Buying Bitcoin – Will I pay tax?

The Bitcoin frenzy in late 2017 was quickly followed by a crash over the next year that saw it drop from above AUD$25,000 to less than $4,500. Although we have no view on cryptocurrency performance, recent predictions from crypto analysts suggest the upward trend this year may be set to continue, with Bitcoin prices reaching upwards of $18,000 in the last month. This bull market is set to catch the eye of more and more Australians if this recent trend continues, raising many questions for the everyday taxpayer who may be looking to try their luck at investing in this unusual market.

If you invest or trade in cyptocurrency, it’s vital that you understand the tax consequences.

You will never pay tax at the point of purchase when it comes to Bitcoin or other cryptocurrencies, or if there is a change in the market value of your current holdings. Yet you may have to pay capital gains tax (CGT) when you sell or dispose of cyptocurrency later on.

Cryptocurrencies such as Bitcoin can be used to pay for goods and services all over the world, and have become a popular online payment method. If you have predominantly purchased Bitcoin to purchase items for your own personal use or consumption, there will usually be no tax to pay on disposal. An exception to this is if you acquire more than $10,000 for personal use and make a capital gain. But if you acquire more than $10,000 for personal use and make a capital loss, this will be disregarded. It is less likely the ATO will deem cryptocurrency a personal use asset if it is held for an extended period of time before any personal use transactions are made.

If you trade between cryptocurrencies, CGT will need to be calculated for the first asset held as it is deemed you have disposed of it before acquiring the second asset. This is achieved by taking the market value in Australian Dollars at the time of the disposal.

If you hold cryptocurrency as an investment for more than 12 months, you may be entitled to a 50% CGT discount upon disposal. It is important to note that this 12 month period resets every time you sell one cryptocurrency for another.

There are some cases where the trading of cryptocurrency will be treated as trading stock which takes it out of the CGT rules whereby proceeds are deemed as ordinary income. This form of trading will have to satisfy various conditions that suggest the activity is that of a business by nature.

Proper record keeping is essential. At our practice we’ve seen the consequences of poor record keeping around cryptocurrencies. The sheer volume of trades can make accounting for these difficult, and a lack of records can result in extra accounting fees or inaccurate tax records. It’s important to keep all purchase and sale documents, exchange records, and digital wallet codes and keys which hold important information such as transaction dates, costs, proceeds and who and what the transactions were for.

Author: Jake Solomon
Email: [email protected]

 

Uber drivers and tax

Being an Uber driver is a relatively new and unique way of earning money and can be an option for many people with a driver’s license and a good car. Unfortunately a lot of Uber drivers do not realise the income tax and GST implications.    

The Australian Taxation Office (ATO) has stated that all Uber drivers must be registered for GST. Unlike other industries, it does not matter how much income you earn through Uber driving; from your first dollar earned you must register. Once registered for GST, you will need to start lodging quarterly Business Activity Statements and pay GST of 1/11th of your gross fares, less expenses to the ATO.

As well as remitting GST on earnings, you will also have to declare your net Uber income in your annual tax return. Uber earnings work like any other business income or contract work done under an ABN in that tax is applied at your marginal tax rate. It is important to plan for the tax payable on this income and to look at saving a percentage of earnings to cover the inevitable year-end tax bill.

There is a large range of expenses you can claim as an Uber driver to reduce your GST liability and income tax payable.

Expenses which relate to your motor vehicle include:

  • Fuel
  • Registration
  • Insurance
  • Repairs
  • Tyres
  • Maintenance Costs
  • Cleaning
  • Depreciation based on the original cost of your car
  • Interest if the vehicle is financed

To claim these costs you must keep a logbook for three months recording all travel. After this period you can use the log book to calculate your work-use percentage and claim a proportion of car expenses based on this percentage. For full time Uber drivers the business use percentage will be high which entitles them to claim a large proportion of these costs.

Other expenses that could be claimable include mints and water for passengers, mobile phone costs and stationery.

