August 2006 Voice - NTAAntaa.com.au/files/Voice/Voice_2006/August_2006_Voice.pdf · of new entrants to the investment property market,” says Darren Wynen, Taxation Manager with

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August 2006

August 2006 Edition No.151

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Voice Tax Advisers'TheWhat's NEW This Issue

PageYour Association at Work 2Practice Notes 3– New FBT gross-up rates– The ATO, Tax Agents and Bookkeepers– Boat Data Matching Project– ATO responds to FBT issues– What's new in the 2006 tax return?– ATO loses employee share plan test case– Rental property deductions for 2005/06– The Commissioner and small business– Better lines of communication with the ATO– Lodgment Program 2006/07– ATO compliance focus for 2006– Business industry codes 2006– ASIC obtains court orders against former AMP adviser– Directors of SMSF companies banned for life– Taxpayers win insurance payout, lose much more in tax– Tax legislation to be cut by more than 4,000 pagesInterpretative Decisions 12FBT, GST and Income Tax Rulings 16Reasonable allowance expense claims 19

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NTAA National Headquarters29-33 Palmerston Crescent

South Melbourne Vic. 3205All inquiries, please call:

Ph: (03) 9209-9999Fax: (03) 9686-4744Email: [email protected]: www.ntaa.com.auABN: 76 057 551 854

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DISCLAIMERThis publication has been prepared for the members of the National Tax & Accountants' Association Ltd. Many of the comments contained in Voice are general in nature and anyone intending to apply the information to practical circumstances should independently verify their interpretation and the information's applicability to their particular circumstances.

Following is one of the many media releases issued by the NTAA in the past month:

ATO tax return “hit list”Employees will soon be receiving group certificates and lodging their 2006 income tax returns hoping for a big refund, but they should be aware that the Tax Office is ready to pounce if they leave income out or claim too many deductions, Darren Wynen of the NTAA warned today.

Specifically, the Tax Office has said that it is targeting:

q Employee shares and share options;

q Share transactions – The Tax Office is using its data matching to pick-up taxpayers not including all their dividend income;

q Rental properties – The Tax Office is focusing activities on people who understate their income or inflate their rental property deductions; and

q Work-related expenses – The Tax Office is focusing attention on large claims for work-related expenses, especially if taxpayers have not kept supporting receipts and invoices etc.

“The Tax Office is concerned about a blow-out in rental property deductions because of the number of new entrants to the investment property market,” says Darren Wynen, Taxation Manager with the National Tax and Accountants’ Association. “Rental property owners can expect very close scrutiny on their travel expenses, initial repairs and renovations to rental properties.”

“The Tax Office is also very concerned about work-related expenses. Hot spots on the Tax Office’s hit list include, home office expenses, mobile phone calls, internet usage, and travel expenses. Also, in some industries, such as the hospitality industry, clothing, laundry expenses and self education expenses will receive close scrutiny.”

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August 2006

PRACTICE NOTES

New FBT gross-up ratesAs a result of the reduction in the FBT rate from 48.5% to 46.5% as from 1 April 2006, the ATO has now released new gross-up rates for calculating the grossed-up value of fringe benefits provided to employees.

Type 1 benefits: 2.0647 (previously 2.1292)

Type 2 benefits: 1.8692 (previously 1.9417)

Editor: The Type 1 gross-up rate is used where the benefit provider is entitled to a GST credit in respect of the provision of a benefit.

The Type 2 gross-up rate is used if the benefit provider is not entitled to claim GST credits.

Note that only the Type 2 gross-up rate is used for reporting on employee’s payment summaries, regardless of whether the benefits provided are Type 1 or Type 2 benefits.

The ATO, Tax Agents and BookkeepersThe ATO advises that there are around 26,000 registered tax agents that assist businesses on tax compliance matters, and approximately 120,000 bookkeepers, many of whom are involved in BAS preparation.

“We understand that by helping and influencing tax agents and other important intermediaries, we help and influence the many taxpayers who are their clients.

“Consequently, we are putting a stronger emphasis on our ongoing relationship management and support for tax agents and other intermediaries such as bookkeepers.

“We are developing products and services to boost the capability of bookkeepers to service the tax needs of businesses. For example, key information for bookkeepers has been published on our website (http://www.ato.gov.au/bookkeepers/).”

Editor: Members should be aware that the information on the website contains the following statement in relation to what it means to be 'working under the direction of a registered tax agent':

Guidelines for ‘working under the direction of a registered tax agent’

Summary of Tax Office viewIn order for a bookkeeper to be ‘working under the direction of a registered tax agent’ the registered tax agent must have a risk-based quality assurance process in place to review the BAS services provided by the bookkeeper for accuracy and completeness, and be satisfied with the standard of BAS services provided.

GuidelinesThe paper provides guidelines for developing a robust risk-based quality assurance process that would meet the requirements of the legislation.

The guidelines are not prescriptive and no one factor is generally conclusive in determining whether a suitable process is in place. The facts and circumstances must be considered on a case-by-case basis.

Whilst not a legislative requirement, we strongly recommend (for the protection of all parties, including clients) that the bookkeeper and the registered tax agent document and maintain copies of their arrangement as to:

q the clients the agreement relates to;

q the period it covers; and

q the details of the agreed risk-based quality assurance process.

We also strongly recommend that the agreement documents client privacy and liability considerations and that both parties consider appropriate professional indemnity insurance. The Commissioner of Taxation cannot determine liability in the event of error.

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Editor: The above was included in the March edition of Voice, but, it seems to be a little more concerning now that the ATO is openly putting it out as their policy on relationships with bookkeepers.

Boat Data Matching Project The Tax Office will request and collect details of individuals or entities who registered a boat/marine vessel with the following organisations:

n NSW Maritime Authority;

n Maritime Safety Queensland;

n Marine Safety Victoria;

n Marine and Safety Tasmania;

n South Australia's Department for Transport, Energy and Infrastructure (Safety and Regulation Division);

n Western Australia's Department for Planning and Infrastructure (Marine Safety);

n Northern Territory’s Department of Planning and Infrastructure (Marine Safety Branch); and

n the Australian Maritime Safety Authority.

These will be electronically matched with certain sections of Tax Office data holdings to identify non compliance with lodgment and payment obligations under taxation laws.

Records relating to approximately 735,000 persons or entities will be matched.

Editor: Buy a boat – get audited!!

Ref: Commonwealth Government Gazette No GN 25, 28 June 2006, Page 1579

ATO responds to FBT issuesThe minutes for the latest NTLG FBT Sub-committee meeting from 18 May 2006 has been released on the ATO's website, and a few of the more interesting issues are set out below.

Editor: The NTLG (or National Tax Liaison Group) is the peak consultative forum dealing with complex technical and policy issues between the tax, accounting and legal professions and the Tax Office. The NTAA sits on all of the sub-committees, including the FBT Sub-committee.

Work-related travelIt is now fairly common for taxpayers from regional centres or country towns to have full-time long term employment in a state capital city, and, to avoid commuting daily between their home and place of employment, they have a place of residence in each centre.

