Category: housing

Record keeping – source documents

Good record keeping supports the ATO’s ability to assure that Top 500 groups are paying, and will continue to pay, the correct amount of tax. Record keeping is also a requirement for under Division 121 and section 262A.

The tax governance policy of the group should include procedures for:

• maintaining a central repository for documentation that records the acquisition and disposal of listed share investments held by the group (including dates of acquisition and disposal, cost of acquisition, proceeds on sale)
• maintaining a central repository for documentation that records:
  • dividend statements received by the group from its investments in listed shares
  • other corporate actions such as share splits, rights issues.

Completeness of dividend income disclosures

Has all dividend income from listed shares been identified and disclosed in the entity’s tax returns?

The tax governance policy of the group should include procedures for:

• ensuring that, when listed shares are acquired, that the relevant share registry services are notified of the holding entities TFN
• correctly capturing and recording dividend income
• where dividends are paid in cash, reconciling dividend payment advices with deposits into the group’s bank accounts
• sense or cross-checking the completeness and accuracy of the group’s dividend income calculations
• differentiating unfranked, partially franked and franked dividends
• recording and adjusting (tax payable) for any TFN withholding withheld by the company paying the dividend.

Dividend income is reported in the correct period

Has dividend income from listed share investments been reported in the correct income year?

The tax governance policy of the group should include procedures for:

• specifying when dividend income is to be recognised for both accounting and tax purposes
• ensuring any timing differences between accounting and tax treatments is captured on the recipient entity’s tax reconciliation.

Franking credits are correctly reported

Have franking credits attached to dividends from listed shares been correctly reflected in the recipient entity’s tax returns?

The tax governance policy of the group should include procedures for:

• ensuring the group entity that is in receipt of franked dividends satisfies the qualified person test (45 day holding and ‘at risk’ rules) with respect to the dividend
• including franking credits in the relevant group entity’s assessable income
• taking into account franking credits when calculating the recipient entity’s tax payable
• ensuring that the balance of the group’s franking accounts correctly reflects franking debits and franking credits arising during the year
• where required, and the eligibility requirements are met, converting excess franking credits into tax losses.

Characterisation and calculation of capital gains and losses on the disposal of investments in listed shares.

Has the vendor entity correctly characterised and reported gains and losses on the sale of investments in listed shares?

The tax governance policy of the group should include procedures for:

• classifying listed share investments held in the central repository as held on either revenue or capital account
• correctly calculating capital gains or losses on sale of listed shares, including (but not limited to) the recognition of:
  • whether gains or losses are on capital (or revenue) account
  • cost base and proceeds
  • the vendor entity’s eligibility for the CGT discount
  • cost base adjustments from capital returns
  • brokerage fees
  • current and prior year capital losses
• conducting a sample verification process of the numeric logic embedded in the books, software or spreadsheets used to do CGT calculations, to ensure that the logic is producing the correct outcomes.

Correct reporting

Has the entity who derived the dividend income or who made the capital gain or loss, reported correctly in their tax return?

The tax governance policy of the group should include procedures for ensuring that dividend and capital gains tax information is migrated across from the working papers and correctly disclosed in the relevant entity’s tax return.

1

The John Simple group shall maintain a central repository for documentation concerning:

• the acquisition (including acquisition of shares through a Dividend Reinvestment Plan (DRP) or similar) and disposal of listed share investments held by Mr Simple
• dividends received by Mr Simple from investments in listed shares
• other corporate actions such as share splits and rights issues associated with Mr Simple’s investments in listed shares.

Acquisitions (including acquisition of shares through a DRP or similar) and disposals of listed share investments including dates, number of shares acquired or sold, prices, and brokerage fees, should be recorded in the Excel spreadsheet entitled ‘Share Investment Register’ within 3 days of the date of acquisition or sale.

Bill Bookkeeper

Good record keeping practices over all of Mr Simple’s investments in listed shares.

2

At the end of each month back up electronic copies of documentation in the central repository and the share investment register to a plug-in hard drive, or memory stick.

Bill Bookkeeper

Ensure records of Mr Simple’s investments in listed shares are not lost in the event primary information sources are compromised.

3

Share registries are to be notified of Mr Simple’s TFN and custodians are provided with details of the bank account through which Mr Simple finances his investments.

Bill Bookkeeper

Remove TFN withholding risk. Ensure cash dividends are received into the correct bank account.

4

The timing and amount of the dividend (including franking credits and dividends re-invested through a DRP) paid on each listed share investment held by Mr Simple should be recorded in the Excel spreadsheet entitled ‘Share Investment Register’, within 3 days of dividend statements being received. Accumulated totals should be maintained within the spreadsheet.

Bill Bookkeeper

Ensuring Mr Simple’s dividend income disclosure is complete and referable to the correct year of income.

