Reducing FBT with the otherwise deductible rule

Non-cash benefits given to an employee by their employer are known as fringe benefits. These benefits are generally subject to Fringe Benefits Tax (FBT) which the employer pays but will often factor into the employee’s package. However there are exemptions and concessions that can reduce or eliminate the amount of FBT payable. An example of one of these concessions is known as the otherwise deductible rule.

The otherwise deductible rule allows the FBT to be reduced to the extent that the employee would have been entitled to claim a tax deduction for the benefit, had the employer not paid for it.

Examples of benefits that the otherwise deductible rule might apply to include expense payments, loan interest, airline transport, board, property, and residual fringe benefits. For instance, your employer might pay for the interest on a loan that relates to your rental property.

In most cases, to be able to utilise the otherwise deductible rule a logbook or some other declaration is required to be maintained and provided to the employer for lodgment of the annual FBT return.

The true benefit of using the otherwise deductible rule can come about in a situation where an employee has a high amount of negatively geared property or investments. Investment losses are added back by the ATO for the purposes of Div 293 tax, health insurance rebates and a number of other income thresholds, which can result in a higher tax assessment.

In some circumstances an employee may be able to save tax by salary sacrificing wages and asking their employer to pay interest on an investment loan. This results in no change to your taxable income, but eliminates the “add-backs” for the adjusted income used for the various thresholds.

PRO TIP:
A crucial part of the application of the otherwise deductible rule is that the tax deduction must be a once only deduction – meaning a deduction spread over a number of years won’t qualify. Therefore if an employee would have claimed a deduction for depreciation for a benefit provided by their employer, the otherwise deductible concession won’t be available for that benefit.

Author: Tessa Jachmann
Email: tessa@faj.com.au

Medicare levy increase

Changes will be made to the Medicare Levy starting from July 1, 2019 when it will rise from the current 2% to 2.5%. The Medicare levy increase will raise an estimated $8.5 billion across the first three years from induction to ensure the National Disability Insurance Scheme is sufficiently funded.

However, there will be continued relief for low income earners. Increases to the low income threshold (where no levy is payable) are as follows, $21,655 for singles, $36,541 for families and $34,244 for seniors (effective from the 1st of July 2017). These changes are to adjust for increases in CPI.

Pro Tip:
Looking to reduce the impact of the Medicare levy increase? If you can bring forward income such as capital gains prior to July 1, 2019 or hold expenses till after July 1, 2019 you may be able to avoid the additional levy.

Author: Lachlan Hunn
Email: lachlan@faj.com.au

Changes to small business concession thresholds

As of the 1st of July 2017, several of the small business concession thresholds that allow small businesses access to a range of concessions have increased, allowing more businesses to take advantage of various small business tax concessions.

The turnover threshold level used to determine whether you are considered to be a small business entity has increased from $2 million to $10 million for the 2017 financial year. An entity is considered to be a small business if the aggregated turnover for the current year is actually or likely to be less than $10 million, of if the turnover was actually less than $10 million in the previous year. You must also satisfy the criteria of having carried on a business during the year to be recognised as a small business.

Small businesses have access to the simplified depreciation rules if their turnover is under $10 million.  This means they can immediately write off the value of assets up to $20,000 (until 30th June 2018). They also have access to lower company tax rates, simplified trading stock rules and an immediate deduction for prepaid expenses.

However the $10 million threshold doesn’t apply for all available concessions. For example access yo the small business CGT concessions are only available to small businesses whose turnover is under $2 million.

Also small businesses that have an aggregated turnover of $5 million or less are entitled to claim the Small Business Income Tax Offset. This offset reduces the amount of tax payable on business income. The rate of this offset has increased from 5% to 8% in the 2017 financial year, but it is still capped at $1,000.

Pro Tip:
If you are a sole trader or partnership and the income you received is considered to be Personal Services Income, you are not eligible for the Small Business Income Tax Offset, unless you are considered to be a Personal Services Business.

Author:  Tessa Jachmann
Email:  tessa@faj.com.au

First home buyers super saving scheme

Buying your first home is a milestone in anyone’s life. However, with housing prices, saving a large enough deposit can seem unmanageable. This is why in the 2017 Budget the Government announced a scheme to help first home buyers boost their deposit savings through superannuation.

How will the Scheme work?
From 1 July 2017 first home buyers can make voluntary contributions of up to $15,000 per year and $30,000 in total into your super. The contributions can be made through a salary sacrifice arrangement or if you are a sole trader, a personal contribution for which you claim a deduction. Voluntary contributions must still be made within existing superannuation caps – $25,000 for concessional contributions in 2017/18 (i.e. Contributions from super guarantee and salary sacrifice contributions). From 1 July 2018 you will then be allowed to withdraw the contributions, along with deemed earnings, to use on a first home deposit.

