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 – 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.

Newsletter – November 2018

Accelerated tax rate reduction for small business

Small business is still a vote winner with the Government and Opposition teaming up to accelerate tax cuts for the sector by 5 years impacting on an estimated 3.3 million businesses.

Parliament recently passed legislation to accelerate the corporate tax rate reduction for corporate tax entities that are base rate entities (BREs). Under the new rules:

• A 26% rate will apply to BREs for the year ending 30 June 2021, and
• A 25% rate will apply to BREs from 1 July 2021

The amending legislation also increased the small business income tax offset rate to 13% of an eligible individual’s basic income tax liability that relates to their total net small business income for the 2020-21 income year and 16% for the 2021-22 income year onwards.

The small business income tax offset continues to be capped at $1,000 per individual per year.

Year Aggregated annual
turnover threshold
Eligible companies* Entities under the
threshold
Other corporate tax
entities
2015-16 $2m SBE ($2m threshold) 28.5% 30%
2016-17 $10m SBE ($10m threshold) 27.5% 30%
2017-18 $25m BRE 27.5% 30%
2018-19 to
2019-20
$50m BRE 27.5% 30%
2020-21 $50m BRE 26% 30%
2021-22 $50m BRE 25% 30%

* Small business entity (SBE), Base rate entity (BRE)

This means that if your business operates as a sole trader for example, the amount of tax you are likely to pay will be reduced from 2020-21 but only up to the $1,000 cap.

What is a base rate entity?

Between 1 July 2015 and 30 June 2017, we used the concept of a small business entity (SBE) to work out what tax rate applied to a company. The concept of an SBE has now been replaced with a base rate entity (BRE) for company tax rate purposes. However, the concept of what a BRE actually is has changed over time to extend the lower tax rate to more companies and to restrict what entities can access the lower tax rate.

For the 2017-18 income year, a BRE was a company that had an aggregated turnover at the end of the income year
of less than $25 million and no more than 80% of its income was passive in nature. Passive income includes some dividends, franking credits, non-share dividends, interest income (there are some exclusions), royalties, rent, net capital gains and gains on securities, and some trust and partnership distributions. If the company receiving the
dividend holds a voting interest of at least 10% in the company paying the dividend then the dividend is not treated as passive income for the purpose of these rules.

For 2018-19, the threshold to be a BRE increased to companies with an aggregated turnover up to $50 million.

Where income is derived through a chain of trusts or partnerships, things get slightly more complicated as the law requires the tests to be applied at each level of the chain. Special rules also exist to prevent partnerships and trusts from reducing their net income by increasing expenses. Indirect expenses such as overheads are excluded from the
calculation of net income.

The problem for franking credits?

The company tax rate changes have also impacted on the maximum franking credit rules. In 2015-16, the first year small business entities could access a reduced company tax rate of 28.5%, the maximum franking credit rate for franked dividends remained at 30%. However, from the 2016-17 income year onwards the maximum franking credit rate needs to be determined on a year-by year basis. In many cases this means that if the company’s tax rate is 27.5% then the maximum franking rate will also be 27.5%. However, this will not always be the case and you can have situations where the corporate tax rate and maximum franking rate are different in a particular year.

In some instances, a company will pay tax at 30% but when it pays out the profits as a franked dividend the maximum franking rate will be 27.5%. The company may end up with surplus franking credits being trapped in its franking account. This can lead to double taxation as shareholders won’t necessarily receive full credit for the tax already paid on those profits by the company.

This problem will potentially become worse as the company tax rate becomes lower as some companies will have paid tax on profits at 30%, but will only be able to apply a 25% franking rate to dividends paid out in future years.
It will be important to look closely at this issue each financial year as there are some strategies that can potentially be applied to prevent franking credits being trapped in the company and minimise the incidence of double taxation.

The new rules for gift cards – what you need to know

In Australia, around 34 million gift cards are sold each year with an estimated value of $2.5
billion. On average, an estimated $70 million is lost because of expiry dates.

Until recently, there was no national regulation for the minimum length of time a gift card should last. In late 2017, New South Wales introduced laws* requiring a minimum three year expiry period for gift cards sold in that state and South Australia was in the process of enacting laws, but no uniform standard applied across Australia.

