Omega Partners who provide outsourcing services for companies, trusts, partnerships and self managed superannuation funds are abreast of these any many other changes. Discuss with us how we can assist your accounting practice leverage from the benefits of outsourcing.

The proposed APES GN 30 is intended to provide guidance to accountants in public practice who either provide or utilise outsourced services. At Omega Partners we take outsourcing seriously and we have ensured that the policies, procedures and practices within our firm comply with APES GN 30.

Proposed APES GN 30 indicates that professional accountants in public practice who provide or utilise an outsourced service should have an outsourcing agreement, which clearly specifies the responsibilities and obligations of the parties to the outsourcing arrangement. Twenty-nine specific issues are identified that should be addressed in that agreement.

You should ensure that whatever outsourcing provider you use to prepare your Australian SMSF, Company or Trust financials and income tax returns addresses the following

(a) the duration of the Outsourcing Agreement including commencement date, minimum and maximum terms and provisions for termination
(b) a description of the type and scope of Outsourced Services to be provided;
(c) details of how the Outsourced Service will be performed;
(d) details of how changes in service requests will be conducted;
(e) representations and warranties;
(f) the required service levels and performance requirements including; contract termination and disengagement triggers; contract reward and penalty considerations; business continuity, security and intellectual property break-up and recovery;
(g) details of the initial transition process from the Member’s operations to the Outsourced Service Provider, including actions and responsibilities of the parties in respect of the transition process:
(h) the pricing model including payment terms and how changes that affect the execution of the process during the agreement will affect pricing;
(i) the procedure for reimbursement of expenses;
(j) ongoing management of confidentiality, privacy and security of information;
(k) taxation obligations, including GST considerations;
(l) the process for managing the ongoing relationship including qualitative and quantitative measures to monitor and review performance;
(m) the nature of the information to be provided by the Member and the Outsourced Service Provider;
(n) the terms of any limitation of liability to the effect that any subcontracting by the Outsourced Service Provider of the Outsourced Services should be the responsibility of the Outsourced Service Provider including liability for any failure on the part of any subcontractor;
(o) audit and monitoring procedures;
(p) a provision that allows the applicable Professional Body access to documentation related to the Outsourcing Services including the right to
conduct on-site visits to the Outsourced Service Provider;
(q) the terms of file retention by the Outsourced Service Provider that are sufficient to meet the needs of the Member or as required by law or regulation;
(r) any use of third party resources;
(s) obligations of the parties to the Outsourcing Agreement;
(t) details of reports or other anticipated outputs, including: expected timing intended use and distribution of reports;
(u) accessibility by the Member to the Outsourced Service Provider’s files;
(v) format, form and quantity of data, that is readable in printed or electronic form that is to be provided by the Outsourced Service Provider at the end of the Agreement;
(w) ownership of documents and records;
(x) that the Outsourced Service Provider is responsible for the accuracy and completeness of the information supplied to the Member;
(y) well-defined dispute resolution mechanisms including jurisdictional considerations;
(z) procedures for changes in business structures and/or ownership structure;
(aa) the use of external service providers (if any);
(bb) details of liability and indemnity insurance;
(cc) the conditions for terminating the Outsourcing Agreement such as:Outsourced Services the Outsourcing Agreement no longer makes economic sense;
poor service, non-performance or non-payment; or a change in control or management at either of the parties to the Outsourcing Agreement.

This test will be satisfied, if just before the CGT event, the total of the following does not exceed $6 million

• the net value of the CGT assets of the taxpayer ;
• the net value of the CGT assets of any ‘connected entities’ of the taxpayer; and
• the net value of the CGT assets of any ‘affiliates’ of the taxpayer , or ‘connected entities’ of the taxpayer’s affiliates.

If a taxpayer is selling an investment property that was acquired after 13 May 1997 then they must reduce the cost base of that property by any Division 43 capital allowances that they have claimed.  If a capital loss is made on the sale of an investment property the reduced cost base must generally be reduced by any Division 43 capital allowances that the taxpayer was entitled to claim regardless of when the property was acquired.

If a taxpayer is selling an investment property that was acquired on or before 13 May 1997 the cost base of that property will only be reduced where the deductions relate to improvement expenditure incurred after 30 June 1999 and which is included in the fourth element of the cost base.

