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The practice statement is useful in providing guidance to small and medium sized businesses or partnerships with limited systems for the generation of tax invoices and adjustment notes. The practice statement only deals with the administrative penalty regime and does not cover the remission of the general interest charge (GIC). |
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Work-related Expense Errors |
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Settlement Payment Assessable |
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The Tax Office has sent out 226,000 letters to taxpayers in respect of incorrect claims for work-related expenses in their 2005/06 tax returns. Common errors anticipated for 2007 include: |
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· self education expense claims where there was an insufficient connection between the work activities and the education expense to warrant a deduction; · car expenses using the cents per kilometre method, where the taxpayer is unable to support the claimed expenses; · incorrectly claiming the entire amount of an asset purchase rather than calculating the asset’s decline in value; and · incorrect calculations regarding the taxpayer’s home office expenses. |
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Family Trust and Interposed Entity Elections |
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Under the trust loss rules, a taxpayer is subject to concessional treatment, making it easier to claim prior year losses, if they have made a Family Trust Election (FTE) or an Interposed Entity Election (IEE). Also, elections may be necessary to preserve franking credits flowing through the trusts. Due to the complexity of the these rules and the potentially adverse consequences of failing to make the required elections, the Tax Office has allowed an extension to make retrospective elections as part of the 2004 income tax returns. The Commissioner recently announced a further extension of time to make a one-off lodgement of an election up until 31 May 2007. This will allow taxpayers to retrospectively submit their FTEs and IEEs for 2004 and earlier income years. The procedures for lodging these extensions have been posted on the ATO website. |
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The Federal Court has found that a settlement payment made to a former accounting firm partner on his termination from the partnership was assessable income. This overturned a previous decision of the AAT. Originally, the AAT had held that a large portion of the settlement payment was a non-assessable ‘un-dissected lump sum’ and therefore should not be included in the partner’s assessable income. The AAT did, however, find that the portion of the payment which represented timing differences should be assessable. The Federal Court overturned this decision stating that the central issue was whether the settlement payment represented the taxpayer’s share of the net income of the partnership and not whether the amount represented ordinary income in the taxpayer’s hands. The Court found that the AAT had erred in law and therefore remitted the issue back to the Tribunal for further consideration. |