Understanding the tax consequences of buying a work vehicle can be complex and confusing.

The general concept is that if you buy a motor vehicle for work related travel, you are able to claim the work portion of the expenses incurred as a deduction, however under current temporary tax measures there are some circumstances where you can claim the cost of the vehicle.

How you claim a deduction for these expenses depends on many factors, such as if you are an employee or sole trader, what type of vehicle you purchase and if there is any private use of the vehicle. See below for a discussion on the factors which determine what method will be most tax effective for your situation.

Cents per kilometre vs logbook method

If you are an employee or a sole trader, you can either claim your car expenses using the cents per kilometre method or the log book method.

Under the cents per kilometre method, you can claim up to 5,000 kilometres of work related travel at a rate prescribed annually by the ATO. For 2021, this works out to a maximum deduction of $3,400. This method requires the least amount of administration as you do not require written receipts to substantiate your claim, but you do need reasonable evidence that you actually traveled the kilometres for work purposes.

The other method to claim car expenses is known as the logbook method. To claim under this method, you need to keep a logbook for 12 continuous weeks detailing all your work related travel to give you a log book percentage. If the logbook states your travel is 70% work related for example, then you can claim 70% of all your vehicle expenses, including depreciation of the vehicle and financing costs. The logbook is valid for 5 years, unless your circumstances change.

One key difference between these methods is that you cannot claim anything for the capital cost of your car under the cents per kilometre method. This is because the prescribed ATO rate already takes the car depreciation into account. On the other hand, the logbook method allows you to claim a depreciation deduction for the work-related portion of the cost of the vehicle.

Further, if you are a sole trader and use the small business concessions, you are currently eligible to claim the work-related portion of the full cost of the car in the year of purchase. The flip side to this is you will also need to declare the proceeds on the eventual sale of the vehicle as assessable income, which is taxed at your marginal tax rate in the year of sale.

Car vs Ute or Van

If your vehicle isn’t considered to be a car for tax purposes, you cannot claim using the cents per kilometre method. Rather, you must claim the portion of your vehicle expenses that relate to work use. A vehicle is not considered to be a car if it has carrying capacity of one tonne or more, or if it is able to carry nine passengers or more (for example, some utes and vans). The ATO states you do not need to keep a logbook to determine the work related use percentage for these vehicles, but it is recommended. It is important to note that not all utes and vans satisfy these conditions, so it is important to confirm the carrying capacity for your vehicle.

Car Cost Limit

If you are claiming car expenses under the logbook method, you can claim the work related portion of the cost of your vehicle up to the car cost limit. This is the maximum value you can use to calculate your depreciation claim. The car cost limit changes yearly – for 2021 it is $59,136 (GST inclusive). As an example, if you are a sole trader registered for GST and purchased a car in the 2021 year for $80,000, the most you can claim is 10/11ths of the car cost limit as a depreciation deduction, which is $53,760. You are also entitled to claim back $5,376 as a GST credit.

Related blogs:

Claiming vehicle expenses using a logbook
New guidelines for FBT exempt motor vehicles

 

Email: tessa@faj.com.au

“We make a living by what we get. We make a life by what we give.” Wise and inspirational words from Winston Churchill.

Around four million taxpayers each year make almost $4 billion of tax-deductible donations to various charities around the country. West Australians top the list for the average amount of donation per person. But not everyone understands the rules around the deductibility of donations.

Those that give may be rewarded through our tax system by receiving a tax deduction for donations given to certain organisations, known as Deductible Gift Recipients (DGRs). But like many components of our complicated tax system, the integrity of the rules is exposed to misunderstanding and misuse.

In the 2019 year, nearly two thirds of the charitable donation claims that were adjusted by the ATO were because the taxpayer could not prove they had made the donation. For this reason the ATO has put out a timely reminder, listing the four main reasons that donations may or may not be tax-deductible.

Firstly, the donation can only be deductible if it is made to an organisation that is endorsed as an Australian registered DGR. An organisation’s DGR status can be checked using the on-line ABN lookup tool at abr.business.gov.au. It’s important to understand that not all charities and not-for-profits are DGRs.

Crowd-funding is proving popular as a modern means of charity, but crowd-funding contributions will rarely be tax-deductible unless the funding organisation is a DGR. Foreign charities are also often not registered as an Australian DGR.

