ATO withdraws cash sales benchmarks

The ATO’s cash sales benchmarks, for the 2009 year, released in November 2010 have been withdrawn from use.

The cash sales benchmarks, covering fifteen industries, are a part of the Austrlaian tax Office’s comprehensive suite of small business benchmarks across 107 industries that they use to identify and deter activities in the cash economy.

The ATO claims it is on a small part of their complance activity and is just one tool that they use in the course of our compliance activities with our key focus remaining on evidence of businesses declaring all income through appropriate record keeping.

Cheryl-Lea Field, Deputy Commissioner, Tax Practitioner and Lodgment Strategy, advised tax agents this week that “We only raise assessments based on cash sales benchmarks when there are inadequate or no records to substantiate their declared income.”

Cash sales benchmarks identify the expected ratio of cash sales to total sales and are based on credit and debit card sales data provided by financial institutions, as well as information provided by small businesses on activity statements.

A review of the data used to calculate the cash sales benchmarks has identified inconsistencies in the way in which cash-outs paid by businesses to their customers were recorded. (An example of cash-out is when a customer requests additional cash when purchasing goods or services.) Accordingly, the ATO believes it is appropriate to withdraw the cash sales benchmarks at this stage. The ATO is refreshing the data used to calculate these benchmarks and will release updated cash sales benchmarks for 2010 later this year.

The 15 industries covered are:

  • Beauty services
  • Fuel retailing
  • Meat retailing and butchers
  • Clothing retailing
  • Garden supplies retailing
  • Newsagents
  • Coffee shops
  • Grocery retailing and general stores
  • Pubs, taverns and bars
  • Florists
  • Hair dressers
  • Restaurants
  • Fruit and vegetable retailing
  • Hardware and building supplies retailing
  • Takeaway food services

Service trusts – a guide to their safe use.

Many business people use a service trust to supply the use of equipment, staff, premises and administration services to their main business entity. The ATO has been stated concerns about them for decades but has only become active in the last few years.
Law Central have put together a useful guide on how to avoid coming unstuck in the even of a tax audit or liquidation. Below is a combination of their advice plus some of ours.

1: Know why you have a service trust

Let me tell you a story with a fun multiple answer quiz:

Assume you get audited. The ATO shows up at your door and water-boards you. They ask why you set up your service trust. So why did you do it?

  • I did it to save tax
  • I did it for asset protection
  • None of the above

If you choose (a) or (b), you need help from your accountant. Run, don’t walk.

Why is (a) wrong?

Repeat after me: Your service trust is not there to avoid tax. Etch this in your brain before reading any further. It helps you fight the urge to sing like a canary when the ATO gets out the crocodile shears.

But can’t I legitimately structure my affairs to save tax? You would think in a democracy that this is the case. But it isn’t. If the dominant purpose is to save tax then no. Remember, there is a fine difference between tax planning (legal) and tax avoidance (illegal).

The Part IVA general anti avoidance provision hovers over every action. If a reasonable person in your position believes the service trust exists solely for the purpose of avoiding tax – then think of a good place to hide your shank in jail.

Why is (b) wrong?

Cleverly (or so you think), you are adamant that your service trust is not there to save tax – you set it up for asset protection. And you’re a man of your word – you say the same thing in a suit in court (when the ATO is grilling you).

Later on, your business goes bust. Here lies the problem. You now can’t plead in the insolvency court that your service trust was there to save tax. The ATO transcripts where you swear your service trust is there for asset protection reasons don’t make good reading in the bankruptcy courts.

Why is (c) correct?

It is rarely wise to cite tax savings or asset protection as a reason for doing anything. If someone asks, service trusts are great to help your Business Succession Planning, Estate Planning and modern business structures – and they really are. Saving tax and asset protection are merely wonderful by-products.

2 – Set up your structures properly

The last thing you want to do is hand the ATO the ammunition to attack you. Poorly drafted or incorrectly implemented arrangements are the kiss of death.

So how do you set up a service trust?

  • Make sure the core business structure is up-to-date. Update trust deeds and the Constitution.
  • Set up the new service trust vehicle: family trust, unit trust, hybrid trust or company. You now have your service trust (or service company – quite rare). The service trust provides as many services as it can to the main business: this includes cleaning, secretarial, serviced offices, accounting, chattel leasing, property leases etc…
  • Build a Service Trust Agreement. This is the ‘glue’ between the core business and the service trust. You need this so you don’t offend our preciously delicate friends at the ATO.

3 – Charge commercial rates

Remember those naughty people we spoke about at the start who got caught. Chances are they were being greedy and charging more than commercial rates. Or were lazy and failing to make the service trust look arms length.

The mantra is:

“My service trust always acts as though it is arms length and a genuine business”

Your service trust can’t be a sham or non-commercial. Forget about “mark-ups”. A commercial business doesn’t charge “mark-ups”. It charges what the market can bear. It can only charge what the market would charge in a normal arms length transaction. Not sure of what the market will bear? Then get some quotes from other businesses in that industry. Is your service trust providing exceptional quality administrative services? Then you can charge more – but only if the market would charge this amount anyway.

Phillips case is the most telling High Court authority regarding service trusts. In a subsequent tax statement the Deputy Commissioner of Taxation stated (correctly in my view):

“There may have been widespread use of service trust arrangements which involved payments that were grossly excessive in relation to the benefit conferred by the service arrangement.”

The Deputy Commissioner is correct. Service trusts are completely valid – as long as they are on valid commercial grounds. But what are valid commercial grounds?

4: Get professional help

Invest in help from your accountant. Their knowledge is invaluable and saves you more than just money.

5: Do what your documents say

If you have an agreement that says that the service trust will provide certain services, don’t let the main business entity pay for them directly. If you treat your two businesses as though they are really just one, don’t be surprised if the Tax Office does the same.

2010-11 ATO audit focus – Individuals

Over the last few years the ATO has found that sending letters to targeted occupations substantially reduces the claims made by that group. In June 2009 they wrote to over 178,000 taxpayers in seven occupations including:

  • concreters;
  • construction and plumbers assistants;
  • electricians;
  • sales and marketing managers;
  • sales representatives;
  • university lecturers and tutors; and
  • truck drivers

advising them of their obligations for the year ended 30 June 2009. On average, targeted taxpayers decreased their claims by 7.6%, with a total work-related expenses claim change of $40.3 million.

This year they will focus on:

  • occupations with a pattern of large and/or rising claims or with issues identified from our intelligence
  • returns which do not fit the pattern or norm for a particular occupation across the community, and
  • returns lodged by tax agents that are significantly outside the norm for their average claim for their clients.

Due to previous claim patterns and behaviours, the ATO will be specifically focussing on people employed as:

  • engineers
  • mechanics, and
  • teachers.

The most common mistakes by people in these occupations include:

  • insufficient documentation available to support motor vehicle and travel expenses
  • incorrectly claiming motor vehicle expenses on the basis that they are carrying bulky equipment
  • incorrectly claiming travel or motor vehicle expenses when they are required to travel from home to work more than once per day, and
  • incorrectly claiming home office, mobile phone and internet expenses.