What the ATO is watching this tax time

Tax time seems to roll around all too quickly! It’s a mad scramble to gather receipts for deductions to be claimed; maybe prepay some expenses or try to defer some income.

One can’t help but think there must be a better way to have a tax system that doesn’t involve huge compliance costs and the annual year-end scramble. But I guess we’ve got to live with what we’ve got at the moment. Although that’s not to say small businesses don’t want to see some changes made.

Following the recent Council of Australian Governments (COAG) meeting, the June Sensis Business Index asked small businesses for their opinions about regulatory reform. As part of the survey, small businesses were able to indicate any area of Federal Government regulation they would like to see reformed.

Report author Ms Christena Singh said that taxation, “overwhelmingly, is the most common area small businesses said they would like to see reformed, with workplace relations the next nominated area for reform”. That won’t surprise anyone who runs a small business. Taxation seems to be ever-present and increasingly complex. And tax time brings out that complexity and the compliance burden it imposes.

That brings me to the ATO. Below I look at some of the issues occupying the ATO’s mind at this time of year.

The Tax Office is currently sending letters to taxpayers who reported rental property or dividend income for the first time in 2010-11. The ATO says the letters aim to assist taxpayers understand their tax obligations, and will cover issues such as:

• helping avoid common mistakes concerning shares e.g. dividend reinvestment schemes, bonus shares, inheriting shares, demergers, share trader v share investor issues;
• information for share investors e.g. on obtaining and disposing of shares;
• avoiding common mistakes concerning rental properties e.g. repairs v improvements, capital works deductions, interest and travel expense deductions, borrowing expenses, apportioning private use of a property;
• information for Australian property investors e.g. obtaining and disposing of a property.

Our tax system has a myriad of rules covering things like shares and rental properties and the ATO is concerned about the mistakes being made. Those who are reporting dividend income or rental property income for the first time have to grapple with all those rules – mistakes happen and people get things wrong. The ATO is trying to head off those mistakes at the pass!

Personal services income

Another issue concerning the ATO is personal services income (PSI), another good technical tax term, and another excuse for an acronym – PSI. PSI is considered to be income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour.

Examples of PSI are salary and wages, fees earned by a professional person on his or her own account, income payable under a contract for services where the payment under the contract relates wholly or principally to the labour of the person concerned, and income derived by a professional sportsperson or entertainer from the exercise of his or her particular skills.

The PSI rules in the tax law limit deductions available to individuals in receipt of PSI if they are not able to satisfy the required personal services business tests. The fundamental rule is that an amount is not deductible to the extent it relates to gaining or producing PSI if the income is not payable to the individual as an employee and the amount would not be deductible if the income were payable to the individual as an employee.

The rules also attribute income derived by an interposed entity, after allowing for a limited range of deductions, to the individual providing services to the interposed entity. The PSI rules do not apply to individuals or interposed entities carrying on a “personal services business”.