Summit - Tax & Business Accountants, Melbourne

The ATO has a new target for this year. They've successfully obtained records from eBay and the Trading Post so they can compare your income generated online to your tax return income declaration.

In particular, the ATO is interested in anyone who has earned $20,000 or more in any of the last three financial years. In essence looking for anyone who is running a business online but not declaring the income. As a side bonus, the ATO are expecting to catch businesses who are understating their income from online sales.

Using a data matching program, the ATO will match the data collected from the sites to ABNs, Tax File numbers, addresses and dates of birth. The program then generates a list of taxpayers 'of interest' to the ATO who will be contacted for a review or audit.

For many early-stage entrepreneurs, sites like eBay are a great way to find out if the product they're selling has appeal without having the overhead costs associated with traditional business, such as a shop front or trying to develop a retail network. This new focus from the ATO suggests they suspect there are many eBay entrepreneurs who are not declaring their income.

So, at what point do you have to declare your income from eBay? Basically the ATO will be looking to see if your online activity could be deemed a business. There is no one particular test. Factors they will take into consideration include:

• regularity of your transactions
• whether your promoting yourself as a business (such a developing a brand)
• if you have marketing activities
• whether you intend to develop a business and make profit (or have the ability to generate profit over time)
• the size, scale and permanency of your activities
• whether you operate in a business-like manner.

If it turns out that your activities are a hobby, then the income is not assessable, and the expenses are not deductible. If you are a business, then the income will need to be declared, but you also get to claim deductions for the cost of running the business.

If you think you might be affected by the ATO's  data matching program, contact us today. The ATO is offering reduced penalties to taxpayers who voluntarily disclose income earned from online trading sites.

Many companies have different classes of shares, but, if you have this share structure, it might work against you when it comes time to sell.

There are many reasons for using a differential share structure - the ability to provide different rights to equity holders and allowing dividends to be paid to one class of shareholder in preference to another are common reasons.  Much of this comes down to the way the company is managed and the arrangements between shareholders.  But essentially having different share classes can provide extra flexibility in the ownership of a company.

There is, however, a situation where different share classes can work against you. That is where the company sells capital assets, triggers a capital gain and wants to reduce that capital gain using the small business CGT concessions. For example, when you sell the business or shares in the company. The CGT concessions are very attractive, as they can defer capital gains tax or reduce it to zero. To access a number of the small business CGT concessions you need to be a significant individual, as defined by the legislation.  This is a person who holds at least a 20% participation interest in the company.  Such an interest requires them to have rights to dividends, return of capital, and voting rights. And this is where we have a problem with different share classes.

For this example, say we have a company with three shareholders. Each shareholder has one ordinary share. Also on issue is one A class share, one B class share and one C class share. These shares have the same rights attaching to them. The different shareholders each hold a different class of share in addition to the ordinary share they own. This structure was put in place to allow dividends to be paid to the shareholders at different times. The directors have the right to declare dividends to any class of share. Over the years the company has declared dividends but only to the ordinary shares. They have never used the different share classes for dividend purposes.

Now, the company sells its business and wants to manage the capital gain by using the small business CGT concessions. The preferred concession they want to access is the small business retirement concession. This concession requires there to be a significant individual.

Unfortunately, none of the shareholders qualify. Because the company could pay a dividend to any of the classes of shares and no one shareholder holds at least a 20% interest in all classes of shares on issue, a significant individual does not exist.  The fact that the company has never paid dividends to one share class in preference to another does not matter.  The mere ability to do this fails the significant individual test.

As the test is applied at the time of the CGT event, it may be possible to overcome this problem. However, you can't just rush out and issue shares, as this could trigger a different CGT problem. But with some planning and thought well in advance of a CGT event, you may not lose access to the small business concessions. Keep in mind though that the concessions available to you may be limited.

You should be finalising your June quarter BAS at the moment. This BAS requires extra care to ensure that everything is correctly recorded for the year. Why? Because the ATO are increasingly matching the data from your tax return to the total of your income recorded in your BAS for the financial year. If there is a significant material difference, an audit can be triggered.

Areas of particular interest are Final revenue figures and inter-entity charges. Decisions about these charges and reconciled numbers should have been made by 30 June. You can't wait until yous finalise your tax return. When you lodge your June BAS with the ATO, you are providing them with a summary of your business income and expenses for the year. Make sure your financial statements agree with this information.

At least the ATO are honest and up-front about who they will be targeting this financial year and why.

The ATO is getting increasingly sophisticated at using third parties for information such as bank details, international transactions, investments, welfare data, super fund info, luxury car and boat purchases, employee share scheme details, property data. These are all used to ensure the income you declare on your return is an honest assessment.

These are the areas the ATO is targeting this year: