CONTENTS

THE SMALL BUSINESS HIT LIST: IS THE TAX OFFICE TARGETING YOUR BUSINESS?
Last month, the Tax Office released a raft of new benchmarks for small business. Under the gentle guise of ‘helping small business with their tax compliance’, the benchmarks are, in reality, one of the key indicators used to identify who is likely to come under Tax Office scrutiny.

The industries benchmarked are high on the ‘likely offenders’ list for the cash economy and the Tax Office make it clear that “businesses reporting outside of these benchmarks are likely to attract attention.”

The small business benchmarks provide an indication of likely costs relative to turnover for different industries. Up to five ratios are used:

So, for a pub with sales between $250,000 and $750,000, the expected cost of goods sold to turnover ratio is 36%-50%. In this same example, the expected labour to sales ratio is 15% - 23%. If the pub falls outside of this benchmark, the Tax Office will take a closer look at their records and determine if an audit is required.

The danger is that if your business falls outside of the benchmark for legitimate reasons, you still need to ensure that you can justify the reasons for the variations. This will be a common problem where businesses do not neatly fit into an industry definition.

If you want to know more about reducing your tax risks, contact us today.

The Tax Office small business benchmark hit list

Accommodation and food services

	Chicken shops
	Coffee shops
	Fish and chips shops
	Kebab shops
	Pubs, taverns and bars
	Restaurants
	Sandwich shops
	Sushi takeaways
	Takeaway food services
	Takeaway pizza shops

Administrative and support services

	Building and other industrial cleaning services
	Pest control services

Construction

	Air conditioning, refrigeration and heating services
	Bricklaying
	Blocklaying
	Concreting services
	Electrical services
	Fence construction
	Painting services
	Plasterboard installers
	Plastering and ceiling services
	Plumbing services
	Roof guttering installation
	Roof painting and repair
	Roofing services - includes roof tiling and metal roofing services
	Tiling and carpeting services
	Tiling - floor and wall
	Timber floor installation
	Timber floor sanding

Manufacturing

	Bakeries and hot bread shops
	Cake shops and patisseries

Rental, hiring and real estate services

Video and other electronic media rental and hiring

Retail trade

	Clothing retailing
	Computer retailing
	Floor covering retail
	Florists
	Footwear retail
	Fresh fish and seafood retailing
	Fresh poultry retailing
	Fruit and vegetable retailing
	Furniture retail
	Grocery retailers and general stores
	Houseware retailing
	Liquor retailing
	Meat retailing and butchers
	Newsagents
	Tyre retail

Transport, postal and warehousing

	Courier services
	Delivery services
	Furniture removalists
	Road freight transport services
	Taxi drivers and operators
	Towing services

Other services

	Barber and men’s hairdressing
	Beauty services
	Hairdressers
	Laundry and dry-cleaning services
	Nail salons

CRACKDOWN ON THE ‘HOBBY BUSINESS’ OF THE RICH
A lot of successful businesses have meagre origins evolving out of the home or a personal interest. For many, these businesses are able to survive because the owners already have alternative forms of income; full time jobs, or other unrelated businesses. Even the great champagne house Veuve Clicquot evolved out of a passion for and a belief in the potential of champagne (the family were successful textile manufacturers). Prior to their success however, there were many years of experimentation and losses not helped by an uncertain political and economic environment.

Until recently, taxpayers were able to offset losses incurred in the hobby business against their other tax liabilities if certain tests were passed.

Last month, the Government moved to prevent individuals with an adjusted taxable income above $250,000 from offsetting tax losses incurred in the hobby business (non-commercial losses), unless they can prove to the Tax Office that the business is a genuine commercial activity.

The change was announced in the 2009/2010 Federal Budget as part of the Government’s integrity measures. Legislation was introduced into Parliament last month to effect the changes which apply from 1 July 2009.

In a recent statement, the Government labelled the change a crackdown on a “$700 million hobby farm tax loophole” but the changes can apply to any type of business that fits the characteristics. The examples in the explanatory memoranda to the amending legislation explore party planners, vineyards, and a business which bred and sold cattle.

Under the non-commercial losses rules, you can generally apply losses against other income if you pass one of four tests:

	assessable income test — the assessable income generated from the activity must be at least $20,000;
	profits tests — the activity must have produced a profit in three of the last five income years;
	real property test — the reduced cost base value of real property or interests in real property used on a continuing basis to carry out theactivity is at least $500,000; and
	other assets test — the reduced cost base of any other assets used on a continuing basis to carry on the activity is at least $100,000.

Genuine business activities are typically those that have an expectation of becoming commercially viable in the near future. For those seeking the Commissioner’s discretion in order to deduct the losses, they will need to detail the business itself, the nature of the losses and the reason for failing the tests, and provide objective and independent evidence that even though the business is producing losses now, the business will pass one of the four tests within a period of time that is considered commercially viable for the industry concerned.

While there is no doubt that the Clicquot champagne house would pass the non-commercial losses tests, even they may have struggled in the first few years to prove that they were a commercial operation rather than just simply a passion. As with many tax issues, the devil is in the detail.

If you are uncertain of your position, want to start up a business, or simply want to review your options, talk to us today.

AVOID DELAYED REFUNDS – LODGE EARLY
As advised by the Taxation Office:
“Business and individual taxpayers may be affected by our plans to Implement our new income tax system in late January 2010.
 

What we are doing
The Tax Office's computer systems will be unavailable from Friday, 22 January until Wednesday, 27 January 2010 while we implement the new system. In addition, we will need to suspend some processing in the weeks leading up to the implementation,
There will also be some processing delays in the weeks following the implementation as the new system gradually returns to full processing levels. We expect these delays may continue during February 2010.

What you need to do
We recommend business and individual taxpayers expecting a tax refund to have their income tax returns lodged as early as possible (before Christmas 2009) to reduce the likelihood of any delays.”