Typically, that would involve the family living full-time in the ‘family home’ in the regional centre or country town (the first residence), and the employee living in the major city (the second residence) for perhaps five days, returning to the regional centre at weekends.

The Tax Office considered the following question put forward by the committee:

If an employee uses an ‘exempt vehicle’, for example a ute or a panel van:

n to travel between the second (city) residence and his/her place of work during the week; and

n then uses that ute or panel van to travel between the place of employment and the first (country) residence at the weekend; and

n then uses that ute or panel van to travel between the first residence and the place of employment at the end of that period;

is that travel still ‘work related’ for the purposes of S.8(2) of the FBTAA, and exempt from FBT?

The Tax Office responded that such travel would be 'work related travel’, provided:

u the vehicle is not driven between the first and second residences, but only between a residence and the place of employment; and

u that other use of the vehicle is for work related purposes and it is not otherwise used for private purposes.

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Note that the second residence could be rented – the residence need only be a place which the person occupies and where they eat and sleep.

Travel insuranceThe Tax Office has advised that the cost of a travel insurance policy taken out by an employee in his/her name when he/she will be travelling on business is expenditure that is private in nature.

Expenses such as insurance policies invariably cover items that are generally private in nature, for example illness, loss of baggage, and theft or damage to belongings.

Therefore, where an employer reimburses an employee for the cost incurred in obtaining travel insurance, the employer could not rely on the ‘otherwise deductible rule’ to reduce the taxable value of the expense payment fringe benefit.

The Tax Office rejected the argument that the cost incurred by the employee would seem to meet the first test of deductibility, being incurred in respect of producing assessable income.

FBT on accommodation for accompanying spouseThe ATO accepts that, where an employee travels on business and has a spouse accompany him/her, there will only be FBT on the additional cost of any accommodation for the spouse.

Depending on the circumstances, the otherwise deductible rule should operate so that there is no FBT attributable to the employee’s accommodation costs.

ExampleThe cost of accommodation for the employee only is $100, but the cost including the spouse as well is $120.

As the extra $20 is an additional cost for the spouse over and above the cost that the employee would otherwise incur, it was agreed that the $20 would generally be a taxable fringe benefit amount.

ExampleThe cost of accommodation for the employee only is $100 and there is no additional cost for the accompanying spouse.

Where there is no additional cost for the spouse as the room rate covers both single and dual occupancy, it was agreed that there would generally not be a taxable fringe benefit in relation to the spouse for the reasons.

Editor: It appears that some Tax Office staff are developing some common sense! Or maybe they’re just taking their spouses with them on business trips...

What’s new in the 2006 tax return?The ATO has issued a fact sheet setting out some of the changes to the 2006 individual tax return:

30% child care tax rebate The new 30% child care tax rebate covers 30% of out-of-pocket expenses for approved child care up to $4,000 per child, and (if eligible) can be claimed on the 2005/06 income tax return for child care expenses incurred in the 2004/05 income year.

Superannuation contributions splittingThe ATO reminds taxpayers that they can claim the superannuation spouse contributions tax offset for a contribution made directly to their spouse’s account (provided the spouse’s assessable annual income plus reportable fringe benefits is less than $13,800), but that they cannot claim the offset if they have simply made a personal contribution to their own super fund and then split part of it with their spouse.

Capital gains tax and property Changes have been made so that certain costs relating to property disposed of on or after 1 July 2005, which were not previously included in the cost base and the reduced cost base, can now be included, even if those costs were incurred before that date.

The costs include:

q certain incidental costs of buying and selling property, including marketing expenses, search fees relating to a CGT asset, the cost of a conveyancing kit (or a similar cost), and borrowing expenses (such as loan application

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fees and mortgage discharge fees);

q costs of owning property in addition to non-capital costs like interest and maintenance (the amendments removed the requirement that the costs be non-capital in nature, and also clarified that only costs of owning the asset (as distinct from costs of becoming the owner) are recognised); and

q costs of preserving the value of property and not just to increase its value, as well as capital expenditure that relates to installing or moving the asset.

An example of expenditure incurred to preserve the value of an asset that would now qualify for inclusion in its cost base would be legal and other expenses incurred to preserve the value of a rental property by opposing a nearby development that would adversely affect the rental property’s value.

Another example would be the costs incurred in unsuccessfully applying for zoning changes.

Capital returns The ATO is aware that more than 850,000 individuals and SMSFs have received capital returns on listed company shares in the 2005/06 tax year.

As a result of these capital returns, these shareholders will have to adjust the cost base of their shares and some may make capital gains which must be declared in their 2006 tax return.

The Tax Office has a number of publications on its website which provide advice on the tax consequences and/or treatment of capital returns from listed shares and share buy-backs, as well as a range of detailed fact sheets relating to specific companies.

Share buybacksThe ATO is also aware that listed companies in Australia have bought back more than 150 million shares worth in excess of $3.5 billion during the 2005/06 tax year.

Shareholders who have participated in these buy-backs need to calculate any capital gain or loss for inclusion in their 2006 tax return.

Dividends paid as part of the buy-back must also be declared in their return.

The Tax Office website includes publications providing advice on the tax consequences of share buy-backs, as well as a range of detailed fact sheets on the tax consequences of share buy-backs by specific companies. See ATO the fact sheet "Share buy-backs".

Medical expenses offsetThe ATO reminds taxpayers that, due to changes to the law, payments for cosmetic procedures which do not qualify for a Medicare refund and cosmetic dental expenses do not qualify for the medical expenses tax offset for the 2005/06 tax year.

ATO loses employee share plan test caseThe Federal Court has held that a proposed issue of shares by a franchisor to the trustee of a Share Plan, for the benefit of employees of its franchisees, would not give rise to a fringe benefit.

FactsABC Learning Centres Ltd (‘ABC Public’) wished to establish an employee share scheme offering shares in ABC Public to current and future employees of its franchisees, called Regional Management Companies or RMCs (each RMC employs its own staff to operate childcare centres).

The vehicle to achieve this was a discretionary trust, and the beneficiaries of the trust were basically any employee of an employer RMC (but it excluded any employees of ABC Public or its subsidiaries and associates).

It was intended that the trustee of the trust, in exercising its powers to appoint income and capital, have regard to the employment position of each beneficiary, and the years of service of each beneficiary with an employer RMC since becoming a beneficiary.

However:

q the proposed arrangement did not require the RMCs to facilitate the operation of the share plan, or participate in any activities of the

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trustee (the trustee would be able to obtain any relevant information from the franchisor);

q the share plan was conceived by ABC Public without any consultation with any of the RMCs;

q ABC Public did not seek the agreement of the RMCs to establish the share plan;

q there was no understanding between ABC Public, its associates and the trustee on the one hand, and the RMCs on the other, as to when and in what amount ABC Public shares would be issued to the trustee and provided to the employees; and

q ABC Public claimed that neither it nor its associates perceived taxation benefits to flow from the proposal. ABC Public did not claim any tax deductions for issuing fully paid ordinary shares, and the employees who received the shares were expected to include the value of those shares in their assessable income when received.

