Some common mistakes that clients may make when using their tax losses:

• incorrect classification of the loss on either revenue or capital account;
• losses being used where a company doesn’t satisfy either the continuity of ownership (COT) and the control test, or the same business test (SBT);
• records not being kept to substantiate the loss;
• incorrect claiming of tax deductions, in particular finance-related claims; and
• carried-forward losses not being checked to ensure they’re correctly calculated including: failure to reduce amounts carried forward by amounts previously recouped (claimed); and tax losses carried forward despite having utilised all losses in the previous year.

The ATO is concerned with the following issues, and clients should look out for them when dealing with their tax losses:

• claims for losses that do not meet COT or SBT;
• unexplained losses;
• inappropriate creation of losses through debt forgiveness and other inter-group/entity transaction;
• inappropriate creation of losses through income omission or incorrect classification (revenue or capital);
• manipulation of loss entities in various ways, including using profitable trusts to distribute income into loss entities;
• inappropriate claims for losses derived from permanent establishments;
• claims for losses the do not reflect genuine commercial arrangements.

To support claims for losses, records should be retained at lest until the end of the period of review for the income year in which the relevant losses are full applied.

SMSF trustees should appoint an approved SMSF auditor for each income year to perform a financial and compliance audit of their SMSF’s operations before they lodge their sel-managed superannuation fund annual return.

Approved SMSF auditor must:

• be registered as approved SMSF auditors with the Australian Securities & Investments Commission (ASIC), and
• have an SMSF auditor number

The trustees of SMSF should appoint a registered approved SMSF auditor not later than 45 days prior to the due date for lodgement of SMSF return.

The trustees of SMSF should check the auditor the trustees intend to appoint with ASIC as an approved SMSF auditor and has been issued with a SAN. Do this even if you have previously appointed this auditor. SMSF auditors who are not registered with ASIC can not undertake SMSF audits.

The trustees of SMSF should contact the auditor early. This ensures that the audit can be performed in sufficient time for the SAR to be lodged on time.

The CGT discount was available to foreign resident individual on taxable Australian property.

What has changed?

From 8 May 2012, foreign or temporary resident individuals must meet certain eligibility conditions to apply the CGT discount.

It depends on:

• whether the CGT asset was held before or after 8 May 2012, and
• the residency status of the individual who has capital gain.

Who is affected?

The change will affects individuals, beneficiary of a trust and a partner in partnership, who are:

• a foreign or temporary resident
• an Australian resident with a period of foreign residency after that date
• has a discount capital gain from a CGT event that occurred after 8 May 2012.

How do the changes affect foreign or temporary residents?

If you are a foreign or temporary resident individual and, after 8 May 2012, you have a discount capital gain from CGT event.

If you were a foreign or temporary resident on 8 May 2012, you may wish to get a market value for the CGT asset as at 8 May 2012 and use a market value calculation. This will apportion the CGT discount to take into account the capital gain you have that was accrued before 8 May 2012.

How do the changes affect Australian residents?

Australian resident should calculate the CGT discount you can apply to the capital gain you have if you are an Australian resident and , after 8 May 2012, you have:

• a capital gain from a CGT event, and
• a period of foreign or temporary residency.

The period of foreign or temporary residency after 8 May 2012 is taken into account when calculating the CGT discount you can apply to your capital gain.

The ATO has recently released a draft taxation determination – TD 2013/D7 – setting out their views on what a super fund needs to do to segregate its pension assets and, therefore, ensure that income from those assets is exempt from tax, without the need to obtain an actuarial certificate.

Although it is only a draft, it provides very practical guidance, and is crucial reading for super funds.

An asset of a super fund will be “invested, held in reserve or otherwise being dealt with for the sole purpose of enabling the fund to discharge liabilities payable in respect of superannuation income stream benefits” (i.e., pensions), where the whole asset is so invested, held or dealt with.

To meet the requirements of S.295-385(3)(a) or (4) of the ITAA 1997 regarding segregation:

• an asset cannot be partly invested held or dealt with partly for the relevant sole purpose and partly for another purpose; and
• part of an asset cannot be invested, held or dealt with for the relevant sole purpose, and another part of the asset invested, held or dealt with for another purpose.

This applies to each single, discrete, indivisible asset at law, including a bank account (being a “single chose in action at law”). Practically speaking, this means that a superannuation fund will often require two separate bank accounts in order to maintain one of them as a segregated bank account. That is, a separate bank account will need to be held for the relevant sole purpose, and another bank account my need to be held for other or general purposes, to properly segregate the bank account held for the relevant sole purpose.

The draft determination acknowledges that, in relation to shares in companies and units in unit trusts, each share or unit represents a single asset, which means that a parcel of shares or unit can be segregated, provided the segregation is evidenced in the records of the fund, such as trustee, resolutions, accounting records, financial statements, investment strategies or policies, actuarial reports of certificates, bank account statements and share holding statements.

If a renal property is jointly owned, each joint owner can claim an immediate write-off where their interest in a renal property depreciating asset is $300 or less*(under S.40-80(02) of the ITAA 1997, assuming the other conditions are met), even if the overall cost of an asset exceeds $300.

(*) Under S.40-80(02), depreciating assets costing $300 or less are written-off in the year of purchase (subject to some exclusions, including where the asset is part of a set of assets acquired in the same income year where the total cost exceeds $300).

For example, if a rental property is jointly owned by two persons (i.e., 50/50), a depreciating asset costing up to $600 my be entirely written-off in the year of purchase.

In contrast, if the property has only one owner, the same asset would have to be depreciated over its effective life if it cost more than $300 (or it could be allocated to an Low Value Pool).

(#) Under Subdivision 40-E, depreciating assets costing (or written down to) less than $1,000 (except those eligible for the $300 immediate write-off) are pooled and decrepitated using a diminishing value rate of 18.75% in the first year, and 37.5% thereafter.

Similar opportunities may also be available if the cost of each owner’s interest in a depreciating asset is under $1,000, because the asset can be allocated to an LVP as a low-cost asset, even if the asset’s overall cost is $1,000 or more.

It also shows the huge benefit that taxpayers can derive from engaging a firm of quantity surveyors to provide a deprecation report that sets out the value of the rental property’s assets.