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Overview of Tax at UNSW for Corporate Finance & DSFP

Overview of Tax at UNSW for Corporate Finance & DSFP. Anne Harvey – Group Tax Manager, Corporate Finance Eric McCallum – Group Tax Accountant, Corporate Finance. 24 August 2012. Objectives. Taxes applicable When does GST apply GST Codes What is FBT What does Taxable Value mean

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Overview of Tax at UNSW for Corporate Finance & DSFP

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  1. Overview of Tax at UNSW for Corporate Finance & DSFP Anne Harvey – Group Tax Manager, Corporate Finance Eric McCallum – Group Tax Accountant, Corporate Finance 24 August 2012

  2. Objectives Taxes applicable When does GST apply GST Codes What is FBT What does Taxable Value mean How is FBT calculated Types of benefits which attract FBT When is FBT charged Update on NFP

  3. UNSW Tax status Charitable institution • established and run for charitable purpose - Education Income Tax Exempt Some GST concessions • Non commercial activities – no GST on sale, claim GST credits on purchase • Fundraising events – treat sales as Input taxed, no GST claimed • DGR – entitled to receive income tax deductible gifts

  4. Taxes

  5. Payroll Tax Reports run from HR System • Salaries and wages, Allowances • Superannuation • Exemptions – Maternity Leave, Severance pay, Workers Compensation Report from GL • Contractor payments subject to PRT • Allowances - Travel, overtime meal Other inclusions • FBT (1/12th of last FBT Return, adjust in Annual Reconciliation) Summarise into OSR reporting format State based tax – NSW (5.45%), ACT(6.85%), Qld (4.75%), SA (4.95%),Vic, WA, NT Monthly return and payment due 7th next month Annual return for July – June year due 21st July – reconcile for year, include any adjustments, e.g. Contractor exemptions, Travel allow, Actual FBT, overseas Grouped with controlled entities – NSG, NSi

  6. When does GST apply? When is it not applicable • GST free sales • Basic food - meat, milk, bread, fruit and vegetables • Most education, child care, health • Most exports – goods within 60 days • Can claim a input tax credit on purchases • Input Taxed sales • Residential property • Financial transactions • Cannot claim GST credit When is it applicable? • Taxable supply • for consideration • in course of furtherance of carrying on enterprise • connected with Australia • registered or required to be registered • not GST free or input taxed • Taxable sales • price includes GST • pay GST on sales • claim GST on purchases • 1/11th of Total invoice/sale price

  7. How Does GST work? Supplier Raises Tax Invoice UNSW Recipient Purchaser Receives Tax Invoice Sponsor

  8. Completing BAS • BAS – Return due to ATO showing Sales and Acquisitions. Reported as Taxable, GST free, Input Taxed, Non Deductible • Monthly return due 21st of following month • 22 NS Financials Queries are run each month to obtain the required data. • Around 50K transaction lines per month • GST codes determine the reporting line of each transaction on the BAS return • GST paid/claimable reconciled to GL before BAS is lodged • FBT instalments are paid quarterly on BAS • GST on imports through Customs, under deferral scheme, charged to BAS and claim as ITC

  9. Common GST Mistakes • Mixed Supplies – need to enter Taxable items and GST free items on separate lines with GST code (Telstra bills, Cabcharge, Hotels, Qantas, basic food) • Use GST code from PO - check if agrees to Tax Invoice • Relying on default GST codes in EMS (Business purpose and expense type) • Tax calculated by the system does not agree to GST on Tax invoice – may need to split lines • Deposits – claiming GST on deposit. Adjust on final Tax invoice (security deposits vs. part payment) • Credits from prior month. Check GST charged on Invoice.

  10. Risk to UNSW if GST Not charged • If Taxable Supply UNSW still have to remit 1/11th of total amount to ATO. • Loss of revenue received by UNSW – only 10/11ths. • Audit risk – inadequate processes and controls • Penalties and Fines • Reputational risk • BAS amendments and ATO risk matrix

  11. Student Accommodation • Accommodation for student during semesters is input taxed residential accommodation and falls outside the definition of commercial residential premises. • Demolition and construction costs include GST and to the extent that a building is used to make input taxed supplies the GST “Input Tax Credits” on the demolition and construction costs cannot be claimed. • The GST legislation allows for the non-commercial operations of charities to be GST free where certain criteria are met. In the case of student accommodation the amount charged to students must be below 75% of the market value for the non-commercial criteria to be met.