A number of parties, including one of the RMCs, applied for a Private Ruling in relation to whether ABC Public or any RMC would be liable to FBT under the proposal.

The Commissioner stated in the Private Ruling that the issue of ABC Public shares in accordance with the proposal would give rise to a fringe benefit in relation to the RMCs as employers.

Reasons for decisionThe Court held that the RMCs, as employers, were not liable to FBT under the proposal.

It agreed with the decisions of Essenbourne, Walstern, and Spotlight Stores that the identification of particular employees is a requisite element in the application of the definition of ‘fringe benefit’.

In addition, there did not appear to be an arrangement between the franchisor and franchisee in any event.

In fact, ‘a far stronger connection existed between the contributions made for the

employees and each employee’s employment in Essenbourne, than existed between the proposed share issue by ABC Public and any particular RMC employee’s employment.’

Editor: Not surprisingly, the Commissioner has lodged an appeal against this decision to the Full Federal Court. Until then, the ATO’s ruling on this issue, TR 99/5, would appear to be in a little trouble...

Ref: Indooroopilly Children Services (Qld) Pty Ltd v Commissioner of Taxation [2006] FCA 734

Rental property deductions for 2005/06The Tax Office has identified common mistakes made by people declaring rental income and claiming deductions.

Common mistakesThere are some common mistakes made by both first-time and other rental property owners:

q Incorrectly claiming the cost of the land as a capital works deduction, that is, as part of the cost of constructing or renovating the rental property.

q Incorrectly claiming the cost of improvements such as remodelling bathrooms or kitchens or adding a deck or pergola as repairs. These are capital improvements and should be claimed as capital works deductions.

q Overstating claims for deductions on the interest on the loan taken out to purchase, renovate or maintain the property (e.g., the interest on the private portion of a loan is not deductible and should not be claimed).

q Incorrectly claiming the full cost of an inspection visit when it is combined with another private purpose, such as a holiday.

q Claiming deductions for properties which are not genuinely available for rent.

q Incorrectly claiming deductions when

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properties are only available for rent for part of the year – taxpayers are not entitled to a deduction for costs incurred during periods a holiday home or unit is used by the taxpayer, their friends or relatives free of charge.

q Claiming deductions for the extra capitalised interest expense imposed under a split loan facility.

The Commissioner and small businessThe Commissioner has recently given a speech about the ATO and small business, parts of which are reproduced below.

He said that the Tax Office’s approach to administering the tax system is threefold:

q they want to maximise the number of taxpayers who choose to voluntarily comply by providing service excellence and by making it as easy as possible for them to understand and meet their obligations;

q they treat taxpayers fairly in accordance with the law; and

q at the same time they have strategies to deter, detect and address non-compliance based on risk management (ultimately, this is to ensure that taxpayers who do the right thing are not at a competitive disadvantage relative to others).

As an immediate priority, the ATO is committed to supporting voluntary compliance by continuing to provide a range of products and services to help small businesses meet their taxation obligations, including:

n a checklist for people new to business, designed to help people get their tax affairs in order right from the beginning, which is available at http://www.ato.gov.au/businesschecklist/. A number of the questions and issues discussed are:

– Do you have the right advice to get your business started successfully?

– Are you actually carrying on a business?

– Which business structure should you choose?

– Do you need to register for GST?

– Do you need to register for PAYG withholding?

– What is you need to change your tax registration details?

– What if you stop carrying on a business?

– Do you need any non-tax business registrations?

n to help small businesses to decide whether to enter the simplified tax system (which has been improved), the ATO has devised an online tool – ‘STS – is it for you?’ that is available from http://www.ato.gov.au/content/18773.htm;

n to help people manage their records the ATO has developed free record-keeping software known as e-Record and conducts record-keeping workshops and record-keeping reviews. Businesses can assess their own record keeping by downloading the record keeping evaluation tool from http://www.ato.gov.au/content/40542.htm (the same tool that ATO auditors use when they visit a business); and

n to help employers in deciding whether an employee is an employee or a contractor for tax and super purposes the ATO collaborated with the building and construction industry to develop an online tool which steps the employer through a series of straightforward questions and then generates the answer for their circumstances: http://www.ato.gov.au/content/4540.htm.

Editor: As an example see the ATO's checklist on "Is you worker an employee or contractor?" on our Website.

Ref: Commissioner’s speech to the Council of Small Business Organisations of Australia, Melbourne, 27 June 2006.

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Better lines of communication with the ATOPhone servicesThe ATO has advised that the staff answering phone calls now have a complete history of interactions on screen in front of them; and later this year they will also have access to images of all correspondence with the ATO, which will make it easier and quicker for them to respond to enquiries.

Web servicesThe ATO is also embarking on a major technology change program in the order of a half a billion dollars to integrate their IT systems and foster a re-engineering of their operating models to make it easier for taxpayers to deal with them.

For example, there won’t be the confusion of, say, receiving an assessment for a fringe benefits refund one day and then an income tax assessment with a debit the next. However, until 2008, they advise that they are sorry for any inconvenience caused to you by their disparate systems and transition to integrated systems.

Processing BASsNearly 40% of all business activity statements are now lodged electronically.

More than 90% of these statements are processed in real time with refunds posted immediately to the taxpayer’s bank account and available once they are released through the normal banking cycle, which is usually three days.

Lodgment Program 2006/07The ATO has released details of the Lodgment Program 2005/06 on its Website.

The Lodgment Program 2006/07 for tax agents was developed in consultation with the Lodgment Working Party (of which the NTAA is a member – Editor).

The key dates outlined in the Lodgment Program 2006/07 are structured to accommodate progressive lodgment of documents throughout the year.

The document is divided into four segments:

n What’s changed – A summary of what’s changed in the Lodgment Program 2006/07;

n Lodgment due dates – A table containing all Lodgment program 2006/07 due dates;

n Obligation type – A breakdown of the program into obligation types – for example, activity statements, income tax returns and FBT returns; and

n Client type – A breakdown of the program into client types – this segment focuses on income tax returns and when each type of client is required to lodge.

The document can be accessed at http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/75303.htm

ATO compliance focus for 2006The Commissioner of Taxation has stated that, in relation to the 2006 year of income, the Tax Office was again focusing on:

q deductions for rental property expenses;

q capital gains from the sale of property and other assets; and

q work-related expenses, such as deductions for motor vehicles, self-education, home-office and travel expenses.

In addition, this year the Tax Office will focus on:

u business professionals;

u hospitality industry service workers;

u factory, store and process workers;

u mechanical, automotive and electrical tradespersons;

u information technology professionals; and

u mining site employees.

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“We cross-check tax returns against a range of data including financial institution data, state and territory revenue and property sales information and Australian stock exchange data,” Mr. D’Ascenzo said.

Business industry codes 2006The industry codes have changed from those used in 2005 and are now available on the ATO's website.

Most of the industry codes used for last financial year cannot be used for this financial year.

