Law

Alert: Christmas Gifts and Fringe Benefits Tax

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Editor:  With the holiday season approaching, many employers and businesses want to reward their staff and loyal clients/customers/suppliers.

Again, it is important to understand how gifts to staff and clients, etc., are handled 'tax-wise'.

 Gifts that are not considered to be entertainment

These generally include, for example, a Christmas hamper, a bottle of whisky or wine, gift vouchers, a bottle of perfume, flowers, a pen set, etc.  

Briefly, the general FBT and income tax consequences for these gifts are as follows:

-   gifts to employees and their family members – are liable to FBT (except where the 'less than $300' minor benefit exemption applies) and tax deductible; and

-   gifts to clients, suppliers, etc. – no FBT, and tax deductible.

 Gifts that are considered to be entertainment

These generally include, for example, tickets to attend the theatre, a live play, sporting event, movie or the like, a holiday airline ticket, or an admission ticket to an amusement centre.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

-   gifts to employees and their family members – are liable to FBT (except where the 'less than $300' minor benefit exemption applies) and tax deductible (unless they are exempt from FBT); and

-   gifts to clients, suppliers, etc. – no FBT and not tax deductible.

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ALERT: Ban on electronic sales suppression tools

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From 4 October 2018, the Government has banned activities involving electronic sales suppression tools (‘ESSTs’) that relate to people or businesses that have Australian tax obligations. 

The production, supply, possession or use of an ESST (or knowingly assisting others to do so) may attract criminal and administrative penalties.

ESSTs can come in different forms and are constantly evolving, some examples include:

-   An external device connected to a point of sale (‘POS’) system.

-   Additional software installed into otherwise-compliant software.

-   A feature or modification that is a part of a POS system or software.

An ESST may allow income to be misrepresented and under-reported by:

-   deleting transactions from electronic record-keeping systems;

-   changing transactions to reduce the amount of a sale;

-   misrepresenting sales records (e.g., by allowing GST taxable sales to be re-categorised as GST non-taxable sales); or

-   falsifying POS records.

Transitional arrangements are in place for six months starting from 4 October 2018 to 3 April 2019 for possessing an ESST.

Taxpayers may avoid committing an offence for possessing an ESST if they:

-   acquired it before 7:30pm 9 May 2017; and

-   advise the ATO that they possess the tool.

Importantly, the transitional provisions do not apply to the manufacture, development, publication, supply or use of an ESST.

Depending on the offence and severity of the crime, taxpayers can face financial penalties of up to 5,000 penalty units, which currently equates to over $1 million.

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NEWS: Legislation to combat illegal phoenix activity

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The Government has announced a package of reforms to tackle illegal phoenix behaviour. 

By way of background, phoenixing occurs when the controllers of a company strip the company's assets and transfer them to another company, to avoid paying the original company's debts. 

The proposed measures will deter and disrupt the core behaviours of phoenix operators by:

-   creating new criminal and civil offences, attaching the highest penalties available under the law, to target those who engage in and facilitate illegal phoenix transactions;

-   preventing directors from backdating their resignations to avoid personal liability;

-   preventing sole directors from resigning and leaving a company as an empty corporate shell with no directors;

-   restricting the voting rights of related creditors of the phoenix company at meetings regarding the appointment or removal and replacement of a liquidator;

-   making directors personally liable for GST liabilities, as part of extended director penalty provisions; and

-   extending the ATO's existing power to retain refunds where there are outstanding tax lodgments.

A new Phoenix Hotline is also being established, which will make it easier to report suspected phoenix behaviour. 

Editor: According to the Government, the proposed measures are tightly targeted at those who misuse the corporate form, while minimising any unintended impacts on legitimate business restructuring.  Whether they will be able to achieve this goal or not is yet to be seen…

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ALERT: Increased scrutiny of home office claims

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Last year, 6.7 million taxpayers claimed a record $7.9 billion in deductions for ‘other work-related expenses’, which includes home office expenses.

Reportedly, due to a high number of mistakes, errors and questionable claims for home office expenses, the ATO has recently advised that it will be increasing attention, scrutiny and education on these claims this tax time.

In particular, the ATO has flagged their concerns relating to taxpayers who are claiming:

-   expenses they never paid for;

-   expenses that their employer has reimbursed them for;

-   private expenses; and

-   expenses with no supporting records.

