Franking credits – what are they?

If you have ever invested in the stock market, it is likely you have come across franking credits. Whether it be an amount on a dividend statement you notice doesn’t hit your bank account, or a refundable tax offset you see on your tax return. What does it actually mean and how does it affect you?

Why does the dividend imputation system exist?
A dividend imputation system is where some or all of the tax liability for a company is transferred to its shareholders in the form of a franking credit. The franking credit accompanies a dividend, which represents earnings by the company. The purpose of franking credits is to stop company profits from being taxed twice, so that whoever eventually receives the profits will be taxed at their own marginal tax rate.

How does it work?
Most companies pay tax on their profits at 30%. The company can choose to either reinvest their after tax profits back into the business or to pay some or all of these profits out to its shareholders as a dividend. The shareholder will initially receive the after tax amount (maximum of 70%), as 30% would have being paid by the company as tax. For the shareholder, the tax treatment is that the dividend is grossed up (imputed back to 100%) and then included as in the shareholder’s tax return and treated as ordinary income. The shareholder is assessed at their marginal tax rate and receives a credit for the franking credit. So if the shareholder’s marginal tax rate is less than 30% the shareholder is better off (from a tax perspective).

Why did I not get my franking credits refunded?
If you are in a higher tax bracket than the company, you will have to pay the additional tax on the dividend that the company hasn’t paid. For example, if you receive a dividend fully franked at 30% (that is the company has paid 30% tax on the earnings already), and you are a higher income earner in perhaps the 45% tax bracket, you will have to pay an extra 15% tax on the dividend.

Why do some dividends not have a franking credit?
If you receive an unfranked dividend, this means the company has not paid tax on the money you are receiving. You are more likely to receive an unfranked dividend when you invest in companies that do not necessarily pay much tax, as they have more deductions available to them. Companies can only distribute franked dividends if they have paid enough tax previously. There is also the possibility of receiving a partially franked dividend, which occurs when the company hasn’t paid enough tax to be able to pay a fully franked dividend.

I don’t need to lodge a tax return, am I entitled to a refund for franking credits?
If you are wanting to do this yourself, the easiest way is to go through your myGov account online. Alternatively, you can obtain an “Application for refund of franking credits for individuals” through the ATO website, before lodging this either by phone or post to the ATO. There is also an automated refund process that is being piloted by the ATO where a selection of taxpayers who applied for a refund in the previous year will be automatically issued a refund based on information reported to the ATO and the relevant share registries.

 

Author: Jake Solomon
Email: jake@faj.com.au

What is the PAYG instalments system?

The Pay As You Go (PAYG) instalments system is a program where regular payments are made to prepay tax on expected annual income tax liability on business or investment income. It only applies if you earn income over a certain amount.

PAYG instalments are based on tax payable as per your previous year’s tax return lodged. Individuals (residents) and trusts will need to pay instalments if they reported $4,000 or more of gross business and investment income in their previous tax return with some exceptions:

• The tax payable on your latest notice of assessment is less than $1,000
• Your notional tax is less than $500
• You are entitled to the seniors and pensioners tax offset
Non-residents must pay instalments if they reported $1 or more of gross business and/or investment income.

There are two options to calculate the amount to pay: the first option is to calculate by instalment amount, where the amount payable is calculated by the ATO. The second option allows you to calculate the amount yourself using the instalment rate provided by the ATO and your instalment income.

If you believe your instalment rate or amount does not represent your current circumstances, you can make it higher or lower by varying it.

For assistance with lodging or varying PAYG Instalment notices, contact us at FAJ on (08) 93355211.

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

What are bank feeds?

Bank feeds are automatically created lists of the transactions (spent and received) in your bank account which are electronically ‘fed’ through a third party provider to your accounting software. Bank feeds have been around for a while as part of desktop accounting software and have been integrated into online accounting software only in the past couple of years.