The industry coding regime used by the ATO is a modified version of the Australian and New Zealand Standard Industry Classification (ANZSIC), which was originally released in 1993, but which has since been updated.

The changes will apply to the Individual tax return 2006, Partnership tax return 2006, Trust tax return 2006, Company tax return 2006 and the Schedule 25A 2006.

An accurate description of the taxpayer’s main business activity and its new 5 digit code must be shown at the correct items on relevant returns and schedules.

The ATO advises taxpayers and tax practitioners to only use codes from Business industry codes 2006, and to take care to describe their business activity as accurately as possible.

An incorrect code may result in clients not receiving necessary service or material from the Tax office, or could lead to incorrect targeting of compliance activities.

Editor: Advert alert! The 2006 Book of Rates contains a fully updated list of the new Business Industry Codes. Fill in the "outsert" on this copy of Voice to receive your copy of the 2006 BoR.

ASIC obtains court orders against former AMP adviserASIC has obtained orders in the Federal Court about superannuation switching advice provided by a former AMP financial adviser.

He had advised five of his clients to switch their superannuation from Tasplan to AMP Flexible Lifetime Super.

The court made declarations that the adviser had breached the law by giving inappropriate advice, by not comparing the clients’ existing super fund with the recommended fund and by not disclosing the disadvantages of switching funds to an AMP fund.

The court orders also included declarations that the adviser:

n did not disclose full information about the costs, lost benefits and other significant consequences of the recommended switch;

n did not compare the projected returns, benefits and costs of continued membership of Tasplan with those of AMP Flexible Lifetime Super; and

n gave inappropriate advice to four clients about life insurance and/or total and permanent disability insurance.

Editor: ASIC’s investigation in this case was part of a wider surveillance project on superannuation switching advice.

Ref: ASIC media release 06-217, 30 June 2006

Directors of SMSF companies banned for lifeASIC has obtained orders from the Supreme Court of Victoria disqualifying two directors from managing corporations for life.

This is the first time that the Court has taken such action.

The Court also disqualified another director for seven years, and permanently restrained those directors from carrying on business or dealing in superannuation interests, financial services or financial products.

The conduct of the three former directors related to their role as directors of a number of companies involved in the Personalised Finance Services group (PFS Group).

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ASIC alleged that the actions of the PFS Group and the directors was to set up SMSFs and then either induce or misappropriate funds from the SMSFs for property development projects involving the directors.

The Court also made declarations that the directors had engaged in conduct that was false and misleading in relation to the carrying on of a financial services business, and that they had acted in contravention of other provisions of the Corporations Act relating to directors’ duties.

ASIC strongly advises consumers considering setting up an SMSF to satisfy themselves that they deal with reputable people, and that they have sufficient funds available to enable the fund to be cost effective.

Ref: ASIC’s media release 06-226, 6 July 2006

Taxpayers win insurance payout, lose much more in taxIn this AAT case, the taxpayers, a husband and wife, had reported a robbery of various valuables worth around $650,000 and made an insurance claim, eventually involving the Federal Police.

Unfortunately, for this pair, their declared average annual income was $3,378 p.a. for Mr. Ebner over a 4 year period and $3,744 p.a. over 12 years for his wife.

Not surprisingly, the Tax Office also decided to pay them a visit.

The subsequent investigation revealed that they had not declared over $2 million in income over 12 years, and the ATO issued amended assessments for them over this period, using the figures in their insurance claim as evidence of undeclared income used to acquire the valuables, as well as other figures of income received from overseas.

However, the AAT held that the ATO should have used cost price rather than market value in determining the undeclared income used to acquire the valuables and other stolen items.

Also, the AAT allowed the taxpayers to deduct an arbitrary figure of 25% for expenses that must have been incurred in earning the overseas income.

Their penalty was also reduced from 90% to 75% for intentional disregard.

Nevertheless, the Ebners can still look forward to amended assessments totalling up to $2,000,000 plus a 75% penalty on the tax shortfall.

Editor: Moral of the story? If you want to hide something from the ATO, maybe keep the police out of it...

Ref: Ebner and Commissioner of Taxation [2006] AATA 525

Tax legislation to be cut by more than 4,100 pagesThe Government has introduced the Tax Laws Amendment (Repeal of Inoperative Provisions) Bill 2006, which will repeal more than 4,100 pages from Australia’s tax legislation.

Inoperative provisions are those that no longer apply to taxpayers, either because they have no effect after a date in the past or because all the transactions or events they did affect have now concluded.

The Bill also makes other improvements to the tax laws such as replacing multiple definitions of some terms with a single definition for each term.

The Treasurer expects the Bill to be passed later this year, allowing for next year’s commercial reprints of the income tax law to reflect the repeal of the inoperative material.

Ref: Treasurer’s press release No.064, 22 June 2006

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Interpretative Decisions

ID2006/154 – Costs of hiring furniture and ornaments included in cost base A taxpayer who sells a rental property can include the costs of hiring furniture and ornaments used in marketing the property as part of the cost base of the property.

Facts The taxpayer hired furniture and ornaments as part of their marketing strategy to sell a property by displaying the saleable qualities of the property to greatest advantage.

The property was sold and the taxpayer wished to include the costs of hiring the furniture and ornaments as part of the cost base of the property. Reasons for Decision The second element of the cost base of a CGT asset includes the incidental costs that the taxpayer incurs relating to a CGT event that happens to the CGT asset (refer S.110-25(3) of the ITAA 1997). The five types of incidental costs that can be included in the cost base of a CGT asset include ‘costs of advertising to find a buyer’. Although there is doubt whether the hiring of furniture constitutes ‘costs of advertising to find a buyer’, the ATO recognises that there have been emerging trends in real estate practise to promote the marketing advantages of such expenditure. Therefore, the ATO accepts that it is now arguable that the hiring of furniture can be regarded as a ‘cost of advertising to find a buyer’ where the purpose of the expenditure is to find a buyer by demonstrating, displaying, exhibiting or featuring the saleable qualities of the property. For example, furniture can be used to demonstrate the good qualities of the property (such as the size of the rooms) or to show that the less-desirable qualities of the property can be managed in a practical or pleasing manner.

Note: This ID replaces ID2003/668, which came to the opposite conclusion.

A technical amendment in Taxation Laws Amendment (2006 Measure No.1) Act 2006 and a specific example in paragraph 2.136 of the related Explanatory Memorandum has now put this matter beyond doubt.

ID2006/157 – Trusts can be ‘continuing shareholders’

Editor: S.175-10 of the ITAA 1997 basically allows the Commissioner to disallow a company's prior year tax loss unless the continuing shareholders of the company will benefit from it to a fair and reasonable extent.

A ‘continuing shareholder’ for the purposes of S.175-10 can include a family trust that is deemed to be a notional entity under S.165-207 for company loss recoupment purposes.

Facts Company A has a tax loss available to it from an earlier income year (the loss year) which it is now seeking to deduct.

Company A derives an amount of assessable income in the income year that it would not have derived if the tax loss had not been available for deduction.