Secondly, donations are generally not tax-deductible where the taxpayer receives or expects to receive a monetary or personal benefit in return. Common examples include buying raffle tickets or chocolates for fundraising purposes, although receiving a token like a pin, wristband or sticker will not deny you of your deduction. Some crowd-funding models also provide reward in return for payments and would therefore not be deductible, regardless of DGR status.

The third reason is based on record-keeping. Most charities issue receipts for donations, but some don’t. Where you have third party evidence like a credit card statement that makes it clear you have donated to a DGR, the ATO will likely accept your claim. They’ll also accept a claim for bucket collections of $2 or more without receipts up to a maximum of $10 per year.

Lastly, the ATO says that some people incorrectly claim deductions for donations they intend to make in their will, or claim for workplace giving that has already reduced taxable income through the payroll system.

Donations made by the executor of a deceased estate are never tax-deductible, so if this is part of your estate planning strategy you should chat to your tax advisor to ensure you get the best outcome.

Related blog:

Is my donation tax deductible?

Author: Mark Douglas
Email: mark@faj.com.au

Fuel tax credits provide businesses with a credit for the tax included in the price of fuel used for certain activities. The tax credits are reported in an entities Business Activity Statements (BAS). Fuel tax credits apply to fuel used for:

  • Machinery
  • Plant
  • Equipment
  • Heavy vehicles (gross vehicle mass above 4.5 tonnes)
  • Light vehicles travelling off public roads or on private roads.

To calculate the fuel tax credit amount on each BAS, you multiply the litres of fuel purchased in the relevant period by the current ATO-specified rate. The rate is determined by several factors, including the type of fuel, when the fuel was acquired and what it is used for. Rates for calculating the credits are updated regularly, so it is advised that you check the rates every time you lodge a BAS.

Eligibility

To be eligible for the credits, you must:

  • Be registered for GST when you acquired the fuel
  • Be registered for fuel tax credits at the time you lodge the BAS.

In order to claim fuel tax credits, your business must purchase fuel to be able to produce income (this excludes general transport). Some examples of industries that claim fuel tax credits include:

  • Road transport businesses
  • Mining (machinery, generators)
  • Fishing
  • Agriculture
  • Construction
  • Non-fuel uses such as:
    • Fuel used to clean machinery
    • Diesel sprayed onto road as sealant
    • Fuel used as an ingredient for production (paints, ink)

Fuel tax credits are classified as assessable income, so it is important to declare them in your tax return.

If you are still unsure about whether your business is eligible to claim fuel tax credits, see the link below for further information:

https://www.ato.gov.au/Business/Fuel-schemes/Fuel-tax-credits—business/

Other related blogs:

Record keeping for small business

Author: Caleb Datson
Email: caleb@faj.com.au

 

Single Touch Payroll (STP) was introduced by the ATO to replace the PAYG Payment Summaries system, requiring employers to report their payroll information in real time. Most employers now report payroll data to the ATO each pay run using STP enabled software. The ATO has recently made STP changes which have taken effect from 1 July 2021.

What has changed for small employers – closely held payees

From 1 July 2021 small employers (with 19 or fewer employees) are now required to report payments made to ‘closely held’ payees through STP enabled software.

Small employers were exempt from reporting closely held payees through STP up until 30 June 2021. A closely held payee is an individual who is directly related to the entity, for example family members of a family business, directors or shareholders of a company, and beneficiaries of a trust.

When to report

There are 3 options to report your closely held payee data:

  1. Report actual payments on or before each pay run
  2. Report actual payments quarterly when the activity statement for that quarter is due
  3. Report a reasonable estimate quarterly

Reporting quarterly means that you only need to lodge an STP report in quarters where you have made a payment that you need to report. Each quarter you still need to include any PAYG withholding amounts on your activity statement, and be sure to make Superannuation Guarantee contributions for your closely held payees before the relevant due date.

If your circumstances change and your reported reasonable estimates in previous quarters are either too high or too low, you have until the due date of your next quarterly STP report to correct a closely held payee’s year to date information. It is important not to underestimate amounts reported for closely held payees as you may be liable for penalties and interest.

How to report

Your best option is to subscribe to a suitable software package. All the major players like Xero and MYOB have stand-alone payroll packages for four or less employees for $10 per month that automate the process.