In order to claim the above expenses you will need to keep appropriate records as evidence. A good start is to open a new bank account and only use it for Uber income and expenses. All relevant information for completing an annual tax return and quarterly BAS obligations will all be in one location. Don’t forget you must also keep all receipts.

If you are planning on doing some Uber driving to earn some additional income or you are already an Uber driver and have not considered your GST and income tax obligations it is highly recommended to see an accountant or tax agent. A tax agent can register you for GST, help prepare quarterly business activity statements, plan how much to save for your upcoming tax bill and lodge your tax return.

The ATO has recently stated that they are targeting Uber drivers for undeclared income and GST. They have access to third party data from Uber for matching against the income you declare. So if you are an Uber driver and haven’t got your tax affairs in order you should do so as soon as possible.

Other related blogs:

Do I need to register for GST?
The sharing economy and taxation

Author: Rhys Frewin
Email: [email protected]

 

Cash is king

I’ve seen plenty of businesses with cash flow problems. It usually starts with deferred payment of creditors, followed by missed employee super obligations, then late payment of the quarterly BAS. And by the time it gets to this point, it’s difficult to break the cycle.

Cash is king. We all know the saying, and it’s true. A profitable business with strong cash flow and healthy cash reserves is far more likely to be successful and weather the storms that invariably hit businesses.

There are loads of technical tools and software designed to help you manage your business cash flow. But that’s all they are – tools. They don’t solve your cash flow problems. This requires a concerted effort from you, the business owner, and some strong discipline.

But first things first – cash flow management won’t save an unprofitable business. If your business has no prospect of making sustainable profits, you should immediately seek advice around your strategy, operations and costs.

If you’re profitable, then disciplined cash flow management will guide you through the known seasonal fluctuations and prepare your business to cope with other unforeseen circumstances.

The first step to good cash flow management is to prepare a monthly forecast. This is essential. You might choose to forecast cash flow or profit, or even set a budget and work out your break-even sales level. This will show you when the dips are coming and give you a benchmark to compare to on a regular basis. Any variances can then be used to regularly analyse and improve your trading performance.

Your forecast doesn’t need to be complicated. You might manage this yourself, or your accountant or a good bookkeeper will be able to help.

While analysing your results, you’ll be constantly looking for ways to improve cash flow. Here’s some things you might look for:

  • Are you invoicing your clients immediately?
  • Do your invoices show a clear due date for payment?
  • Can you encourage more credit card sales? They settle quicker.
  • Can you introduce and promote pre-paid sales vouchers?
  • Have you thought about using after-pay services (but weigh up the costs)?
  • Do you offer multiple payment methods?
  • Do you hold stale stock (if so, discount it and move it on)?
  • Are you incurring heavy interest charges on credit cards?
  • Can you trim some excess costs?
  • Is there a more efficient way to do things?

Most accounting software now offers budgeting features, auto reminders for debtors, daily bank feeds, automated posting rules, and mobile device invoicing. These features can be used to ensure your data is always up to date so you can monitor your performance and make informed decisions immediately.

And make sure your software is in the cloud, so you can share your data with us, and get instant advice when it’s needed most.

Other related blogs:

Record keeping for small business

Email:[email protected]

 

 

Proposed changes to Division 7A

Following the 2018 – 2019 Federal Budget, the government has now deferred the start date of the proposed changes to Division 7A until 1 July 2020.  These amendments were originally to apply from 1 July 2019, which gives us another year grace period.

Division 7A is one of the most complicated areas of tax law and these new measures could result in increased tax burdens that may be difficult to fund.

Division 7A (Div 7A)– what is it?

In broad terms, Div 7A applies when shareholders borrow or take money from a company with little or no interest and repayments.  Under the law, the borrowed money is treated as a dividend and therefore is taxable unless a formal written loan agreement for interest and repayment is in place, and it’s conditions are met.  Previously the term of these loans could have a maximum of 7 years (unsecured loans) or 25 years (secured loans).  Interest rates for these loans had to meet a benchmark interest rate (currently 5.2% for 2019).

