ATO review of the Direct Selling / MLM industry
It has come to my attention that the Australian Taxation Office (ATO) is about to conduct a review of the direct selling industry. In particularly they are going to select 12 companies and review the entitlements of that companies independent salespeople (agents) to be registered for an Australian Business Number (ABN).
I have spoken with the ATO Assistant Director and she has informed me that the ATO will pick 12 companies at random (some of which will be members of the Direct Selling Association).
The purpose of this review is for the ATO to establish a position in relation to ABN entitlement for independent salesperson operating within the direct selling industry. The aim will be to develop case studies that can be used by the direct selling industry to outline when it is appropriate to have an ABN and when it is not appropriate.
The ATO have advised me that they are looking at:
- The entitlement of independent salespeople to an ABN;
- The treatment of good and services tax (GST) by independent salespeople;
- The treatment of withholding tax where there is no ABN; and
- Whether independent salespeople are actually operating independently or should they be classed as employees.
I expect the review to start in the next month and most likely to complete in the next 12 months. At this state I am not aware of which direct selling companies are going to be reviewed, though as this is an important issue I wanted to bring it to your attention. This is also a good opportunity to revisit the entitlement for an Australia Business Number (ABN).
For example, while becoming an independent salesperson (agent) can also include the added benefit of being able to purchase products at a discount while also receiving commissions. A genuine business opportunity can usually be characterised as having some of the following:
- The activities performed have a commercial character and they are being done for the purpose and likelihood of earning a profit;
- The business has repeating transactions and appropriate business records are kept; and
- There is a separate bank account, a registered business name and other registrations.
Where independent salespeople (agents) purchase products for personal use and for their immediate family, such purchases are private in nature and would not indicate the existence of a business opportunity. Furthermore, this could lead to a further legal issue where a business opportunity is being wrongfully promoted.
I will be sure to keep you informed of any developments and please let me know if you have any questions or require further information.
How to setup a Direct Selling / MLM Business
If you are looking to setup a direct selling / MLM business then generally we suggest the following:
Australian Co
mpany
We generally recommend registering and trading through a local Australia company because it enables you to establish a local business presence while also helping to stop other businesses from using your business name. Furthermore, if you want to get Therapeutic Goods Registration (TGA) then you will need a local company anyway.
The Australian company will need to have a local Australian director, public officer and a registered office address. Our firm can provide these services while we setup the company and get ready to start trading.
Overseas Shareholders
Generally an Australian Direct Selling / MLM company with a foreign shareholder needs to be audited and submit its financial statements to the Australian Securities and Investment Commission (ASIC). However, there are a number of options available within the first three months for the Australian company to elect not to be audited. Applying for audit relief can save business a fortune in audit fees.
No Australian Business Number (ABN) Withholding
If your Independent Salespeople do not have an ABN and the total payment for goods and services is more than $75 (excluding GST) you:
- cannot claim the GST input tax credit for that supply; and
- must withhold 49% of the payment and pay it to us.
However, our firm is able to get an exemption from the 49% withholding tax where Independent Salespeople’s commission is less than $10,000 per year.
Please contact our office for further information.
Direct Selling / MLM and ABN Requirements
The Australian Taxation Office (ATO) is reviewing several Australian Business Number (ABN) registrations of Independent Salespeople within the direct selling /MLM industry. The ATO is becoming increasingly concerned that many people who believe they are conducting a commercial enterprise are in fact only engaging in a hobby or part time recreational activity.
The Australian business landscape is complicated and it is not enough to simply register for an ABN and then rely on that ABN as proof of your commercial enterprise. The ATO’s view is that a business consists of many characteristics including: repeated transactions, a thought-out business plan, a separate office space and an intention to generate a profit, etc.
Our firm sees difficulties for both the Direct Selling / MLM firms and their Independent Salespeople where no ABN is provided by the Independent Salesperson. Particularly as the ATO requires that 49% of the commissions be withheld from the Independent Salesperson and reported and paid by the Direct Selling / MLM firm to the ATO.
However, our firm has been successful in getting exemptions from the requirement to withholding 49% of the commissions where no ABN is provided, up to $10,000 a year in commission. This has proved very helpful for our clients and their sales teams.
2016 Budget Summary
I have put together a few summary points form the 2016 budget. The main changes are to superannuation, including a reduction in the concessional contribution cap to $25,000 and the introduction of a lifetime non-concessional contribution cap of $500,000.
The instant deduction for capital items costing less than $20,000 remains until 30 June 2017.
Small Business
- The small business entity annual turnover threshold will be increased from $2 million to $10 million from 1July 2016 for the purposes of accessing the proposed 27.5 per cent company tax rate and certain existing income tax concessions including the $20,000 instant asset write off.
- From the 2016-17 income year, the company tax rate for businesses with an annual aggregated turnover of less than $10 million will be reduced to 27.5 per cent.
- Simplified depreciation rules under Subdiv 328-D of the Income Tax Assessment Act 1997 (ITAA 1997), including the instant asset write off threshold of $20,000 available until 30 June 2017
- Option to account for GST on a cash basis and pay GST instalments as calculated by the ATO
- Other tax concessions such as the extension of the FBT exemption for work-related portable electronic devices available from 1 April 2016 and the immediate deduction of professional expenses under s 40-880 of ITAA 1997.
Other enterprises
- Tax incentives for investing in early-stage innovative companies are to be expanded.
- Funding arrangements to attract more venture capital investment will be expanded.
- The tax treatment of asset backed financing arrangements such as deferred payment arrangements and hire purchase arrangements will be amended.
Superannuation
- The threshold at which high income earners pay additional contributions tax will be lowered to $250,000 from 1 July 2017. The annual cap on concessional superannuation contributions will also be reduced to $25,000.
- The tax exemption on earnings of assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017.