Applying from 1 November 2019, new laws are in effect that introduce a regime for the regulation of gift cards including:
• A minimum 3 year expiry period
• Bolstering disclosure requirements, and
• Banning post-supply fees.

What business needs to do

From 1 November 2019, businesses should ensure:

All gift cards have a minimum three year expiry period. Any existing gift card stock should be run down and production reviewed to ensure that once the new regime comes into effect, only compliant gift cards are issued.
Ensure disclosure requirements are met. The expiry date or the date the card was supplied and a statement about the period of validity must be set out prominently on the gift card itself. For example, if the supply date was December 2019, “Supply date: December 2019. This card will expire in 3 years,” or “Valid for 3 years from 12/19”. It is assumed that the card expires on the last day of the month where only the month and year are displayed. If the gift card does not expire, the card will need to clarify this by stating words to the effect of, “never expires”.
Post-supply fees are not charged. A post-supply fee is a fee that is charged reducing the value of the gift card such as administration fees for using a gift card. Post-supply fees exclude the fees that are normally charged regardless of how someone pays for a product or service. For example, booking fees, a fee to reissue a lost or damaged card, and payment surcharges.

A number of larger businesses have adopted a 3 year expiry period following the introduction of NSW laws. These include David Jones, Myers, Westfield, Rebel Sport, Coles, and Dymocks. Other retailers have no expiry dates including iTunes, JB Hi-Fi, EB Games, Woolworths and Bunnings. Generous expiry periods are a point of difference when consumers are working out which retailers gift card to purchase.

What happens if a business ignores the new rules?

Once the new rules come into effect, if a gift card is supplied with less than a three year expiry period, the disclosure requirements are not met, or post-supply fees are charged, a penalty may be imposed of up to $30,000 for a body corporate and $6,000 for persons other than a body corporate. In addition, the ACCC has the ability to impose infringement notices. Each infringement notice is 55 units (currently $11,500) for a body corporate and 11 units (currently $2,420) for persons other than a body corporate.

What happens if a business becomes insolvent or is sold?

The consumer’s rights do not change if the business becomes insolvent or bankrupt. The consumer becomes an unsecured creditor of the business.

If a business changes owners, the new owner must honour existing gift cards and vouchers if the business was:
• Sold as a ‘going concern’. That is, the assets and liabilities of the business were sold by the previous owner to the new owner.
• Owned by a company rather than an individual, and the new owner purchased the shares in the company.

*Amendments to the NSW Fair Trading Act 1987 require that most gift cards and vouchers sold from 31 March 2018 have a 3 year expiry period. In addition, no post-purchase fees can apply to redeem the voucher (including activation fees, account keeping fees, balance enquiry fees, telephone enquiry fees and fees applied when a card is inactive or not being used). See Fair Trading for more details.

Quote of the month

“Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
– Eleanor Roosevelt

Travelling to and from your investment property

From 1 July 2017, new rules came into effect that prevent taxpayers claiming a deduction for expenses they incur travelling to and from their residential investment property.

The Government restricted travel deductions to curb “widespread abuse around excessive travel expense claims relating to residential investment properties….This will stop residential property investors from using the tax system to pay for their holidays by claiming costs as a rental expense.”

The new rules prevent a deduction from being claimed for a loss or outgoing if it relates to travel and the expense is incurred in gaining or producing assessable income from the use of residential premises as residential accommodation.

The purpose of the travel is not really relevant under these rules. They simply prevent a deduction from being claimed if the travel is undertaken in connection with a residential rental property, which could include travel to inspect the property, undertake repairs, collect rent or meet with real estate agents.

The restriction applies to transport costs (regardless of the mode of transport used), meals and accommodation expenses incurred in relation to a residential rental property.

There are some exceptions to these changes.

Firstly, the rules will not prevent a deduction from being claimed if the expense is necessarily incurred in carrying on a business. This means that if you carry on a business of renting properties, you can continue claiming travel deductions if you carry on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services.

The distinction between someone merely investing in property and someone carrying on a business of property investing is a matter of fact. The ATO will look at the characteristics of the business including:
• The total number of residential properties that are rented out
• The average number of hours per week you spend actively engaged in managing the rental properties
• the skill and expertise exercised in undertaking these activities, and
• whether professional records are kept and maintained in a business-like manner.

The fact that a taxpayer has multiple properties does not necessarily mean that they are in business. It will really depend on whether you can prove that you actively manage the properties like a business. In a recent case, the Administrative Appeals Tribunal found that a taxpayer with 9 rental properties was considered to be carrying on a business of property rental largely because the taxpayer actively supervised the real estate agent employed and managed issues associated with the properties (thus having a discernible pattern of trading to their activities), the capital employed was significant and they had conducted property rental activities for a number of years.

Also, the rules do not apply to certain entities including:
• Companies;
• Superannuation funds, except SMSFs;
• Managed investment trusts;
• Public unit trusts;
• Unit trusts or partnerships, but only if all unit holders or partners fall within one of the categories above.

In addition to the rules that prevent a deduction from being claimed, the changes also ensure that these travel expenses cannot be included in the cost base or reduced cost base of a property. This means that they cannot be
used to reduce a capital gain or increase a capital loss made on sale of the property.

How tampons became a political debate?

GST is applied to tampons but not to incontinence pads. Viagra is exempt from GST but nipple shields for breast feeding mothers are not. We explore the political football of GST exemptions.

Australia’s goods and services tax (GST) is messy. To ensure that the GST passed Parliament, a deal was brokered to exclude certain items including fresh food, education, health and child care. The reason for the carve out was to ensure that low income earners are not adversely affected by the GST on the necessities of life. Our New Zealand neighbours however, took the simpler approach and apply GST to most things, leaving the social security system to
target the needs of low income earners.

The problem with the carve out is that the boundaries between different products and services is not clear-cut
or intuitive, creating anomalies between the tax treatment of different items. Feminine hygiene products are one of those anomalies. For example, feminine hygiene products are not considered a health product but pads for incontinence are as they are required for a medical condition. Toilet paper and nappies, arguably also essentials of life, are also taxed.

Treasury has undertaken consultation to define what a feminine hygiene product is to remove it from the GST. The States and Territories have agreed to remove the tax. The Federal Government has stated that it intends to remove the tax on tampons from 1 January 2019 but as yet, no legislation has been introduced into Parliament to effect the change.

Newsletter – October 2018

Working from home: What deductions can you claim?

For a while now, the Australian Taxation Office (ATO) has been concerned about tax deductions individuals have been claiming for a whole host of expenses. The latest on their ‘hit list’ are home office expenses. We guide you through what you can and can’t claim if you work from home.

Last financial year, 6.7 million taxpayers claimed a record $7.9 billion in deductions for ‘other work-related expenses’ which includes expenses for working from home. While the ATO appreciates that technology has led to more people working from home and greater flexibility, they don’t believe that all of the claims being made are legitimate. Take the example of the school principal who claimed $2,400 for electricity and phone expenses incurred during the year. The principal had a letter from the school verifying that they were required to work from home outside of school hours but could not explain how she calculated the claim. The principal ended up voluntarily reducing the claim by 70%. Or, the advertising manager who claimed her rent as a tax deduction because she worked from home at irregular hours to manage the timeframes of overseas clients. Her deduction for rent was rejected.

A major bugbear for the ATO are the people who claim 100% of their expenses like mobile phone plans and internet services when they are mostly for personal use. If you claim 100% of your phone and internet and you are not running a business from home, you can expect the ATO to look closely at your claims (that goes for subcontractors as well!).

Working out the work related portion of your expenses

You need to be able to prove how you came up with your expense claim. This includes having a documented method of calculating the work related portion of that claim if the item you are claiming is used for private and work purposes. For phone and internet expenses for example, you might look at the number of work calls, the
time spent, or data downloads as a portion of the total bill. The other method is to complete the equivalent of a log book or diary over four weeks to track your work use of the item, then apply the work percentage over
that four weeks to your annual expense. If for example you used your phone for 20% of the time over the four weeks you documented in your diary, you could then claim 20% of your annual phone expense as a home office expense (assuming your circumstances don’t change across the year).

What can you claim?

Working from home

A lot of people do some sort of work from home. It might be simply answering emails on the couch or working from home a few days a week. So, what can you claim if you’re putting in extra hours?

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. This of course assumes that your employer doesn’t reimburse you for your phone and internet expenses and you purchased your computer for yourself.

You can claim up to $50 for phone and internet expenses without substantiating the claim (although the ATO may still ask you to prove that you actually incurred the expense), or you can work out your actual expenses (see Working out the work-related portion of your expenses).

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 (see Working out the work-related portion of your expenses).

Running a business from home

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. Take the example of a hairdressing business that runs out of the hairdresser’s home. One room is dedicated as a salon and is not used for any other purpose other than the salon. For the portion of the house taken up by the salon, the hairdresser can claim running expenses such as electricity and the interest on the mortgage.

The downside to claiming occupancy expenses such as interest on a mortgage is the impact it has on your tax-free main residence exemption for capital gains tax (CGT) purposes. In general, your home is exempt from CGT when you sell it. However, if you use your home to earn assessable income like the hairdresser, then you might only qualify for a partial exemption on the sale. If you are claiming part of your home as a business expense, then it is unlikely that any gain you make on your home will be fully CGT-free. You might also need to obtain a valuation of your home at the time it was first used to generate business income.

What home office expenses can be claimed?

  1. Running expenses – if you have a dedicated work area such as a study set aside for work, the essentials to keep the work area running like electricity, cleaning, office equipment etc., can be claimed as an expense. Of course, any claim can only be for the work-related portion of the expense. If your family use your home office as well or you use it for personal use, then you can only claim a portion of the expense. Running expenses can be claimed:
    • at a fixed rate of 45 cents per hour – you will need to track either the actual amount of time you work from home or keep a log book over 4 weeks that can be applied to your expenses across the year.
    or
    • as an actual expense – to claim an actual expense you need to document the total expenses for lighting, cleaning, heating and cooling for your home for the year, work out the floor area of the part of your home that you use for work as a percentage of the total floor area, and then work out the percentage of the year you used that part of your home exclusively for work.
  2. Occupancy expenses – expenses such as rent, interest on your home loan, property insurance, land taxes and rates can only be claimed if your home is your ‘place of business’ and no other work location has been provided to you. A place of business is unsuitable for any other use other than business, like a doctor’s surgery connected to a home or a hairdressing salon in a room of the house. Occupancy expenses can be claimed by calculating your total expenses × floor area × percentage of year that part of your home was used exclusively for work. Generally, occupancy expenses are not a deduction available to employees.
  3. Work related phone and internet expenses – unless you run your business from home and you have a dedicated phone and internet line it’s unlikely you can claim 100% of your phone and internet expenses. If your employer provides you with a phone, you cannot make any claim for these expenses. If you are a casual worker you cannot claim a deduction for phone rental expenses. For the rest of us, you can claim up to $50 for phone and internet expenses without substantiating the claim (but the ATO still might expect you to prove the claim), or you can work out your actual expenses. Claims for actual expenses can be made by working out the work-related use of the phone and internet and then applying that percentage to the expenses.
  4. Decline in value – for depreciable assets such as computers and printers, you might be able to claim decline in value if the cost of the item was over $300. Decline in value deductions might also be available for office furniture used for work purposes in a home office, but not if the individual is using the fixed rate of 45 cents per hour to claim running expenses.
Expenses Home is principal workplace with dedicated work area Home not principal workplace but has dedicated work area You work at home but no dedicated work area
Running expenses Yes Yes No
Work-related phone & internet expenses Yes Yes Yes
Decline in value of a computer (work related portion) Yes Yes Yes
Decline in value of office equipment Yes Yes No
Occupancy expenses Yes No No

Source: Australian Taxation Office

 

What does the China/US trade war mean to Australia?

As the bilateral trade war between the US and China heats up, Australia is caught between its cultural and military ties to the US and its strong economic relationship with China.

At the annual United Nations General Assembly President Donald Trump threw fuel on the trade war fire by stating that “…regrettably we found that China has been attempting to interfere in our upcoming 2018 election…against my administration. They do not want me or us to win because I am the first President ever to challenge China on trade….and we are winning on trade …we are winning at every level.” Following the speech President Trump told a press conference that, “China has total respect for Donald Trump and for Donald Trump’s very, very large brain.” China’s Foreign Minister Wang Yi stated that, “We did not and will not interfere in any country’s internal affairs and we refuse to accept any allegation of interference.” It was just another day in the media juggernaut that is President Trump.