The trustees of trust B and C collectively own shares that carry more than 50% of the voting power in company A, and rights to more than 50% of the dividends and capital distributions of company A, during the whole of the relevant period.

Both trust B and C have made family trust elections (FTEs) which are in force for all relevant income years.

For the purposes of the company loss recoupment rules, company A meets the conditions of the continuity of ownership test (COT) in S.165-12.

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Reasons for Decision Basically, to be able to deduct the carried forward losses (and not have them disallowed under S.175-10), the company must pass the COT test.

The COT is expanded by S.165-207, so that a family trust is considered to be a 'person' for the purposes of the COT test.

Since trusts B and C are 'persons' who:

u beneficially own the shares in company A ; and

u collectively have more than 50% of the voting power and rights to dividends and capital distributions of company A, during the whole of the relevant period;

each trust is a ‘continuing shareholder’ for the purposes of the COT test and S.175-10.

Therefore, the company will be entitled to deduct the loss in the current year.

ID2006/158 – The effect of indirectly receiving a franked distribution

through trusts A beneficiary will be entitled to a franking credit if it can be demonstrated that the beneficiary received a franked distribution indirectly through various trusts, even if one of the intermediary trusts offsets its own losses against the distribution.

Facts Family investment trust A, a family trust, owns all of the shares in Company A.

Trust B, a unit trust, is a beneficiary of family investment trust A.

Another related trust, trust C, owns 100% of the units in trust B.

Individual D is a beneficiary of trust C and is the head of the family investment trust group and is entitled to 100% of the net income of trust C.

The following are the relevant distributions:

q Company A will pay to its shareholder (family investment trust A) a franked distribution of $7 million with franking credits of approximately $3 million (it is

franked with a franking percentage of 100%).

q Family investment trust A will then make an interim distribution of $7 million (with franking credits of approximately $3 million) to trust B.

q Trust B will offset the franked distributions against its carry forward tax losses as at 30 June 2006 of approximately $6 million.

q Trust B will then make an interim distribution of its net income to its beneficiary, trust C.

q Trust C will then make a distribution of all its net income to individual D as its beneficiary.

Reasons for Decision Subdivision 207-B of the ITAA 1997 deals with the effect of receiving a franked distribution through certain partnerships and trusts.

Basically, S.207-50 provides that franking credits can flow through one or more trusts to a beneficiary as long as:

n the trust receives a franked distribution;

n the beneficiary has a share of the trust’s net income for that income year; and

n the beneficiary’s share of the franked distribution as calculated under S.207-55 is a positive amount, whether or not the beneficiary actually receives any of that share (i.e., the beneficiary must have an entitlement to part or all of the franked distribution).

The income in this arrangement flows as follows:

u family investment trust A will include the amount of the $3 million franking credit in its assessable income. Therefore, its net income will be $10 million, all of which it distributes to trust B;

u trust B will also include the amount of the $3 million franking credit in its assessable income. After deductions for tax losses, the net income of trust B will be approximately $4 million, which

Page 14 August 2006

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it distributes to trust C;

u Trust C will include the amount of $4 million in its assessable income, including its share of the franking credit of $3 million. Trust C will then make a distribution of all its net income of approximately $4 million to individual D as its sole beneficiary.

As 100% of the net income and franking credits will flow to individual D under the terms of the trust deed, individual D’s share of the franking credit pursuant to S.207-57 will be $3 million.

Individual D will include the amount of $4 million in its assessable income and claim a tax offset for the franking credit of $3 million (under S.207-45).

ID2006/159 – No FBT on funeral expenses of deceased employee

A benefit provided in respect of a deceased employee (such as where an employer has organised and paid for the funeral expenses of the deceased employee) does not give rise to a ‘residual fringe benefit’ as defined in S.136(1) of the FBTAA 1986.

Facts An employee died leaving a dependant spouse with a young family.

To assist the deceased’s family, the employer decided to organise and pay for the funeral expenses of the deceased employee.

Reasons for Decision A benefit may be provided under the FBTAA to an employee or an associate of an employee.

An ‘employee’ is defined in terms of ‘a person’ who receives, or has received, or is entitled or has been entitled to receive, salary or wages.

Central to these concepts of an ‘employee’ is the continuing existence of an individual.

Where the individual dies, they are no longer ‘a person’ for the purposes of the FBTAA.

This would be distinct from a benefit being provided to a former employee who has merely retired or changed employers.

Also, the Commissioner and the Government have previously stated that the FBT system does not apply to benefits provided to relatives of deceased employees.

ID2006/161 – Exemption for temporary residents on foreign

source pension incomeA taxpayer, who is a 'temporary resident' of Australia, is not assessable in Australia on UK sourced pension income.

Facts The taxpayer is a resident of Australia for the purposes of Australian tax, but is also a ‘temporary resident’ as defined in S.995-1(1) of the ITAA 1997.

The taxpayer derived pension income from the UK whilst a temporary resident of Australia.

Reasons for Decision Assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year, and would include UK-sourced pension income.

However, the foreign source income exemption for temporary residents, contained in Subdivision 768-R of the ITAA 1997, provides an exemption for most foreign income derived by temporary residents of Australia.

In particular, S.768-910 provides that ordinary income derived from a foreign source, excluding:

u employment related income; and

u capital gains on shares and rights acquired under employee share schemes;

is exempt from income tax in Australia when derived by a temporary resident of Australia.

The taxpayer’s pension income from the UK is therefore exempt from income tax in Australia as the taxpayer was a temporary resident of Australia when the taxpayer derived it.

Note: Subdivision 768-R does not allow a temporary resident to make an election as to whether the exemption from income tax will apply to their foreign source income or not.

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August 2006

Therefore, a temporary resident cannot choose to have their UK pension income taxed in Australia, rather than taxed in the UK – refer ID2006/163.

ID2006/166 – Allocated pension from an Australian super fund paid to a

resident of Japan

An allocated pension from an Australian resident public superannuation fund received by a Japanese resident is not assessable income under S.6-10(5) of the ITAA 1997.

Facts The taxpayer is a resident of Japan for taxation purposes.

The taxpayer is in receipt of an allocated pension from an Austral ian resident public superannuation fund (not being a Commonwealth Government employee’s superannuation fund).

The taxpayer made personal contributions to the public fund while employed by a Commonwealth Government department.

Reasons for Decision Under S.6-10(5), a foreign resident taxpayer’s assessable income includes statutory income from all Australian sources and some other statutory income.

Under S.27H of the ITAA 1936, annuities and superannuation pensions are ordinarily included in assessable income.

However, in determining liability to tax on Australian sourced income received by a foreign resident, it is necessary to also consider any applicable tax treaties.

Article 13(1) of the tax treaty between Australia and Japan provides that a pension or annuity, derived from sources within Australia by a resident of Japan, shall be exempt from tax in Australia.

Although there is an exclusion from this exemption in article 13(3), in this case the pension was not 'in respect of services rendered to the Commonwealth Government in the discharge of governmental functions.'

Therefore, the pension is exempt from tax in Australia.