- A lifetime non-concessional contributions cap of $500,000 will be introduced (see more details below).
- Individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2017.
- From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.
- A balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase will be introduced from 1 July 2017.
Lifetime cap for non-concessional superannuation contributions
A lifetime non-concessional contributions cap of $500,000 will be introduced. To ensure maximum effectiveness, the lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007, from which time the ATO has reliable contributions records, and will commence at 7.30 pm (AEST) on 3 May 2016.
The lifetime non-concessional cap will replace the existing annual caps which allow annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65). Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax.
GST and other indirect taxes
- GST will be extended to low value goods imported by consumers from 1 July 2017.
A Genuine Home Business
Home Business Startups
Australian businesses are continuously moving away from traditional ‘bricks and mortar’ retail outlet and office spaces and are now learning how to take advantage of low cost E-business platforms. As an accountant and business advisor I see more and more of our clients moving towards alternative business models such as home offices, virtual offices and café meeting.
The internet has enabled new E-businesses to startup and operate from the home while still enabling them to grow to a size that can maintain national and often international sales. When we look at some of the large iconic American companies that started as a home businesses, for example: Apple, Amazon, Google and even The Walt Disney Company, is not surprising that more and more people are becoming inspired to start a home business.
Enter the Independent Salesperson
It’s not just the possibility of financial success that motivates people to start a home business, but it’s also the ability to work your own hours, manage your work/life balance and the challenge of working for yourself.
Furthermore, working as an independent salesperson enables people to have direct contact with their customers and the ability to build and manage their own relationships. For example, a carefully planned marketing campaign on social media can enable independent salespeople to leverage personal relationships to help their friends become loyal customers. In this way, social media has also enabled businesses to gain access to customers that would otherwise not purchase their products.
A Genuine Business Opportunity
Direct selling businesses (particularly multi-level marketing) usually promote more than just their products. They also offer a business opportunity by encouraging the happy and enthusiastic customers to join the direct selling business as an independent salespeople. This new opportunity can also include the added benefit of being able to purchase products at a discount while also receiving commissions.
However, it can be difficult to determining if a genuine home business exists and we often see that direct selling businesses and independent salespeople get it wrong. A genuine home business can be characterised as having some of the following:
- The activities performed have a commercial character and they are being done for the purpose and likelihood of earning a profit
- The business has repeating transactions and appropriate business records are kept
- There is a separate bank account, a registered business name and other registrations
Where independent salespeople purchase products for personal use and for their immediate family, such purchases are private in nature and would not indicate the existence of a home business.
Please contact our firm for all your direct selling accounting and taxation needs.
Not For Resale (NFR) Model
The Not For Resale (NFR) model is often used by foreign companies wishing to enter the Australian direct selling / MLM market. The revolution of Ebusiness has largely changed the nature of multi level marketing (MLM) businesses by enabling customers to go online and purchase products directly from overseas companies.
The Australian customer therefore becomes the direct importer of the overseas product, rather than the customer purchasing a local product from an independent salesperson.
However, customers should be careful when purchasing therapeutic goods, such as weight loss products, from overseas companies as these products may not meet Australian health standards.
The Therapeutic Goods Act (TGA) ensures therapeutic goods within Australia meet acceptable standards of quality, safety and performance.
The TGA and the Australian Border Force (ABF) can stop shipments of products which are known to be potentially dangerous and to sample and identify suspect products so future shipments cannot enter Australia.
Furthermore, it is an offense under the Therapeutic Goods Act to promote unapproved therapeutic goods within Australia.
Foreign direct selling / MLM companies wishing to enter the Australian marketplace need to be sure they seek local accounting, taxation and legal advice before they start promoting their products within Australia.
More information about the TGA can be found here: https://www.tga.gov.au/about-australian-therapeutic-goods-legislation
Online Ebay store as a business
Over the last three years, John who is a self employed mechanic has also built an online Ebay store which lists and sells second hand car parts. His online business compliments his mechanic shop very well and provides him with an outlet for used parts that would otherwise be waste.
Johns’ Ebay business is growing very successfully and he is starting to earn sales revenue of $80,000 per year, which is in addition to his shop.
John has registered his Ebay store with an ABN and business name. However, he does not include the income from his online sales, but he does claim the GST credits on his purchases.
John is carrying on a business and is avoiding his tax obligations by:
- not reporting all his income
- claiming the GST credits for the online portion of his work.
John should immediately amend the relevant income tax returns to include his online sales.
The ATO has a number of other examples of online business: https://www.ato.gov.au/Business/Starting-your-own-business/In-detail/Getting-started/Online-selling—hobby-or-business-/?page=3
Lake Maquarie Accountant
Are you looking for a Lake Maquarie Accountant who is a local, personable and who understands business and personal taxation matters?
Kirk Davis Accounting is now providing accounting, taxation and business advisory services in Dora Creek, Lake Maquarie. This is in additional to our commercial offices in Sydney and Newcastle.
If you need help with year end tax planning, of if your starting a business or if you have any general accounting, tax or GST queries please contact us and we can come to you for a free no obligation meeting.
Our local branch office is on Dora Street, Dora Creek. Phone 0412 776 647
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Direct Selling Compliance Training
Do you need an online direct sales compliance training program for your independent salespeople?
Kirk Davis Accounting and Tony Davis Lawyers partner with our direct selling clients to provide customised online compliance training programs for use by our client’s independent salespeople. Our compliance training program is an innovative risk management and mitigation tool developed by legal, accounting and taxation professionals who are also experienced lecturers and compliance trainers.
Direct Sales Compliance brings a unique, cross-disciplinary approach to the direct selling and MLM industry and we address clients’ challenges, ensuring the right balance of professional expertise and real world business experience.
www.directsalescompliance.com.au