The ATO maintains a product register to include all available STP software options. This may be through an update to your existing software, or an additional service. Specifically for small or micro employers is a list of no cost or low cost STP software solutions, that cost less than $10 per month.

Each software provider will provide a way to report quarterly closely held payee data in addition to reporting payroll for regular employees each pay day. However, it may be more efficient for you to report your closely held employees at the same time.

End of financial year finalisation declaration

You will need to make a finalisation declaration in your STP enabled software to let the ATO know your STP reporting is complete for an employee for a financial year. This means your employees’ information will be available via myGov rather than on a payment summary.

Small employers with only closely held payees must make a finalisation declaration by the due date of the individual’s tax return, and the due date for arm’s length employees remains 14 July. If you are using the reasonable estimate reporting method you must correct the actual year to date amount paid.

What has changed for micro employers

Until 30 June 2021 a quarterly STP reporting option applied to micro employers (1 to 4 employees). From 1 July 2021 micro employers will need to report their payroll data in real time, or they can continue to report quarterly through a registered tax or BAS agent if they meet the following eligibility requirements:

  • Lodge activity statements electronically through a registered tax agent
  • Have a non-computerised payroll i.e. manually on a paper or a spreadsheet
  • No overdue amounts owing to the ATO or lodgement obligations
  • Meet the ATO’s exceptional circumstances determined on a case by case basis

Exceptional circumstances may include natural disasters, impeded access to records, serious illness or death of a family member, internet issues such as the inability to connect to the internet or an unreliable or slow internet connection, or having seasonal or intermittent workers.

Next phase of STP

From 1 January 2022 extra information will need to be included in your STP reporting for each employee, including their employment basis, itemised payment types that make up the gross amount (e.g. allowances, overtime, salary sacrifice), how they are taxed and details of why their employment has ceased.

Other related blogs:

Single Touch Payroll

Author: Danielle Pomersbach
Email: danielle@faj.com.au

What is PAYGW?

For those of us who are not so savvy with ATO acronyms, PAYGW stands for Pay As You Go Withholding.

This is a system of taxation that requires employers to withhold a portion of employees’ wages and then pay it to the ATO to offset expected year-end tax liabilities.

The system is usually more convenient for taxpayers, avoiding the accrual of large unexpected tax liabilities and also allows a more even flow of tax revenue for the Government.

What are the risks for failing to withhold?

There can be risks for business owners who are unaware of the PAYGW regime and who may pay cash to employees or pay wages through the Single Touch Payroll system, but who do not withhold the correct amount of PAYGW.

The consequence for failing to withhold tax on an employee’s wages is that an amount equal to the amount of tax not withheld must be paid to the ATO as a penalty.

Where an employer fails to withhold tax from their employee’s wages over a period of years, the penalties in the case of an ATO audit can be substantial and potentially crippling to a small business.

Additional risks for businesses who pay contractors

There can be additional risks for businesses who pay contractors. In some circumstances, despite having a contracting arrangement with an individual, the ATO would regard this person as an employee. Some factors that may indicate that a contractor should really be classified as an employee are:

  1. The employer pays the contractor on an hourly basis for their labour rather than on a ‘results’ basis
  2. The employer supplies any tools/equipment required for the work
  3. The employer is responsible for any warranty or faulty work
  4. The employer holds the workers compensation insurance
  5. The contractor does not have the right to delegate the work to someone else
  6. The business has the right to direct the way in which the worker does the work.

Businesses who use contractors should assess each one to check if they should actually be employed as employees and therefore have PAYGW deducted from their wages.

In the event that the ATO audits the business and classifies any contractors as employees, the ATO could apply the failure to withhold penalties along with interest on amounts from earlier periods. These amounts can be substantial in some cases.

Furthermore, employees who have been wrongly classified as contractors, may have rights to leave and super entitlements from the Employer, adding further costs to the employer’s business.

What do I need to do?

If you are an employer, have a look at the ATO page ‘PAYG withholding’  and register for PAYG withholding if required.

If you are a business that employs contractors, have a go at the ATO’s ‘Employee or contractor decision tool’ for each contractor.

If you need more help, speak to your Accountant or Bookkeeper or contact FAJ on (08) 9335 5211.