  12. Student Accommodation continued: • The UNSW has engaged a property valuer to determine the market value of the student accommodation to be supplied at Gate2 and the Kensington Colleges in order to ensure compliance with the non-commercial operations of a charity criteria. • As the UNSW is a charity for taxation purposes meeting the non-commercial operations of a charity criteria means that the supply of student accommodation is GST free, provided charged at less than 75% of market rate. • The benefits of the accommodation supply being classified as GST free are that the student receive more affordable accommodation and the UNSW can claim GST “Input Tax Credits” on the demolition, construction and on-going costs.

  13. Sale of Second Hand Capital Equipment • Sale of second hand equipment is a taxable supply and consequently 1/11th of the sale price must be remitted to the ATO. • As the UNSW is a charitable institution if the sale price of the second hand equipment • is less than 50% of the market value then the supply is GST free, or • is less than 75% of the original purchase price paid the supply is also GST free. • Given that the original purchase price is often easier to substantiate than the current market value; it may be worthwhile to look up the cost on the Fixed Assets Register prior to negotiating the final sale price.

  14. Appropriations Previously New legislation -1/7/2012 • Current requirement to be specifically covered by appropriation removed – (no need to specify GRE recipient by name, or generically) • If payment by GRE, can be paid to GRE and/or non Govt – not appropriation • New “non-commercial” test satisfied • Non-commercial activities of GRE not subject to GST • 9-15(3)(c) only apply where payment can only be made to GRE • Non-commercial activities of GRE – No GST • Payment from GRE to GRE, covered by appropriation, non commercial – not consideration – No GST • If payment to GRE for commercial supply-GST • If margin above cost of supply – GST • GST Act paragraph 9-15(3)(c) • Payment made by GRE to another GRE is not consideration for GST purpose if payment specifically covered by appropriation under Australian law • Be Appropriation under Australian law • Payment made by GRE to GRE • Specifically covered by appropriation • No GST – outside scope of GST

  15. Appropriations Non-commercial test Appropriation made by GRE under Aust law to GRE Supplier for making a supply Consideration (for a supply) • Anticipated or actual cost of GRE Supplier making: • the supply, or • any other related supply ≠ ≥ + 3rd party payments (monetary and non-monetary) 3rd party payments – in connection with, or in response to, or inducement of the supply or any other related supply Is supply by GRE? – No, not appropriation, out of scope, usual GST rules. If yes … Is payment to Government and Private (co contribution)? If yes … Is there a margin? Yes, failed non-commercial test. GST on Government and non Gov’t supplies. If determine non commercial – document reasons why

  16. Appropriations

  17. Grants • Where the Grant is consideration for a supply made by the UNSW then the Grant will be subject to GST. If sufficient connection between supply and payment – basic GST rules. • Since the gross amount received by the UNSW is reduced by the GST payable (1/11th of the receipt), the treatment of the GST should be agreed during the initial negotiations. This will enable both parties to align their GST treatment, minimise the risk of one party being left out of pocket by the GST, and limit any subsequent conflicts. • Certain grants that are completely unconditional and are not tied to a material supply will be GST free and treated like a donation or gift.

  18. Difference between Grants & Appropriations Grant Appropriation Is not part of a commercial transaction and would normally reflect the non-commercial activities of government. Is between government and government related entities. The authority behind an appropriation is to be found in an appropriation Act of Parliament or other legislation. Is only available to government or government related entities. • Can be consideration for a supply • Could be made by a private entity to a government entity or vice versa • Can be made by an individual, body corporate or legal entity. • A competitive Grant could be open to private companies and government related entities

  19. Main Point with Grants & Appropriations Grants Appropriations Don’t assume that a GRE to GRE transaction is automatically GST free or outside of scope. Try to determine if there a supply connected to the payment. Estimate the cost of making that supply in order to determine any margin. Determine if the payment is covered by an appropriation Act or other legislation. Can the payment also be made to 3rd parties? • Don’t assume that it is GST free because it is a Grant. • It may be necessary to obtain the Grant agreement and review the terms to determine if there is a supply. • It is important to review the obligations imposed on the UNSW under a Grant agreement as this may indicate a supply. • A competitive Grant available to the private sector is an indicator of a taxable supply.