The great thing about bank feeds is that they heavily reduce the amount of data entry for business owners or their bookkeepers. The method of collecting these feeds differ between software providers and banks.

How does it work?
Bank feeds work by linking the data in your business’s bank, credit card and PayPal accounts to your accounting software.

Once the transaction has arrived in your software it needs to be coded to a general ledger account. This is where the magic begins – once a transaction has been coded the first time the software uses rules and artificial intelligence to learn how to automatically code future transactions. You can further assist by setting up  rules within your accounting software to auto-match all transactions and in this way minimize data entry.

For example, once you have allocated an account and tax code to a bank charge transaction all future bank charges with the same description will automatically be coded the same way. Of course if necessary the auto coding can be overridden.

Bank fed lines can also automatically match to any sales invoice or purchase invoice created in the software. If multiple invoices are paid at one time then matching to outstanding invoices can be completed with ease from the bank reconciliation screen.

The setup.
Generally setup requires signed bank forms which can be downloaded from within the accounting software. Sometimes direct links through online banking can be activated on the spot depending on the bank and type of account. This involves either:

  • Accessing the bank account through online banking and activating to link with the accounting software selected (e.g. Xero, MYOB or Quickbooks) and the bank account created in the software

Or

  • Accessing and printing bank forms from your accounting software, filling out the bank form information and getting the relevant people to sign forms (i.e. the signatories of the bank account). Then submit the forms to the relevant accounting software used. (Submission is usually via email to the accounting software provider)

Why are Bank Feeds So Important?
A large part of SME bookkeeping is coding bank statements into revenue and expense categories so a business can track its sales and costs. A user can set up rules to automatically match transactions from certain suppliers (e.g. a credit card transaction from an airline would be categorised as Travel). This coding occurs from within the bank reconciliation screen which is more efficient than older methods, and cuts out hours of manual data entry required to reconcile accounts.

Online accounting software collects bank feeds in two ways.

1. The Direct Feed
Larger software companies pay the biggest banks to receive bank feeds for shared customers’ accounts. The bank’s IT department prepares its systems to export a daily feed of transactions from its banking system to the software company’s databases that run the online accounting program (eg. Xero, MYOB).

Direct feeds are commonly used for everyday business and personal bank accounts, some loan accounts but not term deposits. It does depend on the banks setup of the banking accounts whether they can be fed or not.

2. The Indirect Feed
An online accounting program can also use a data aggregation service which collects bank feeds from thousands of banks.

The data aggregator used by most software companies is a US headquartered company called Yodlee. Yodlee sidesteps the cost of paying for fees by copying the list of transactions on the screen of users’ online banking portals.

Yodlee cleans up the list, removes duplicates and sends it to the user’s online accounting software as a bank feed.

This process is called “screen scraping” and initially created some controversy for two reasons.

  1. The technology is not perfect and the occasional transaction is duplicated or omitted. Online accounting programs that use Yodlee recommend checking reconciled accounts against the balances in your online banking portal.
  2. Yodlee is most commonly used for credit card feeds, although recently the ANZ Business One credit card has commenced feeding through using the direct method feed.

Pro Tips:

  • Credit cards can be particularly helpful when using bank feeds as they contain more descriptive information than regular bank transactions. This description improves the effectiveness of rules and artificial intelligence.
  • Contact FAJ Bookkeeping if you’d like advice or assistance with integrating your bank feeds into your accounting software.

Author: Jasmina Nesic
Email: jasmina@faj.com.au

TBAR – what it means for an SMSF trustee

Self managed super funds have new reporting requirements also known as TBAR (transfer balance account reporting). This helps the ATO to track members’ balances in relation to the $1.6m transfer balance cap and their total super balance.

From 1 July 2018 SMSFs must report includes certain transactions or events relating to pensions in retirement phase.

