Newsletter – December 2019

Australia embraces Black Friday and Cyber Monday

The Black Friday and Cyber Monday sale concepts have well and truly arrived in Australia with retailers embracing this latest retail event to stimulate what has been an economically lack lustre year.

Why Black Friday?

For many Australians, Black Friday is just confusing – shouldn’t Black Friday’ be on Friday 13th? In the US, the Black Friday sales follow Thanksgiving in a similar way to the Australian Boxing Day sales. The Black Friday sales also lay a clear runway to Christmas, stimulating consumer spending.

The story behind the name Black Friday is hotly contested. In the US, the use of the name ‘Black Friday’ was first used for the gold market crash on 24 September 1869. The crash was engineered by financier Jay Gould and railway magnate James Fisk amongst others, when an attempted play to drive up the price of gold unravelled. The pair sought to corner the market in loose gold using political influence to keep Government gold off market, driving up the price from $100 to $163.50. However, when the Government recognised the scheme, it placed $4 million
in-specie on the market. The price of gold plummeted to $133 with the ensuing panic spreading to the rest of the
market. Gould, who secretly sold much of his gold stocks on the high, did better than Fisk who lost much of his investment.

The use of Black Friday in a retail context appears to have come out of Philadelphia, where the police used the term for the general craziness created by the crowds swelling the city’s population for the post- Thanksgiving Day sales and in preparation for the Army- Navy football game on the Saturday. Stretched to their limits the police could not take the day off and worked long shifts, thus it was a black day on their calendar.

The widespread use of Black Friday to describe a shopping sales event was at some point in the 1980s with PR
spin turning the story into a positive economic event. The story goes that struggling retailers went from being ‘in
the red’ throughout the year to ‘in the black’ following the boost in sales in the period between Thanksgiving and
Christmas. When accounting was documented by hand, the black in black Friday was said to be from the black ink
staining the fingers of the accountants.

And now Black Friday is in Australia, adding another event to give consumers a reason to spend. We now jump from one retail event to the next with Easter eggs and hot cross buns appearing almost immediately after Christmas, with a quick foray into Valentine’s Day in between, then a sea of pink for Mothers’ Day before the big red signs come out for the EOFY sales. Post the last minute sales rush of the end of financial year, we have  Fathers’ Day, now Halloween, before the Christmas decorations go up and the Christmas carols go on a 24/7 rotation.

From a retail perspective, and to hijack Voltaire’s famous quote, if Christmas did not exist, it would be necessary to invent it.

The rise and rise of online shopping

Black Friday and Cyber Monday are online focussed events (although anyone who fought the shopping centre
on Friday, 29 November would hotly contest this).

Australia Post’s recent 2019 eCommerce Industry Report states that in 2018, the five weeks from 11 November to
15 December accounted for almost 15% of all eCommerce transactions. The peak for this period was Black Friday Cyber Monday, which was the biggest online shopping week in Australia’s history, recording strong growth of
over 28% from the previous year.

In general, more than 73% of Australian households shopped online in 2018. Group CEO Christine Holgate
said, “Almost three quarters of all Australian households are now shopping online and we expect that around 12% of all consumer spending will be conducted online by 2021.”

eCommerce in Australia is growing rapidly, with online spend reaching 10% of total retail sales in 2018, two
percentage points higher than the previous year. Australians spent $27.5 billion buying goods online, an increase of 24.4% year on year.

The number of online purchases grew by more than 13% year on year in every State and Territory, with the national average growing over 20%.

Services such as Afterpay have also taken away the pain point for consumers deciding whether or not to make a purchase (without the debt loading of traditional credit card arrangements). Afterpay reported $4.3 billion in underlying sales through its platform in 2018-19 with a loyal client base entrenching the service as a habit.

While the rise of eCommerce sounds impressive, this growth does not necessarily represent economic growth. Much of the expansion of online shopping is an alternative to physical shopping and a reflection of a market shift towards consumer preferences. Growth in retail spending has been steady at a low rate, but rising prices have implied that the volume of retail sales declined over the year to the September quarter.

5 things that will make or break your business’s Christmas

The countdown to Christmas is now on and we’re in the midst of the headlong rush to get everything done and capitalise on any remaining opportunities before the Christmas lull. Busy period or not, Christmas causes a period of dislocation and volatility for most businesses. This dislocation and volatility mean that it is not ‘business as usual’ and for many businesses, it is the change that causes the problem.

Most business owners cope well with consistent trading conditions, where trading and business conditions are
predictable as are the solutions to issues that arise, but it is a different story during periods of disruption. Here are some things to watch out for:

1. Ho, Ho, No. The trading stock headache.

If business activity spikes over the Christmas period and you sell goods, then there is a temptation to increase stock levels. That makes sense as long as you don’t go too far. Too much stock post the Christmas period and you will either be carrying product that is out of season or you will have too much cash tied up in trading stock. Try to work with suppliers who can supply on short notice. Better yet, see if some of your suppliers will supply you on consignment where you only pay them once the stock is sold. It might be better to miss a few sales than carry a
trading stock headache into the New Year.

Managing your trading stock is not just about managing cost, consumers will go online if they cannot find what they need in store. Some savvy retailers are capitalising on this with opportunities to purchase online while instore if stock is not available or providing free shipping codes.

2. The discounting trend.

Consumers now expect a bargain and can generally find one. The attraction of the Black Friday sales is that stock is generally available. Those waiting for bargains in the week immediately prior to Christmas, can only choose from what’s left.

If you choose to discount stock (or the market forces you to), it’s essential to know your profit margins todetermine what you can afford to give away. A business with a 30% gross profit margin that offers a 25% discount (certainly nothing unusual about that in today’s market) needs a 500% increase in sales volume simply to maintain the same position. The result generally is that often businesses trade below their breakeven point and generate losses. So, think carefully about your strategy and what you can sustain.

3. The Christmas cost hangover

Costs tend to go up over Christmas. More staff, leave costs, downtime from nontrading days, as well as increased promotional costs all mean that the cost of doing business increases. Keep an eye on them. It’s great to get into the Christmas spirit as long as you don’t end up with a New Year hangover.

Many businesses also bring on casual staff. It’s essential that you pay staff at the correct rates and meet your Superannuation Guarantee obligations. Under the Retail Award, the rate for adult casuals (21 and over) start at $26.76. There is also a 3 hour shift minimum for all casuals regardless of whether you send them home early. Check the pay calculator to find the correct rates.

4. New Year cash flow crunch

The New Year often leads into a quieter trading and tighter cash flow period. The March quarter tends to be the toughest cash flow quarter of the year. You will need a cash buffer going into the New Year. Don’t over commit yourself in the run up to year end and end up in trouble in the New Year.

5. Take a lesson from Scrooge

If you work with account customers, start your debtor follow up now. If your customers are under any cash flow pressures, the Christmas period will only increase that pressure. The creditors who chase hard and early will get paid first. Don’t be the last supplier on the list; the bucket may be empty by then.

Christmas is a great time of year. Just don’t get caught up in the rush and let things get out of control.

Bushfire relief from ATO obligations

The ATO has provided relief from lodgement compliance and payment obligations for those impacted by the
bushfires. An automatic two month deferral for activity statements lodgements and payments due has been provided to those in affected postcodes.

Taxpayers can also call the ATO directly to request further assistance, such as requesting extra time to manage tax debt or lodgements, help finding lost documentation such as Tax File Numbers, reconstructing tax documentation, fast tracking refunds, interest free periods, and remittance of penalties or interest charged during the crisis.

Super guarantee opt-out for employees with multiple employers

Employees with multiple employers can now opt-out of superannuation guarantee from all but one employer.

Employers are required to pay 9.5% superannuation guarantee for all eligible employees. But what happens if you are an employee with multiple employers? Until recently, these compulsory payments meant some employees risked unintentionally breaching their concessional contributions caps. New laws however provide a potential solution.

Legislation that passed Parliament late last month allows an employee to apply to the Commissioner of Taxation for an employer shortfall exemption certificate to opt-out of the SG system for specific employers. This certificate prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for the period covered by the certificate.

It’s important to note that the exemption certificate does not require the employer to stop paying SG, it merely protects them if they fail to make SG payments. The employer may choose to continue paying SG – either because they could not reach an agreement with the employee on their total remuneration package once SG is removed, or the administration required to exclude an individual employee is too onerous.

The Commissioner will only issue an employer shortfall exemption certificate where:

  • The taxpayer is likely to exceed their concessional contributions cap for the financial year (just because you have multiple employers does not mean you can opt out of SG), and
  • At least one employer is paying SG for the employee.

The Commissioner might deny the certificate if it’s not appropriate, the application would significantly reduce
the amount of SG by an amount larger than necessary (for example, opting out of SG from the largest of the multiple employers), or where there is a contrived arrangement to take advantage of the new rules.

The due date for the employer shortfall exemption certificate is 60 days before the first day of the quarter to which the application relates.

Before applying for a certificate, it’s important to understand the impact of opting out of SG. You will need to negotiate your total remuneration package with your employer and the impact of this on your tax position, understand the tax outcomes if you did nothing and exceed your contributions cap, and the impact on your retirement savings over time.

The Super Guarantee timing trap for employers

How employers are being caught out by the timing of superannuation guarantee payments.

Employers can generally only claim a deduction for superannuation contributions in the income year in which the
contribution is made. Super contributions are made when the payments are received by the trustee of a complying superannuation fund.

It’s not uncommon for employers to be caught out by timing problems, many in the belief that the contribution has been made at the point the payment is made rather than when it is credited to the superannuation fund provider’s account. Many forms of electronic transfer however are not guaranteed to be automatic or next day. BPay for example may take up to 2 days, a delay that is often not factored in.

A new practice statement from the ATO highlights the problem created by the use of clearing houses.

There is a specific element of the law that enables payments made to the Government’s Small Business Superannuation Clearing House (SBSCH) to be accepted as contributions when the clearing house receives them, rather than when the trustee of the superannuation fund has received the contribution. The SBSCH is only available to small businesses with 19 or fewer employees, or with an annual aggregated turnover of less than $10 million.

Private clearing houses are treated differently and as such, employers need to allow sufficient time for their
superannuation contributions to be received, processed and paid by the clearing house to the superannuation fund, before their SG obligation is discharged.

Take the example of an employer who brings forward superannuation contributions before 30 June to be able to claim the tax deduction in that year. If a private clearing house was used, and time was not allowed for the clearing house to process the payment, and as a result the payment was not received by the trustees before 30 June, then the deduction cannot be claimed until the next financial year.

Merry Christmas!

Our office is closed from EOB on Friday, 20 December 2019 and will re-open on 6th January 2020.

On behalf of all of the team, we wish you a safe and Merry Christmas. We’ll look forward to working with you again in the New Year.

Newsletter – November 2019

CGT and the family home: expats and foreigners targeted again

The Government has resurrected its plan to remove access to the main residence exemption for non-residents – a move that will impact on expats and foreign residents.

Back in the 2017-18 Federal Budget, the Government announced that it would remove the ability for non-resident
taxpayers to claim the main residence exemption. The unpopular measures were introduced into Parliament but
stymied. An election later, a recomposition of Parliament, and the Government has again introduced the reforms but in a modified form.

The proposed changes would apply from the original Budget announcement on 9 May 2017, so could impact on properties that have already been sold. However, a transitional rule would allow capital gains tax (CGT) events
happening up to 30 June 2020 to be dealt with under the existing rules as long as the property was held continuously from before 9 May 2017 until the CGT event.

That is, if you held a property from 9 May 2017 up until the sale date, the existing rules might continue to apply.

If the measures pass Parliament, a non-resident taxpayer would be prevented from applying the main residence exemption to the sale of a property, regardless of whether they were a resident of Australia for some or most of the ownership period.

For expats, there is a proposed exception to the new rules for situations where the individual has been a non-resident for 6 years or less and a specific life event occurred during the period of foreign residency. “Life events” refer to terminal medical conditions suffered by the individual or certain family members, the death of certain family members or a marriage or de facto relationship breakdown. That is, if you were working overseas for 5 years and your spouse died during this time, the exemption could still potentially apply to your former Australian main residence.

For non-resident individuals, there will be a significant flow-on impact if the legislation passes Parliament as:

  • They will miss out on a full or partial exemption under the main residence rules.
  • They will generally be taxed at non-resident rates (i.e., no or only partial tax-free threshold).
  • The CGT discount percentage could be less than 50%.
  • The cost base reset rules that sometimes apply to provide an uplift in the cost base of the property to its market value at the time it is first rented out, are unlikely to apply, and
  • The foreign resident withholding rules could impact on the cash flow position of the vendor.

Currently, individuals are generally not subject to CGT on the sale of the home they treat as their main residence.
If the home was your main residence for only part of the ownership period or if the home is used to produce income (for example, you use part of the home as a business premises or rent out part of the property), then a partial exemption may be available. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out or indefinitely if you don’t rent it out (the ‘absence rule’).

The main residence exemption is currently available to individuals who are residents, non-residents, and temporary residents for tax purposes. Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 is currently before the House of Representatives and is not yet law.

While you should plan for change, do not act specifically on these impending changes until they have passed Parliament.

If you are concerned about how these impending changes may impact you, please contact us.

Quote of the month
What is the difference between a taxidermist and a tax collector?
The taxidermist takes only your skin.
Mark Twain

Vacant land deduction changes hit ‘Mum & Dad’
property developments

Legislation that passed through Parliament last month prevents taxpayers from claiming a deduction for expenses incurred for holding vacant land. The amendments are not only retrospective but go beyond purely vacant land.

Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to
claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs.

The new laws, aimed predominantly at Mum & Dads (individuals, closely held trusts and SMSFs), prevent these deductions from being claimed. Since the new laws apply retrospectively to losses or outgoings incurred on or
after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in
place, the amendments will not only impact those intending to develop vacant land but those who have already acquired land to develop. This is the same target as previous tax changes that denied travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties.

The changes however, go beyond purely vacant land for residential purposes. Deductions could also be denied for land with a building on it, if that building is not ‘substantial’. The only problem is, the legislation does not clearly define what ‘substantial’ means. The Bill suggests that a silo or shearing shed would be substantial but a residential garage for example, would not meet the test.

If the new measures prevent holding costs from being claimed as a deduction, then they will generally be added
to the cost base of the asset for capital gains tax (CGT) purposes. This means that they can potentially reduce any capital gain made when you dispose of the property in the future. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base and these costs cannot increase or create a capital loss on sale of a property.

On the positive side, vacant land leased to third parties under an arm’s-length arrangement may continue to be eligible for deductions for holding costs after 1 July 2019 if the land is used in a business activity. Also, land used in a primary production business will generally be excluded from the new rules. However, deductions could still potentially be lost (at least to some extent) if there are residential premises on the land or that are being constructed on the land.

There are also carve outs for land which has become vacant or which cannot be used to produce income for a
period of time due to structures being impacted by natural disasters or other events beyond the owner’s control.

The amendments do not apply if you (or certain related parties) carry on a business on the land or where the land is owned by companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.

Calculating Super Guarantee: The new rule

From 1 July 2020, new rules will come into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the
employer.

Under current rules, some employers are paying SG on the salary less any salary sacrificed contributions of the employee. Currently, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and they choose whether or not to include the salary sacrificed amounts in OTE.

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement. Let’s look at an example:

Pablo has quarterly Ordinary Time Earnings of $15,000 which would ordinarily generate an entitlement to $1,425 in SG contributions ($15,000 x 9.5%). He salary sacrifices $1,000 a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter.

However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer’s mandated SG obligation, and only makes a total contribution of $1,425, mostly consisting of the employee’s $1,000 salary sacrificed amount.

Under the new amendments, Pablo’s $1000 sacrificed contribution will no longer reduce the charge. Therefore,
the charge percentage would only be reduced by 2.83% ($425 / $15,000 x 100). As the employer is required to
contribute 9.5% of the OTE base, they must contribute an additional 6.67% to meet their minimum SG obligations. The employer has a shortfall of approximately $1,000 (6.67% x $15,000).

As sacrificed contributions no longer reduce the charge Pablo’s employer will need to contribute $1 425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, to avoid a shortfall and liability for the SG charge.

The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base.

Can the ATO take money out of your account? Your right to know

You might have seen the recent spate of media freedom advertisements as part of the Your Right to Know campaign. The prime-time advertising states that the Australian Tax Office (ATO) can take money from your account without you knowing. The question is, do you really know what powers the ATO have?

The ATO is one of the most powerful institutions in Australia with very broad and encompassing powers. Over
the last few years the approach has been to work with taxpayers to ensure that the tax they owe is paid. But this level of understanding only lasts so long and they will take action where taxpayers are unwilling to work with them, repeatedly default on an agreed payment plan, or don’t take steps to resolve the situation (these steps include an expectation that you go into debt to clear your tax debt). And, there are also circumstances where the ATO can swoop in where they believe there is a need to secure assets such as bank accounts if there is a risk of disposal or flight risk.

The ATO’s principal purpose is to collect the majority of the Federal Government’s revenue. According to an Inspector-General of Taxation’s report earlier this year, in 2016-17:

  • 88% of tax payments owing were made by the due date
  • 7% ($33.4bn) was paid within 90 days after the due date
  • 1.3% ($6.1bn) was paid within a year after the due date, and
  • $15 billion was left unpaid after a year.

At the end of the 2016-17 financial year, the total of undisputed collectable tax debt was $20.9 billion.

Here are just a few of the ATO’s powers to ensure that tax owing is collected:

  • Issue a garnishee notice to someone holding money on your behalf – for example a bank. For salary and wage earners, the ATO can require your employer to take part of your salary and pay it to them until your tax debt is paid. This is generally limited to a maximum of 30% of your salary. If you are a business, the ATO can go as far as accessing your merchant facility if you have credit owing.
  • Director penalty notice – Directors can personally incur penalties equal to their company’s unpaid PAYG
    withholding liabilities or superannuation guarantee charge. The Government wants to expand this to cover unpaid GST liabilities as well. If this debt is not paid, the ATO may issue a director penalty notice to start legal proceedings (and withhold any refunds due to the director).
  • Direction to pay super guarantee – if employers receive a direction to pay superannuation guarantee, any outstanding Superannuation Guarantee Charge must be paid within the period specified. It’s a criminal offence not to comply with this notice and may result in enforced penalties and/or imprisonment.
  • Impose a freezing order – for example, on your bank accounts. That is, without notice the ATO can freeze
    and then if required strip your accounts, particularly where they believe you have alternative sources of income. This freezing order cannot be initiated by the ATO but must be granted by a court.
  • Issue writs or warrants of execution, or warrants of seizure and sale. For example, they can force you to sell certain assets to pay your tax debts.
  • Winding up – liquidate your company or bankrupt you. Most taxpayers don’t believe how strongly the ATO will act. The ATO can commence winding up procedures before any dispute is decided. In 2017-18 the ATO bankrupted 470 taxpayers and wound up 1,282 entities. The ATO would argue that in many cases the wind up forces the inevitable and prevents further debt being incurred either to the ATO or other parties.

The message is, make sure you are on top of your paperwork. If the ATO has queries or suspects something is not right, you need to be able to respond. The longer you take, or a lack of evidence, will only escalate the situation.

So, can the ATO take money out of your account without advising you first? With the support of the courts, absolutely and a whole lot more.

Are you paying your staff correctly? Woolworths $200m plus remediation

Woolworths is the latest company facing a fallout from the underpayment of staff. In what is believed to be the largest remediation of its kind, Woolworths have stated that they have underpaid 5,700 salaried team members with remediation expected to be in the range of $200m to $300m (before tax).

The discovery was made as part of a 2 year review following the implementation of a new enterprise agreement but could have been occurring since the implementation of the modern award in 2010.

In a statement, Woolworths stated: The review has found the number of hours worked, and when they were worked, were not adequately factored into the individual salary settings for some salaried store team members.

Interim back payments will be made to affected staff identified in the initial review before Christmas. Woolworths states that full remediation will be made as soon as practicable to all other staff impacted.

We cannot stress the importance of ensuring that staff are paid at the correct rates. If staff are underpaid, it is not simply a matter of making a catch-up remediation payment. Underpayment of superannuation entitlements in particular will incur significant penalties and charges. To ensure that your staff are paid at the correct rate, check the Fair Work Ombudsman’s pay and conditions tool and see their guide to audit your pay rates.

Thoughts on Investing

Should you buy when markets are high?

We look at how you would have done in the past by investing at market all-time highs.

Thousands of hopeful shoppers log on, or line up, from the early hours knowing they’ll bag a bargain, at much less than full price.

We see similar behaviour in investing. There’s a tendency to wait until markets are ‘on sale’ to bag that bargain. The problem with this strategy is we never know when the next sale is coming up, or what the discount may be.

Also since markets generally trend upwards, there’s a chance the sale will never happen and you’ll end up buying even higher than today’s price!

Back in July 2019 we asked if Australian shares are expensive compared to history? We concluded that they were actually at long term historical average prices.

In this article we consider a different question: “should I invest when the market is high?^

Should you fear investing when markets have never been higher?

We look at how you would have done in the past by investing at market all-time highs.

Newsletter – October 2019

ATO take ‘gloves off’ on overseas income

Five years ago, the Australian Taxation Office (ATO) offered a penalty amnesty on undisclosed foreign income. Five years on, the ATO has again flagged that underreporting of foreign income is an issue but this time the gloves are off.

How you are taxed and what you are taxed on depends on your residency status for tax purposes. As tax residency can be different to your general residency status it’s important to seek clarification. The residency tests don’t necessarily work on ‘common sense.’ For tax purposes:

  • Australian resident – taxed on worldwide income including money earned overseas (such as employment income, directors fees, consulting fees, income from investments, rental income, and gains from the sale of assets).
  • Foreign resident – taxed on their Australian sourced income and some capital gains. Unlike Australian resident taxpayers, nonresident taxpayers pay tax on every dollar of taxable income earned in Australia starting at 32.5% although lower rates can apply to some investment income like interest and dividends. There is no tax-free threshold. Australian sourced income might include Australian rental income and income for work performed in Australia.
  • Temporary resident – Generally, those who have come to work in Australia on a temporary visa and whose
    spouse is not a permanent resident or citizen of Australia. Temporary residents are taxed on Australian sourced income but not on foreign sourced income. In addition, gains from non-Australian property are excluded from capital gains tax.

Just because you work outside of Australia for a period of time does not mean you are not a resident for tax purposes during that period. And, for those with international investments, it’s important to understand the tax status of earnings from those assets. Just because the asset might be located overseas does not mean they are safe from Australian tax law, even if the cash stays outside Australia. Don’t assume that just because your foreign income has already been taxed overseas or qualifies for an exemption overseas that it is not taxable in Australia.

How your money is being tracked

A lot of Australians have international dealings in one form or another. The ATO’s analysis shows China, the United Kingdom, Switzerland, Singapore and the United States are popular countries for Australians.

The ATO shares the data of foreign tax residents with over 65 foreign tax jurisdictions. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets, and other income. There is also data obtained from information exchange agreements with foreign jurisdictions.

In addition, the Australian Transaction Reporting and Analysis Centre (AUSTRAC) provides data to the ATO (and the Department of Human Services) on flows of money to identify individuals that are not declaring income or paying their tax.

It’s not uncommon for taxpayers to forget to declare income from a foreign investment like a rental property or a business because they have had it for a long time and deal with it in the local jurisdiction with income earned ‘parked’ in that country. However, problems occur when the taxpayer wants to bring that income to Australia,
AUSTRAC or the ATO’s data matching picks up on the transaction and then the taxpayer is contacted about the nature of the income. If the income is identifiable as taxable income (for example, from a property sale or income from a business), you can expect the ATO to look very closely at the details with an assessment and potentially penalties and interest charges following not long after. There is no point telling the ATO the money is a gift if it wasn’t, they can generally find the source of the transaction and will know it’s not from a very generous grandmother – misdirection is only going to annoy them and ensure that there is no leniency.

What you need to declare in your tax return

If you are an Australian resident, you need to declare all worldwide income in your tax return unless a specific exemption applies, although in some cases even exempt income needs to be reported. Income is anything you earn from:

  • Employment (including consulting fees)
  • Pensions, annuities and Government payments
  • Business, partnership or trust income
  • Crowdfunding
  • The sharing economy (AirBnB, Uber, AirTasker etc.,)
  • Foreign income (pensions and annuities, business income, employment income and consulting fees, assets and investment income including offshore bank accounts, and capital gains on overseas assets)
  • Some prizes and awards (including any gains you made if you won a prize and then sold it for a gain), and
  • Some insurance or workers compensation payments (generally for loss of income).

You do not need to declare prizes such as lotto or game show prizes, or ad-hoc gifts.

Do I need to declare money from family overseas?

A gift of money is generally not taxable but there are limits to what is considered a gift and what is income. If the
‘gift’ is from an entity (such as a distribution from a company or trust), if it is regular and supports your lifestyle, or is in exchange for your services, then the ATO may not consider this money to be a genuine gift.

I have overseas assets that I have not declared

Your only two choices are to do nothing (and be prepared to face the full weight of the law) or work with the ATO to make a voluntary disclosure. Disclosing undeclared assets and income will often significantly reduce penalties and interest charges, particularly where the oversight is a genuine mistake.

How to repatriate income or assets

Before moving funds out of an overseas account, company or trust it is important to ensure that you seek advice on the implications in Australia and the other country involved. This is a complex area and the interaction between the tax laws of different countries requires careful consideration to avoid unexpected consequences.

If you need to clarify your residency status for tax purposes or are uncertain about the tax treatment of income, please contact us today.

eggs_basketAre all your SMSF eggs in one basket?

The investment strategies of Self Managed Superannuation Funds (SMSFs) are under
scrutiny with the Australian Taxation Office (ATO) contacting 17,700 trustees about a lack
of asset diversity.

The ATO is concerned that, “a lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.”

This does not mean that you must have diversity in your fund. A lack of diversity might be a strategic decision by the trustees but you need to be able to prove that the strategy was an active decision. Section 4.09 of the Superannuation Industry (Supervision) Regulations require that trustees “formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity.” To do that you need to:

  • Recognise the risk involved in the investment, its objectives and the cash flow of the fund
  • Review the diversity of the investment strategy (or otherwise) and the exposure of a lack of diversity
  • Assess the liquidity of the investment and cashflow requirements of the fund
  • Assess the ability of the fund to discharge its liabilities, and
  • Review and have in place appropriate insurance cover for members and assets

Importantly, you need to be able to justify how you formulated your strategy if the ATO asks.

The 17,700 people being contacted by the ATO hold 90% or more of the fund’s assets in a single asset or single asset class.

Property is one of the problem areas the ATO is looking at. With property prices at a low point, the asset value of many funds has diminished.

In addition, debt taken on by SMSFs has significantly increased. The number of SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) to purchase property has increased significantly from 13,929 (or 2.9% of all SMSFs) in 2013, to 42,102 (or 8.9% of all SMSFs) in 2017. For SMSFs that have purchased property through an LRBAs, on average, these LRBAs represent 68% of total assets of the funds.

LRBAs are most common in SMSFs with a net fund size (total assets excluding the value of the amount borrowed) of between $200,000 and $500,000. In 2017, the average borrowing under a LRBA was $380,000 and the average value of assets was $768,600.

rental_property_apartmentRental property expenses – what you can and can’t claim

It’s not uncommon for landlords to be confused about what they can and can’t claim for their rental properties. What often seems to make perfect sense in the real world does not always make sense for the Australian Tax Office (ATO).

In general, deductions can only be claimed if they were incurred in the period that you rented the property or during the period the property was genuinely available for rent. This means a tenant needs to be in the property or you are actively looking for a tenant. If, for example, you keep the property vacant while you are renovating it, then you might not be able to claim the expenses during the renovation period if it was not rented or available for rent during this time (there are some exceptions to this general rule). There needs to be a relationship between the money you make and the deductions you claim. Here are a few common problem areas:

Interest on bank loans

Only the interest on repayments for investment property loans, and bank charges, are deductible – not the actual loan itself. Also, if a loan facility is used for multiple purposes then only some of the interest expenses might be deductible. For example, if some of the loan is used to acquire or renovate a rental property but further funds are drawn down to pay for a holiday then this is a mixed purpose loan and an apportionment needs to be undertaken.

Repairs or maintenance?

Deductions claimed for repairs and maintenance is an area that the ATO is looking very closely at so it’s important to understand the rules. An area of major confusion is the difference between repairs and maintenance, and capital works. While repairs and maintenance can often be claimed immediately, the deduction for capital works is generally spread over a number of years.

Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves restoring a worn out or broken part – for example, replacing damaged palings of a fence or fixing a broken toilet. The following expenses will not qualify as deductible repairs, but are capital:

  • Replacement of an entire asset (for example, a complete fence, a new hot water system, oven, etc.)
  • Improvements and extensions where you are going beyond the work that is required to restore the property back to its former state

Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible, even if you didn’t find out about the problem until later.

The sharing economy

The deductions you can claim for ‘sharing’ a room or an entire house are similar to rental properties. You can claim tax deductions for expenses such as the interest on your home loan, professional cleaning, fees charged by the facilitator, council rates, insurance, etc. But, these deductions need to be in proportion to how much and how long you rent your home out. For example, if you rent your home for two months of the financial year, then you can only claim up to 1/6th of expenses such as interest on your home loan as a deduction. This would need to be further reduced if you only rented out a specific portion of the home.

Friends, family and holiday homes

If you have a rental property in a known holiday location, the ATO is likely to be looking closely at what you are claiming. If you rent out your holiday home, you can only claim expenses for the property based on the time the property was rented out or genuinely available for rent and only if the property was not actually being used for private purposes at that time.

If you, friends or relatives use the property for free or at a reduced rent, it is unlikely to be genuinely available for
rent and as a result, this may reduce the deductions available. It’s a tricky balance particularly when you are only allowing friends or relatives to use the property in the down time when renting it out is unlikely.

A property is more likely to be considered unavailable if it is not advertised widely, is located somewhere unappealing or difficult to access, and the rental conditions – price, no children clause, references for short terms stays, etc., – make it unappealing and uncompetitive.

business_taxThe $11.1bn small business tax shortfall

Last month, the ATO released statistics showing small business is responsible for 12.5% ($11.1 billion) of the total estimated ‘tax gap’.

These new figures give visibility to tax compliance issues within the small business sector and indicate where we can expect ATO resources to be focussed now and in the future.

The tax gap estimates the difference between the tax collected and the amount that would have been collected if everyone was fully compliant with the law.

Australia’s small business community is doing comparatively well with international figures showing gaps in this same sector of between 9% and 30%.

ATO Deputy Commissioner Deborah Jenkins says that some small businesses are making mistakes with their
tax, but these are often unintentional errors which are easily fixed.

To combat these errors, the ATO have ramped up their ‘visits’ to small businesses to monitor compliance, and
educate business operators on compliance expectations with the goal of reducing the black economy (estimated to be 64% of the total small business tax gap). The ATO plans to visit almost 10,000 businesses this financial year.

If the ATO turn up at your business, they may spot check how you are recording your sales and the records for the past day or so. They may also check payroll records to ensure that staff are ‘on the books’ and superannuation entitlements are being met. If something does not look right in an initial assessment, it’s likely the ATO will expand their enquiries to other elements of the business.

The ATO states that the three main drivers of the small business income tax gap are:

  • Not declaring all income
  • Failing to account for the private use of business assets or funds, and
  • Not sufficiently understanding tax obligations.

The small business tax gap estimate is based on a sample of 1,398 randomly selected businesses for the 2015-16 income year (around 0.03% of the small business population). The ATO are looking to expand that sample to 2,000 businesses. However, one of the criticisms of the tax gap analysis has been the size of the sample group, particularly given that ATO resources are allocated on a return on investment basis.

Tips to make your business ATO proof:

  • Tax reporting is up to date
  • Systems are in place to manage your business, those systems are set up correctly, and you can explain how those system work
  • Payroll records are up to date and accurate
  • You can explain and provide evidence that your invoicing or receipts system works correctly and is well maintained.

Newsletter – July 2019

Super, insurance and exit fees: The 1 July changes

From 1 July 2019, new laws prevent superannuation funds from eroding member balances with unwanted or unnecessary insurance and exit fees. Plus, inactive accounts with low balances will be moved to the ATO to try and unite the unclaimed super with its owner.

These changes do not apply to selfmanaged superannuation funds or small APRA funds.

Insurance inside your fund

Up until 30 June 2019, superannuation providers were required to provide members with appropriate life and total and permanent disability (TPD) insurance inside superannuation on an ‘opt out’ basis. That is, the insurance was automatically put into place when you became a member of the fund.

The problem is that for a lot of people, such as young people with no dependants and those with insurance cover elsewhere, these default insurance premiums are a key factor in eroding their superannuation balances.

And in many cases, people simply did not realise they had insurance inside their funds.

New laws that came into effect on 1 July 2019 prevent superannuation providers from maintaining ‘default
insurance’ for any member with an account that has been inactive for a continuous period of 16 months unless that person has elected to maintain the insurance. An inactive account is one where no contributions or rollovers
have been received in the previous 16 month period.

For everyone else, insurance will remain a default on new and existing superannuation funds unless you specifically opt out.

What to do if you are affected

If you are affected, you need to make a decision about whether the insurance held in your fund is valuable to you. Often insurance cover through superannuation is cheaper than what you might be able to access elsewhere. Also, the premiums come out of your fund so they don’t impact on your cashflow. However, if the insurance is unnecessary or duplicated, the premiums will simply erode your account.

Employer default super funds generally provide death and TPD cover. This basic cover may be available without health checks. You can usually increase, decrease, or cancel your default insurance cover. Your super fund’s website will have a product disclosure statement (PDS) which explains the insurer they use and details of the cover available.

If you are affected, the insurance you hold inside your super fund may be cancelled unless you take action. If you choose to, you can keep your insurance by contacting your insurer (login to your insurer’s website and follow the links or call them to find out how to make the election) or by making a contribution. The election cannot be made over the phone to your fund.

Your superannuation provider is obliged to let you know if your insurance is about to be cancelled.

Low balance super accounts moved to ATO

Australians have over $17.5 billion in unclaimed superannuation. From 1 July 2019, superannuation providers will be required to report and pay inactive lowbalance accounts to the ATO. Twice a year, super funds will report and pay:

  • unclaimed super of members aged 65 years or older, non-member spouses and deceased members.
  • unclaimed super of former temporary residents.
  • small lost member accounts and insoluble lost member accounts.
  • inactive low-balance accounts.

A low balance account is one with less than $6,000. These new rules mean that if your superannuation account has less than $6,000, and the account has been inactive for 16 months, the balance will be transferred to the ATO who will attempt to consolidate your superannuation.

Reducing fees and charges

From 1 July 2019, exit fees including fees on partial withdrawals have been abolished for all superannuation fund
members regardless of their superannuation account balance.

Where a superannuation fund member’s final account balance is less than $6,000 in a year, new caps apply to the
fees that providers can charge. From 1 July 2019, administration and investment fees and other prescribed costs on these accounts will be capped at 3%. If the fund has charged more than 3%, the excess needs to be refunded within 3 months.

Single touch payroll exemption for directors and family members

The ATO has provided a concession from single touch payroll for payments by small employers to closely held payees.

Single touch payroll (STP) was extended to cover all employers on 1 July 2019. For directors of their own company or for family businesses employing family members, there are some practical problems with STP – sometimes they don’t know exactly what their salary or wages are for the year until just after the end of the financial year. STP however demands that payments are reported to the ATO in real time.

A new concession allows payments made by small employers with 19 or less employees to closely held payees, such as directors and family members, to be exempt from STP until 1 July 2020. Payments to arm’s length employees will need to be reported using STP.

There is no need for entities to apply to the ATO for the concession, although the ATO will need to be notified of
closely held payees. For 2019-20, employers using the concession will report as they have in the past, issuing payment summaries at year end to affected employees.

Who is a closely held employee?

A closely held payee is someone who receives non arm’s length payments, that is, they are directly related to the entity from which they receive payment. For example:

  • family members of a family business
  • directors or shareholders of a company
  • beneficiaries of a trust

What happens after 1 July 2020?

From 1 July 2020, employers making payments to closely held employees will have the option of reporting these
payments quarterly. The ATO expects the employer to make a reasonable estimate of year-to-date amounts up
to and including the last pay day of the relevant quarter.

Three methods could potentially be used for this purpose:

  • Withdrawals taken by the payee (but don’t include payments of dividends or payments which reduce liabilities owed by the business to the closely held payee).
  • Calculating 25% of the total salary or director fees from the previous year or the year of the last lodged tax return of the closely held payee.
  • Vary the previous years’ amount (to take into account trading conditions) within 15% of the total salary or directors fees for the current financial year.

If a business chooses to report closely held payees quarterly, they will have until the due date of their 2021 tax return to finalise the information that has been reported for the year and make any adjustments to the amounts that have been reported.

There are some practical problems still to be worked through, like what happens if you overestimate income and pay too much superannuation? Unlike tax payments, superannuation cannot normally be refunded if contributions exceeded the amount that was required to be paid.

60,000 Tax Cheat Tip-offs

Tip-offs to the Australian Taxation Office (ATO) have reached an all-time high with close to 60,000 tip-offs received between June and May 2019 – almost double the number of the previous year. The ATO thinks the number of tip-offs will reach around 70,000 for the full financial year.