ID2006/173 – Worker's compensation received in substitution of exempt

foreign employment income

Worker’s compensation payments received by an Australian resident deployed overseas, in substitution for salary and allowances, are exempt from tax where the employee is on a graduated return to work program in Australia.

Facts The taxpayer is a resident of Australia who was deployed to an overseas country for a continuous period of not less than 91 days.

The taxpayer was injured during the deployment overseas, and returned to Australia in accordance with the terms of deployment and received medical treatment.

The taxpayer was unfit to return to work in the overseas country, but was under the deployment conditions of service while undertaking the medical treatment.

The taxpayer received workers’ compensation payments from Comcare and part salary and allowances from the employer under the terms and conditions of their employment.

The taxpayer returned to the overseas deployment after being found fit for duty.

Reasons for Decision Under 23AG(1) of the ITAA 1936, where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from foreign service will be exempt from tax in Australia.

The term ‘engaged in foreign service’ is extended to include any period during which the person is, in accordance with the terms and conditions of their service, absent from work because of accident or illness.

Therefore, workers’ compensation payments paid to an Australian resident employee who:

n was previously deployed overseas; but now

n is on a graduated return to work program in Australia;

are exempt from tax.

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TD 2006/44 – Car depreciation limit The car limit for the 2006/07 financial year is $57,009 (the same as that which applied in the 2005/06 financial year).

The car limit of $57,009 is used to calculate depreciation deductions under the income tax law (refer S.40-230 of the ITAA 1997).

Editor: Note that this amount (i.e., $57,009) is also used to determine the luxury car tax threshold – refer to LCTD 2006/1.

TD 2006/45 – Benchmark interest rate for Div 7A The benchmark interest rate for the income year commencing 1 July 2006 for the purposes of S.109N and S.109E of the ITAA 1936 is 7.55% p.a. (up from 7.30% p.a. for the 2005/06 income year).

This benchmark interest rate is relevant to:

u private company loans made or deemed to have been made after 3 December 1997 and before 1 July 2006; and

u trustee loans made after 11 December 2002 and before 1 July 2006.

It is used to:

q determine if a loan made in the 2006 income year is deemed to be a dividend; and

q calculate the amount of the minimum yearly repayment for the 2007 income year on an amalgamated loan taken to have been made prior to 1 July 2006 (refer S.109E(5)).

The Determination does not apply to private companies or trustees with substituted accounting periods.

TR 2004/6A – Substantiation exception for reasonable allowancesEditor: Subdivision 900-B of the ITAA 1997 sets out substantiation rules for work-related deductions, and provides for exceptions in the case of some types of expenses.

TR2004/6 explains the way in which the substantiation exception operates for reasonable travel allowance expenses or reasonable overtime meal allowance expenses.

The Commissioner also publishes amounts that are considered to be reasonable for the purposes of this substantiation exception each income year.

TD2006/43 is the determination for the 2007 income year, and the amounts are included at the end of this month’s edition of Voice.

TR2004/6 contains an administrat ive concession which permits taxpayers to not include certain allowances on their income tax returns.

However, when a taxpayer does not include such an allowance on their return but it is shown on their payment summary, the Tax Office Income Matching systems may generate a query to the taxpayer.

This addendum modifies the administrative concession from 1 July 2006 so that it does not apply to allowances which are shown on the taxpayer’s payment summary.

This will eliminate the Income Matching queries

FBT, GST and Income Tax RulingsThe following rulings are summaries of Practice Statements, Public Rulings and Tax

Determinations. Copies are available from the ATO Website at www.ato.gov.au.

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August 2006

and align the Ruling with the directions in TaxPack.

TR 2006/4 – CGT exemption for ‘mirror’ or ‘cloned’ trustsBackgroundAn asset can be transferred from one trust to another without triggering CGT, as long as the terms of both trusts are the same (refer S.104-55(5)(b) and S.104-60(5)(b) of the ITAA 1997).

This Ruling explains the circumstances in which the beneficiaries and terms of two trusts are considered to be the same for this purpose.

Editor: So-called 'mirror' or 'cloned' trusts are often used for asset protection purposes (e.g., separating business assets in one trust from real estate assets in another trust) and succession planning.

Ruling The beneficiaries and terms of both trusts must be the same – even differences that might be considered minor will prevent the exception being available.

In effect, both trusts must be in writing and the trust deeds must have exactly the same meaning and effect.

Meeting this requirement is not simply a matter of ensuring that both deeds are worded identically. In some cases the meaning and effect of the deeds will not be the same even though they are worded identically, and in other cases the meaning and effect of both deeds will be the same even though the deeds are worded differently.

These conditions must be met when the asset is transferred.

What must be the same?u Beneficiaries – The direct beneficiaries

(as opposed to the indirect or ultimate beneficiaries) of the new trust must be the same as the direct beneficiaries of the original trust. The reference to ‘beneficiaries’ in this context includes a class of beneficiaries, the objects and potential beneficiaries of a

discretionary trust, a default beneficiary and the members and pensioners of a superannuation fund.

u Terms – The new trust must contain all the terms contained in the original trust and no others, including those set out in the trust deed and those implied by statute and the general law, such as the powers, duties and discretions of the trustee and of any appointor or guardian, and the power to amend the trust terms.

u Appointors and guardians – If one trust has an appointor or a person who fulfils that role, then the other trust must have the same appointor, and their successors. The identity of any guardians and protectors must also be the same.

u Beneficiaries’ rights and entitlements – Each beneficiary must have the same rights, entitlements and interests as to the income and corpus.

u Vesting and termination dates must be the same for both trusts.

u State laws – The same state laws must govern each trust.

u Family trust and interposed entity elections – If one trust has made a family trust election or an interposed entity election, then the other trust must have made the same type of election, and must specify the same ‘test’ individual (or family group of the individual specified in the family trust election).

What does not have to be the same?The two trusts also need not have the same:

u trustees;

u name;

u commencement or establishment date;

u settlor; or

u trust property (except that the transferred asset must be an asset of both trusts, though obviously not at the same time).

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SGD 2006/2 – ‘Salary’ sacrificing superannuation for contractorsWhere a contractor is deemed to be an employee of an entity for superannuation guarantee purposes only because of S.12(3) or S.12(8) of the Superannuation Guarantee (Administration) Act 1992 (SGAA), the contractor and the employer can enter into an effective ‘salary’ sacrifice arrangement

Editor: S.12(3) of the SGAA deems a person working under a contract that is wholly or principally for labour to be an employee for the purposes of that Act.

S.12(8) of the SGAA deems certain people working in the fields of entertainment, art and sports to be employees for the purposes of that Act.

S.11 of the SGAA deems payments made to persons covered by S.12(3) or S.12(8) to be ‘salary or wages’ of the person for SGAA purposes.

If the ‘salary’ sacrifice arrangement is effective, the contributions are properly considered to be made by the employer for the purposes of the SGAA.