These events includes:

  • existing retirement pensions a member was receiving on 30 June 2017 that continue to be paid to them on or after 1 July 2017
  • new pensions commenced
  • pensions commuted (taken as a lump sum or converted to an accumulation interest)
  • some limited recourse borrowing arrangement payments
  • compliance with a commutation authority issued by the Commissioner
  • personal injury (structured settlement) contributions

From 1st of July 2018, TBAR applies to SMSFs on a compulsory basis, and at that time SMSF trustees will need to make a one-off disclose of the value of their 30 June 2017 pension balances.

SMSFs will have different reporting timelines for depending on individual member balances within each fund as per the below:

  • where all members of the SMSF have a total superannuation balance of less than $1 million, the SMSF can report this information at the same time as when its annual return is due (often 15 May of the following year)
  • SMSFs that have any members with a total superannuation balance of $1 million or more must report events affecting members’ transfer balances within 28 days after the end of the quarter in which the event occurs
  • The initial transfer balance account events that occur during 2017–2018 should be reported at the same time as the SMSF’s first TBAR.
  • Note that the reporting of existing pensions (regardless of size) at 30 June 2017 must be done on or before 1 July 2018.

In the instance where a SMSF member has exceeded their transfer balance cap, they are required to report earlier.

An excess transfer balance cap can result in additional tax and any late lodgement may also incur penalties.

Pro-tip

  • Pension payments do not need to be reported under TBAR, even if minimum pension amounts are exceeded, but lump sum withdrawals must be reported.
  • Reporting requirements (quarterly or annual) are based on members total super balances at 30 June in the previous year.

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

How much tax do I pay?

How much tax you pay depends on how much income you earn net of deductible expenses. Simply speaking, tax is paid to the Australian Taxation Office (ATO) based on your taxable income. When we prepare your tax return, our focus is to report the correct taxable income.

The basic formula for calculating your taxable income is: total income minus total deductions. Income can come from a range of sources, such as: wages, business earnings, interest earned, dividends received, Centrelink payments etc. We will work out all your allowable deductions, whether they relate to your work, your business or your investments. We do this to reduce your taxable income, hence reduce the amount of tax the ATO will ask from you.

Once your taxable income has been established, the ATO have set rates on how much tax is due on that particular amount of taxable income. This figure can also depend on your personal circumstances. A few examples include; the types of income earned, whether you are single or member of a family, whether you have a HELP debt or your age at year end. We then compare the tax figure calculated by the ATO at year end to any tax that you have already paid during the year.

The most common form of prepaid tax comes from an employer withholding tax from their employees. If you are a wage earner, each time you get paid, your employer is withholding some tax and paying it to the ATO on your behalf. If you have sources of income that are generally untaxed during the year (for example business profits, interest earned or investment earnings etc.), the ATO can also ask you to prepay some tax during the year. These are known as PAYG instalments and are usually due on a quarterly basis.

Once we complete your tax return (to include all income, deductions and tax paid) we can then let you know if you have paid too much, or not enough. If your prepaid tax is greater than what the ATO are asking for, you will receive a tax refund. If your prepaid tax is less than what the ATO are asking for, you will have to pay further tax.

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

What is a sophisticated investor certificate?

Normally investors must be given a disclosure document such as a prospectus before being offered shares or securities for purchase. However investors holding a sophisticated investor certificate are exempt from these rules and can purchase these shares without having received a prospectus.

So how do you get a sophisticated investor certificate?

Under chapters 6D and 7 of the Corporations Act 2001, a qualified accountant may issue a sophisticated investors certificate to an investor.

A qualified accountant is defined in section 88B of the Act as a person belonging to:

  • Chartered Accountants Australia and New Zealand;
  • CPA Australia:
  • Institute of Public Accountants (IPA); or
  • Certain other eligible foreign professional bodies

Before issuing a certificate an accountant must consider whether the investor satisfies the criteria to qualify as a sophisticated investor. This criteria is set out in the Corporations Regulations as:

  • Net asset of at least $2.5 million; or
  • A gross income for each of the last 2 financial years of at least $250,000.