Whilst additional costs incurred as a direct result of working from home can be claimed, care must be taken not to claim private expenses as well.

The ATO has indicated that one of the biggest issues they face is people claiming the entire amount of expenses (e.g., their internet or mobile phone), rather than just the extra portion relating to work.

Provided the taxpayer is able to demonstrate that they have incurred additional costs of running expenses (e.g., electricity for heating, cooling and lighting), then these are generally deductible.

In contrast, employees are generally not able to claim any portion of occupancy-related expenses (e.g., rent, mortgage repayments, property insurance, land taxes and rates).

Taxpayers are warned that the ATO may contact their employers to verify expenses claimed for working from home.

In addition, the ATO expects to disallow a lot of claims where the taxpayer has not kept adequate records to prove that they have legitimately incurred the relevant expense and that the expense was related to their work.

As with the claiming of deductions in general, supporting records must be kept when claiming work-from-home expenses, which may include receipts, diary entries and itemised phone bills. 

Importantly, only the additional work-related portion of the relevant expense is deductible.

Advancement in technology has allowed the ATO to deploy sophisticated systems and analytics to spot claims that do not ‘add up’ and claims that are out of the ordinary compared to others in similar occupations, earning similar income.

Finally, the ATO has reminded taxpayers of the ‘three golden rules’ to follow when claiming work-from-home deductions, being:

-   the taxpayer must have spent the money themselves and have not been reimbursed;

-   it must be directly related to earning the taxpayer’s income, not a personal expense; and

-   the taxpayer must have a record to prove the expense.

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NEWS: Black economy recommendations will impact day-to-day business

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Editor: Recently issued draft legislation has focused on introducing new measures to manage the growing cash economy (i.e., the ‘black economy’) in light of the Black Economy Taskforce recommendations and recent Federal Budget announcements. 

Two of these key recommendations are outlined below.

Removing tax deductions for PAYG failure

The Government is currently considering removing tax deductions where businesses fail to comply with their PAYG withholding obligations for payments to employees and contractors from 1 July 2019.

Specifically, deductions are proposed to be denied for these types of payments where the payer has failed to either:

-   comply with their obligations in relation to withholding from these payments; or

-   notify the ATO of the withholding amount (i.e., via their BAS).

Interestingly, deductions will only be denied if no withholding took place or no notification has been made. 

That is, incorrect amounts withheld or reported to the ATO will not impact a taxpayer’s entitlement to deductions.

Further expansion of the taxable payments reporting system (‘TPRS’)

The TPRS was introduced for the first time in the 2013 income year with respect to businesses in the building and construction industry, requiring the reporting of total payments made to contractors for building and construction services each year.

The taxable payments annual report is due by 28 August each year.

Legislation is currently being considered by Parliament to extend the TPRS to the cleaning and courier industries from the 2019 income year.

Furthermore, draft legislation has now been released to further expand the TPRS to the following industries from the 2020 income year:

-   security providers and investigation services;

-   road freight transport; and

-   computer system design and related services.

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NEWS: ATO scrutinising car claims this tax time

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The ATO has announced that it will be closely examining claims for work-related car expenses this tax time as part of a broader focus on work related expenses.

Assistant Commissioner Kath Anderson said: 

“We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed.”

This is no doubt because over 3.75 million people made a work-related car expense claim in 2016/17 (totalling around $8.8 billion), and, each year, around 870,000 people claim the maximum amount under the cents-per-kilometre method.

Ms Anderson said that the ATO’s ability to identify claims that are unusual has improved due to enhancements in technology and data analytics: “Our models are especially useful in identifying people claiming things like home to work travel or trips not required as part of your job . . . simply travelling from home to work is not enough to qualify, no matter how far you live from your workplace.”

Ms Anderson said there are three golden rules for taxpayers to remember to get it right.

“One – you have to have spent the money yourself and can’t have been reimbursed, two – the claim must be directly related to earning your income, and three – you need a record to prove it.”

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NEWS: Superannuation guarantee amnesty introduced

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The Government has introduced legislation to complement the superannuation guarantee ('SG') integrity package already before Parliament by introducing a one‑off, twelve month amnesty for historical underpayment of SG.

The Bill incentivises employers to come forward and "do the right thing by their employees" by paying any unpaid superannuation in full, as well as the high rate of nominal interest (but without the penalties for late payment that are normally paid to the Government by such employers).