Common problem areas that people feel obliged to report include suspected tax evasion, illegal phoenix activity, and the black economy. More than half of all tip-offs received were for suspected under reporting of income or about the cash economy, for example businesses demanding cash from customers or paying their workers cash in hand.

The effectiveness of the tipoff line has led the ATO to dub it the “crime stoppers” for tax.

ATO Assistant Commissioner Peter Holt suggests that the people doing the right thing “…have had enough of
competitors cheating the system and getting an unfair advantage.”

The tip-off line has been so successful that a new and improved “Tax Integrity Centre” launched this month to provide a single point of contact for reporting suspected tax evaders.

Some of the typical behaviours reported include:

  • Discounts for cash, cash deals without a receipt or a discount for cash/mates rates
  • Jobs paying cash wages without payslips or superannuation entitlements
  • Not ringing up a sale on the till or keeping the till drawer open
  • Having two sets of books
  • Deleting transactions on the point of sale system
  • Claiming work-related expenses the taxpayer is not entitled to
  • Attempts to avoid paying child support or other obligations by appearing to earn less income than what the person receives
  • Failing to lodge returns or keep records
  • Arrangements that promise tax benefits like fabricated deductions or schemes out of step with the intention of the law

Business owners are reported for:

  • Claiming personal expenses on a business account so they can claim deductions
  • Paying employees late or less than they should
  • Not paying superannuation or other employee entitlements

The top 5 ‘tip-offs’ to the ATO

  • Under-reported income 31%
  • cash economy 27%
  • non-lodgment 25%
  • inadequate or no
  • superannuation paid 8%
  • over-stating expenses 3%

Laundry expenses hung out to dry

The ATO is airing the ‘dirty laundry’ on work-related clothing and laundry expenses warning that it is closely reviewing claims.

“Last year around 6 million people claimed work-related clothing and laundry expenses, with total claims adding up to nearly $1.8 billion. While many of these claims will be legitimate, we don’t think that half of all taxpayers would have been required to wear uniforms, protective clothing, or occupation-specific clothing,” Assistant Commissioner Kath Anderson said.

Clothing claims are up nearly 20% over the last five years and the ATO believes taxpayers are making common mistakes and errors like claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated. In some cases, the ATO will ask employers if
they require their employees to wear a uniform to check the validity of claims made.

In one case highlighted, a car detailer claimed work related laundry expenses of over $20,000 per year over two
years. It seems that the taxpayer worked out how many hours he spent doing his laundry then multiplied that by what he thought was a reasonable hourly rate ($227 per hour because his personal time was valuable).
Needless to say, the taxpayer’s claim was reduced to $0.

It’s not just large claims that the ATO is reviewing but claims up to the $150 substantiation threshold. Claims over $150 have to be substantiated with receipts for expenses. Below this level taxpayers are not required to keep normal records. The ATO believes that a lot of taxpayers are simply ticking the box thinking that the claim is a ‘standard deduction’ but it’s not an automatic entitlement.

“Just to be clear, the $150 limit is there to reduce the record-keeping burden, but it is not an automatic entitlement for everyone. While you don’t need written evidence for claims under $150, you must have spent the money, it must have been for uniform, protective or occupation-specific clothing that you were required to wear to earn your income, and you must be able to show us how you calculated your claim,” Ms Anderson said.

Who owns the assets of a trust?

It’s not uncommon for people to put assets such as their family home into a trust, particularly professionals working in litigious fields or family groups wanting to protect assets. A recent case highlights some of the tax problems that can occur.

The taxpayer in this case had become the owner of their main residence as a result of a Family Court order. At that time, they caused the property to be held in the name of a trust (with a corporate trustee of which the taxpayer was a director).

4 years later when the property was sold, the taxpayer sought to access the main residence exemption to exempt the property from capital gains tax (CGT). Afterall, it was their main residence. However, the ATO saw it a different way. Instead, they saw the proceeds of the sale of the property as a distribution from the trust to the beneficiary. Therefore, the main residence exemption could not apply as it generally only applies to an individual taxpayer.

The ATO has previously indicated that the main residence exemption can apply in situations where a property is held in trust but the individual living in the dwelling is “absolutely entitled” to the property as against the trustee.

The taxpayer argued that the property was not an asset of the trust but was held by the trustee in a different capacity (effectively as a bare trustee) and that the taxpayer was absolutely entitled to the asset – citing the terms of the Family Court order as evidence.

However, the Federal Court agreed with the ATO.

The decision relied heavily on the evidence surrounding the transfer of the property to the trustee. While the Family Court orders allowed the property to be transferred to the taxpayer or a nominee, rather than specifically providing that the taxpayer was to have ownership of the property, there was not enough evidence to prove that the property was held under a bare trust arrangement and that the taxpayer was an absolutely entitled beneficiary.

Working against the taxpayer was the evidence that suggested that the property was a trust asset. The taxpayer had agreed to the transfer, had signed financial statements that identified the property as a trust asset, the proceeds from the sale were accounted for as an asset of the trust, and there was a valid resolution by the trustees distributing the net capital gain to the taxpayer.

In effect, without explicit documentation stating that the property was held on bare trust for the taxpayer at the time of the transfer, it did not matter that all the parties involved thought things were structured differently. The
case also shows how important it is for everyone to understand the implications of what is presented in the financial records. The actions of the taxpayer in this case when they signed off the accounts was a factor that led to the Court to determine that the property was an asset of the trust.

Newsletter – June 2019

Tax time: Are you in the ATO’s sights?

A consistent theme this tax time is overclaiming and under reporting. With the Australian Taxation Office (ATO) getting more and more sophisticated in its data matching approaches, taxpayers can expect greater scrutiny where their claims are more than what is expected. We take a look at the key issues.

What’s new

Live reporting through Single touch payroll

Single touch payroll (STP) reporting has changed the way businesses report salary and wages, PAYG withholding and superannuation contribution information to the ATO. For the 2018-19 financial year, only businesses with 20 or more employees were required to use STP. From 1 July 2019, all businesses will need to use STP although there is some leniency for micro businesses struggling with implementation.

STP means that employers will no longer issue Payment Summaries, instead a finalisation declaration will generally need to be made by 14 July (the deadline is 31 July 2019 for businesses using single touch payroll for the first time in 2018-19).

If your employer has used STP in 2018-19, you can access your Income Statement from myGov. Through your myGov account, you will be able to see your year to date tax and superannuation information within a few days of your employer paying you.

For you

Work related deductions

Last financial year, over 8.8 million taxpayers claimed $21.98 billion in deductions for work related expenses. It’s an area under intense review by the ATO. If you claim workrelated deductions, it’s important to ensure that you
are able to substantiate any claim you make.

To claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business, in most cases you need a record proving you incurred the expense, and the expense has to be directly related to how you earn your income – that is, the expense is directly (not sort of) related to your work. This also means ensuring that you only claim the work-related portion of items you use personally, such as mobile phones or internet services.

When you don’t have to keep records

If your claim for work related deductions is below $300 you do not have to keep a record of the expense, such as a receipt. Work related clothing has a $150 record keeping limit. However, the ATO is concerned that taxpayers are ‘automatically’ claiming these deductions without incurring any expenses because of a belief that you don’t have to support the claim. If you have claimed an amount up to the record keeping threshold, you may find that the ATO will ask you to explain how you came to that amount. If you don’t have diary entries or a good explanation, your claim might be denied.

Working from home

If you don’t have a dedicated work area but you do some work on the couch or at the dining room table, you can
claim some of your expenses like the work-related portion of your phone and internet expenses and the decline in value of your computer. If you have a dedicated work area, there are a few more expenses you can claim including some of the running costs of your home such as a portion of your electricity expenses and the decline in value of office equipment.

If your home is your principal place of business, you might be able to claim a range of expenses related to the
portion of your home set aside for your business. What the ATO is looking for is an identifiable area of the home
used for business.

Ensure any claims are in proportion to the work related use. You can’t, for example, claim all of your internet expenses because you do a bit of work from home in the evenings and need the internet.

Work related clothing

In general, you cannot claim the cost of your work clothes or dry cleaning expenses unless the clothes are
occupation specific, such as chefs whites or a uniform with a logo, or protective gear because your workplace has
hazards (jeans don’t count as protective wear).

Just because you have to wear a suit to work does not make it deductible.

Cryptocurrency

The ATO has a special taskforce dealing specifically with cryptocurrency. Cryptocurrency is considered an asset for tax purposes, rather than a form of currency. This means that gains or losses made on disposal or exchange
of cryptocurrency will often be captured under the tax system – regardless of whether you’re switching between currencies or ‘cashing out’ your asset into AUD.

You will need to keep records of all of your trades in order to work out whether you’ve made a taxable gain or loss each time you dispose of an asset.

Capital gains tax can be complex and this is an area that the ATO is looking very closely at, particularly where
taxpayers are claiming large losses. Also, some disposals can be taxed as ordinary income which means the CGT
discount cannot apply and capital losses cannot be applied against the gains that have been made.

Rental property deductions

In the 2017-18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions and the
ATO believes that is too much – one in ten is estimated to contain errors.

What you can claim for your rental property has been significantly curbed. For example, you can no longer
claim deductions for the cost of travelling to inspect the property. And, you can no longer claim depreciation
deductions for second hand plant and equipment. Previously, you could for example, buy a rental property
from someone else and then claim depreciation on the assets already in the property such as the kitchen appliances and carpet. From 1 July 2017, you can only claim deductions for new assets you purchase and install in the property.

4,500 audits of rental property deductions will be undertaken this year with the focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing. Deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim.

When you own a share in a property

For tax purposes, rental income and expenses need to be recognised in line with the legal ownership of the property, except in very limited circumstances where it can be shown that the equitable interest in the property is different from the legal title. The ATO will assume that where the taxpayers are related, the equitable right is the same as the legal title (unless there is evidence to suggest otherwise such as a deed of trust etc.,).

This means that if you hold a 25% legal interest in a property then you should recognise 25% of the rental income and rental expenses in your tax returns even if you pay most or all of the rental property expenses (the ATO would treat this as a private arrangement between the owners).

The main exception is that if the parties have separately borrowed money to acquire their interest in the property
then they would claim their own interest deductions.

Earning money from the sharing economy

Income earned from the sharing economy, AirBNB, Uber, AirTasker etc., must be declared in your tax return. But
you may also be able to claim proportional expenses associated to providing the service. Ensure that any deductions you claim are related to providing the service itself (not just switching on the app or making yourself available).

If you are a driver with Uber or another platform, you will need to be registered for GST regardless of how often you drive.

Your superannuation

Not making your full superannuation contribution? Now you can catch up

This year is the first year of new measures that enable people who have been out of the work force, like new
Mums, to top up their superannuation.

If you have:

  • A total superannuation balance below $500,000 as at 30 June; and
  • Not utilised your entire concessional contributions cap ($25,000) for the year

then you can ‘carry forward’ the unused amount on a rolling 5 year basis.

For example, if your total concessional contributions in the 2018-19 financial year were $10,000 and you meet
the eligibility criteria, then you can carry forward the unused $15,000 over the next 5 years. You may then be able to make a higher deductible personal contribution in a later financial year. If you are selling an asset and likely to make a taxable capital gain, a higher deductible personal contribution may assist in reducing your tax liability in
the year of sale.

Remember:

  • Your total superannuation balance must be below $500,000 as at 30 June of the prior year before you
    utilise any carried forward amount (within the 5 year term); and
  • In some cases, an additional 15% tax can apply (30% total) to concessional contributions made to super
    where income and concessional contributions exceeds certain thresholds ($250,000 in 2018-19). Your
    income could be higher than usual in the year when you sell an asset for a capital gain.

Your business

There are around 3.8 million small businesses, including 1.6 million sole traders in Australia. They employ around
5.5 million people and contribute $380bn to the economy. Small business is also in debt to the ATO to the tune of $15bn.

This tax time, the ATO has stated they are looking closely at taxpayers:

  • setting up or changing to a company structure
  • claiming motor vehicle expenses
  • who may not be correctly apportioning between personal and business use

There are a multitude of datamatching programs and benchmarks to catch out those attempting to rort the system.

For wealthy groups and medium businesses, the focus is on structuring to avoid tax:

  • international risk – international profit shifting and corporate restructuring
  • inappropriate arrangements that seek to extract profits or capital without the right amount of tax being paid
  • high risk trust arrangements attempting to gain advantage beyond ordinary trust arrangements or tax
    planning associated with genuine business or family dealings.

If the ATO suspect there is a problem, you may be contacted to justify why decisions were made to structure your affairs or the affairs of your company in a particular way.

No tax deductions if you don’t meet your tax obligations

From 1 July 2019, if taxpayers do not meet their PAYG withholding and reporting obligations, they will not be able to claim a tax deduction for payments:

  • of salary, wages, commissions, bonuses or allowances to an employee;
  • of directors’ fees;
  • to a religious practitioner;
  • under a labour hire arrangement; or
  • made for services where the supplier does not provide their ABN.

The main exception is where you realise there is a mistake and voluntarily correct it before the ATO begins a
review or audit. In these circumstances, a deduction may still be available if you voluntarily correct the problem
but penalties may still apply for the failure to withhold the correct amount of tax. There is also an exception for situations where you make payments to a contractor but then later realise that they should have been paid as an employee, as long as the worker has provided an ABN.

The Government has also proposed that from 1 July 2021, the ABNs of those required to lodge a tax return but have not done so will be cancelled, and from 1 July 2022, ABN holders will be required to confirm the accuracy of their Australian Business Register details each year.

Recording payments to contractors

The taxable payments reporting system requires businesses in certain industries to record and report payments made to contractors to the ATO.

From 1 July 2019, security providers and investigation services, road freight transport, and computer system design and related services businesses will need to collect specific information in relation to payments made to contractors (individual payments and total for the year). These businesses will need to lodge an additional report to the ATO with this information. The first report will be due by 28 August 2020.

Businesses within the building and construction industry, cleaning, and courier services need to report payments to contractors in the year ending 30 June 2019 by 28 August 2019.

This reporting requirement is focussed on industries identified as active participants in the black economy, raising
around $2.7bn per year in income and GST liabilities.

Your trust

Timing of resolutions

Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make
by 30 June 2019 at the latest (the trust deed may actually require this to be done earlier). Decisions made by the trustees should be documented in writing, preferably by 30 June 2019.

If valid resolutions are not in place by 30 June 2019, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).

TFN reporting

Has your trust lodged TFN reports for all beneficiaries?

Trustees of closely held trusts have some additional reporting obligations outside the lodgement of the trust tax
return each year. The ATO is currently reviewing trustees to ensure their compliance with these obligations, particularly the requirement to lodge TFN reports for beneficiaries.

Where beneficiaries have quoted their TFN to the trustee, trustees are required to lodge a TFN report for each beneficiary. The TFN report must be lodged by the end of the month following the end of the quarter in which a
beneficiary quoted their TFN. For example, if the trustee receives a beneficiary’s TFN in April, they must lodge a TFN report by the end of July.

Where a TFN has not been provided by a beneficiary, the trustee is required to withhold tax at a rate of 47% and pay this to the ATO. The trustee must also lodge an annual report of all amounts withheld.

Failure to comply with the TFN reporting and withholding requirements may incur penalties.

If you are concerned about any of the issues raised, please call us – we would be happy to help you.

Quote of the month
“We contend that for a nation to try to tax itself into prosperity is like a
man standing in a bucket and trying to lift himself up by the handle.”

-Winston S. Churchill

How to Prepare for a Tax Office Visit

The Tax Office is actively targeting geographic areas for special visits as part of a nationwide crackdown on the black economy.

The ATO plan on visiting over 10,000 businesses in the new financial year, hunting out those hiding sales, paying
cash in hand, or underpaying workers. And, they have a plethora of case studies to support the effectiveness of
these visits, like the $2m in undeclared income for a series of nail salons owned by the one taxpayer. The ATO’s
interest was initially piqued by anomalies between the owner’s lifestyle and assets, and the income being declared from the salons. In another case a restaurant owner was only declaring eftpos payments and not cash payments received (the cash was kept in a shoe box). An audit revealed unreported income and overclaimed expenses of around $1.1m.

So, what is it about a region that makes it a target? The ATO says they exhibit some statistical anomalies, for
example, a higher number of businesses not registered for PAYG or GST. Other indicators include businesses that:

  • Operate and advertise as ‘cash only’ or mainly deal in cash
  • ATO data matching suggest don’t take electronic payments
  • Are part of an industry where cash payments are common
  • Indicate unrealistic income relative to the assets and lifestyle of the business and its owner
  • Fail to register for GST, lodge activity statements or tax returns
  • Under-report transactions and income according to third-party data
  • Fail to meet super or employer obligations
  • Operate outside the normal small business benchmarks, or
  • Are reported to the ATO by a member of the community.

If ATO officers turn up at your business, they may ask you to show them how you record your sales and ask to
see the records for the past day or so. If there appear to be anomalies in your reporting, further action might be taken.

They may also check payroll records to ensure that staff are ‘on the books’ and superannuation entitlements
are being met. A classic problem area is cash payments or poor records for family working in the business. If a family member is employed, unless they are a Director of the business, you need to meet the same standards as if they were not related including minimum wage, PAYG withholding and superannuation guarantee payments.

What you can do to prepare for an ATO visit:

  • Have great records, particularly if your business predominantly uses cash.
  • Make sure your paperwork is up to date – invoicing for services provided, recognition of expenses (with receipts), salaries and cash taken out of the business by the owners.
  • Ensure staff are recording sales and expenses correctly.
  • Ensure your business has a separate bank account – it cannot be your personal bank account.

Newsletter – Pre-Election 2019

What you can expect after the election

Headlines only explain so much. In this special update, we examine where the 2019-20 Federal Budget left us, and the pivotal policies from the ALP on tax, superannuation and business.

There are no guarantees, however, that any policies or announcements not already legislated will come to fruition-that will depend on the Senate composition. At the next election, 40 of the 76 Senate seats will be contested – 6 in each State and 2 in the Territories. The final Senate composition will determine what policies become a reality, the more controversial the policy the less likely it is to pass the Senate. Let’s take a look!

Budget 2019-20: The pre-election announcements that are now law

The Federal Budget announced a series of measures, some of which were legislated before the election was called.

 

Extension and increase to the instant asset write-off

The popular instant asset write-off for small business has been extended and increased. The new laws:

  • increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
  • enables businesses with aggregated turnover of $10 million or more but less than $50 million to access instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.

Assets will need to be used or installed ready for use from Budget night until by 30 June 2020 to qualify for the higher threshold. Anything previously purchased does not qualify for the higher rate but may qualify for the $20,000 or $25,000 threshold. Similarly, anything purchased but not installed ready for use by 30 June 2020 will not qualify.

The instant asset write-off only applies to certain depreciable assets. There are some assets, like horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc., that don’t qualify.

For assets costing $30,000 or more

For small businesses (aggregated turnover under $10m), assets costing $30,000 or more can be allocated to a
pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $30,000 at the end of the income year, then the remaining pool balance can be written off as well.

The ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out) will continue to be suspended until 30 June 2020.

Pooling is not available for medium sized businesses which means that the normal depreciation rules based on
the effective life of the asset will apply to assets that don’t qualify for an immediate deduction. The amendments apply from 7.30 pm legal time in the Australian Capital Territory on 2 April 2019 until 30 June 2020.

One-off energy assistance payments

A one-off energy assistance payment of $75 for singles and $62.50 for each eligible member of a couple, will be
made to predominantly pension and social welfare recipients who were residing in Australia on 2 April 2019. The payments are expected to be completed by 30 June 2019.

Medicare levy and surcharge income threshold increase

The Medicare levy low income thresholds for singles, families, and seniors and pensioners will increase from the 2018-19 income year, meaning more people will be excluded from paying the levy.

North QLD flood recovery

Grants are treated as nonassessable non-exempt income if they:

  • are Category C or D measure disaster recovery grants paid to small businesses, primary producers or non-profit organisations; and
  • relate to flooding that commenced in Australia in the period between 25 January 2019 and 28 February
    2019 (inclusive).

As a result, Category C and D measure grants to small businesses, primary producers and non-profit organisations affected by floods in North Queensland in late January 2019 and that continued into February 2019 are non assessable non-exempt income.

And, grants to primary producers are non-assessable non-exempt income if the grants are for repairing or replacing farm infrastructure, restocking or replanting, and they are provided for the purposes of an agreement between the Commonwealth and a State or Territory to assist primary producers affected by the flooding.

As a result, such grants to primary producers in North Queensland affected by floods in late January 2019 that
continued into February 2019 are non-assessable nonexempt income.

ATO doubles rental deduction audits

In the 2017-18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions and the Australian Taxation Office (ATO) thinks that is too much – one in ten is estimated to contain errors.

4,500 audits of rental property deductions will be undertaken this year with the focus on over claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others,
and omitted income from accommodation sharing. Deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim. In one case exposed by the ATO, a taxpayer had to pay back $12,000 in claims for deductions against a holiday home that was not genuinely available for rent and was blocked out during the holiday season. In another, a taxpayer paid back $5,500 because they had not apportioned their rental interest deduction to account for redraws on their investment loan to pay for living expenses.

A Labor Government on Tax & Super

Tax on investment property

In general, taxpayers are able to deduct from their assessable income any expenses they incur generating or producing that income. An investment is negatively geared when the cost of owning the asset is more than the return. Negative gearing is not limited to property but can apply to other assets such as shares. In 2016-17, Australians claimed $47.5 billion in rental deductions against gross rental income of around $44.1 billion.

A number of capital gains tax (CGT) exemptions potentially apply to investment property. For Australian resident
individuals, a 50% CGT discount applies to net capital gains made on investments held for longer than 12 months. In addition, a taxpayer’s main residence is exempt from CGT. As part of this exemption, a taxpayer can be absent
from their main residence for up to 6 years and still claim the property as their main residence (assuming they do not treat any other property as their main residence). So, the property can be used as an investment property for 6 years but then sold as the taxpayer’s main residence.

Labor’s plan seeks to:

  • Limit negative gearing to new housing from 1 January 2020. All investments made prior to
    this date will not be affected by the changes and will be fully grandfathered. The ALP states that the grandfathering element of the policy applies to property and assets purchased prior to the start
    date of the policy. “This means, for example, that if you own a property prior to 1 January 2020, you are able to negatively gear it after that date.”
  • Halve the capital gains tax discount for all assets purchased after 1 January 2020. This will reduce the CGT discount for assets held longer than 12 months from 50% to 25%. Once again, all investments made prior to the 1 January 2020 will be fully grandfathered. The changes will not apply to superannuation funds or to the 50% active asset reduction concession that applies to small businesses.

There is no policy statement from the ALP on the main residence exemption. The Morison Government had introduced legislation to remove access to the main residence CGT exemption for non-resident taxpayers, but
this Bill stalled in the Senate. Chris Bowen told the Australian Financial Review that it will be up to the ALP to
work through outstanding tax measures and “iron out any unintended consequences” including the impact on expats and retrospectivity.

Dividend imputation and the impact on self-funded retirees

One of the more controversial measures announced by the ALP is the reform of the dividend imputation credit
system to remove refundable franking credits from shares. The measure, as announced, would apply to individuals and superannuation funds, and exclude Australian Government pension and allowance recipients, and tax exempt bodies such as charities and universities. SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes. The policy is intended to apply from 1 July 2019.

How does the system currently work?

A dividend is a shareholder’s share of a company’s earnings (profits). When a dividend is paid from an Australian
company’s after-tax profits, these are known as franked dividends and include a franking credit (imputation
credit), which represents the amount of tax already paid by the company on the underlying profits that are being paid out in the form of a dividend.

An Australian resident shareholder pays tax on dividends they receive (as dividends are treated as income). If the dividend received is a franked dividend, the shareholder includes the franking credits in their income (i.e., a gross-up occurs) but they can then use the franking credit attached to the dividend to reduce their tax liability. If the credit exceeds their tax liability for the year then they receive a cash refund for the excess amount. For example, an SMSF owns shares in a company. The company pays the SMSF a fully franked dividend of $7,000. The dividend statement says there is a franking credit of $3,000. The $3,000 represents the tax the company has already paid
on its profits. This means the profit, before company tax was subtracted, would have been $10,000 ($7,000 +
$3,000). The SMSF must declare $10,000 worth of income and will receive the $3,000 as an offset.

The sensitivity of the issue

The sensitivity of this issue is how the dividend imputation system interacts with the way superannuation is taxed. Currently, income an SMSF earns from assets held to support retirement phase income streams (i.e., a pension), such as dividends from shares, is tax-free. That is, a self-funded retiree in some circumstances pays no tax on the income they earn from dividends. If they pay no tax, then any franking credits are paid as a cash refund.