It is important for people selling investment properties that if capital allowances have been claimed the vendor is required to provide the purchaser with a written notice containing information that will allow the purchaser to calculate the remaining capital allowances.  The vendor needs to consider this as part of the sale if the building commenced construction after 26 February 1992.  This notification must be provided within 6 months after the end of the year of the income in which the property was sold or penalties can apply for the vendor.  This is something frequently overlooked by both parties.

If the taxpayer has not claimed the Division 43 capital allowance they are however required to reduce the cost base by the amounts they could have claimed regardless of whether they have been claimed or not by virtue of s110-45(2) of ITAA 1997 and s 110-45(4) of the ITAA 1997. Taxation Determination TD 2005/47 also deals with this issue http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200547/NAT/ATO/00001. This is something which is frequently identified during audit and can result in penalties and interest if the taxpayer or their accountant have not identified this during their calculation of the capital gain.

However the ATO does provide a concession to not reduce the cost base where

• the taxpayer does not have sufficient information to determine the property’s construction expenditure ; and
• the taxpayer does not seek to claim any deduction for the capital allowance.

Risk Assessment

A transfer pricing risk assessment “red flags” transfer pricing risks and opportunities. You will be better informed so that you can prioritise and remove the identified risks, helping you solve these issues for future improvement.

Documentation and Benchmarking

“Transfer Pricing Documentation” is a record of actions taken that details the transfer pricing policy of a multi-national group, the environment in which it operates, and demonstrates the arm’s length nature of trade within it. A benchmarking study is a core part of such documentation. It provides a commercial context for setting and applying arm’s length pricing, and support for the resulting profit outcomes.

Documentation affords you the protection of a defensible intra-group pricing position and valuable insight into the market and business operation across country borders.

Transfer Pricing Planning

Transfer pricing planning helps achieve tax process compliance, business process certainty, and tax burden understanding, providing you increased reassurance and the potential for tangible cost savings.

Dispute Resolution

Omega Partners can provide referral to experts in dispute resolution assistance, working with your legal advisor if required. Their assistance can be in the form of

• audit defense filings and adjustment settlement
• negotiation with ATO competent
• authority in Double Tax Treaty matters
• post audit appeal management.

Syttadel had acquired the asset, comprising land, buildings, marina berths, goodwill and plant and equipment, in June 1996 for $1.675 million.

The venture was not initially profitable but by 2006 its net profit was $280,306. The majority of the revenue was earned from the hiring of wet berths and dry storage and some income was received from the lease of commercial premises within the marina and the sale of fuel.

Mr Godden, a director and member of Syttadel gave evidence about several enquiries and offers to purchase the marina over time. One, at $2.5 million was made in 2004 – it was rejected because the proposed purchaser wanted vendor finance. The first ‘serious offer’ was made in mid-2005 and was for $3.7 million. A written offer of $4 million was made by the same prospective purchaser in February or March 2006. It was not accepted as Mr Godden ‘was hoping for a price closer to $4.5 million’.

Whilst these dealings were taking place a consortium led by a local real estate agent enquired at what price Mr Godden would be prepared to sell. He replied ‘$9 million’, which response he said was made ‘tongue in cheek’ with the figure of $9 million being ‘completely over the top’.

The consortium negotiated with Mr Godden and a written contract for the sale and purchase of the marina at $8.7 million was executed in early December 2005. The purchaser, World Housing Corporation Pty Ltd, ultimately failed to complete the transaction and forfeited its deposit.

After that Mr Godden had further dealings with the local real estate agent which led to the execution of a new contract, dated 4 July 2006, by which Spinnaker Sound Joint Venture Pty Ltd agreed to purchase the marina as a going concern for $8.9 million. The contract was completed on 14 August 2006.

Syttadel submitted a private ruling request to the Commissioner in November 2008 requesting that the Commissioner rule that, despite the sale at $8.9 million, the market value of the marina was in the range of $4 million to $4.5 million so that Syttadel would be eligible for the small business CGT concessions. The Commissioner ruled on 25 November 2008 that the value of the asset was its sale price and that Syttadel did not qualify for concessional capital gains tax treatment.