Other related blogs:

Employee or contractor – the risks of getting it wrong

Author: Heather Cox
Email: heather@faj.com.au

 

 

 

 

 

 

Concessional super contributions are payments put into your super fund from your pre-tax income. Concessional super contributions are tax deductible to the contributor and are taxed at 15% when they are received by your super fund. They include:

  • Employer super guarantee contributions (including contributions made under a salary sacrifice arrangement)
  • Personal contributions claimed as a tax deduction.

The tax advantages that concessional contributions provide is limited subject to an annual cap. From 1 July 2017, the general concessional contributions cap is $25,000 for all individuals regardless of age, and has since increased to $27,500 from 1 July 2021.

From 1 July 2018, members can make ‘carry-forward’ concessional super contributions. The carry forward rule allows individuals to make additional concessional contributions in a financial year by utilising unused concessional contribution cap amounts from up to five previous financial years, providing their total superannuation balance just before the start of that financial year was less than $500,000. Effectively, this means an individual can make up to $150,000 of concessional contributions in a single financial year by utilising unapplied and unused concessional contribution caps from the previous five financial years.

Income year Maximum* CC cap with carry forward rule
2019–20 $25,000 to $50,000
2020–21 $25,000 to $75,000
2021–22 $25,000 to $100,000
2022–23 $25,000 to $125,000
from 2023–24 $25,000 to $150,000

Prior to these amendments, if an individual did not fully utilise their annual CC cap in a financial year, they could not carry forward the unused cap to a later year. This rule constitutes an exception to the usual rule when it comes to concessional contributions: ‘Use it or lose it’.

Related blog:

What happens if I make excess contributions to super?

Author: Jesper Lim
Email: jesper@faj.com.au

In Western Australia if you die without leaving a valid will your estate will be distributed according to legislation, this being the Administration Act 1903. This means that the law decides who your beneficiaries are and how your estate is divided with minimal flexibility.

Intestacy is the term given when a person dies without leaving a valid will.

Any person over the age of 18 who is entitled to a share of the estate can apply to be the administrator of the estate. The administrator of the estate is in charge of paying individual debts and allocating the deceased estates assets to beneficiaries.

The estate first pays off any debts owed by the deceased individual before death, this occurs regardless if a will is in place or not. After the debts are paid, the assets are divided between the spouse and children as per below:

  • If the deceased estate assets are valued at less than $50,000 the spouse receives it all.
  • If the deceased estate assets are valued at more than $50,000, the spouse receives the first $50,000 and 1/3rd of the remaining. The remaining 2/3rd is split between all children.

If the deceased has no children at the time of death the distribution of assets changes:

  • Spouse receives all household chattels, the first $75,000 of assets and 1/2 of the remaining assets. The other 1/2 is split as follows:
  • Parents receive the next $6,000 of assets and 1/2 of the remaining balance.
  • Siblings receive the remaining balance.

The asset allocation splitting as seen above does not give much flexibility to the administrator of the estate. Especially in the case where an individual with family disputes and multiple families might want to look after specific beneficiaries and not want particular family members receiving any assets. Therefore, it is very important for individuals to make sure they have a valid will to ensure they are happy with their estate asset allocation.

Individuals should not only have a will but also update their will when family circumstances change, like a divorce or having children.

Other related blogs:

Due you need a binding death benefit nomination?
What is an enduring power of attorney?

Author: Rhys Frewin
Email: rhys@faj.com.au

Eligibility for the Instant Asset Write Off (IAWO) has changed over time and in recent changes has been extended to 30 June 2021. IAWO is available for eligible entities with an aggregated turnover threshold of up to $500 million. It allows businesses an immediate tax deduction for capital assets acquired.

IAWO has been further extended with another measure known as Temporary Full Expensing which allows a deduction for the cost of the business portion of eligible depreciable assets. A tax deduction is available for new business assets provided aggregated turnover is under $5 billion, and for second hand assets provided turnover is under $50 million. This measure originally ran until 2022 but was extended in the recent budget to run from 6 October 2020 until 30 June 2023.

However utilising IAWO may not always give the best outcome from a tax planning perspective. Claiming an immediate deduction for expensive capital assets could result in a business or business owner dropping into a lower tax bracket or creating or increasing a tax loss. In this case the business won’t get the full benefit of the deduction. In some situations it may be better to apply the usual depreciation rules and spread the deduction over the number of years.