If the ALP policy comes to fruition, these self-funded retirees lose this cash payment unless they are also Australian Government pension and allowance recipients.

Who will be impacted by the change?

Based on information from Treasury, 85% of the value of franking credit refunds go to individuals with a taxable
income below $87,000. That is, 97% of taxpayers receiving refunds have a taxable income below $87,000. And, more than half of those receiving a franking credit refund have a taxable income below the tax free threshold of $18,200. Around 40% of SMSFs receive a franking credit refund.

Around 1.1 million individuals received a franking credit refund in 2014-15 with more than half of these over the age of 65. And, more than two thirds of refunds to SMSFs are to those whose fund balance per member is greater than $1 million. However, this figure is likely to be diminished by the 1 July 2017 reforms that imposed a $1.6m cap on retirement phase superannuation accounts and tax earnings on accumulation accounts.

The Parliamentary Budget Office has also outlined what behavioural changes they expect to see in the market as
a result of making franking credits non-refundable. These include shifting from shares to alternative investment
arrangements, and couples shifting ownership of shares from the lower income earner to the higher income earner to utilise the franking credits as a non‐refundable tax offset.

The most significant behavioural change is expected to be from SMSF trustees: “The assumed behavioural response for SMSFs in 2019‐20 is equivalent to these funds, in aggregate, moving around a quarter of the value of their listed Australian shares into APRAregulated funds that are in a net tax‐paying position.”

The alternative, of course, is for SMSFs to change their composition of Australian shares to reduce their holding.
The Parliamentary Budget Office also notes that one potential outcome is that SMSFs will increase the number of taxpaying members. “For instance, a couple with an SMSF in the pension phase could invite two additional working‐aged children into their fund, allowing them to use their excess franking credits to offset the contributions and earnings tax payable on the assets owned by their children.”

Minimum 30% tax on discretionary trust distributions

There are around more than 690,500 discretionary trusts, also known as family trusts, in Australia. Discretionary trusts are popular as the trustee has the discretion on how to pay the income or capital of the trust to the beneficiaries – beneficiaries do not have an interest in the trust. Income can be apportioned by the trust to the beneficiaries on a discretionary basis, for example, to beneficiaries on a lower income tax bracket. As a result, discretionary trusts are often used to protect assets within family groups, manage succession, and to distribute
income tax effectively within that group.

From 1 July 1979, laws were introduced to ensure that distributions to minors were taxed at the top marginal tax
rate to prevent trusts distributing funds to children at minimum tax rates.

The proposed reforms

The ALP reforms address the ability for distributions to be channeled to beneficiaries in low income tax brackets.
Instead, a new standard minimum rate of tax for discretionary trust distributions to mature beneficiaries (aged over 18) of 30% will apply.

Tightening of superannuation framework

Mr Shorten told a media conference in April that the ALP had “no plans to increase taxes on superannuation.” ALP
policy however does recommend changes in a series of areas. These include:

  • Non-concessional contributions – the nonconcessional contributions cap (the amount you can contribute to super from your after-tax income), will be reduced to $75,000 from 100,000.
  • Division 293 tax – High income earners pay an additional 15% tax on their concessional taxed contributions to superannuation. Currently, the threshold at which this tax applies is $250,000. The ALP intends to reduce this threshold to $200,000.
  • Remove the ability to ‘catch up’ superannuation concessional contributions – Individuals with a total superannuation balance of less than $500,000 just before the start of the financial year are top up their concessional contributions in that financial year by using their unused concessional contribution cap amounts carried forward from the previous five years. This measure can only be applied to unused cap amounts from
    the 2018-19 year. The ALP intends to remove the ability to use unused cap amounts.
  • Remove measures expanding tax deductibility for super contributions – Under the super reform measures, the ‘substantially self-employed test’ (‘10% test’) was removed. This enabled taxpayers, regardless of their work status (but otherwise eligible to contribute) to claim a tax deduction on their personal super contributions. The ALP intends to unwind these reforms.

Newsletter – March 2019

Single touch payroll extended to all employers

From 1 July 2019, single touch payroll – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – will apply to all employers. What employers need to report will also be extended to include certain salary sacrificed amounts.

Employers with 20 or more employees have been required to use single touch payroll since 1 July 2018. The new rules push all businesses with employees into the single touch payroll system. This includes the situation where
payments are made to the owners of the business in the form of salary, wages or directors fees.

The ATO has asked software providers to provide new lowcost payroll options for micro employers (1-4 employees). MYOB and Xero have announced new $10 per month offerings (limited to 4 employees) with other software houses following suit.

The ATO also states that to assist micro employers there will be, “a number of alternate options that are not available to employers with 20 or more employees – such as initially allowing your registered tax or BAS agent to report quarterly, rather than each time you run your payroll.”

While the start date for small employers will technically start on 1 July 2019, the Commissioner of Taxation released a statement indicating that small employers can actually start reporting through single touch payroll any time from 1 July 2019 until 30 September 2019. No penalties will be applied to mistakes, missed or late reports for the first year.

Plus, if your business is in an area with no viable internet connection, such as some rural and remote regions, then exemptions may apply.

Under 20 employees? What you need to do

1 July 2019 is not that far away. If your business does not already use STP compliant software, you may need to
upgrade your systems or implement new ones.

STP requires PAYG withholding and superannuation contribution details to be reported to the ATO as payments are made to employees or superannuation funds.

When it comes to PAYG withholding, employers will report details of salary and wages paid to employees as well as the PAYG withholding amount at the time the payment is made to the employee. Employers have the option of paying the PAYG withholding liability at the same time, although this is not compulsory.

What needs to be reported:

  •  Salary & wages
  • Director remuneration
  • Return to work payments to individuals
  • Employment termination payments (ETPs) – not compulsory if the employee has died
  • Unused leave payments
  • Parental leave pay
  • Payments to office holders
  • Payments to religious practitioners
  • Superannuation contributions (at the time the payment is made to the fund)
  • Salary sacrificed amounts (from 1 July 2019).

Employers with poor super guarantee payment history outed

Underpayment or nonpayment of superannuation guarantee (SG) is a big issue. New laws will enable the ATO to advise employees (or former employees) of their employer’s poor SG payment and reporting history.

If an employer makes a complaint to the ATO, then a taxation officer is able to make a record or advise the employee about a failure or suspected failure by their employer or former employer to comply with their SG obligations. They can also share the Tax Commissioner’s response to the complaint. So, if the Commissioner finds
there is a problem with SG payments, they can disclose this information to the complainant.

If you have any concerns about how impending legislation may impact on you, please give the team a call and we
would be happy to clarify your position.

Quote of the month
“Give me six hours to chop down a tree and I
will spend the first four sharpening the axe.”
-Abraham Lincoln

Legislation in limbo

A budget, an election, and the legislation that hasn’t made it through.

The February 2019 Parliamentary sitting days were the last opportunity before the Federal Budget for the Government to introduce or push through new legislation. Next month, on 2 April, Parliament reconvenes for the Federal Budget and it’s likely that an election will be called very soon after that (18 May 2019 is the last possible date for the election of the House of Representatives). Any legislation that has not passed when the election is called basically goes back to the drawing board and may never be enacted.

With the focus of politicians firmly on the impending election and the asylum seeker debate, and the Government now in an untenable position following the loss of its majority in the lower house, tidying up outstanding business legislation was not the priority in February, and as a result, several key pieces of legislation are in limbo.

Extension of the $20k instant asset write-off

Originally introduced in the 2015-16 Budget, the popular $20k instant asset write-off has been extended across
consecutive years. At present, small businesses are able to immediately deduct purchases of eligible assets costing less than $20,000 that are first used or installed ready for use by 30 June 2019.

In a pre-election sweetener, the Government announced that the threshold for the small business instant asset
write-off will increase to $25,000 and the timeframe to claim the increased write-off extended from 29 January
2019 until 30 June 2020.

The Bill enabling the changes was rushed into Parliament in February. While the upcoming Budget will provision for the measure, the outcome of the next election may determine whether the change comes to fruition.

Removing the CGT main residence exemption for nonresidents

Currently, individuals are generally not subject to capital gains tax (CGT) on the sale of the home they treat as their main residence. If the home was your main residence for only part of the ownership period or if the home is used to produce income (for example, you use part of the home as business premises or rent out part of the property), then a partial exemption may be available. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out or indefinitely if you don’t rent it out (the ‘absence rule’).

“…any employer who made a voluntary
disclosure to the ATO will not benefit from
the reduced punitive penalties unless the
legislation passes, which at this stage, is
highly unlikely…”

The main residence exemption is currently available to individuals who are residents, non-residents, and temporary residents for tax purposes.

In the 2017-18 Federal Budget, the Government announced that non-residents and temporary residents would no longer have access to the main residence exemption under the CGT rules. The Government later confirmed
that the exemption would still be available to temporary residents as long as they were residents of Australia under the normal residency tests.

The proposed rules would prevent non-residents from claiming the main residence exemption even if they were a
resident for some (or even most) of the ownership period. The proposed rules do not allow for partial exemptions. If, however, you are an Australian resident at the time you sell, then the normal main residence exemption rules apply, even if you were a non-resident for some or most of the ownership period. The draft laws become even more complex when dealing with deceased estates.

Under the proposed new laws, the transitional period for non-residents to make arrangements to either sell their property or restructure their affairs, ends on 30 June 2019. The transitional period applies if the property was held at 9 May 2017 and is sold under a contract entered into on or before 30 June 2019. If there is no contract of sale in place by 30 June 2019, then the main residence exemption will not apply if the individual is a non-resident when the sale takes place.

With the legislation stalled in the Senate, non-residents are in a precarious scenario. If the legislation is enacted with the current deadlines, it will now be difficult to sell any property in time to meet the transitional period
requirements.

We expect that the timing of the main residence exemption amendments will be addressed in the upcoming Federal budget. We will keep you posted!

Employer Superannuation Guarantee amnesty

Back in May 2018, the Government announced an amnesty for employers who had fallen behind with their
superannuation guarantee (SG) obligations. Under the amnesty, employers could catch up or “self correct” outstanding SG payments for any period from 1 July 1992 up to 31 March 2018. The intent was to reduce the estimated $2.85 billion owed by employers in late or missing SG payments.

Running from 24 May 2018 for 12 months, the amnesty was to provide relief from some of the punitive penalties that normally apply to late SG payments. To take advantage of the amnesty, employers were to make voluntary
disclosures to the ATO about outstanding payments.

But, the legislation enabling the amnesty has stalled in the Senate. Up until recently, the ATO was encouraging
employers to make voluntary disclosures with the view that when the legislation passed Parliament, the amnesty
would be applied. However, any employer who made a voluntary disclosure to the ATO will not benefit from the
reduced punitive penalties unless the legislation passes, which at this stage, is highly unlikely in its current form.

Further, the Tax Commissioner has no discretion under the law to reduce the penalties applied to employers in this scenario, so if the legislation doesn’t pass, then there isn’t much the ATO can do to soften the blow.

SMSF membership limit changes

Rushed into Parliament before the break was a bill enacting the Government’s 2018-19 Budget measure increasing the maximum number of allowable members in a Self Managed Superannuation Fund from four to six. The measure is before the Parliament but unlikely to be addressed before the election.

Superannuation guarantee and salary sacrifice

The Bill amending how superannuation guarantee is calculated, to ensure that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum superannuation guarantee (SG) contributions,
appears to have stalled. The Bill has not progressed since November 2017. At present, the minimum amount of SG an employer is required to pay is based on an employee’s ordinary time earnings. As entering into a salary sacrifice arrangement reduces the employee’s ordinary time earnings, it reduces the amount of SG that an employer is required to pay.

Craft beer excise changes

Australia’s growing craft beer industry were promised changes to the way excise applies to their product. The
amendments extend the concessional excise duty rates that currently applying to draught beer in kegs and other
containers exceeding 48 litres to smaller containers of 8 litres or more if these containers are designed for dispensing from commercial premises. Once again, this measure made it into Parliament but is unlikely to
be addressed before the next election.

Future Drought Fund

The Future Drought Fund is a dedicated investment vehicle to secure a revenue stream for “drought resilience,
preparedness and response”. The fund uses $3.9 billion in uncommitted funds from the Building Australia Fund. The Bill to create the fund made it into Parliament in November 2018 and passed the lower house on the last sitting day in February. The future of the fund is in the hands of whoever wins the next election.