5

The “Share Investment Register” is updated to include additional shares issued as part of Mr Simple’s choice to participate in a DRP.

Bill Bookkeeper

Ensuring new shares issued as part of a DRP are recorded as an asset acquired by Mr Simple.

6

Reconcile cash dividend payments deposited to Mr Simple’s investments bank account with dividend statements.

Bill Bookkeeper

Helping ensure Mr Simple’s dividend income disclosure is complete.

7

Before forwarding information to tax agent, review spreadsheet to sense-check listed share investments held against dividend statements received to verify that dividends and franking credits have been captured and correctly recorded as expected.

Bill Bookkeeper

Helping ensure that Mr Simple’s dividend income disclosure is complete.

8

At least 4 weeks prior to the due date for lodgment of Mr Simple’s tax return, provide Mr Simple’s tax agent with:

• Mr Simple’s share investment register spreadsheet for the income year
• related source documents as required by the tax agent.

Bill Bookkeeper

Helping ensure that Mr Simple’s tax return is lodged on time.

Helping the tax agent with the process of preparing Mr Simple’s tax return.

9

Tax agent to provide an annual engagement letter to Mr Simple that specifies the tax agents and Mr Simple’s responsibilities under the engagement.

TAG & Mr Simple

To provide clarity around:

• Mr Simple’s responsibility for providing complete and accurate information
• tax agents’ responsibility for ensuring that all dividend income, franking credit entitlements, and capital gains (losses) are correctly recorded in Mr Simple’s income tax return.

10

Logic check dividend income and franking credit calculations in Mr Simple’s Share Investment Register spreadsheet.

Tax agent

Integrity check over primary data source from which dividend income information is obtained.

11

Verify that Mr Simple’s franking credit entitlements satisfy the 45 day holding period rule

Tax agent

Confirm Mr Simple’s eligibility to claim franking credits.

12

Calculate capital gains and losses on the disposal of listed share investments that occurred during the year.

As a competent professional Mr Simple’s tax agent is across the method statement in s102-5 and the issues that are relevant to the correct calculation of gains and losses arising from the disposal of investments in listed shares.

Tax agent

Correct calculation of capital (or revenue) gains and losses made by Mr Simple during the income year.

13

Retain and file working papers

Tax agent

Retention of records that support tax return disclosures.

14

Dividend income and franking credits derived by Mr Simple during the year are migrated across from the Share Investment Register spreadsheet across to Mr Simple’s income tax return.

Tax agent

Correctly capture dividend income in Mr Simple’s tax return.

15

Dividend income totals in Mr Simple’s final return are checked back to the Share Investment Register spreadsheet.

Tax agent

Ensure calculations align with information included in the tax return.

16

Capital gains tax calculations carried out by the tax agent are migrated from the tax agent’s working papers across to Mr Simple’s tax return and accompanying schedules.

Tax agent

Ensure capital gains and losses are correctly reported.

17

Verify that the correct amount of franking credit offsets are included in the calculation of Mr Simple’s tax payable.

Tax agent

Helps ensure that the calculation of tax payable by Mr Simple is correct.

1

Complex Co shall maintain a central database repository for documentation concerning:

• confirmations of the acquisition – including acquisition of shares through a Dividend Reinvestment Plan (DRP) or similar – and disposal of listed share investments carried out directly by Complex Co
• dividends statements received by Complex Co from investments in listed shares
• notifications of other corporate actions such as share splits, rights issues associated with Complex Co’s investments in listed shares.

Information is to be captured in Complex Co’s tailored investment management software package.

Investment Management team

Good record keeping practices over the source documents that record Complex Co’s direct investments in listed shares.

2

Complex Co will record acquisitions (including acquisition of shares through a DRP or similar) and disposals of listed share investments including:

• whether the share was acquired on revenue or capital account
• the date of acquisition or sale
• the number of shares acquired or sold
• the price at which the shares have been acquired or sold
• brokerage fees
• in the management software on the date of the transaction.

Investment Management team

Good record keeping practices over the ongoing management of Complex Co’s portfolio of direct investments in listed shares.

3

Summary transactional information captured in the management software is migrated to Finance Department’s accounting software each day.

Investment Management team/Finance team

Ensures transactional activities of the investment management team can be reconciled to bank and integrated into Complex Co’s daily P&L and Balance Sheet.

4

At the end of each week back up in the management software files to Complex Co’s cloud repository.

Investment Management team

Ensure records of Complex Co’s investments in listed shares are not lost in the event primary information sources are compromised.

5

Share registries are notified of Complex Co’s TFN and provided with its bank account details.

Investment Management team

Remove TFN withholding risk. Ensure cash dividends are received into the correct bank account.

6

The timing and amount of the dividend (including franking credits and dividends re-invested through a DRP) paid on each listed share investment held by Complex Co should be recorded in the management software on the same day as dividend statements being received.