This will mean that the employer can make contributions to a complying superannuation fund or retirement savings account under the arrangement in lieu of ‘salary’ for the individual, and those contributions will reduce the income of the contractor and also be considered deductible employer contributions.

What is an effective salary sacrifice arrangement?In essence, a salary sacrifice arrangement involves the parties agreeing in advance that the employee will receive at least part of his or her remuneration in a form other than salary or wages.

The main assumption made by the parties to a salary sacrifice arrangement is that the employee is then taxed under the income tax laws only on the reduced payment amount.

Editor: This means that the ATO’s ruling about salary sacrificing super – TR 2001/10 – effectively extends to employees within

the extended definition of that expression in S.12(3) and S.12(8) of the SGAA.

What is the effect of such a contractor effectively sacrificing their salary?Those contr ibut ions to a comply ing superannuation fund or a retirement savings account made on behalf of a deemed employee by their employer:

u reduce the employer’s obligations for super guarantee for the quarter concerned;

u give rise to a deduction under S.82AAC to S.82AAF of the ITAA 1936 subject to the usual conditions in those provisions; and

u are not assessable income of the employee under the income tax laws;

if they are made under an effective salary sacrifice arrangement between the employer and the employee.

Note: This reasoning does not apply to contractors who are not deemed to be employees under S.12 of the SGAA.

Also, the determination does not consider the income tax treatment of non-salary benefits other than employer superannuation contributions.

New Accreditation for Queensland Fellows

The Queens land Bu i ld ing Serv ices Authority recently released its new Financial Requirements for Licensing policy.

This change included, for the first time the ability for NTAA Fellows to complete Reports for BSA for building companies with a turnover of up to $12 million.

Please refer to the NTAA website for more detailed information.

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August 2006

Reasonable allowance expense claims(TD 2006/43)

This TD states that it should be read together with TR2004/6 which explains the substantiation exception and the way in which these expenses are able to be claimed.

Note that an addendum has recently been made to TR2004/6 which excludes allowances shown on a payment summary from the substantiation exception (refer page 16 of this edition of Voice).

Reasonable Amounts for Allowances – 2006/07The reasonable amounts for travel (domestic, overseas and employee truck drivers) and award overtime meal allowance claims for the 2006/07 income year are set out in TD 2006/43 and the following tables.

Overtime Meal Allowance AmountsRateThe reasonable amount for overtime meal allowance expenses for 2006/07 where an allowance is paid under an award, order, determination, industrial agreement or a Commonwealth, State or Territory law, is as follows:

Description Reasonable Amount$

Per Meal 21.90

Substantiation Requirements Description Allowable

Deduction?1 Written Evidence

Required?Award overtime meal allowance is paid and claim does not exceed the reasonable amount

Yes No

Award overtime meal allowance is paid and claim exceeds the reasonable amount Yes Yes

2

A non-award allowance, or no allowance, is paid No N/A

1 A deduction is allowable provided the amount of the expense claimed was actually incurred to buy food or drink in connection with overtime worked.

2 The entire amount must be substantiated with written evidence.

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Daily Travel Allowance AmountsThe reasonable amounts for daily travel allowance expenses, according to salary levels and destinations for 2006/07 are as follows.

Employee’s Annual Salary Range is $0 – $84,250 Place Accommodation

$Food and Drink

$Incidentals

$Total

$

B'fast Lunch Dinner 19.60 21.95 37.80Adelaide 136.00 79.35 14.95 230.30Brisbane 141.00 79.35 14.95 235.30Canberra 114.00 79.35 14.95 208.30Darwin 128.00 79.35 14.95 222.30Hobart 104.00 79.35 14.95 198.30Melbourne 150.00 79.35 14.95 244.30Perth 126.00 79.35 14.95 220.30Sydney 158.00 79.35 14.95 252.30

High cost country centres See below1 79.35 14.95 Variable depending on accommodation1

B'fast Lunch Dinner 17.50 20.05 34.55

Tier 2 country centres (see below)2 89.00 72.10 14.95 176.05

Other country centres 78.00 72.10 14.95 165.051. Refer to High Cost Country Centres – Accommodation Expenses table2. Refer to Tier 2 Country Centres table

Employee’s Annual Salary Range is $84,251 – $149,750 Place Accommodation

$ Food and Drink

$ Incidentals

$ Total

$

B'fast Lunch Dinner 21.30 30.15 42.25Adelaide 152.00 93.70 21.35 267.05

Brisbane 172.00 93.70 21.35 287.05

Canberra 143.00 93.70 21.35 258.05

Darwin 140.00 93.70 21.35 255.05

Hobart 125.00 93.70 21.35 240.05

Melbourne 169.00 93.70 21.35 284.05

Perth 152.00 93.70 21.35 267.05

Sydney 196.00 93.70 21.35 311.05

High cost country centres See below1 93.70 21.35 Variable depending on accommodation1

B'fast Lunch Dinner 19.60 20.05 39.00

Tier 2 country centres (see below)2 107.00 78.65 21.35 207.00

Other country centres 94.00 78.65 21.35 194.00

1. Refer to High Cost Country Centres – Accommodation Expenses table2. Refer to Tier 2 Country Centres table

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Employee's Annual Salary Range is $149,751 and above

Place Accommodation$

Food and Drink$

Incidentals$

Total$

B'fast Lunch Dinner 25.00 36.00 55.00

Sydney Melbourne 265.00 116.00 21.35 402.35

Brisbane 216.00 116.00 21.35 353.35

Perth Adelaide Darwin Hobart Canberra 195.00 116.00 21.35 332.35

Country centres 151.00* 116.00 21.35Variable

depending on accommodation*

* Use the High Cost Country Centre amount at the table below, if higher/applicable.

High Cost Country Centres – Accommodation Expenses

Country Centre $ Country Centre $

Ballarat (VIC) 100.00 Karratha (WA) 166.00Bendigo (VIC) 95.00 Kununurra (WA) 113.00Broome (WA) 134.00 Launceston (TAS) 96.00Burnie (TAS) 100.00 Newcastle (NSW) 101.50Carnarvon (WA) 97.00 Newman (WA) 119.50Christmas Island (WA) 120.00 Norfolk Island 100.00Dampier (WA) 105.00 Pt Hedland (WA) 124.00Devonport (TAS) 103.50 Thursday Island (QLD) 140.00Exmouth (WA) 96.00 Warrnambool (VIC) 95.00Gold Coast (QLD) 112.00 Weipa (QLD) 125.00Halls Creek (WA) 112.00 Wilpena (SA) 106.50Horn Island (QLD) 119.00 Wollongong (NSW) 104.00Jabiru (NT) 190.00 Yulara (NT) 307.00Kalgoorlie (WA) 102.00

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Tier 2 Country Centres

Country Centre Country Centre

Alice Springs (NT) Mount Gambier (SA)Bordertown (SA) Mount Isa (QLD)Bright (VIC) Mudgee (NSW)Bunbury (WA) Northam (WA)Cairns (QLD) Orange (NSW)Castlemaine (VIC) Port Lincoln (SA)Cocos (Keeling) Island Port Macquarie (NSW)Derby (WA) Portland (VIC)

Geelong (VIC) Queenstown (TAS)Katherine (NT) Wagga Wagga (NSW)Maitland (NSW)

Travel Allowance Claims for Employee Truck DriversThe 2006/07 reasonable daily amounts for the meal expenses of employee truck drivers, who receive a travel allowance and are required to sleep away from home in the course of travelling for work, is as follows:

Salary Range$

Food and Drink$

Total per Day$

0 – 84,250 Breakfast Lunch Dinner 17.50 20.05 34.55 72.10

84,251 and above Breakfast Lunch Dinner 19.60 20.05 39.00 78.65

Office holders covered by the Remuneration TribunalDaily domestic travel allowance expense claims made by office holders covered by the Remuneration Tribunal are considered to be reasonable amounts if they do not exceed the rate of allowances set by the Remuneration Tribunal for that office holder.