In 2017, the US imported well over $500bn worth of products from China. The US trade deficit in the same year was over $811bn of which China accounted for around 46%. From China’s perspective, the US market accounts for 19% of all Chinese exports and US imports represent 8% of China’s imports.

The trade war between the US and China escalated in September when the US imposed a further round of tariffs on US$200bn worth of Chinese goods, bringing the total value of Chinese goods impacted by the trade war to approximately US$250bn. The tariffs start at 10% and rise to 25% on 1 January 2019. President Trump has threatened to impose tariffs on a further US$267bn worth of goods if China retaliates.

China has responded by imposing tariffs of between 5% and 10% on a further round of US goods bringing the total value of imports targeted to US$110bn. China has released a White Paper on the China-US trade friction that states, “China is the world’s biggest developing country and the United States is the biggest developed country” and both have benefited from the development of relations. The paper points out that “China represents the No. 1 export market for US airplanes and soybeans, and the No. 2 export market for US automobiles, IC products and cotton.” But, the new administration has “abandoned the fundamental norms of mutual respect and equal consultation that guide international relations.”

Economists predict that the trade war may continue to the point where all Chinese goods imported into the US and all US goods imported in China will be impacted.

To date, Australia has avoided any significant impact from the trade war. This is not the case for Canada that saw the Trump administration impose a 25% tariff on steel imports and 10% on aluminium imports. The US imports approximately US$29bn of steel with 17% of that from Canada (accounting for approximately 88% of total Canadian steel exports). Australia was one of the few countries excluded from the tariffs although the US only accounts for 0.8% of Australian steel and 1.5% of aluminium exports.

The issue for Australia is the potential reduction in China’s GDP growth. Currently, mainland China is Australia’s largest two-way trading partner representing over 28% of Australia’s export market (the US represents 6.3%) and over 18% of our imports. A slowdown in China’s growth spells a slowdown in imports reducing the value of Australia’s export market and impacting Australia’s growth.

While Australia is not directly impacted by the bilateral trade war, there is a potential danger that consumer sentiment might be damaged with consumers unwilling to spend and instead taking a ‘wait and see’ approach.

Quote of the month

“Live as if you were to die tomorrow. Learn as if you were to live forever.”
– Mahatma Gandhi

Reminder on cents per km car expenses rate

The cents per kilometre car expense rate increased from 66 cents to 68 cents per kilometre from 1 July 2018. Employers who use the cents per kilometre rate to pay car allowances for employees should ensure that car allowance rates are up to date. If more than 68 cents per kilometre is paid, employers need to withhold tax on the excess amount under the PAYG withholding system.

New immediate deduction for primary producers

Legislation that passed Parliament last month will enable primary producers to claim an immediate deduction for fodder storage assets such as silos and hay sheds used to store grain and other animal feed. The deduction is available if the primary producer first uses the asset or has the asset installed and ready for use on or after 19 August 2018. The immediate deduction can be claimed in the year the expense is incurred. Prior to this date, primary producers could generally only deduct the cost of these assets over 3 years.

This is one of several measures announced as part of the Government’s package of drought assistance measures which are intended to aid drought-affected farmers.

Confusion reigns over superannuation transfer balance cap

A recent speech by the ATO’s Assistant Commissioner for Superannuation demonstrates the very practical problems with the new superannuation rules.

The $1.6 million transfer balance cap (TBC) that limits the amount you can hold in a superannuation pension requires trustees to be aware of how close they are to this limit at all times. To ensure that this cap is not breached, trustees need to report common events that may impact on a member’s pension account. Trustees should have already reported pre-existing pensions (pensions members were receiving just before 1 July 2017 that they have continued to receive and which are in retirement phase on or after 1 July 2017).

This new event-based reporting requirement is causing a few headaches with the wrong information or no information being reported. Common ‘events’ that need to be reported include:

  • The start of new retirement phase pensions
  • The full or partial pay-out of a pension (commutation), and
  • Some limited recourse borrowing arrangements.

Some information does not need to be reported including withdrawals from accumulation accounts, standard pension payments, or investment earnings or losses made on or after 1 July 2017.
To make the reporting process work, it’s essential to keep us up to date as events occur. If you are not sure, just give us a call or drop us a line – it’s better to be sure.

 

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.