Proposed rules for new loans

  • There is a maximum 10 year repayment period, from 30 June of the year the loan was made
  • Formal written loan agreements are no longer required
  • The principal mus be paid equally over the life of the loan (yearly repayments still include principal and interest though)
  • Interest is calculated on the remaining balance at 30 June, regardless of when repayments are made
  • Interest for year 1 has to be paid on the full amount of the loan for the full financial year, even if it is paid back in full before lodgement of the company tax return (previously no interest was paid if the loan was paid in full before tax return lodgement).
  • Interest is payable at the overdraft rate (currently 8.3% for 2019).

Other adjustments (existing loans)

  • 25 year loans will be exempt from the new rules until 30 June 2021 (except for the change in interest rate), when they will be converted to the above 10 year loans
  • 7 year loans will have to comply with the above new rules from 1 July 2020 (although the original term of the loan will remain)
  • All pre 4 December 1997 loans that were previously exempt from Div 7A will now have to comply with the new rules from 1 July 2021
  • The requirement to have a distributable surplus (e.g. retained earnings) is removed. Previously the deemed dividend rules were avoided where a company had no distributable surplus
  • The amendment period for a Div 7A application is extended to 14 years after the year the loan was made

Undrawn Present Entitlements 

An undrawn present entitlement (UPE) occurs when a trust distributes profits to a company but the actual cash owed to the company from that distribution is not paid.

From 30 June 2009, companies had the choice of putting UPEs under a subtrust (a special loan where only interest is paid for 7 or 10 years, after which the loan must be repaid in full), or a Div 7A loan agreement if the loan remained unpaid at tax lodgement date.  From 1 July 2020, UPEs will have the same requirements as all other loans under the proposed changes to Division 7A.

Existing UPEs under subtrust agreements will also be required to be placed under the same 10 year loan agreement from 30 June 2020.  At the moment it is unclear whether the existing term will remain, or be reset to 10 years from 30 June 2020.

At this stage, UPEs prior to 16 December 2009 are not required to comply with the new rules but may be subject to transitional rules in the future.

Other related blogs:

What is Division 7A?

Author: Stacey Walker
Email: [email protected]

 

 

Is your business STP ready?

Single Touch Payroll (STP) for small businesses starts on 1 July 2019 and is now just a matter of weeks away, although the ATO has given an extension until 30 September to be STP ready.

STP is an electronic reporting system for payroll. It means that every time a business pays an employee, information like earnings, tax and super must be reported direct to the ATO in real time. There’ll be no more PAYG summaries at year end, and your activity statements will now come pre-populated with your payroll information.

All of the major software suppliers are STP ready with their cloud based products. If you’re already using this software, you’ll just need to change a few settings, and there’s plenty of help articles available.

If you are using desktop software, or no software, you have two choices. You can upgrade to cloud based accounting software, or you can use a stand-alone STP service. The major suppliers have payroll only software for employers with 1 to 4 employees for around $10 per month or there are other payroll service providers out there who’ll look after your entire payroll process for a more substantial fee.

Full cloud based accounting software will cost your business around $50 to $100 per month for your subscription. Besides looking after your STP, the software will provide you with many other benefits that should outweigh the additional cost.

With your new software you can set up bank data feeds, which means your transactions are fed daily into your software. No more data entry, no more bank reconciliations, and no errors.

Next you can automate your coding using in-built artificial intelligence. You should be able to accurately allocate 80 to 90% of your transactions to the right account without touching the software.

You can store your receipts electronically, invoice from a device and automate debtor follow ups. And importantly, your accountant can log in at any time and use live information to give you better advice.

Other related blogs:

DoI need to pay payroll tax?
Record keeping for small business

Author: Jasmina Nesic
Email: [email protected]

Why use a Family Trust?

Discretionary trusts are a type of structure commonly used as an effective way to share business or investment profits among family members, to minimise tax liabilities and to protect a family’s assets.

A discretionary trust can be further classified as a “family trust” for tax purposes. This occurs when the trust makes a Family Trust Election on it’s tax return. So why use a family trust?