  20. FBT year 1 April to 31 March Tax Rate 46.5% - Calculated on Grossed Up Taxable Value FBT paid by employer – UNSW Includes benefits under a salary sacrifice arrangement Reportable Fringe Benefit included on Payment Summary in June, if > $2000 FBT is tax on benefits (right, privilege, service or facility) provided to employees & associates (relative, partner/ spouse, child) by an employer, associate of employer or under an arrangement with a third party in respect of employment – reward for service “Employee” includes current, former and future employees If pay Salary  PAYG deduction  Employee pays tax If provide fringe benefit  no PAYG deduction  Employer pays tax Fringe Benefits Tax - Facts

  21. What is Taxable Value Determined by the rules applying to each category of fringe benefit Generally the cost of the benefit Some benefits concessional tax, e.g. Motor Vehicles Some reductions and exemptions provided in legislation FBT Calculated on Taxable Value • GST Impact • Taxable Value based on GST inclusive amount • FBT payable depends on whether entitlement to ITC credit • Can claim Input Tax Credit for GST paid Important correct GST codes are used and GST amount is correct.

  22. FBT Calculation Type 1 Entitlement to ITC Gross Up rate 2.0647 Taxable Value – incl GST $1000.00 * Gross Up rate 2.0647 Grossed up TV $2064.70 FBT rate 46.5% FBT cost $960.09 Type 2 No entitlement to ITC Gross Up rate 1.8692 Taxable Value - no GST $1000.00 * Gross Up rate 1.8692 Grossed up TV $1869.20 FBT rate 46.5% FBT cost $869.18 PRT = $1000 * 1.8692 * 5.45% (NSW PRT rate) = $101.87

  23. Examples of Benefits Incurring FBT • Salary packaged Motor Vehicles or UNSW provided – personal use. • Medical Insurance - inpatriates • Permanent Residency – application, police & medical checks, lawyers fees (Exempt if to enter Australia on relocation) • Gifts, awards and prizes - $300 or more • Travel for family – SSP, accompany employee on business (exclude relocation) • VC Child care support • Furniture purchase in lieu of relocation transport/ relocation allowance • Kensington College accommodation and meals – provided to tutors/employees • Reimburse deferred HECS/HELP fees • Write off Advance - Debt waiver • Outstanding Advance not acquitted within 6 months – Loan • Home phone/ internet – private % • Dual purpose travel – business and private • Entertainment – tax exempt body

  24. Entertainment v Sustenance

  25. Entertainment – FBT Sustenance – no FBT (6611) Morning and afternoon tea for employees Birthday cake – morning tea for employees Light lunches, sandwiches, finger food, salad, juice, etc for employees Light breakfast at training seminar – incidental to seminar Finger food and light refreshments (with moderate alcohol) immediately after training or CPD seminar – incidental to seminar Meal at seminar that goes for over 4 hours Meal (with alcohol) while travelling on business - employee Tea / coffee – employee Overtime meal in office • Social function, farewell • Party, Christmas party • Restaurant meals • Business lunch & drinks • Celebrations, Dinners • Spouse meal of employee travelling on business • Non travelling employee (when dines with travelling employee) • Morning, afternoon tea, light lunches – associates • Leisure or amusement activities • Sporting activities, golf days • Gym membership, sporting club memberships • Holiday • Theatre/movie ticket • Cruises

  26. Travel Benefits Business Purpose Dual Purpose Travel to conference then holiday Holiday at same or different location Book Annual Leave days in myUNSW Family accompanies Private portion 40% or more of total days Travel Allowance only for business days Frequency of trips No restrictions on private travel Flight cost split 50/50 between business and private  FBT on 50% private If employee pays 50% of airfare directly to Travel Agent  No benefit  No FBT • Predominantly business undertaken • Considered Incidental to business – extra day to acclimatise • Weekends during business period, e.g. 2 week business trip • Day to prepare/ wrap up • Make Flight connections • Due to flight availability/ delays • 1 day Stopover en route – no extra cost • Day between business meeting

