ATO (tax office) payments by credit card

[wafliron]

I thought it might be good to summarise the current collective view on the deductibility of the ATO CPF (CC surcharge) in one post, for the benefit of future readers. Assuming I've got it right, perhaps this could be stickied at the start of the thread?

Businesses Taxes
(including tax liabilities of sole traders and companies, and most likely partnerships and other structures which carry on a business)
- CPF is fully deductible for the business for all types of tax as long as the CPF expense is directly incurred by the business (e.g. tax paid using a credit card held in the business' name).
- CPF is never deductible for an individual (except sole traders) when incurred by an individual on behalf of a business (i.e. if the individual pays tax on behalf of a business on their personal credit card).
- CPF is fully deductible for the business if incurred by an individual paying tax on behalf of the business and the business reimburses the individual for the CPF.

Note: All of the above assume the taxes being paid were incurred by a business "in the course of gaining or producing assessable income, or in the course of carrying on a business for the purposes of gaining or producing assessable income".

Individual Taxes
- CPF on income tax is fully deductible as long as the individual does not borrow money to pay the tax (i.e. makes prepayments into a credit card to put it into a credit balance high enough to cover the tax payment, and pays using that card)
- CPF on repaying student assistance loans is fully deductible as long as the expenses paid using the student assistance loan were themselves deductible (rare I'd imagine?).

The above comes with the normal disclaimer: I'm not an accountant / lawyer, there may be mistakes in the above and you should seek your own professional advice, etc.

 

[ermen]

I am starting to have some nasty thoughts.
Gets in before tha Amex earn rate drops + brings forward tax revenue to this financial year just making it that little bit harder for Wayne Swan next financial year.
Told you I was nasty!

sorry does anybody know when the earn rate drops for amex? i hear it will fall to half points?

 

[cove]

No change on Ultimate....it works for me!

 

[Stephen65]

Wafliron

Thanks for that summary. Two comments:

- I don't think you can lump in partnerships (as least the ordinary type of partnership) with sole traders and companies. This is because of the way partnerships are taxed: they don't pay tax themselves but instead distribute a share of the partnership income or loss to the partners for them to include in their personal tax returns. The ATO's view is that like wage and salary earners partners cannot have a deduction for the cost of borrowing to pay tax so the same logic should apply to CC fees incurred to pay tax:

TD 2000/24 - Income tax: are partners entitled to a deduction under section 8-1 for interest on borrowings to pay personal income tax? (As at 7 June 2000)

- a sole trader should get a deduction for CC fees even if he uses a card that is in his or her personal name rather than a business name because he or she is the entity running the business and paying tax. The business name is merely a brand he uses to run his business under.

PS: I also wonder whether the exclusion in 25-5 for "expenditure for borrowing money (including payments of interest) to pay an amount" is apt to apply to fees for charge card transactions. I think you could argue that the use of a charge card does not involve a borrowing of money, rather you simply owe a debt to Amex as a result of using the card. This debt is clearly part of a credit arrangement but does it involved a lending of money to you by Amex? The safest thing is probably to pay out of a credit balance though.

(usual disclaimers etc)

 

[cove]

If the partners process taxes on credit cards in equal proportions to their capital and profits share then the partnership could reimburse those costs.

 

[Stephen65]

Wouldn't that "reimbursement" be income though in the hands of the partners? When the partners pay their own tax bills and incur a CC fee then they aren't doing so on behalf of the partnership so I don't see how the partnership could truly be reimbursing them.

 

[amaroo]

No change on Ultimate....it works for me!

Same here - used Ultimate Friday evening to pay my first ever ATO payment and the points posted to the account today at 1.5x

 

[cove]

I was only thinking of BAS payments in my comment rather than personal taxes.

 

[burrco]

Well any charges on paying a partnership BAS would be fully deductible - but an installment activity statement paid individually by the partners is interesting (basically tax on their partnership profit).

Clearly the ATO has implied that in this instance it is subject to the same deductiblility guidelines as a salary/wage earner. However a partnership is not a distinct legal entity seperate from its partners, so I'm not sure how the ATO justifies that the payment of tax relating to a partnership is not "in the course of carrying on a business for the purposes of gaining or producing assessable income"​. As a partnership is not a legal entity I'd argue it is not carrying on a business - the individual partners are. This line of thought only applies to a business partnership in which the partner was an active participant carrying on a business and excludes tax payable on income from other sources.

It also applies an unfair disadvantage to a business operating as a partnership as the individual partners appear to be in the only business structure where the card fee isn't clearly deductible.

Obviously the ATO believes otherwise, and I'm not a tax lawyer - just a CA with a thought bubble!