Some other issues to consider before investing in new assets for the business:

  • Not all assets are eligible. IAWO does not apply to capital works such as extensions, alterations and structural improvements to a building.
  • The car limit still applies to passenger vehicles designed to carry fewer than nine passengers or a load of less than one tonne. This limits car deductions to $59,136 (for 2021).
  • From a cash flow perspective it may be better to lease an asset rather than commit to purchasing it outright
  • To use IAWO, small businesses must elect to use SBE simplified depreciation rules which does not provide flexibility as everything needs to be written off

Small business currently can choose to use what is known as the Simplified Depreciation rules. These rules include a number of concessions, including IAWO. A small business can opt-out of these concessions and therefore opt out of IOWA, but as a result they lose access to all of the Simplified Depreciation rules.

More ATO information on IAWO

Related Blogs

Company carry back losses – what are the rules?

Author: Elena Grishina
Email: elena@faj.com.au

In April 2020 the ATO first announced a new method for claiming home office expenses due to the coronavirus pandemic. The new “shortcut method” allows you to claim a deduction of 80 cents for each hour you worked from home for the periods between 1 March 2020 to 30 June 2020, and from 1 July 2020 to 30 June 2021.

The shortcut method rate covers all running expenses, including:

  • Electricity for lighting, heating & cooling and running electronic items
  • Phone and internet costs
  • Computer consumables e.g. printer ink and stationery
  • The decline in value of home office furnishings and electronic equipment
  • Cleaning expenses

The benefit of the shortcut method is that you do not need to have a dedicated working area in your home, which is a requirement for using the fixed rate method. It is especially useful for people who are working from shared spaces in their home, and multiple people living in the same home can all make claims using the 80c rate.

Additionally the method is very simple to claim, as all you need is a record of the hours you have worked from home. The record can be in the form of a timesheet, roster or diary.

The shortcut method covers all running expenses, so you are unable to claim any other expenses for working from home for that period. If you have large phone or internet expenses, or have purchased a computer for working from home, this likely means that you would be eligible for a larger deduction using another method.

Home office claims can still be made under the existing methods, and you can choose to use the method that allows you the best deduction.

The fixed rate method involves claiming a deduction of 52 cents per hour worked from home, and this rate covers electricity, decline in value and repairs of furnishings. You will separately calculate your work-related use for your phone and internet expenses, computer consumables and depreciation of electronic equipment.

See here for more information from the ATO website on the available methods and record keeping requirements for your home office claim.

Other related blogs:

Home office vs place of business
Wages during lockdown

Author: Danielle Pomersbach
Email: danielle@faj.com.au

The recent lockdown was another timely reminder for WA businesses that we live in a very uncertain business environment.

With the full lockdown only lasting three days it seems that we once again dodged a bullet. But our luck might run out, and if it’s not because of COVID, it will because of the next big disruptor.

Which makes now a great time to reflect on the importance of online for your business. During lockdown it is the only way for many businesses to transact with their customers. But even if your bricks and mortar business is open, most customers now locate businesses from a google search, including the 62% of millennials who prefer to buy over the net.

Consumers expect you to be online. If you have no online presence, then to many customers you just don’t exist.

They want to be able to locate your business effortlessly, browse services, see prices and make comparisons. Importantly, with an upswing in blower-angst, it’s essential that customers can make that on-line appointment, booking or purchase without having to lift a hand-set.

And don’t forget FAQs. Make sure these are clear and really do answer the questions that people frequently ask, even if they’re tough or awkward.

An online presence gives you access to a wider audience. Customers can make purchases or appointments while you’re closed, and your products will be available to those who can’t make it to your premises, perhaps because of transport issues, disability or time constraints.

Your online presence builds integrity and trust. It enables reviews and comments from satisfied customers and gives you a chance to highlight your expertise in your industry. Even negative reviews can be turned into a positive by publicly reaching out and righting wrongs.

It also provides a great opportunity for marketing. You can access ready-made audiences to market to through social media and subscriptions, and don’t forget those randoms that are browsing your site are already captive – they are there because they’re interested.

To get people to your site you should look at using search engine optimisation (SEO). With a bit of research you can learn the basics of this and common platforms like WordPress have functionality to guide you through it.

An online presence is not just important to grow your business. It’s essential for all businesses. Best estimates are that over 50% of people prefer to search online before making a purchasing decision. Being invisible online is like opening your shop every second day and expecting success.

Related blog:

Is the cost of your new website deductible?

Author: Mark Douglas
Email: mark@faj.com.au