Investment Management team

Ensuring Complex Co’s dividend income disclosure is complete and referable to the correct year of income.

7

Dividend information captured in the management software is migrated to Complex Co’s Finance Department’s accounting software each day.

Investment Management team/Finance team

Ensures dividends received can be reconciled to bank and integrated into Complex Co’s daily P&L.

8

The management software is updated to include additional shares issued as part of participation in a DRP.

Investment Management team

Ensuring new shares issued as part of a DRP are recorded as an asset.

9

Reconcile cash dividend payments deposited to Complex Co’s bank account with dividend statements.

Financial accounting team

Helping ensure Complex Co’s dividend income disclosure is complete

10

Dividend information is analysed to verify whether Complex Co satisfies the 45 day holding period rule in relation to the franking credits attached to each dividend that has been paid to it.

The balance of Complex Co’s franking credit entitlements are to be maintained on an on-going basis with the annual total included as a preparatory note to the tax return working file. This is to ensure that franking credits are recognised (added back) in Complex Co’s tax reconciliation and final tax calculation.

In-house tax accountant

Helping ensure that Complex Co’s franking credit entitlements are accurate and correctly disclosed.

11

Franking account to be maintained

In-house tax accountant

Assign accountability for ensuring that Complex Co’s franking account is accurate and correctly disclosed.

12

At year-end dividend information is analysed to identify any final dividend entitlements that have been declared but which remain unpaid. Any differences are included as a preparatory note to the tax return working file to ensure that they are recognised in Complex Co’s tax reconciliation.

In-house tax accountant

To help ensure that timing differences are taken into account when income is recognised for accounting and tax.

13

Extract trading information from the management software and:

• quantify and prepare tax reconciliation adjustments for (unrealised M2M) accounting gains and losses
• prepare draft calculations of realised capital gains and losses on the disposal of listed share investments that occurred during the year.

Complex Co’s in-house tax accountant should have the capability to carry out capital gains tax calculations for disposals of listed shares and to apply the method statement in s102-5. Where required the in-house tax accountant will refer complex issues across to Complex Co’s tax agent/advisors.

In-house tax accountant

Adjustments for accounting gains and losses are captured on the tax reconciliation.

Correct calculation of capital (or revenue) gains and losses.

14

Tax agent to provide an annual engagement letter to Complex Group that specifies the tax agents and Complex Co’s responsibilities under the Complex Co tax return preparation engagement.

TAG & Complex Co’s group CFO

To provide clarity around:

• Complex Co’s responsibility for providing complete and accurate information
• tax agent’s responsibility for ensuring that all dividend income, franking credit entitlements and capital gains (losses) are correctly recorded in Complex Co’s income tax return.

15

At least 4 weeks prior to the due date for lodgment of Complex Co’s tax return, the Financial Controller will need to provide their tax agent with:

• Statutory Financial Statements
• trial balance
• dividend income figures and supporting calculations
• notes and working papers that were prepared in support of accrual adjustments and Complex Co’s franking credit entitlements
• capital gains tax calculations and working papers
• related source documents as required by the tax agent.

Financial Controller supported by in-house tax accountant

Helping ensure Complex Co’s tax return is lodged on time.

Helping the tax agent with the process of preparing Complex Co’s tax return.

16

Review Complex Co’s dividend income, franking credit, and capital gains tax working papers and draft calculations. Make inquires of Complex Co as required and adjust calculations as necessary.

Tax agent

Integrity check over primary data source from which dividend income information for Complex Co is obtained.

17

Reconcile calculations back to Complex Co’s trial balance.

Tax agent

Integrity check over primary data source from which dividend income information for Complex Co is obtained.

18

Prepare Complex Co’s tax reconciliation including taking steps to:

• add back franking credit entitlements
• adjust for prior and current year accrued dividend income
• subtract (add-back) current year accounting gains (losses) on investments in listed shares
• recognise (add-back) realised net (revenue or) capital gains
• include a note showing Company tax return label field disclosures for each line item.

Tax agent

Given that the tax reconciliation is a working paper that is central to the tax return preparation process for Complex Co it’s important that accounting and tax differences are correctly captured and that the source of each adjustment is traceable.

19

Migrate dividend income total from the working papers to Complex Co’s income tax return.

Tax agent

Correctly capture dividend income in Complex Co’s return.

20

Prepare capital gains tax schedule and migrate net capital gain figure across to income tax return.

Tax agent

Ensure capital gains and losses are correctly reported in Complex Co’s return.

21

Verify that the correct amount of franking credit offsets are included in the calculation of Complex Co’s tax payable.

Tax agent

Ensure calculation of Complex Co’s tax payable is correct.

22

Retain and file Complex Co’s tax return working papers

Tax agent

Retention of records that show how Complex Co’s tax return disclosures and tax payable have been determined.