A more relevant (and scary) thought bubble - I'm surprised most credit card providers haven't ruled the payment of taxes to be exempt from points earning.

 

[Deleted User]

A more relevant (and scary) thought bubble - I'm surprised most credit card providers haven't ruled the payment of taxes to be exempt from points earning.

Perhaps we should all stop talking about this then...?

 

[drron]

sorry does anybody know when the earn rate drops for amex? i hear it will fall to half points?

Several have mentioned and my email said from July 1st.

 

[New Chump]

PS: I also wonder whether the exclusion in 25-5 for "expenditure for borrowing money (including payments of interest) to pay an amount" is apt to apply to fees for charge card transactions. I think you could argue that the use of a charge card does not involve a borrowing of money, rather you simply owe a debt to Amex as a result of using the card. This debt is clearly part of a credit arrangement but does it involved a lending of money to you by Amex? The safest thing is probably to pay out of a credit balance though.

(usual disclaimers etc)

Stephen65, I do not think you can successfully argue that the use of a charge card does not involve a borrowing of money, IMHO. A charge card is similar to a credit card, but it is generally used for purchases during a single billing cycle. Unlike a credit card, a charge card doesn't offer you a revolving line of credit, and you must pay the balance in full each month.

If the balance is not paid, a nasty liquidated damages charge is usually incurred, unlike a more traditional interest payment incurred on the unpaid balance on a credit card.

ATO ID 2010/161 says: If a taxpayer uses a credit card and that use results in the card issuer providing credit, then the taxpayer has borrowed money from the credit card provider (Taxation Ruling TR 2000/2 at paragraph 43).

Even using a charge card, the card issuer is advancing you an amount. You must pay the amount you spend back when the monthly statement issues. You owe a debt to AMEX as a result of using the card, but that debt has equivalent characteristics of a loan arrangement (as does a credit card). The card issuer is providing credit with each use of the card, whether it is a credit or a charge card. Each use of the card is a borrowing of money, which must be repaid.

I have only used my (soon to be cancelled due to travel insurance "enhancements" :evil AMEX Plat Charge card once to pay COVE's girlfiend, but I put it in credit to do so and paid from a credit balance (and claimed the fee as a deduction).

NC

 

[PaulZ]

With so many people earning so many hundreds of thousands/millions of points... I wonder if this could have any FBT/deemed income consequences...

I mean... your classic example.
Owner of a PTY LTD business
Paying tax on a credit card (whether it be in the director's personal name or a card in the name of a company)... someone is earning the points... which have a value...

My main driver has been the interest free days... which has meant that even if I didnt get a deduction for the CPF... I am still financially better off paying on the Visa Card and getting 45 days interest free!


Also... I query... what is the best way to pay a company's tax bill on a credit card?
A personal credit card or a business credit card?

 

[wafliron]

- I don't think you can lump in partnerships (as least the ordinary type of partnership) with sole traders and companies. This is because of the way partnerships are taxed: they don't pay tax themselves but instead distribute a share of the partnership income or loss to the partners for them to include in their personal tax returns. The ATO's view is that like wage and salary earners partners cannot have a deduction for the cost of borrowing to pay tax so the same logic should apply to CC fees incurred to pay tax:

TD 2000/24 - Income tax: are partners entitled to a deduction under section 8-1 for interest on borrowings to pay personal income tax? (As at 7 June 2000)

Fair enough - I'll certainly defer to you on this one, I'm no tax expert. I'd simply assumed other business structures would receive the same treatment of the interest / CPF. Pretty unfair on partnerships though :-(

Do you think it would be the same if the partnership had appointed a managing company (I think that's what it's called?)? I know such a thing exists but don't know how it affects the tax affairs of the partnership.

- a sole trader should get a deduction for CC fees even if he uses a card that is in his or her personal name rather than a business name because he or she is the entity running the business and paying tax. The business name is merely a brand he uses to run his business under.

That's what I was trying to imply by "(except sole traders)" in:

- CPF is never deductible for an individual (except sole traders) when incurred by an individual on behalf of a business (i.e. if the individual pays tax on behalf of a business on their personal credit card).

Let me know if that isn't clear enough as I don't want to mislead anyone.

With so many people earning so many hundreds of thousands/millions of points... I wonder if this could have any FBT/deemed income consequences...

I mean... your classic example.
Owner of a PTY LTD business
Paying tax on a credit card (whether it be in the director's personal name or a card in the name of a company)... someone is earning the points... which have a value...