Curbing payday loans and rent-to-buy schemes

The Bill curbing payday lending is unusual because it was introduced in the last sitting period by the Labor Party who have in effect, introduced the Government’s own exposure draft reforms from 2017. The reforms amend the consumer credit code to impose caps on total payments made under a consumer lease, require small amount credit contracts to have equal repayments and interval periods, remove the ability for small loan providers to charge monthly fees if the loan is fully paid out before the term of the loan expires, prevent door to door selling, and strengthen compliance. In the wake of the Royal Commission and the recent Senate enquiry into payday lending, there will be reform, it’s just a question of when.

Benefits during emergencies exempt from FBT

If your business assists employees during an emergency, for example floods, bushfires etc., then fringe benefits tax is unlikely to apply to the assistance you provide. While we doubt anyone would be thinking about FBT during a crisis, it’s good to know that the tax system does not disadvantage your generosity.

The exemption applies in a range of scenarios including natural disasters, accidents, serious illness, armed conflict, or civil disturbances. As an employer you might provide benefits such as meals, temporary accommodation, clothing or transport, etc.

International Women’s Day: Has anything changed?

Women and girls make up just over half (50.7%) of the Australian population. While women comprise roughly 47% of all employees in Australia, they take home on average $251.20 less than men each week (full-time adult ordinary earnings). The national gender “pay gap” is 15.3% and it has remained stuck between 15% and 19% for the past two decades.

In 2017, Australia was ranked 35th on a global index measuring gender equality, slipping from a high point of
15th in 2006. While Australia scores very highly in the area of educational attainment, there is still a lot of progress to be made in the areas of economic participation and opportunity and political empowerment.

So, what are we missing? Why do we have so many highly educated women but still have a pay gap and unequal representation in senior management? The number of women on the Boards of ASX-listed companies grew from 8.3% in 2009 to 26.2% in 2017 but while very positive, this percentage is hardly representative of the broader
population.

McKinsey & Co’s recent Women in the Workplace 2018 study tracks a similar dilemma in the US. The study states:

“The two biggest drivers of representation are hiring and promotions, and companies are disadvantaging women in these areas from the beginning. Although women earn more bachelor’s degrees than men, and have for decades, they are less likely to be hired into entry level jobs. At the first critical step up to manager, the disparity widens further. Women are less likely to be hired into manager-level jobs, and they are far less likely to be promoted into them—for every 100 men promoted to manager, 79 women are. Largely because of these gender gaps, men end up holding 62 percent of manager positions, while women hold only 38 percent.”

While it is convenient to point to the amount of work women do in the home and maternity leave as the reason
for why women do not progress, it is not enough to justify the statistics: Australian women account for 68% of primary carers for older people and people with disability and 95% of primary parental leave (outside of the
public-sector) is taken by women and women spend almost three times as much time taking care of children each day, compared to men.

International Women’s Day is on Friday, 8 March.

Newsletter – February 2019

What would happen if…

Life does not always go to plan. While we logically know that, most of us don’t plan for the worst – it’s all a bit morbid and time consuming.

The downside of not planning is the potential for hard earned assets to be squandered, family fall-outs, and money handed to the Government that could have been distributed in accord with your wishes. If you are a business owner, then the stakes are even higher.

As a population, planning is more important than ever because:

  • The ageing demographic – 1 in 7 of us are now aged 65 and over (3.8 million).
  • The baby boomer generation represent only 25% of the population but hold 55% of the wealth.
  • We are entering a period of intergenerational wealth transfer from the baby boomer generation.
  • Over the last 25 years there has been an explosion of wealth in Australia.

Estate planning is simply identifying your assets and liabilities and what you want to happen to those assets if
something happens to you. As part of that, you need to look at the issues that might arise and how best to manage them. All of this is then reviewed for tax outcomes and the legal requirements to provide the best care and protection for your beneficiaries.

If you are a business owner, there are also another set of issues to consider to ensure that the business can continue if you are not able to continue in your current role. Or, your beneficiaries can take their share of the value accumulated in the business.

This planning will protect your beneficiaries, the business, and your business partners.

Estate planning does not have to be hard work, but it does have to be planned.

It’s also important to understand that actual wealth or the size of your estate is not the sole reason for estate
planning. Estate planning is important for:

  • The care and maintenance of minor children.
  • Managing the respective rights and expectations of beneficiaries, particularly with blended families.
  • Avoiding disputes between family members.
  • Relationships outside of the immediate family
  • Managing liabilities of the estate
  • Assets which may not be capable of immediate realisation or where value will be diluted by realisation
  • The transfer of assets through generations

Estate planning seeks to not only distribute the assets of your estate but do so in a way that protects the estate,
addresses issues within the estate, and fulfils your wishes.

Inspired to answer the ‘what would happen if’ question? Talk to us today.

What the statistics say

While 4 in 5 of us rate our health as ‘very good’, 50% of Australians have a chronic condition that is likely to
cause their death, 63% of adults are overweight or obese, and around 45% of us will experience a mental
illness in our lifetime.

Leading causes of death differ by age:

  • 1 – 44 years: suicide, land transport accidents
  • 45 – 74 years: coronary heart disease, lung cancer
  • 75 years and over: coronary heart disease, dementia and Alzheimer disease

It’s estimated that 138,300 people were diagnosed with cancer and 48,600 died from it in 2018.

Australia enjoys one of the highest life expectancies of any country in the world at 82.5 years (in 2015) and is
ranked fifth among 35 OECD countries. Japan has the highest life expectancy at 83.9 years. Men aged 65 in 2014-2016 could expect to live another 19.6 years (an expected age at death of 84.6 years) and the life expectancy of women aged 65 in 2014-2016 was 22.3 years (an expected age at death of 87.3 years).

We’re also working longer – 13% of Australians aged 65 and over participate in the workforce (17% for men
and 10 for women). This is compared to 2006 when the workforce participation rate was 8%.

Source: Australian Institute of Health and Welfare

Tax warning on overseas income

Do you earn income overseas? A recent case highlights why you might pay more tax than you thought on foreign income.

If you are an Australian resident and earn income from overseas, such as income from investments, sale of assets such as property, distributions from foreign trusts, etc., you will generally need to declare that income in your
Australian tax return. If you have paid tax in a foreign country on that income, you might be able to claim a foreign income tax offset to reduce your Australian tax liability.

Sounds simple enough but a recent case highlights where problems can occur and you might end up paying a lot
more tax than you thought.

The taxpayer in this case was a resident of Australia but was taxed in the US on gains they made on interests in US real estate.

Most of the gains they made were taxed at a concessional rate of 15% (rather than the normal rate of 35%) because the interests had been held for more than one year. Some of the gains were ultimately taxed at 35% in the US.

The capital gains were also taxed in Australia and qualified for the general CGT discount of 50%.

As the taxpayer was a resident of Australia and had paid tax on the US gains, the taxpayer claimed a foreign
income tax offset for all of the US tax they paid. However, the ATO amended the tax assessment and only allowed a tax offset for slightly less than 50% of the tax they paid in the US.

The problem for the taxpayer was that while the US and Australia both have tax concessions for longer term
capital gains, they operate quite differently. The US applies a lower rate to the whole gain while Australia applies a normal tax rate to half of the gain.Unfortunately for the taxpayer, the Federal Court held that the Commissioner’s
approach was correct. If foreign tax has been paid on an amount that is not included in your assessable income then you cannot claim a foreign tax offset on it. In this case, the portion of the capital gain that was exempt from Australian tax because of the CGT discount, was not included in assessable income.

It is not uncommon for people who have made capital gains on foreign assets to assume that they get all of the tax back that they paid overseas.

Unfortunately, that’s not necessarily the case and often only a partial credit is available, if at all.

What changed on 1 Jan 2019

  • Tampon tax (GST on sanitary products) scrapped
  • Voluntary crackdown begins on credit card providers to protect consumers who cannot pay-off their credit card debt or who cannot afford an increased limit
  • Higher Education Loan Program:
    • New lifetime caps prevent students repeating courses or continually enrolling in new courses.
    • New loan limits: Increase in fee assistance for students studying medicine, dentistry and veterinary science courses with increases in their loan limit from an estimated $130,552 in 2019 to a new limit of $150,000. $104,440 for all other students.

Quote of the month
“Politics is the art of looking for trouble, finding it everywhere,
diagnosing it incorrectly and applying the wrong remedies.”
Groucho Marx

You’ve been scammed, hacked or breached

Another year, another scam. While data driven crime is more sophisticated and difficult to address than ever, human error and judgement remains one of the major problems.

The latest data breach report from the Office of the Australian Information Commissioner (OAIC) is
surprising for the simplicity of the problems – 37% of data beaches resulted from human error not malicious attack. In over 20% of reported cases, personal information was simply sent to the wrong recipient. Another 6% of complaints were attributed to system faults.

Since 22 February 2018, businesses covered by the Privacy Act need to report unauthorised access to or disclosure of personal information or loss of personal information that your business holds under the Data Breach Scheme. The rules impact organisations with an annual turnover of $3 million or more, businesses ‘related to’ another business covered by the Privacy Act, or if your business, regardless of size, deals with health records (including gyms, child care centres, natural health providers, etc.,), is a credit provider, or holds Tax File Number information (see the list).

Organisations are required to take all reasonable steps to prevent a breach occurring, put in place the systems and procedures to identify and assess a breach, and issue a notification if a breach is likely to cause ‘serious harm’.

What the statistics from the OAIC demonstrate is that procedural integrity in your business is paramount – train
your team to not only be wary of scams but ingrain best practice for the day to day management of personal
data. Privacy protection is not just an ‘IT’ issue.

While not the only factor, protecting your systems remains a priority as Marriot Hotels discovered when the Starwood guest reservation database was breached.

According to the latest announcement, up to 383 million records were potentially impacted. Of those, there were approximately 5.25 million unique unencrypted passport numbers. On 30 November 2018, the company
announced that unauthorised access to the database may have been occurring since 2014.

Similarly, Cathay Pacific released a statement notifying that up to 9.4 million members have potentially had
their data breached including passenger name; nationality; date of birth; phone number; email; address; passport
number; identity card number; frequent flyer programme membership number; customer service remarks and historical travel information.

Remember, hackers can gain access to your business’s data simply by a staff member clicking on a link.
While not impacting personal data, according to the ScamWatch, a common scam is where hackers gain access
to a business’s email accounts, or ‘spoof’ a business’ email so their emails appear to come from the company. The hacker then sends emails to customers claiming that the business’s banking details have changed and that future invoices should be paid to a new account. These emails look legitimate as they come from one of the business’ official email accounts. Payments then start to flow into the hacker’s account. The average loss from these scams is around $30,000.

A variation is where the hacker sends an email internally to a business’ accounts team, pretending to be the CEO, asking for funds to be urgently transferred to an off-shore account. Hackers can also request salary or rental payments be directed to a new account.

In 2018, these scams cost Australian business $30 million in 2018.

Simple measures you can take:

  • Have strong and enforced processes in place for the management of personal client information.
  • Strong authorising procedures for payments – two-step authority.
  • Change passwords often and use two-step authentication where available.
  • If a client’s bank details have changed, phone them and check the details.
  • Train your team on cyber security:
    • Check requests for payments that arrive electronically from other team members and management.
    • Check email addresses are legitimate – look for slight variations.
    • Be suspicious of poorly written emails.
    • Don’t click on links from email – always use your account with the supplier or Government department to check details.
  • If contacted by the ATO, contact us to verify the information if you are concerned.

Latest scams

Tax scams
The Australian Taxation Office (ATO) has warned about the emergence of a scam where “…scammers are using an ATO number to send fraudulent SMS messages to taxpayers asking them to click on a link and hand over their personal details in order to obtain a refund.”

The refund scam follows a more sinister four phase scam stating there is a warrant out for your arrest for unpaid
taxes in prior years. The scam starts with a text message purportedly from the Australian Federal Police
(AFP). Within minutes, your mobile rings and the caller identifies themselves as being from the AFP and working
with the ATO. They then ask for your accountant’s details. You then receive a call purportedly from your
‘accounting firm’ asking you to verify the AFP/ATO claims. Finally, you are provided with a way, if you act quickly, to make the AFP go away by paying a fee before your ‘imminent arrest’.

The ATO states that it will not:

  • Send you an email or SMS asking you to click on a link to provide login, personal or financial information, or to download a file or open an attachment.
  • Use aggressive or rude behaviour, or threaten you with arrest, jail or deportation.
  • Request payment of a debt via iTunes or Google Play cards, pre-paid Visa cards, cryptocurrency or direct
    credit to a personal bank account, or
  • Request a fee in order to release a refund owed to you.

Medicare Scam
A new phishing scam sent text messages purportedly from Medicare advising the recipient that they are owed a
$200 rebate from Medicare. Once the person clicks on the reclaim link, they are asked to provide their personal details including bank account details for the ‘rebate.