Syttadel objected to the ruling, but by then an assessment had issued, and the Commissioner treated the objection as being one against the assessment. The Commissioner disallowed the objection.

The Tribunal mentioned that both parties made reference to the passages from Spencer v The Commonwealth (1907) 5 CLR 418 where Griffith CJ said,

In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring ‘What would a man desiring to buy the land have had to pay for it on that day to a vendor will to sell it for a fair price but not desirous to sell?’

and where Isaacs J said

To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding
features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.

The Tribunal also noted that the parties agreed that the market value of the land had to take into account the highest and best use of the land.

The Tribunal had been provided with two valuations, one for the company where the value was set at $4.5 million, and one for the ATO where the valuer had originally set a value of $6.3 million but revised that down to $5.3 million.

The Tribunal were unprepared to accept the $4.5 million valuation figure as the Deputy President did not agree with the valuation methodology employed. The company’s valuer had set the value as being the value at which the vendor would be prepared to sell, and justified this by valuing the component parts of the marina using capitalization rates of 9% and 12%. The ATO’s valuer by contrast had used capitalization rates of 6% which the Deputy President considered ‘appropriate rate having regard to the market evidence and the potential for future growth but taking account the generally poor condition of the marina’. The ATO’s valuer had also supported their valuation by using comparable sales data.

As the Tribunal was unprepared to accept the company’s valuation it held that the small business CGT concessions would not be available.

Franking Credits

One of the potential issues for having an offshore entity holding Australian shares is that the franking credits paid to the shareholder will effectively be lost.  This mean that if a dividend is paid out to an offshore entity and those distributions are then paid back to an Australian resident individual the franking credits from the original dividend will not be able to be used by the Australian resident individual.  Structuring at this point is critical and it may be appropriate for the Australian resident individuals to hold their interests through an Australian entity and for the PRC investors to hold their interests through an offshore structure.  Accountants need to recognise however the cultural and political reasons for the structure and the PRC investors may want the entire investment to be held through the offshore structure.  Tax should never take precedence over commercial reasons and so this is an extremely important aspect to be considered.

CFC Issues

It will be important to consider how the Controlled Foreign Corporations (CFC) regime will impact upon you as an Australian tax resident.  This area of law is currently undergoing dramatic changes and you need to engage an accountant who deals with these issues.  It will be important to look at things such as the central management and control, the type of income (is it active – business- income or passive income), control percentages, permanent establishment, etc to determine how you will be affected.

Setup Costs and Ongoing Costs

One of the reasons that PRC investors sometimes use a BVI over a Cayman Islands company is due to the initial setup costs and ongoing costs.  Cayman Islands companies are generally more expensive to establish and operate than a BVI.  Discuss this with us so we can determine what may be the most appropriate structure.

Tax Evasion

Note that you must not deal with clients who want to establish such structures to evade tax or to launder funds.  Gone are days when you could move money offshore and hope it would not be detected.  AUSTRAC tracks all incoming and outgoing transfers and when transfers are made to established tax havens such as the BVI and Caymans it will be highlighted to the ATO.  If things are being done correctly and there are legitimate commercial reasons for these structures then the ATO will not have an issue.  Our principal director has been involved in a number of Operation Wickenby matters and we can assure you that it is not worth doing the wrong thing.  The penalties and interest can be dramatic and worse you may serve time in a prison for having defrauded the Commonwealth and ultimately your friends and others who pay taxes of what is due.

Remember none of this is scary for those who have the experience.  China is investing more and more around the world and it would be negligent of an accountant to dismiss offshore structures just because they really do not understand them.  Offshore structures are legitimate investment vehicles for many public and private companies around the world and as China makes more investments into Australia the demand for such advice will continue.

Fortunately there is.  Generally workers coming to Australia on a temporary basis are able to apply for exemption from Medicare under the provision that a person is exempt from the medicare levy where the Minister for Community Services and Health has certified a person is ineligible for Medicare benefits.  This is is the case for temporary residents unless they are coming to Australia from one of the countries who have entered into a reciprocal health care agreement.  A qualified accountant and tax adviser should review your situation to determine whether the Medicare Levy and whether you should obtain an exemption.