Employers that do not take advantage of the amnesty will face higher penalties when they are subsequently caught – in general, a minimum 50% on top of the SG Charge they owe. 

In addition, throughout the amnesty period the ATO will still continue its usual enforcement activity against employers for those historical obligations they don't own up to voluntarily.

The amnesty will run for twelve months from 24 May 2018.

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NEWS: 2018 Budget Update

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The Government handed down the 2018/19 Federal Budget on Tuesday 8th May 2018.  Some of the important proposals include:

-    The introduction of the 'Low and Middle Income Tax Offset', a temporary non-refundable tax offset of up to $530 p.a. to Australian resident low and middle income taxpayers for the 2019 to 2022 income years.  This offset will apply in addition to the Low Income Tax Offset. 

-    Providing tax relief for individual taxpayers by progressively increasing some of the tax brackets (including an increase in the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000 from 1 July 2018), and eventually removing the 37% tax bracket entirely.

-    The $20,000 immediate write-off for small business will be extended by a further 12 months to 30 June 2019 (i.e., for businesses with aggregated annual turnover less than $10 million).

-    From 1 July 2019:

–      Increasing the maximum number of allowable members in an SMSF from four to six members;

–      Ensuring that unpaid present entitlements (or ‘UPEs’) come within the scope of Division 7A; and

–      Denying deductions for expenses associated with holding vacant residential or commercial land.

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NEWS: Employee denied deductions for work-related expenses

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An employee photographer has been denied deductions for travel expenses (when travelling with his family), and other purported work related expenses.

The AAT held that the travel expenses were primarily incurred for the purposes of a family trip or holiday and were therefore non-deductible, as they were private and domestic in nature.

Also, in relation to the taxpayer's reliance on bank statements in the absence of invoices and receipts, the AAT observed that “evidence of the mere transfer of funds, be it by way of bank transfer or by any other means, is not sufficiently informative of the actual character of an expense", so the other disputed expenses could not be claimed as allowable deductions.

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ALERT: Get ready for Single Touch Payroll

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Single Touch Payroll (or 'STP') is mandatory for 'substantial employers' (being those with 20 or more employees) from 1 July 2018.

All employers are required to count the number of employees on their payroll on 1 April 2018 to find out if they are a substantial employer (note that this can be done after 1 April, but they need to count the employees who were on their payroll on 1 April). 

They must count each employee (not the full time equivalent), including full-time, part-time and casual employees, as well as those employees based overseas or absent or on leave (paid or unpaid).

Employers that are part of a company group must include the total number of employees employed by all member companies of the wholly-owned group.

However, employers don't have to include the following in the headcount:

-    any employees who ceased work before 1 April;

-    casual employees who did not work in March;

-    independent contractors;

-    staff provided by a third-party labour hire organisation;

-    company directors or office holders; or

-    religious practitioners.

Note that, although directors, office holders and religious practitioners are not included in the headcount, if the employer starts reporting through STP, the payment information of these individuals will need to be reported (because the payments are subject to withholding and are currently reported in the Individual non-business payment summary).

Employers don't need to send the ATO the headcount information, but they may want to keep a copy for their own records.

Once an employer becomes a substantial employer, they will need to continue reporting through STP even if their employee numbers drop to 19 or less (unless they apply for and are granted an exemption).

Editor: Please contact our office if you need any assistance regarding the new STP regime.

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ALERT: Continued ATO focus on holiday home rentals

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The ATO has recently advised that they are “setting their sights on the large number of mistakes, errors and false claims made by rental property owners who use their own property for personal holidays”

While it confirms that the private use of holiday homes by friends and family is entirely legitimate, the ATO states that such use reduces a taxpayer’s ability to earn income from the property, and therefore impacts on (i.e., reduces) the amount of claimable deductions.

As a result, the ATO has reminded holiday home owners that: 

-    They can only claim deductions for a holiday home with respect to periods it is genuinely available for rent.

-    They cannot place unreasonable conditions on prospective tenants/renters, set rental rates above market value, or fail to advertise a holiday home in a manner that targets people who would be interested in it and still claim that the property was genuinely available for rent. 

-    Where a property is rented to friends or relatives at ‘mates rates’, they can only claim deductions for expenses up to the amount of the income received. 