Newsletter – December 2018

No tax deductions if you don’t meet your tax obligations

New laws passed by parliament last month directly target the behaviour of taxpayers that don’t meet their obligations.

Tax deductions denied

If taxpayers do not meet their PAYG withholding tax obligations, from 1 July 2019 they will not be able to claim a tax deduction for payments:

  • of salary, wages, commissions, bonuses or allowances to an employee;
  • of directors’ fees;
  • to a religious practitioner;
  • under a labour hire arrangement; or
  • made for services where the supplier does not provide their ABN.

The main exception is where you realised there is a mistake and voluntarily corrected it. For example, if you made payments to a contractor but then later realised that they should have been paid as an employee and no PAYG was withheld.

In these circumstances, a deduction may still be available if you voluntarily correct the problem but penalties may still apply for the failure to withhold the correct amount of tax.

Are you in the road freight, IT or security, investigation or surveillance business?

The Taxable Payments Reporting system was introduced to stem the flow of cash payments to contractors and rampant under reporting of income. Since the building and construction industry was first targeted in 2012, the
reporting system has expanded to include cleaning and courier services. Now, a broader set of industries have been targeted.

If you have an ABN, and are in road freight, IT or security, investigation or surveillance, then any payments you make to contractors will need to be reported to the Australian Tax Office (ATO).

Be careful here as the definition of these industries is very broad. For example, ‘investigation or surveillance’ includes locksmiths. The definition covers services that provide “protection from, or measures taken against, injury, damage, espionage, theft, infiltration, sabotage or the like.”

IT services are the provision of “expertise in relation to computer hardware or software to meet the needs of a client.” This includes software installation, web design, computer facilities management, software simulation and testing. It does not include the sale of software or lease of hardware.

Road freight is typically goods transported in bulk using large vehicles. This includes services such as log haulage, road freight forwarding, taxi trucks, furniture removal, and road vehicle towing. The addition
of road freight to the taxable payments reporting system completes the coverage of delivery and logistics services as businesses in courier services are already obliged to report payments to contractors to the ATO.

If your business is impacted by these changes, you need to document the ABN, name and address, and gross amount paid to contractors from 1 July 2019. Your first report to the ATO, the Taxable Payments Annual Report (TPAR), is due by 28 August 2020. This might seem like a long way away but it will come around quickly and you need to ensure that your systems are in place to manage the reporting required easily and accurately.

Who needs to report?

The obligation to report contractor payments to the ATO is already quite broad. The addition of road freight, IT or security, or investigation or surveillance services, adds another layer.

Service Reporting of contractor payments
Building and construction services From 1 July 2012
Cleaning services From 1 July 2018
Courier services From 1 July 2018
Road freight, IT or security, or investigation or surveillance services From 1 July 2019

For businesses providing mixed services, if 10% or more of your GST turnover is made up of affected services, then you will need to report the contractor payments to the ATO.

Quote of the month
“If everything seems under control, you’re just not going fast enough.”
Mario Andretti
Racing driver

Contractor or employee? Defining workers in the gig economy

A former Foodora Australia delivery rider, Joshua Klooger, recently won an unfair dismissal claim despite a service agreement that classified him as an independent contractor. We explore the implications of the case.

Pivotal to the Fair Work Commission’s decision was the classification by Foodora of Mr Klooger as an independent
contractor. The “Corporate Rider” was employed under a service agreement titled “Independent contractor agreement”. At the initial rate of $14 per hour and $5 per delivery, corporate riders would log into an app (the shifts app) which, at predetermined times each week, displayed available shifts. The shifts identified start and finish times and a specific geographical location where the delivery work would be undertaken. The riders could then decide what shifts they wanted. The riders undertaking shifts were provided with a Foodora branded insulated box, and other Foodora branded attire and equipment. Once the shift started, the riders would receive notifications through the app of an order to be picked up from a restaurant. Once the order had been collected, the rider would confirm the pick up, then the deliveries app would advise the delivery address.

In 2016, Mr Klooger’s friend and fellow Foodora delivery rider had his visa cancelled. As a result, Foodora suspended the friend’s access to the shifts and deliveries app. Instead, Mr Klooger gave his friend his access to the Foodora app allowing him to select and fulfil shifts. Over time, three other individuals did the same. Mr Klooger would reconcile his account, deduct tax and a further 1% for his involvement, then pay the substitutes. While the Foodora contract allowed for substituting, it required prior written consent. However, when Foodora became aware of the substitution scheme it took no steps to stop it and instead commended Mr Klooger for his “entrepreneurial initiative.”

The rates Foodora paid to riders and the way in which shifts were allocated changed over time. In July 2016, the
hourly rate for new riders/ drivers was reduced to $13 plus $3 per delivery, and a $1 per delivery payment for Friday, Saturday and Sunday night work.

Towards the end of 2016, Foodora removed the hourly rate for new riders completely, fixing a flat $10 per delivery payment. The flat rate was progressively reduced further and by February 2018, the rate for new delivery riders had dropped to $7 per delivery. In addition, a new “batching system” was put in place which established a fortnightly assessment process that ranked individual delivery riders and offered shifts according to rank. The highest ranked riders were offered shifts well before lower ranked riders.

When determining whether a worker is a contractor or an employee, the courts say “… the distinction between an
employee and an independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer’s business, and a person who carries on a trade or business of his own.”

The factors identified by the commission in this case are helpful indicators:

How work is fulfilled. The commission determined that while the riders had the choice to accept the shifts, the shift start and finish times and geographical locations were fixed by Foodora. Despite the ability to self-select shifts, the commission saw that the “process for engagement is similar to a variety of electronic and web-based systems that are frequently used to advise, in particular, casual employees of available shifts that are offered.” While the system is not as prescriptive as naming particular employees, the commission saw the results as essentially similar.

What the contract said. While the Foodora service agreement attempts to establish a relationship of principal and contractor, the commission found that, “The service contract contains many provisions which are similar in form and substance to those that would ordinarily be found in an employment contract document.” These included clauses dealing with rostering and acceptance of jobs, the attire to be worn when on shift, the specific nature of the engagements to be undertaken including requirements that the contractor is to comply with all policies and practices of the principal.

Who had control? Foodora had “… considerable capacity to control the manner in which the applicant performed
work.” The commission also noted that the batching system meant that to maintain a high ranking, riders had to
perform a certain number of deliveries during a shift, work a minimum number of shifts in a week and work a number of Friday, Saturday and Sunday shifts.

Generating business. In Foodora’s favour was the fact that it did not prevent its riders from working for other
companies or delivery platforms. However, in this case the commission compared this ability to casual restaurant staff working for more than one restaurant.

Is the contractor operating separate to the principal? One of the aspects of many contractor versus employee cases is whether the individual holds themselves out to the public as a separate business in their own right – do they have their own place of business. In this case, Mr Klooger worked exclusively for Foodora.

Supply of tools of trade. Mr Klooger’s only investment as a contractor was his bicycle which he also used privately. An asset which the commission points out does not require a high degree of skill or training.

Delegation of work. One of the factors that determines whether someone is a contractor or employee is
their capacity to delegate work to others. The substitution scheme operated by Mr Klooger was a significant factor in this case as he was delegating work.

However, in this instance, the commission saw that the substitution scheme was a breach of Foodora’s own service agreement not evidence of delegation despite their eventual acceptance of the scheme.

Identifying as Foodora. Riders had to identify as being from Foodora. Clause 4 of the service contract established an expectation riders dress in Foodora branded attire, and utilise equipment displaying the livery of the Foodora brand.

Tax, leave, and remuneration. As Foodora classified the riders as independent contractors no tax was deducted from payments made. Riders were not entitled to holiday or sick leave. When Foodora paid Mr Klooger, they would generate a recipient created invoice. Once Mr Klooger had reviewed the invoice and made any corrections, the invoice would be paid.

Reputational damage. If the riders did not perform to the standard expected by customers, it was Foodora that faced reputational damage not the riders.

While Mr Klooger won his case and was awarded $15,559, Foodora appointed voluntary administrators on 17 August 2018, well before this case came before the commission. The commission pursued the case on public importance grounds.

Foodora is by no means the first company to fall foul of the definition between contractor and employee; there are a litany of companies that have stepped over the definitional boundary but it is one of the first to test platform based work relationships in the gig economy.

However, not all gig economy businesses engaging with workers using a platform are at risk. In December 2017, an unfair dismissal claim against Uber was dismissed. Many of the factors evident in the Foodora case were not evident in Uber’s model. Interestingly, the commission noted that current laws that determine work for wages and the nature of employment relationships “… developed and evolved at a time before the new “gig” or “sharing” economy. It may be that these notions are outmoded in some senses and are no longer reflective of our current economic circumstances. These notions take little or no account of revenue generation and revenue sharing as between participants, relative bargaining power, or the extent to which parties are captive of each other, in the sense of possessing realistic alternative pursuits or engaging in competition. Perhaps the law of employment will evolve to catch pace with the evolving nature of the digital economy.”

Pre-empting the commission’s warning on the gig economy was the 2017 Senate report that asked whether the gig economy is “hyper flexibility or sham contracting.” In addition to exploring the model of organisations like Deliveroo, the Senate committee demonstrated how apps like AirTasker are being used by businesses for ongoing roles without the burden of employment. The fee Airtasker takes is charged only to the worker. Posters deposit payment into an account managed by the company, and Airtasker then releases 85% of that money to the worker, once the job poster declares the work to be complete.

What to do if you engage contractors

If you engage contractors, it is essential to get the facts of the relationship right. Business owners need to take a
proactive approach to reviewing arrangements to ensure that the business is not exposed to material liabilities.
Key factors include:

  • Whether the work involves a particular profession or skill set.
  • The level of control the contractor has over how the contract is executed.
  • The ability of the contractor to delegate work to another person.
  • Whether the contractor supplies his own tools or equipment.
  • Whether the contractor has his own place of business.
  • The contractor’s ability to generate goodwill or saleable assets during the course of the contract.
  • How the contractor is paid (for hours worked or a result).
  • The level of risk the contractor bears.
  • Whether the contractor is independent or in reality, simply ‘part and parcel’ of the organisation they contract to.

No single factor is determinative; it is the weight of evidence, on balance, across all of the factors.

The implications of misclassifying a worker

The implications of misclassifying a worker go well beyond industrial relations. If a business misclassifies an employee, it impacts on superannuation guarantee (SG), PAYG withholding, workers compensation, and payroll tax. These entitlements will often need to be met even if the misclassification was a genuine mistake.

For SG obligations, there is no real time limit on the recovery of outstanding obligations. However, the ATO will generally only go back 5 years unless the individual employee can prove an entitlement beyond this point. Remember that employers that fail to make their superannuation guarantee payments on time don’t just pay the outstanding superannuation but are subject to the SG charge (SGC) and lodge a Superannuation Guarantee Statement. SGC is made up of:

  • The employee’s superannuation guarantee shortfall amount;
  • Interest of 10% per annum; and
  • An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal superannuation guarantee contributions, SGC amounts are not deductible to the employer, even when the liability has been satisfied.

Getting it wrong can be a very costly exercise particularly if the error is evident over a number of years.

Tax on shares: ATO extends data matching  program

The Australian Tax Office (ATO) is utilising data provided by the Australian Investments and Security Commission (ASIC) to data match share trades.

The ATO is accessing more than 500 million records detailing price, quantity and time of individual trades dating back to 2014. The information complements information that the ATO already holds from brokers, share registries and exchanges.

Utilising this wealth of information, the ATO will explore what has been reported on tax returns, specifically, capital gains on the sale or transfer of shares and the losses claimed.

Given that more than 5 million Australians now own shares, the ATO is keen to ensure that errors are minimised.

“… there is evidence that some taxpayers are getting it wrong when it comes to reporting their capital gains or losses from the sale of shares. In particular, we tend to see higher rates of error among those who don’t regularly trade in shares and who are not aware of the tax implications,” Assistant Commissioner Kath Anderson said.

With penalties as high as 75% of the tax shortfall, it is important to ensure that you have your documentation in place for share trades and transfers including records of share purchase and sale prices, as well as costs like brokerage fees. If you sold part of your share holdings, you need to keep records of the parcel you sold and the
parcel you are still holding.

We can design a personalised plan that explains how we can help you to reach your financial goals.

Work with the expert tax team your business deserves

Start a free trial and learn how Bench can take tax and bookkeeping stress off your plate for good. We’ll do one month of your bookkeeping and prepare a set of financials for you to keep.