April 2022 – de Kretser Chartered Accountants

Keeping good business records is a crucial part of running your business. Records can help evaluate and assess business growth and progress over a specific period of time. Tracking records may also indicate how well a business is performing or what changes can be made to increase business success. Keeping good records can help you:

Comply with your tax and superannuation obligations
Gain a greater insight into the financial health of your business, enabling you to make informed decisions
Manage your cashflow
Demonstrate your financial position to prospective lenders, and also potential buyers of your business

ATO REQUIREMENTS

The ATO requires that business owners:

Keep most records for five years from when you obtained the records, or completed the transactions or acts that they relate to – whichever is the later
Be able to show the ATO records if needed or on demand
Have their records in English or be able to be easily converted to English.

DIGITAL RECORDS

The ATO is reminding business owners that you can keep your records (paper/hard copies) digitally. The ATO accepts images of business paper records saved on a digital storage medium, provided the digital copies are true and clear reproductions of the original paper records and meet the standard record keeping requirements. Once you have saved an image of your original paper records, you don’t have to keep the paper records unless a particular law or regulation requires you to.

However, if you enter information (for example, supplier information, date, amount and GST) from digital or paper records into your accounting software, you still need to keep a copy of the actual record, either digitally or on paper. Some accounting software packages may do both your accounting as well as your record keeping.

STORAGE OPTIONS

1. Cloud

If you use cloud storage, either through your accounting software or through a separate service provider, eg, Google Drive, Microsoft Onedrive or Dropbox, ensure:

The record storage meets the record-keeping requirements
To download a complete copy of any records stored in the cloud before you change software provider and lose access to them.

2. E-invoicing

Regardless of your E-Invoicing software or system, your business is responsible for determining the best option for storing business transaction data.

Business owners should:

Ensure that your process meets the record-keeping requirements
Discuss your options with your software provider
Talk to your business adviser, if necessary.

DIGITAL ADVANTAGES

As the ATO point out, there are many advantages to keeping your records digitally. If, for example, you use a commercially-available software package, it may help you:

Keep track of business income, expenses and assets as well as calculate depreciation
Streamline your accounting practices and save time so you can focus on your business
Automatically calculate wages, tax, super and other amounts, including:

Develop summaries and reports for GST, income tax, fringe benefits tax (FBT) and taxable payments reporting system (TPRS), as required
Be prepared to lodge your tax and super obligations, including your tax return, business activity statements (BAS) and taxable payments annual report (TPAR) if you are a business that is required to
Send some information to the ATO online (if the package meets ATO requirements), for example, your activity statement
Meet your legal Single Touch Payroll (STP) reporting obligations

Most importantly, the ATO recommends to back up records using cloud storage to keep your records safe from flood, fire or theft.

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The ATO has just updated its guidance around trust distributions made to adult children, corporate beneficiaries and entities that are carrying losses. Depending on the structure of these arrangements, there is a potential that the ATO may take an unfavourable view on what were previously understood to be legitimate arrangements.

Background

For various reasons, including legal tax minimisation and asset protection, many business owners operate their affairs through a trust structure. While trust structures are legitimate, the ATO has become increasingly sceptical of the motivations behind the use of trusts which it believes in many cases are motivated chiefly by tax minimisation. In February 2022, the ATO updated its guidance directly focusing on how trusts distribute income, and to whom! Consequently practices which may have once been previously accepted may now not be. This may result in higher taxes for family groups in particular – both going forward, and potentially retrospectively.

Target

The ATO is chiefly targeting arrangements under s100A of the Tax Act, specifically where trust distributions are made to a low rate tax beneficiary but the real benefit of the distribution is transferred or paid to another beneficiary usually with a higher tax rate. In this regard, the ATO’s new Taxpayer Alert (TA 2022/1) illustrates how s100A can apply to the quite common scenario where a parent benefits from a trust distribution to their adult children. Released at the same time, the ATO’s new draft ruling states that for the new guidance to potentially apply, one or more of the parties to the agreement must have entered into it for a purpose (not necessarily a sole, dominant purpose) of securing a tax benefit. This sets the bar quite low and may capture a number of arrangements.

Assessing the risk

The ATO released an accompanying guideline providing taxpayers with a risk assessment framework for them to work through with their accountants to assess the level of risk involved in current and past distribution arrangements. In the guideline, the ATO has provided a number of examples of high-risk arrangements that are actually quite common and include:

Arrangements where the presently entitled beneficiary lends or gifts some or all of their entitlement to another party and there is a tax benefit obtained under the arrangement.

Arrangements where trust income is returned to the trust by the corporate beneficiary in the form of assessable income and the trust obtains a tax benefit.

Arrangements where the presently entitled beneficiary is issued units by the trustee (or related trust) and the amount owed for the units is set-off against the beneficiary’s entitlement.

Arrangements where the share of net income included in a beneficiary’s assessable income is significantly more than the beneficiary’s entitlement.

Arrangements where the presently entitled beneficiary has losses.

For arrangements that fall into the high-risk category, the ATO advises that it will conduct further analysis on the facts and circumstances of the arrangement as a matter of priority. If further analysis confirms the facts and circumstances of your arrangement are high risk, they may proceed to audit where appropriate.

What next?

The ATO’s new ruling and guidelines are still in draft form, and are expected to be finalised soon. Once finalised, they are intended to apply both prospectively and retrospectively. However, for entitlements conferred before 1 July 2022, the ATO has indicated it will stand by any administrative position reflected in its prior website guidance before the new material was released.