should be relatively straightforward.

With applications for the R&D Tax Incentives for 2011/12 now closed, it is time for businesses to consider where they can take advantage of the significant savings on offer for this financial year.
AusIndustry has indicated that they were expecting some 1400 applications more that they got. This means a lot of companies are missing out on cold, hard cash from the government!!

The new R&D Tax Incentive is easy in many ways but it does require a degree of organisation, which we would all agree is not a bad thing. There is always a flurry of activity coming up to 30 April each year to get registration for R&D. This makes it difficult for all concerned; the business, the consultant and AusIndustry.

We cannot stress enough the advantages of being ahead of the game. The saving in time and stress is significant, and almost invariably the amount of the tax incentive is noticeably more.
The R&D Tax Incentive is a great source of cash flow. Many companies are undertaking R&D without knowing they are eligible for the tax incentive. I have just finished a paper on this for the Tax Institute and it highlights with some case studies how broad the scope of R&D can be. For the record, the paper is for a national conference called “Tax through the bottom of a glass”: my paper is entitled “Does drinking on the job count as R&D?” Don’t know why they picked me to present at this conference.
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The R&D Tax Incentive has now been further enhanced with a quarterly payment for most businesses. Rather than having to wait for the tax return to be lodged, the R&D payments can be made quarterly.

If you as a business or any accounting practice clients are unsure whether or not you might be eligible, contact me for an obligation free meeting. What have you got to lose?

As my old mate Paul Gerrard from Thompson Reuters (if you are looking for great R&D software, give PG a call) put it so succinctly to me the other day, the new R&D Tax Incentive can be summarised as:

Documentation = Evidence = Verification = Cash

As for whether or not drinking on the job does count as R&D, read my paper.

“The rumours of my death have been greatly exaggerated” Mark Twain

After several enjoyable years at PKF/BDO and Deloitte, I have returned to my roots and set up my own indirect tax consulting practice, Mostyn Consulting. If you want to know how the name came about and see my tax blogs, go to http://www.tonyince.com (I can’t believe that domain name wasn’t taken!).

Areas of expertise include:
• GST
• Payroll Tax
• Fuel Tax Credits
• R&D Tax Incentives
• Employee/contractor issues
• Wine Equalisation Tax (WET)
• Enhanced Project By-law Scheme (EPBS)

HOW WE CAN HELP YOU

Let’s divide those areas into two broad groups; Fuel Tax Credits and R&D Tax Incentives, and “the rest”.

Advice in relation to Fuel Tax Credits and R&D Tax Incentives (and to a lesser extent, the EPBS) tends to be proactive. That is, we can often review these areas of a business on a contingency basis, with our fee being a percentage of the benefit obtained.

While we are happy to be proactive on “the rest”, consulting in these areas tends to be reactive. Advice is sought in relation to a particular issue when it arises. Often this will be as a result of a Tax Office audit.

OUR SERVICES

• Consulting in the areas of indirect tax as and when an issue arises. We will generally be able to give you an indication of fees before we proceed and the rate is a fraction of the Big 4 charge out rate (yes, I know 7/8ths is a fraction but it is closer to 1/3rd).
• A telephone hotline service for a fixed monthly fee that enables unlimited telephone enquiries. This can be used to save research time, float an idea or just to make certain of an issue when you think you know the answer.
• Reviews of any aspects of indirect taxation. For Fuel Tax Credits or R&D Tax Incentives, this may be on a contingency basis, so there is no risk for your business or your client.
• In-house training (usually at no charge).

CONTACT DETAILS

For an obligation free chat about how we can assist your practice or business, please contact Tony Ince:
Mobile: 0417 174 369
Email: tony@mostynconsulting.com

There was a recent decision of the Federal Court that should cause taxpayers real concern. As you know, income tax is not my specialty but the decision in this case made me raise my eyebrows.

The case, Yazbek v Commissioner of Taxation [2013] FCA 39 (31 January 2013,) confirms that the Commissioner may not be limited to two years in issuing an assessment.

Broadly, the Commissioner argued that the four year amendment period applied as the two year amendment period for individuals under Item 1 of s 170(1) of ITAA 1936 was subject to certain qualifications, one of which was, if the individual was “a beneficiary of a trust estate at any time” in the year (qualification (d)).

Not only did Mr Yazbek not receive a distribution from the family trust, the assessment which the Commissioner issued was unrelated to the trust or any income it derived or distributed. As he did not derive any income from the trust, the applicant argued he was not a beneficiary of the trust for the 2005 tax year and the two year amendment period applied.

The Federal Court found that the applicant was a beneficiary of the trust even though he derived no income from the trust for the 2005 tax year.

Why am I concerned (and somewhat surprised) by this decision?

Because just about every individual in Australia is a “beneficiary” of a discretionary trust, be it their own, their parents, their siblings, their in-laws, their aunts and uncles; you get the drift. Most of us would be potential beneficiaries of at least one (and probably several) family trusts although (a) we wouldn’t know it and (b) we would never receive a distribution.

This means that the Commissioner can assess for the four year period rather than the two year period for individuals. Clearly he had both the desire and where-with-all to do it in Mr Yazbek’s case, so why wouldn’t he do it in all cases?

We have not seen a Decision Impact Statement from the Commissioner on this case, or any indication of how widely or in what circumstances he intends to use this power. Perhaps an amendment to the legislation is warranted although the fact that the Commissioner took on the matter suggests that he may well want to keep the un-even playing field, with the rules favoring him (naturally).

GST Case study one

I recently did some work with a client where we managed to free up his cash flow substantially by delaying the timing of the GST liability.