Where does the boost in savings come from?
The contributions are effectively pre-tax income. However, when the contributions hit your super fund they are taxed at 15%. The withdrawal of the contributions will be taxed at your marginal tax rate less 30% offset. This effectively means you will not pay any more than 15% tax on your income that is used for a deposit. Compare this with someone earning $60,000 and is in the 32.5% tax bracket. The savings they will put towards their deposit is taxed at 32.5%. Using the super scheme could result in a few extra thousand for a deposit.

Don’t contribute just yet?
Although you could have started contributing from 1 July 2017; the government have not yet legislated the scheme and it is unclear if it will pass through parliament. If it does not pass, those using the savers scheme might have their contributions held in super until retirement. However, if you don’t mind taking the risk, talk to your payroll to discuss salary sacrificing into super.

Author: Allan Edmunds
Email: allan@faj.com.au

Working holiday makers

People who come to Australia on a “working holiday” are taxed at higher rates than Australian residents, meaning they do not get the same benefit of the tax-free threshold.

However, from 1 January 2017, working holiday makers will pay tax at 15% for taxable income up to $37,000, instead of the higher non-resident tax rates.

Am I a Working Holiday Maker?

You will pay tax at the working holiday maker rates if you hold either a:
1. Subclass 417 Working Holiday Visa
2. Subclass 462 Work and Holiday Visa
3. Certain bridging visas.

Which bridging visa’s allow me to pay tax at working holiday maker rates?

A bridging visa that permits you to work in Australia will allow you to access the lower rates if:

  • The bridging visa was granted in relation to a subclass 417 or 462 visa, and
  • you are still waiting for a decision to be made on your application, and
  • your most recent visa (other than your bridging visa) was a subclass 417 or 462 visa.

What is my “working holiday taxable income”?
Your working holiday taxable income is derived from all assessable income from sources in Australia while qualifying as a working holiday maker, less deductions relating to working holiday income.

PRO TIP:
As the working holiday maker tax rules only apply from 1 January 2017, the rates of tax payable will differ for working holiday makers, depending on whether or not Australian sourced income was derived before or after 1 January 2017. If a working holiday maker worked for the same employer before and after 1 January 2017, the employer will need to issue two separate PAYG summaries for the employee for the 2017 financial year to distinguish the income earned in each period.

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

Work related expense crackdown by the ATO

The Australian Taxation Office’s (ATO) ability to check work related expense claims (including incorrect and unusually high claims) has become more sophisticated through the use of technology and data analysis which increases its audit coverage of individual taxpayers. This is predominantly through the ATO’s data matching programs (for example matching data from state titles offices to capital gains declared in tax returns).

In identifying higher than expected work-related expense claims, the ATO will be comparing a taxpayer’s claims on the return against claims made by taxpayers in similar circumstances (i.e., taxpayers working in a similar occupation and earning a similar level of salary income).

Where the ATO identifies that a taxpayer’s work-related expense claims are unusually high, the ATO may contact the taxpayer’s employer to obtain more information about the taxpayer’s circumstances, including:

  • any allowances paid by the employer to the employee;
  • the nature of the employee’s duties relative to their claim;
  • whether the employee was required to undertake any travel in relation to their work; and
  • whether the employee was reimbursed by their employer for the relevant expenses.

Where information provided by an employer indicates that a taxpayer’s claims were incorrect, the taxpayer’s claims will be further investigated and adjustments potentially made. So it’s important to make sure that all claims are reasonable, but it’s equally as important that all legitimate claims are made and that supporting evidence is available to support your claims.

Author: Shaun Coelho
Email: shaun@faj.com.au

Do I need to register for GST?

If you are carrying on an enterprise and your turnover for the next 12 months is likely to be more than $75,000 you will be required to register for GST.

If you are under that threshold you can choose to be registered for GST, unless you’re a Taxi or Uber driver in which case you must register for GST, regardless of turnover.

How do I register?
Registering is easy – you can do this online, phoning the ATO on 13 28 66 or alternatively contact your accountant.

If you’re new to business then you can do your GST registration at the same time you apply for your Australian Business Number (ABN).

Once you’ve registered, you must include GST in your sales price (unless you’re providing exempt services such as medical or education).

How do I know how much GST to put aside?
If most of your sales and purchases are subject to GST, then you should put aside an estimated amount based on one-eleventh of your sales less one-eleventh of your purchases.

When do I need to pay the GST?
You report and pay GST amounts to the ATO, and claim GST credits, by lodging a business activity statement (BAS) or an annual GST return. This can be done online or manually.

The ATO will issue your business activity statement about two weeks before the end of your reporting period, which for GST is usually every three months. The date for lodging and paying is shown on your activity statement.

Record Keeping
Ultimately you need a system that is going to track the GST you have received and paid. This could be a simple excel worksheet, manual cashbook or more advanced accounting system such as MYOB or Xero. Your accountant can help you decide which system would best suit your business.

Pro Tips
If you run a small business that deals primarily with home users then it’s usually preferable not to register for GST (if you’re turnover is under the thresholds). This means that your total cost to the end consumer may be less than someone that is registered for GST, and this gives you a competitive advantage.

If you run a small business you can opt to account for GST on a cash basis. The advantage of cash accounting is that it’s easier to manage your cash flow as the money flowing through your business is better aligned with your business activity statement liabilities.

Author: Allan Edmunds
Email: allan@faj.com.au

Making sense of SuperStream for Employers

SuperStream is the way businesses must pay employee superannuation contributions to super funds. SuperStream transmits money and information electronically across the super system – employers, super funds, service providers and the Australian Taxation Office (ATO).

Advantages include:
• Employers are able to make all their super contributions in a single transaction, even if the payments are going to multiple super funds
• Super contributions and rollovers are processed faster, more efficiently and with fewer errors
• People are more reliably linked to their super, reducing lost accounts and unclaimed monies

Some online accounting software packages include SuperStream for employers – for example MYOB and Xero. If you have this type of accounting software, you can contact the software provider and arrange registration for SuperStream. Transfer of payments and the associated information will then be completed via your online accounting software.

If you do not have online accounting software then you are required to register with the government superannuation clearing house. Once set-up you will be able to lodge your super returns with the ATO and payments with the clearing house. The clearing house will then complete the required payment and information transfer to the appropriate super funds for your employees.

The ATO Small Business Superannuation Clearing House is free for small businesses with 19 or fewer employees, or a turnover of less than $2 million a year. Below is a link to information, including registration about this ATO site:

The employee information required for setting-up SuperStream includes the employee’s tax file number (TFN), their fund’s ABN and their fund’s electronic details. The electronic information required for employees with industry or retail superannuation funds is the fund’s unique superannuation identifier (USI). If your employee has a self-managed superannuation fund (SMSF) then they will need to provide you with their fund’s ESA (electronic service address).

Author: Brigette Liddelow
Email: brigette@faj.com.au

What is Division 7A?

As a business owner you may have heard your accountant talking about Division 7A and wondered what all the fuss it about.

If you are operating your business through a company, you might expect that your hard earned efforts to be profitable would mean that the money is yours to access, right? This is somewhat true. The problem is that a company is a separate legal entity. As the owner of that company you have the ability to access the profits but only through the correct mechanism – i.e. by payment of dividends to shareholders or payment of wages to directors.

A common trap for company owners is to think that they can withdraw money from their company bank account ad-hoc for private use and not pay the money back. This is perfectly acceptable for sole traders or partnerships, but not for companies.

The Australian Taxation Office (ATO) has enforced Division 7A to prevent shareholders from doing exactly this. Why would this matter to the ATO? Because if shareholders are taking money from companies without declaring it in their own tax returns (as you would with dividends and wages), the shareholder is essentially receiving a tax-free distribution. This is different to a sole trader or partnership where the owner is paying personal tax on all the profits anyway, whether he or she draws those profits or not.

Should you withdraw money from your company for personal use and do not pay the full amount back by the lodgement date of that year’s tax return, you will trigger Division 7A. If this occurs, and no action is taken then any payments made from the company to shareholders will need to be declared as unfranked dividend to the shareholders (an outcome which ought to be avoided).

One option to avoid an unfranked dividend being declared is to enter into a complying Division 7A loan agreement between yourself and your company. This allows the money withdrawn to be treated as a loan for which you must pay future minimum repayments and interest. This is often a better outcome, especially when cash flow is an issue and you can’t immediately pay the money back.

Pro Tips
• Always be mindful when taking money from a private company if it cannot be paid back before tax return lodgement date
• Make sure your Division 7A loan agreement complies with all the requirements of the law for it to be valid
• Speak to your accountant about ways repayments can be made if a Division 7A loan agreement has been entered into

Author: Allan Edmunds
Email: allan@faj.com.au

Subdividing your main residence and selling the subdivided block – what costs can you claim?

If you are considering subdividing your main residence and selling the new block, the profit on the sale of the subdivided block is subject to capital gains tax. In order to calculate the capital gain made on the sale of property, you will need to know the sale price and the cost base. There are several expenses that you can add to the cost base of your newly created property which will decrease the profit you make on the sale of the land, and therefore the capital gains tax you pay.

Expenses that you can add to the cost base of the new block are as follows:

– A portion of the original property cost
– Subdivision costs
– Construction costs (if you build on the new block)
– Council rates
– Water expenses
– Electricity expenses
– Interest on the property loan
– Repairs and maintenance
– Insurance expense

The above expenses are generally apportioned on a reasonable basis between the original dwelling and the new block, except for payments that are solely attributable to new property (for example, construction costs if you build a house on the new block).

It is essential that you have all the information necessary to calculate the correct cost base amount in order to avoid a larger capital gains tax bill.

Pro tip:

Although subdivision costs are generally apportioned across the two properties, the costs of connecting electricity and water to the new block can be solely attributed to this block.

Author: Tessa Jachmann
Email: Tessa@faj.com.au