       -   Property owners whose claims are disproportionate to the income received can expect greater scrutiny from the ATO.

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NEWS: GST withholding measures now law

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Legislation has been passed to “clamp down” on GST evasion in the property development sector.

From 1 July 2018, purchasers of new residential premises and new residential subdivisions will generally be required to withhold the GST on the purchase price at settlement and pay it directly to the ATO. 

Property developers will also need to give written notification to purchasers regarding whether or not they need to withhold. 

The new obligations are primarily aimed at ending the practice of some developers collecting GST on new properties before dissolving their business prior to remitting such tax to the ATO. 

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NEWS: Commissioner’s speech highlights ATO’s focus areas

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Recently, the Commissioner of Taxation highlighted the areas in which the ATO has recently increased its focus, including: 

-    undeclared income;

-    individuals' unexplained wealth or lifestyle;

-    incorrectly claimed private expenses;

-    unpaid superannuation guarantee; and

-    cash-only businesses and those with low usage of merchant banking facilities, with black economy visits to over 2,600 businesses across 8 locations in 2017.

The Commissioner also highlighted ongoing ATO concern with respect to the predicted 'work-related expense claim gap', which (at least by the ATO’s estimates) could amount to being greater than the 'large corporate tax gap' of $2.5 billion of lost revenue. 

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UPDATE: Super guarantee payable on ‘public holidays’ and ‘additional hours’

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The Federal Court has held that superannuation guarantee contributions were payable with respect to the ‘additional hours’ and ‘public holidays’ component of annualised salaries paid by BlueScope Steel, on the basis that these particular components formed part of ordinary time earnings (‘OTE’). 

Under an enterprise agreement, primarily due to the specific working environment, the employees in question were required to be available (at short notice) 365 days per year and 24 hours per day, including a requirement to work additional hours and public holidays. 

As such, the employees were paid an annualised salary, which was made up of a base rate, as well as a component which absorbed all additional payments, such as penalty rates, allowances, public holiday loadings and pay-outs, and payment for additional hours worked outside the normal rostered hours.

However, when paying superannuation, adjustments were made to the annualised salary, so that the additional hours and public holiday components were not included by BlueScope Steel as OTE for superannuation guarantee purposes.

Decision

The Federal Court did not agree with the employer’s adjustments, instead finding that, under the circumstances, the ‘additional hours’ and ‘public holidays’ formed part of an employee’s ‘ordinary hours of work’ and, therefore, were considered OTE for superannuation guarantee purposes.

This remained the case whether or not the employee actually worked the additional hours or the public holidays.

That is, the ordinary conditions of the employee’s work required them to be available outside their rostered shifts and on public holidays (on short notice) and, as this was factored into their annual salary, they were considered ordinary hours for these particular employees.

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NEWS: Review of rules for early release of superannuation

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The Government has announced that Treasury will review the current rules governing early release of superannuation on grounds of severe financial hardship and compassionate grounds.

It will also review whether, and the circumstances in which, a perpetrator’s superannuation should be available to pay compensation or restitution to victims of crime.

The review will not examine other general conditions of release for superannuation.

The Government also announced that it will transfer the regulatory role of administering the early release of superannuation benefits on compassionate grounds from the Department of Human Services to the ATO in 2018, to enable the ATO to provide a more streamlined service to members.

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NEWS: Further 'affordable housing' measures passed

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Parliament has passed the legislation allowing first home buyers to save for a deposit inside superannuation through the First Home Super Saver Scheme (FHSSS), and also allowing older Australians to 'downsize' and then contribute the proceeds of the sale of their family home into superannuation.

From 1 July 2018, a first home buyer will be able to withdraw voluntary superannuation contributions they have made since 1 July 2017 (up to $30,000 each, with individuals being able to contribute up to $15,000 a year within existing caps), along with a deemed rate of earnings, to help buy their home.

Also, from 1 July 2018, when Australians aged 65 and over sell a home they have owned for at least 10 years, they may contribute up to $300,000 from the proceeds into their superannuation accounts, over and above existing contribution restrictions.   Both members of a couple may take advantage of this measure, together contributing up to $600,000 from the proceeds of the sale into superannuation.

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UPDATE: Can travel in an Uber be exempt from FBT?

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Editor: The ATO has released a discussion paper to facilitate consultation regarding the definition of 'taxi' contained in the FBT Act, and the exemption from FBT for taxi travel undertaken to or from work or due to illness.