Background

A GST liability arises for non-cash (accruals) GST taxpayers at the earlier of when you issue an invoice (note: it does not have to be a “tax invoice” – another topic for another time) or receive any payment. That means if you receive any part payment, it can trigger the full GST liability. There are some exceptions for what are known as “periodic and progressive supplies” but these are not the norm.

However, GST is not payable on most deposits. The GST liability in these cases arises at the earlier of when the deposit is forfeited or when (as is usually the case) it is applied to the sale.

If it’s a “bona fide” deposit, no GST liability. If it’s a part payment, the entire GST liability is triggered. The Commissioner has a published view on what he thinks constitutes a deposit as distinct from a part payment. This is his ruling GSTR xxxxxx. He takes the view that it is abnormal for a deposit to be more than 10%.

Our circumstances

The client sells and installs high value custom made building products. Because the products are made to order, he charged a 50% deposit. If the customer decided not to go ahead, there was no way the product could be on-sold to another customer. Added to this, there is a long construction and delivery lead time.

Based on previous advice and their interpretation of the Commissioner’s ruling, the client was treating the payment as a part payment and remitting GST up front.

We reviewed all the circumstances, including the legislation and case law, and concluded that the payment should be correctly treated as a deposit. A private ruling was sought from the ATO who agreed that the first payment of 50% of the full price was, in fact, a deposit.

Outcome

Instead of remitting what was substantial GST upfront (which was funded by Letters of Credit from the bank), the client now remits the GST many months later when they receive the second payment (a further 30%) which is effectively on delivery of the goods.

This has freed up working capital and reduced the need for credit from the bank to meet GST liabilities.

Savings, significant, with complete certainty.

What Price a State Income Tax?

With pressure on the states (and territories) to raise more of their own income, what are the chances that a state income tax could be reintroduced?

At a broad theoretical level, it has some appeal. The states complain of “vertical fiscal imbalance”, a term that reflects that the states are committed to much more expenditure than revenue they raise, with the balance coming from the Commonwealth in the form of various grants.

The introduction of the GST was supposed to overcome this to some degree but recent events suggest that Commonwealth/state financial relationships are back where they were pre 2000.

History

Back in the day (at the time of Federation), the states levied their own income taxes and the Commonwealth raised most of its revenue by way of customs and excise duties. In 1942, the Commonwealth introduced such a high rate of income tax and gave itself priority for collection that it made it impossible for the states to continue to levy their own income tax.

This measure was a temporary one for the duration of the war, and the states were given compensation by way of what are now known as Commonwealth grants. These grants were to continue for 5 years after the cessation of the war.

A number of states (most notably South Australia) took their case to stop the Commonwealth to the High Court in 1942 in what was called “the first Uniform Tax Case”. They lost. This meant that the Commonwealth was allowed to raise income tax and take priority in collection even though it effectively meant the states could not also apply their own income tax.

In 1957, some states again took the Commonwealth to the High Court on a similar issue (boringly called the second Uniform Tax Case) and, unsurprisingly, lost.

These decisions do not mean that the states cannot apply their own income taxes; it seems that they are Constitutionally allowed to do so. What it means, I think, is that the Commonwealth calls the shots. If the Commonwealth wants to apply an income tax and take priority, it can.

But there does not seem to be anything to stop the Commonwealth from allowing the states to levy their own income taxes.

The Current Problem

Put simply, the states have limited capacity to raise revenue. They have inefficient taxes like (stamp) duty which raise a considerable chunk of their revenue. There is also the unpopular payroll tax (a tax on employment) and land tax. States have varying access to mining royalties and gambling taxes but the raising of royalties effectively reduces their access to Commonwealth grants.

The states want more certainty in their funding without having to negotiate constantly with the Commonwealth on how much they will get from the Grants Commission via complex formulae.

The Commonwealth is continuing to put pressure on the states to get rid of a plethora of small taxes as well as inefficient taxes like (stamp) duty. Consider the possibility of the Commonwealth giving a certain level of income tax responsibility to the states.

Exactly what this state income tax would look like is part of the detail to be determined. It could be on all taxpayers, an addition to the current income tax (although the current rate would presumably be reduced because the Commonwealth would have less expenditure to the states). This would seem to be the most efficient method but no modelling has been done on this to my knowledge. Perhaps it would be a business income tax only. This would need to be resolved. Those states seeking to encourage businesses could apply a lower rate, the trade off being that they raise less income.

The vertical fiscal imbalance would also be reduced with reliance on the Commonwealth being reduced.

This is a preliminary proposal, food for thought if you like. Sure, there is a lot of work to be done on such a proposal but why don’t we have a look at it?

Who would be against it? The states? Unlikely, as it would give them more control and certainty over their revenue collections? The Commonwealth? Surely not, if such an agreement resulted in the states getting rid of inefficient taxes. Taxpayers (read electors); probably, because we have become accustomed to not trusting politicians of any persuasion.

But maybe a bit of competition between the states on income tax rates would be a good thing.

Politics aside, would it improve our overall tax system??

I’d love to hear your thoughts. Is it worth investigating further?

Welcome all.

I recently started consulting in my own right on indirect tax matters. For a full rundown on what I do and how I got here, see my homepage at tonyince.com.

Rather than produce the standard newsletters about tax matters that I find interesting (yes, I do find tax matters interesting), I thought I would use modern methods and blog. That way, you can read them (or not) and provide any comments.

The blogs will generally be about GST, payroll tax or fuel tax stuff. I am trying to make them interesting as well as useful and some times thought provoking. The first (coming soon) is about the possibility of the states implementing a state based income tax. Sacre bleu!!

love to get your feedback or hear from you about any subjects to would like me to address. Indirect tax issues are preferred but may, in certain circumstances, give anything a crack.