The accountant uses their professional judgement to in measuring income and assets for the purposes of these tests, and can take into account the income and assets of controlled companies and unit trusts (usually 50% ownership), but not discretionary trusts.

Certificates are valid for up to two years.

Pro tip:
There is potentially a greater level of risk when considering investments as a sophisticated investor as you may not received important information including  a statement of advice, product disclosure statements or prospectus.

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

Client gifts, are they a legitimate deduction?

Client gifts are becoming a common part of business practice these days and can help you win new clients, increase referrals and generate new revenue.
Like other business expenses you want them to be tax deductible so they can be claimed at tax time. Most of these gifts are tax deductible provided they meet certain criteria. Tax Determination 2016/14 states that provided the gift is characterised as “being made for the purpose of producing future assessable income”, it is tax deductible. This however doesn’t mean that any gift given to a client is deductible as shown in the examples below.

Deductible
• Bottled Spirits
• Bottles or Cartons of Wine, Beer
• TV Sets
• DVD’s
• Computers
• Gift Vouchers to generic organisations (eg. Myer, David Jones, Westfield)
• Crockery
• Swimming pools
• Gardening equipment
• Perfume
• Pen sets
• Groceries
• Games

Not Deductible
• Glasses of Champagne
• Hot Meals
• Theatre Tickets
• Holiday Accommodation
• Cruises
• Hired Entertainers
• Hired Sporting Equipment

So why is there a difference between the deductible and not deductible expenses if they are all purchased as gifts for clients?
The answer to this is whether or not the client gift constitutes entertainment or not.
Entertainment is specifically excluded from being deductible in the Income Tax Assessment Act and is defined as entertainment by way of food, drink or recreation; or accommodation or travel to do with providing entertainment by way of food or drink or recreation.
In practice, the provision of entertainment can be determined by reference to the characteristics of timeliness and direct connection.
Essentially you need to ask your self one main question in relation to client gifts.
1. Is the benefit used up immediately after consumption or is it delayed and can be drawn out?
The more the benefit can be delayed, drawn out or used again the less likely it is to be considered entertainment.

Author: Elissa Bonser
Email: elissa@faj.com.au

Entertainment and marketing expenses – what’s the difference?

Many people think entertainment and marketing expenses are the same thing but from a tax perspective they are very different. Entertainment is generally not deductible whilst marketing is. It’s important to know the difference between the two so you can understand what’s deductible to your business and what’s not.

Let’s begin by breaking down what these two word’s actually mean.

The generic definition of entertainment is something affording pleasure, diversion, or amusement. The Australian tax law goes even further to describe it as either providing entertainment by way of food, drink or recreation; or by accommodation or travel to do with providing entertainment by way of food, drink or recreation.

Marketing is defined as the action or business of promoting and selling products or services, including market research and advertising. From these definitions we can easily see that these are two very different types of expenses.

Even though these two types of expenses are different there are potential points where they can overlap. This may occur where you take your client out to dinner lunch, or even coffee, you provide food or drinks to your clients at your premises or any other circumstances where you provide something to a client which provides pleasure.

In these cases you must determine if the expenses is marketing or entertainment.

When looking at whether a meal purchased and or provided by your business for a client is deductible there are four questions to ask:

1. Is it being provided for enjoyment or refreshment?
* If the purpose of the meal is pleasure it is unlikely to be deductible.
2. How elaborate is the meal?
* The “fancier” the meal the less likely it is to be deductible
3. Is it consumed during or outside worktime?
* Consumed during work time is more likely to be refreshment and thus deductible
4. Is it consumed on your business premises?
* If consumed on business premises more likely to be deductible

The answers to the above questions should be considered together as generally if the answer to one question leans toward the expense being entertainment, it generally is.

Some examples that you may consider to be marketing that the ATO generally treats as entertainment are listed below.

• Meeting your client at a café during work time and buying them a coffee and cake while discussing business related topics
• Taking your client to a pub for dinner and couple of beers while discussing business related topics
• Inviting all of your clients to a function on your premises outside business hours where alcohol and nibbles are provided
• Meeting your suppliers at a restaurant and buying them lunch while discussing business related topics

Refreshments provided in the office environment such as sandwiches and take-away coffee at a staff training session or client meeting will usually be tax deductible.

Author: Elissa Bonser

Email: elissa@faj.com.au

Changes to company tax rates

The 2016-17 Federal Budget announced changes to company tax rates which will progressively reduce the tax rate to 25%.

The company tax rate for the 2016-17 financial year is 30%, and for Small Business Entities (SBEs) the company tax rate is 27.5%

To be identified as an SBE, a company must satisfy both of the following criteria:
1. Carry on a business in that income year
2. Either in its previous year or current year have turnover less than the current year threshold (for the 2016-17 financial year this amount is $10 million)

Table 1 shows the progressive reduction in the company tax rates for the next 10 years.

From the 2017-18 financial year onwards, companies which are Base Rate Entities qualify for the lower tax rate concessions.

A Base Rate Entity (BRE) which is very similar to a SBE must meet the following criteria:
1. Carry on a business in that income year
2. Has turnover less than its current year threshold (for the 2017-18 year this amount is $25m).

On 18 October 2017 a bill was proposed to change the definition of a Base Rate Entity for the 2017-18 year to replace the ‘carrying on a business’ criteria to an 80% passive income test.

Passive income includes:
• Dividends other than non-portfolio dividends
• Interest income, royalties and rent
• Dividends (except non portfolio dividends)
• Trust / partnership distributions which are passive

Under this proposed change a company will not qualify for the lower tax rate if more than 80% of the income is passive income, even if the company is carrying on a genuine business.

The 80% passive income test is only a proposed change by the federal government. It may be some time before we know which tax rate will need to be used for certain companies. The government’s goal with the reduction to company tax rates is to implement a 25% tax rate for all companies around the year 2027. This will hopefully make Australian companies more competitive with other world wide companies.

Table 1:

Income Year Turnover Threshold Lower Rate
2015-16 $2m 28.5%
2016-17 $10m 27.5%
2017-18 $25m 27.5%
2018-19 – 2023-24 $50m 27.5%
2024-25 $50m 27.5%
2025-26 $50m 26.0%
2026-27 $50m 25.0%

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

 

 

What is the research and development tax offset?

The research and development tax offset is an incentive to encourage Australian companies to invest in R&D activities.

The Australian Taxation Office and the Department of Industry, Innovation and Science work together to deliver the Research and Development (R&D) Tax Incentive Programme. This programme provides tax offsets to companies (but not to other entities) for expenditure spent on eligible R&D activities.

The R&D Tax Incentive can reduce the cost and risk involved in undertaking research and development activities for a business. This benefit helps companies doing eligible work to create new or improved products, processes and services by reducing their tax.

The program is open to eligible companies of all sizes, in all industry sectors and aims to boost competitiveness and improve productivity across the Australian economy.

How much is the offset?

For income years from 1 July 2016 onwards:
• A 43.5% refundable tax offset is available for eligible companies with an aggregated annual turnover of less than $20 million per year, provided they are not controlled by income tax exempt entities.
• A 38.5% non-refundable tax offset is available for all other eligible companies. Unused offset amounts may be carried forward to future income years.

For income years before 1 July 2016, the refundable tax offset is 45% and the non-refundable tax offset is 40%.

What are the steps to claim the offset?

1. Determine if you are eligible for the R&D Tax Incentive. The following ATO link outlines the eligible entities and activities (https://www.ato.gov.au/Business/Research-and-development-tax-incentive/Eligibility/)
2. Make sure you keep records as evidence of your eligibility.
3. Apply to register your R&D activities with the Department of Industry, Innovation and Science.
4. Claim the offset through your company’s income tax return.

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