Although the provision of travel by an employer to an employee would generally be a benefit upon which FBT would be payable, employers are specifically exempted from having to pay FBT in respect of travel undertaken by their employees in a 'taxi' to or from work or due to illness of the employee.

The ATO has previously advised that this exemption "does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi."

However, in light of a recent Federal Court decision regarding Uber, and proposed changes to licensing regulations in a number of states and territories, the ATO is reviewing its interpretation of the definition of 'taxi' in the FBT Act and may adopt an interpretation that accepts that a taxi may include a ride-sourcing vehicle or other vehicle for hire.

Editor: Until this matter is resolved, private travel (including between home and work) undertaken using ride-sourcing vehicles and other vehicles for hire may possibly be exempt from FBT under the minor benefits exemption.

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NEWS: ATO: Combatting the cash economy

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The ATO has reminded taxpayers that it uses a range of tools to identify and take action against people and businesses that may not be correctly meeting their obligations.  Through 'data matching', it can identify businesses that do not have electronic payment facilities. 

These businesses often advertise as 'cash only' or mainly deal in cash transactions.  When businesses do this, they are more likely to make mistakes or do not keep thorough records. 

The ATO’s ability to match and use data is very sophisticated.  It collects information from a number of sources (including banks, other government agencies and industry suppliers), and also obtains information about purchases of major items, such as cars and real property, and then compares this information against income and expenditure reported by businesses and individuals to the ATO.

Example: Unrealistic personal income leads to unreported millions

The income reported on their personal income tax returns indicated that a couple operating a property development company didn’t seem to have sufficient income to cover their living expenses.

The ATO found their company had failed to report millions of dollars from the sale of properties over a number of years.

They had to pay the correct amount of tax (of more than $4.5 million) based on their income and all their related companies, and also incurred a variety of penalties.

Example: Failing to report online sales

A Nowra court convicted the owner of a computer sales and repair business on eight charges of understating the business’s GST and income tax liabilities.

The ATO investigated discrepancies between income reported by the business and amounts deposited in the business owner’s bank accounts, and found that the business had failed to report income from online sales.

The business owner was ordered to pay over $36,000 in unreported tax and more than $18,400 in penalties, and also fined $4,000 (and now has a criminal conviction).

Get it in writing and get a receipt

The ATO also notes that requesting a written contract or tax invoice and getting a receipt for payment may protect a consumer's rights and obligations relating to insurance, warranties, consumer rights and government regulations.

Consumers who support the cash economy, by paying cash and not getting a receipt, risk having no evidence to claim a refund if the goods or services purchased are faulty, or prove who was responsible in case of poor work quality.

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UPDATE: No small business tax rate for passive investment companies

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The Government has released draft tax legislation to clarify that passive investment companies cannot access the lower company tax rate for small businesses of 27.5%, but will still pay tax at 30%.

The amendment to the tax law will ensure that a company will not qualify for the lower company tax rate if 80% or more of its income is of a passive nature (such as dividends and interest).

The Minister for Revenue and Financial Services said the policy decision made by the Government to cut the tax rate for small companies was meant to lower taxes on business, and was not meant to apply to passive investment companies.

 

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ALERT: ALP announces massive (potential) changes to trust taxation

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Editor: Although we don't normally report on Opposition tax policies, this policy change is so fundamental, and the existing state of the Federal Parliament is so chaotic, that we believe it's worth bringing this to your attention.

The Leader of the Opposition, Bill Shorten, has announced that a Labor Government (should they be elected) will introduce a standard minimum 30% tax rate for discretionary trust distributions to "mature beneficiaries" (i.e., people aged 18 and over).

Although the ALP acknowledges that individuals and businesses use trusts for a range of legitimate reasons, such as asset protection and business succession, "in some cases, trusts are used solely for tax minimisation."

Labor’s policy will only apply to discretionary trusts, so other trusts – such as special disability trusts, deceased estates and fixed trusts – will not be affected by this change.

Labor’s policy will also not apply to farm trusts and charitable trusts, and other exemptions will apply, such as for people with disability (the Commissioner of Taxation will be given discretionary powers to manage this). 

Their announcement also reiterated their other policies regarding tax reform, including further changes to superannuation, changes to negative gearing and CGT, and limiting deductions for managing tax affairs.

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