  27. Exemptions and Reductions Exemptions Reductions Otherwise deductible – entitled to Income tax deduction if incurred expense, e.g. course fees, professional subscriptions, home internet LAFHA – with declaration • Minor benefit < $300 and provided infrequently and irregularly – (not for entertainment) • Relocation – transport, temporary accommodation, removalist • Work related item – laptop, portable electronic device. Limit 1 item per FBT year – same function • LSL awards $1000 for 15 yrs, +$100 each additional year

  28. If expenses charged to the GL account, FBT will be accrued at month end

  29. Accrued FBT v Actual FBT V

  30. Living Away From Home Currently Tax Implications Employee Salary Sacrifices for Rent and F&D Managed by HR Rent – No PAYG, No FBT F&D – No PAYG, No FBT on exempt statutory amount (i.e. >$42pw per adult up to ATO rate) No Payroll Tax - Exempt Fringe Benefit LAFHA not subject to SGC No Workers Compensation - Exempt Fringe Benefit • FBTAA provides concessional taxation to LAFH benefits • LAFHA is compensation for additional expenses & disadvantages suffered due to employee being required to live away from usual place of residence in order to perform employment duties • Required by employer to move • Temporary period – fixed term contract • Intention to return to live at former locality • Employee provides a LAFHA declaration each FBT year

  31. Living Away from Home Proposed Reforms Eligibility • Required by employer to live away from Australian residence • Maintain a home in Australia • Ownership interest in home • Home which living away from must be available for their personal use and enjoyment at all times • Cannot be rented out or sublet • Expectation to return to live at former residence • Leave LAFHA in FBTAA • Temporary Residents who do not maintain a home in Australia which living away from for work no longer eligible for LAFHA from 1/10/2012 • Transitional rules for domestic employees living away from Australian home as at 8/5/2012, eligible LAFHA until 1/7/2014 unless material change in employment arrangement • Domestic employees, contract after 8/5/12, maximum period of 12 months for LAFHA

  32. Contractors and VN1 Form All new Vendors to complete VN1 form – process and system to manage VN1 form has questions in relation to the services provided and ABN status To assess if employee or contractor Assess for PAYG withholding, Superannuation and Payroll Tax Vendor Classification assists in identifying for upfront Payroll Tax exemption, ongoing Payroll tax assessment or SGC. If “Refer HR” – needs to be referred to HRC for setting up in HR system. Cannot be paid through AP. Standard UNSW Contact • Sole Trader Contractor Agreement • Other Entity Contractor Agreement (Company, Partnership, Trust)

  33. Service Provider – Payment for Service Note: Some Sole Traders may be assessed(VN1 result) to be paid via A.P, if no Superannuation or PAYG obligations

  34. NFP Sector 10 May 2011 reforms to NFP sector announced Creation of Australian Charities and NFP Commission (ACNC) – National regulator, establish and maintain database of charities, one-stop-shop for charities, oversight on financial and governance practice. Est by 1/10/12. Statutory definition of Charity due 1/7/13. Charitable status of entity reassessed against definition. Some entities potentially lose tax exempt status if not meet definition. Ensure focus activities on education or other charitable purposes. Reform to better target NFP tax concession. NFP taxed on income of Unrelated commercial activities, where profits not directed back to entities altruistic purposes. Applies from 1/7/12 to new unrelated commercial activities commenced after 10/5/11. Restating “In Australia” special conditions. Operate and pursue purposes principally in Australia. Income tax exemptions, DGR status. May place restrictions on overseas operations that could jeopardise tax concessions.

  35. Questions Further Information Finance website: http://www.fin.unsw.edu.au/PoliciesProcedures/AccountingManual/FBT.html Contact: Anne Harvey - Ext 51635. Email: a.harvey@unsw.edu.au Eric McCallum – Ext 52825, Lucy Lowe – Ext 51204

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