I've wondered about this too... a couple of relevant points / questions I've thought of:

1) All FF program T&Cs I've ever read say "points have no cash value" or similar, which if interpreted literally by the ATO would mean no value assigned to the FF points and hence no FBT. But do they take this view? This clearly would have been a relevant question for a long time, as the same question / rules would (may?) apply to FF points earned by an individual through business-related air travel.

2) Even if the ATO deems FF points do have a value, is an employee earning them through choosing to make tax payments on behalf of a business really a taxable fringe benefit? At the very least it's much less clear than a business giving a car to an employee to use, or similar.

3) Even if the ATO decided FF points earned by an employee paying business tax do have a value, and are a taxable fringe benefit, they would need to put a value on them. I can't imagine this would be any more than 1c/pt, and given we all know how to get 3+c/pt value of them you'd still be in front even if FBT was payable. Wouldn't be a good outcome though.

Can any of the accountants following this thread throw any light on the above questions?

Also... I query... what is the best way to pay a company's tax bill on a credit card?
A personal credit card or a business credit card?

What do you mean by "best"? Assuming the options are that you use a business card, or a personal card and then have the business reimburse you for the CPF (surcharge), the tax deducitibility / net cost is likely the same. So then it really comes down to which card earns more points?

 

[albatross710]

Even if the Tax office is right or wrong on the deductibility or otherwise of their own fee judging by the various interpretations it will takes years to resolve and then challenge.

Just lay back in the F & J seats and enjoy this window of opportunity.

 

[cove]

Alby we promise to do our bit with that window of opportunity!
The good news is we are not running on empty when it comes to points totals and I was chuffed getting Saver J for a quick run to LAX with SQ.
Went OTT on other bookings recently so we have a great series of trips booked with OW and *Alliance.

 

[cove]

When the Treasurer starts his long winded Budget speech we think of it as "and now we come to the cove and Mrscove's tax".
It appears he wants an extra $15k out of superannuation contributions that we will end up putting on credit cards next financial year.
I would have preferred that our Treasurer just went for the jugular and made it so our incremental tax rate is a half.

 

[wafliron]

I'm more surprised that the Visa/MC surcharge is so low: it's way below any blended merchant rate I've ever seen published. Additionally, I can't see how 0.48% is commercially viable for the banks providing high-points-earning cards - e.g. surely 1.33 KrisFlyer points costs CitiBank more than for 0.48 cents (not to mention that Citi won't be getting 0.48 cents for every dollar spent - both Optus and Visa need to take their cut - so they're earning maybe 0.30 cents? per $1).

I've been wondering for a while if the ATO is perhaps subsidising part of the merchant fee - particularly for Visa/MC - as they may feel it's worth the cost in return for receiving more tax revenue on time?

Quite by chance I stumbled across a probable answer to this question - in short, I don't think there's any ATO subsidies going on.

The business I work for received a letter from our bank on Thursday detailing some changes to how they charge / itemise fees for our merchant facility. Amongst other things it contained two big tables which detailed all the various "categories" of interchange and associated fees for Visa /and MasterCard. As many of us know there are different interchange fees for standard / premium / super-premium cards (and damn, super-premium cards cost merchants a fortune!), but based on the tables in the letter it looks like "government" pays (and hence CC providers earn) a fixed, low interchange fee regardless of the type of card used. i.e., there is no additional interchange fees for premium / super-premium cards for government, and the fee listed for government was lower than a normal merchant's "standard card" interchange fee and lower than what the ATO is charging.

A more relevant (and scary) thought bubble - I'm surprised most credit card providers haven't ruled the payment of taxes to be exempt from points earning.

...and the above has made me even more worried about this happening at some point - I just don't see how the current arrangement could be commercially viable for the CC companies. We should definitely all be making (maximum) hay while the sun shines methinks.

 

[Stephen65]

New Chump

While I would agree that the use of a charge card creates a debt owed by you to the issuer and is properly described as a provision of credit by them to you I am not so sure that it amounts to the borrowing of money. There are lots of circumstances where a debt is created and it could be described as the provision of credit but where you wouldn't ordinarily say that money has been borrowed. For example, if I buy office supplies on 30 day terms I am indebted to the supplier and they have provided me credit but I wouldn't say that therefore I have borrowed money from them.

Regardless its definitely safest to pay the bill using a card in credit if you are a wage and salary earner.

 

[serfty]

...
...and the above has made me even more worried about this happening at some point - I just don't see how the current arrangement could be commercially viable for the CC companies. We should definitely all be making (maximum) hay while the sun shines methinks.

AMEX have already started - reducing the point earn on such payments for most other than premium cards.

I'm sure with the M</C and Visa payments that many providers will soon be assessing what would be business and what would be personal.