Federal Members of ParliamentThe travel allowances paid to Federal Members of Parliament and Federal Parliamentary Secretaries, under the arrangements that commenced on 14 April 1998, are considered reasonable amounts for the recipients of those allowances.

This includes the Capital City and Canberra travel allowance rates for domestic travel, having regard to the circumstances under which those allowances are paid.

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Overseas Travel Allowance AmountsThe reasonable amounts for overseas travel expenses for 2006/07 are shown below. Table 1 sets out the cost group for each country, and Table 2 provides the reasonable amount for meals and incidental travel expenses by cost group and salary level.

Table 1: Table of Countries1

1 If a country is not listed in Table 1, Cost Group 1 should be used from Table 2 below.

Albania 3Algeria 3Angola 6Antigua & Barbuda 5Argentina 1Austria 4Azerbaijan 3Bahamas 6Bahrain 3Bangladesh 1Barbados 5Belgium 4Bermuda 6Bolivia 1Bosnia 2Brazil 2Brunei 1Bulgaria 2Burkina Faso 3Cambodia 3Cameroon 4Canada 4Chile 2China (includes Macau & Hong Kong) 4Colombia 3Congo Dem Rep 5Cook Islands 3Costa Rica 1Côte D’Ivoire 4Croatia 3Cuba 4Cyprus 4Czech Republic 2Denmark 6Dominican Republic 4East Timor 1Ecuador 2Egypt 3

El Salvador 2Eritrea 1Estonia 2Ethiopia 1Fiji 2Finland 5France 5Gabon 5Gambia 2Georgia 1Germany 4Ghana 3Gilbraltar 3Greece 4Guatemala 3Guyana 1Hungary 3Iceland 6India 3Indonesia 2Iran 1Irish Republic 5Israel 4Italy 4Jamaica 3Japan 5Jerusalem 3Jordan 3Kazakhstan 2Kenya 1Korea Republic 5Kuwait 4Laos 1Latvia 2Lebanon 4Libya 3Lithuania 2Luxembourg 4Macedonia 1

Malawi 1Malaysia 1Mali 2Malta 3Martinique 5Mauritius 2Mexico 2Monaco 5Morocco 3Mozambique 1Myanmar 3Namibia 2Nepal 1Netherlands 4New Caledonia 5New Zealand 3Nicaragua 1Nigeria 4Norway 6Oman 4Pakistan 1Panama 4Papua New Guinea 3Paraguay 1Peru 2Philippines 1Poland 3Portugal 3Puerto Rico 5Qatar 3Romania 2Russia 5Rwanda 1Samoa 3Saudi Arabia 2Senegal 4Serbia 2Sierra Leone 4Singapore 3

Slovakia 1Slovenia 1Solomon Islands 2South Africa 2Spain 3Sri Lanka 1St Lucia 4St Vincent 2Sudan 4Surinam 1Sweden 4Switzerland 5Syria 2Taiwan 3Tanzania 1Thailand 1Tonga 3Trinidad & Tobago 4Tunisia 2Turkey 4Uganda 1Ukraine 5United Arab Emirates 4United Kingdom 5Uruguay 1USA 5Vanuatu 4Venezuela 2Vietnam 1Zambia 2Zimbabwe 2

Cost Cost Cost CostCountry Group Country Group Country Group Country Group

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Reasonable amounts for overseas travel allowance expensesThe reasonable amounts for overseas travel expenses are shown in Schedule 1 of TD2006/43. Table 1 sets out the cost group to which a country (or part of a country) has been allocated. However, the employee needs written evidence to substantiate all accommodation expenses. Table 2 sets out the reasonable amount for meal expenses and incidental travel expenses for each cost group for specified employee salary ranges.If the employee travels to a country that is not shown in Table 1 the employee can use the reasonable amount for Cost Group 1 in Table 2 for the relevant salary range.

Table 2: Reasonable Amounts by Cost Groups (by salary level)

Cost Group

Salary $0 – $84,250

Salary $84,251 – $149,750

Salary $149,751 and above

Meals$

Incidentals $

Total $

Meals $

Incidentals $

Total$

Meals $

Incidentals $

Total $

1 65 25 90 90 25 115 115 30 145

2 80 30 110 110 35 145 140 40 180 3 105 35 140 130 40 170 160 45 205 4 130 35 165 160 45 205 190 50 240 5 170 40 210 210 50 260 250 60 310 6 205 45 250 260 50 310 300 60 360

Example – Allowance includes a separate meals and incidentals componentAn employee travels to Brazil on business for two weeks and is paid a travel allowance of $300 per day ($100 for meals and incidentals and $200 for accommodation). The employee’s annual salary is $86,000.

The reasonable daily overseas travel allowance expense claim is calculated as follows.

Table 1 lists Brazil as Cost Group 2. Using Table 2, at a salary of $86,000 per year, the reasonable overseas travel allowance amount for meals and incidental expenses for Cost Group 2 (which covers Brazil) is $145 ($110 for three meals and $35 for incidentals).

The employee claims a deduction for meals and incidental expenses actually incurred of $120 per day. As the employee is claiming a deduction that is less than the reasonable amount of $145 per day, the employee does not need to keep written evidence to substantiate expenditure on meals and incidental expenses, but does need to maintain a travel record and to keep receipts or other documentary evidence to substantiate accommodation expenses.

Example – allowance without an identified component for meals and incidentalsAn employee travels overseas on business for four days and is paid a travel allowance of $300 per day for meals, incidentals and accommodation. The employee’s annual salary is $33,000.

The employee travels to a country in Europe that is not listed in Table 1. Cost Group 1 is used for the reasonable overseas travel allowance amount for a country not listed in Table 1 and the reasonable amount is as follows.

At a salary of $33,000 the reasonable overseas travel allowance amount for Cost Group 1 is $65 for three meals and $25 for incidental expenses (See Table 2).

The travel allowance paid to the employee does not specify an amount for each of the components of the allowance, but it covers meals and incidental expenses.

He can claim up to $90 per day for expenses incurred on three meals and incidentals without substantiation provided he has incurred deductible meals and incidental expenses at least equal to $90, but needs written evidence to substantiate accommodation costs claimed.