In practice the procedures for obtaining a Medicare exemption cause a number of problems particularly as the authorities require original signatures on any application forms (photocopies of documents ARE NOT accepted) and you also need to provide certified copies of EVERY used page of your passport.

Main Residence

If the property was used as the main residence of the deceased then any capital gain or loss on a dwelling acquired by an individual as a beneficiary of deceased estate or by the trustee of a deceased estate will be fully exempt if

1. the dwelling was the deceased’s main residence just before they died or it was the deceased’s pre-CGT property; and
2. the dwelling was disposed of within two years of the deceased’s death, or it was, from the time of death until the disposal, the main residence of

• the spouse of the deceased
• an individual who had the right to occupy the dwelling under the will of the deceased ; or
• a beneficiary

3. then need to consider a number of events with your adviser.

Careful planning needs to be undertaken to ensure that this event is planned for.

For all other property, other than your main residence or other dwelling e.g. an investment property, you will need to determine whether the property is a pre-CGT asset (purchased prior to 20 Sept 1985) or a post-CGT asset (purchased after 20 Sept 1985).

Pre CGT Assets of the Deceased

If the property you inherit was acquired by the deceased prior to 20 September 1985 you will be deemed to have acquired the property for its market value on the day the deceased died.  It will then be a post CGT asset for you.  You will need to hold the property for more than 12 months from the date the deceased died in order to obtain the 50% general CGT discount.

Remember though the special rules in Section 118-195 ITAA 1997.  If the property was acquired by the deceased prior to Sept 1985 and you dispose of that property within 2 years of the deceased date of death there will be no CGT on the sale of that property.  Many accountants do not read the table in Section 118-195 properly and think it is to be read like most tables.  However s118-195 makes it very clear only one condition in Column 3 and one condition in Column 2 is required.  It is a matrix not a table.  We have seen this to be a common mistake made by many accountants.

Post CGT Assets of the Deceased

If the property you inherit, other than your main residence (discussed above) or other dwelling e.g. an investment property which are subject to special rules (worth discussing with your adviser), was acquired by the deceased on or after 20 September 1985 you will be deemed to have acquired the property for the cost base and the reduced cost base that applied to the deceased.  You will need to hold the property for more than 12 months from the date the deceased acquired the property to obtain the 50% general CGT discount.

They say that two things in life are certain.  Death and taxes.  Unfortunately the two are often intertwined.  Omega Partners are able to assist with the preparation of a deceased clients tax return.

The ATO has held the view that a home office area must have the character of a place of business before occupancy costs are deductible.  The ruling indicates that the following has the character of a business :

• the area is clearly identifiable as a business
• the area is not readily suitable or adaptable for use for private or domestic purposes
• the area is used exclusively or almost exclusively for carrying on a business ; or
• the area is used regularly for visits of clients or customers

Where you have a fixed place of business that you go to every day (e.g. school teacher, lawyer for a large law firm, radio show host) and you have an room in your house or apartment that you use for study and work purposes it will generally be considered to be of a private and domestic nature and a portion of the occupancy costs will not be deductible.  We have seen cases where clients have claimed a percentage of their rent in such cases and during audit the claim has been disallowed.

One of the major cases is Handley v FC of T where a barrister claimed a proportion of his interest, rates, taxes and fire insurance premiums attributable to the study.  He used his home study for approximately 20 hours per week for about 45 weeks of the year.  The courts said that the expenditure was not an allowable deduction because the essential character of that expenditure was domestic.

Mason J said

“Here the study is a room in the taxpayer’s home, not seperate from it in any way, having no distinctive physical characteristics, readily capable of other use for family purposes, and in fact used for non-professional purposes from time to time.  Moreover when used for professional work it is ordinarily used only for professional work that can be done at home, in the evenings and on weekends e.g. working on briefs and preparing opinions.  Expenditure related to the study is therefore referrable to the home. The essential character of the expenditure….is therefore of a capital, private or domestic nature”

There are cases where your home occupancy costs will be deductible and why the facts of your particular situation need to be reviewed to ensure that you are making a correct claim.  People with rental properties frequently incorrectly claim their home office expenses and this is usually only detected at audit or when changing accountants.  Unfortunately by then penalties and interest can have accumulated.