Your tax regime has been tweaked – pay attention

Last Saturday (yes, Saturday!), the Government announced that it would cut the quarterly PAYG instalments for the 2009-10 income year for taxpayers whose quarterly tax instalments are adjusted for previous years’ gross domestic product (GDP) growth.

The Treasurer said the Government will use the expected increase in the CPI for 2009-10 – rather than previous years’ GDP growth – to calculate tax instalments. The Government expects this will better align the tax treatment of small businesses, self-funded retirees and small superannuation funds with changing economic conditions and help prevent businesses paying too much tax.

The change is generally welcome, although it is in essence only a timing change. And it won’t be relevant to SMEs that don’t have their PAYG instalments calculated under the GDP method. The Treasurer specifically noted that the reduction does not apply to taxpayers who calculate their instalments based on the instalment rate notified by the tax office.

For the 2009-10 income year, the Government says it has reduced the GDP adjustment from 9% to 2%, aligning it with the expected CPI growth of 2% for 2009-10, as forecast in the updated economic and fiscal outlook.

That outlook also forecast that tax receipts for 2008-09 and 2009-10 would be down by $9.5 billion and $22.6 billion, respectively, since the mid-year outlook. The reductions arose primarily from lower expectations of company and GST receipts.

Swan says those business owners who pay their GST quarterly will also benefit. He says the Commissioner of Taxation has advised that he will use the 2% adjustment factor when he calculates GST instalments.

Taxman works on tax debt

The Federal Parliamentary Joint Committee of Public Accounts and Audit holds a biannual meeting with the Tax Commissioner. The most recent meeting was held this week.

In its submission to the committee, the tax office said it had made considerable progress in reducing the rate of growth of collectable tax debt to 1% ($111 million) in 2007-08. It said this is significantly down from 27.7% ($2.08 billion) in 2004-05. Note that this is growth in tax debt, not the total tax debt itself.

Nonetheless, the tax office acknowledges that the current economic environment is placing “substantial pressure” on its goal of continuing to reduce the rate of growth of collectable debt, and it concedes this will make similar results more difficult to achieve going forward.

The tax office says its debt collection strategies are increasingly focusing on early intervention to, in many instances, address tax debt earlier in the debt cycle, before it escalates and becomes unmanageable.

For example, at 31 January 2009, the tax office said it had 194,292 debt cases “under arrangement” (that is, arrangements were in place with taxpayers to pay off their tax debts) worth $2.5 billion.

Compared with January 2008, this represents an increase of almost 18% (29,303) in the number of debt cases under arrangement and an increase of 15.6% ($339 million) in the value of debt cases under arrangement. A reflection of the times no doubt!

Intervening early involves the tax office contacting taxpayers with a debt as soon as possible. For businesses, the tax office encourages those that are struggling to remain viable to contact it early to discuss assistance options. These options might include:

• Giving businesses more time to meet business activity statement and other lodgement obligations, without penalties.
• Allowing additional time to pay tax debts without any interest charge.
• Allowing taxpayers to pay their tax debt by instalments over an extended period of time.
• Remitting penalties and interest that may have been imposed.

Other help from the tax office is also available for SMEs. For example, in the first seven months of the 2008-09 financial year, the tax office says it has helped 48,000 small businesses through tax seminars and workshops, business assistance on-site visits, outbound education telephone calls to new and existing SMEs at key times in their business lifecycle, and working with small business organisations.

At the extreme end of the scale, the tax office also has a dedicated hardship capability to investigate all avenues for taxpayers and businesses that need more than temporary assistance for short-term cashflow problems.

Businesses in deep trouble can apply to the tax office for either a total or partial release of their tax debts. Of course, they will need to set out in full their case for such release, and the tax office will make a decision on a case-by-case basis. Although recent statistics (see below) suggest the tax office is increasingly granting releases, it cannot be assumed that the process is automatic.

For the first half of 2008-09, the tax office received just over 1600 applications for release of tax debts worth $61.9 million. This is a 61% increase over the same period in the previous year. The taxman granted full releases in 927 cases worth $23.5 million and partial release in 35 cases worth $1.1 million. That is, full or partial remission was granted in 57% of cases. This compares to 50% of cases for 2007-08, 49% of cases in 2006-07 and 33% of cases in 2005-06.

All this illustrates the extent to which the taxman can help struggling businesses. But businesses must be upfront about their tax situation.

Note however, that it would be a mistake to assume the taxman will help every business. The tax office has indicated it will take “firmer action”, including insolvency action, to collect tax debts where businesses choose not to work with it, continually default on agreed payment arrangements, or do not have the capacity to pay.

Car expenses: Cents per km rates for 2008-09

The Income Tax Assessment Regulations have been amended to update the cents per kilometre rates for calculating motor vehicle expenses for income tax purposes for the 2008-09 income year – applying from 1 July 2008 to 30 June 2009.

The rates for 2008-09 are:

The rates for the previous year (that is 2007-08) were 58c/km, 69c/km and 70c/km respectively, so there has been a healthy increase for this year.

Also, don’t forget that the cents per kilometre method can only be used for the first 5000 business kilometres travelled. If more than 5000 business kilometres are travelled, the cents per kilometre method can still be used, but the excess is ignored for the purpose of the claim.

Otherwise, for more than 5000 business kilometres, the 12% of original value or one third of actual car expenses methods can be used. They should give a greater deduction, but there is more work involved in working out the claim.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.