There are three main circumstances where a trust could benefit by making a family trust election:

  1. The trust receives franked dividends

The election bypasses restrictions in distributing franking credits, which can usually only be passed to beneficiaries if the individual receives less than $5,000 in franking credits.

  1. The trust has losses

Ordinarily trusts are subject to complex measures before being allowed to deduct prior year losses from current year taxable income. However where an election has been made, the trust only needs to pass one test – known as the income injection test rather than face the four regular complex tests to recoup the loss.

  1. The trust owns shares in a company that has losses.

The election allows for a more concessional treatment of the company loss recoupment rules, and may permit the offset of company losses in circumstances where a non-family trust would not.

The election must specify one person – the test individual, who forms the point of reference for defining the family group. The family group sets the maximum range of beneficiaries to whom the trustee can distribute income or capital of the trust to.

The family group includes:

  • The test individual and their spouse
  • Any parent, grandparent, brother or sister of the test individual or of their spouse
  • Any nephew, niece, or child of the test individual or of their spouse and any lineal descendant of these individuals
  • The spouse of anyone mentioned above

To make a valid election the trust must pass the Family Control Test, which ensures that only a trust controlled by that family can make a valid election.

Control mainly looks at who can control the application of income or capital of the trust. To pass the test the trust needs to be controlled by a group consisting of the test individual, their family, or their legal/financial advisors.

An Interposed Entity Election is used to make an entity, such as another family trust, a member of the family group. This election must specify the same test individual as in the family trust election.

Pro tips:

  • Distributing income among beneficiaries who are on lower marginal tax rates can reduce the effective tax rate on a trust.
  • As a consequence of making the family trust election you are restricting the people to which income can be distributed, and distributions to anyone outside the family group trigger tax at the highest rate (currently 47%).
  • It is important to understand when the election may be required, as the absence of the above scenarios may mean there is no benefit in doing so.

Other related blogs:

Making a family trust election

Author: Danielle Pomersbach
Email: [email protected]

 

 

How Does WA Land Tax Work?

Land Tax is a State imposed tax paid annually by many land owners in Australia. In WA Land Tax is calculated on the aggregated unimproved value of all land held by an owner as at midnight 30th June each year.  For example, if you solely own two properties with unimproved values of $330,000 and $270,000, you have an aggregated value of $600,000.

In WA, total land holdings (excluding exempt land) with an unimproved value of $300,000 or more will receive a land tax assessment.  The land tax payable increases incrementally on a sliding scale from rates of 0.25% to 2.67%.  The current rates of land tax payable in Western Australian can be found on the Department of Finance WA website.

Other states have similar rules, but exemptions and rates differ, so you should inquire with the relevant State taxing authority to find further information for land held outside of WA.

Land tax is assessed on the unimproved value of land only. These valuations are undertaken by the Valuer-General in Western Australia and notices are issued based on land ownership and use as at midnight 30th June each year.  No land tax is payable on your primary residence.

For properties located within the metropolitan region an additional tax is levied called the Metropolitan Region Improvement Tax (MRIT).  This additional tax is calculated at 0.14 cents for each dollar that your aggregated unimproved land value exceeds $300,000.  For example, if your total aggregated unimproved land value (excluding exempt land) is $500,000, the MRIT payable will be $280.

There are various exemptions and concessions available to reduce or negate land tax, the most common being:

  • Land owned by yourself as an individual and used as your primary residence
  • Private residence under construction or refurbishment at 30th June
  • Moving from one residence to another
  • Land used for a primary production business
  • Land held by a recognised charitable organisation

If you disagree with your Land Tax assessment you are able to lodge an objection. The above website has additional information on how this can be lodged.

Pro tips:

  • If your private residence is held in or owned by a company or trust, you generally won’t get the primary residence exemption
  • Land holdings held in a trust are assessed separately (i.e. not aggregated) to land held in your own name
  • Land tax on commercial property is usually recoverable through outgoings, so there is no cost to the owner
  • You can object against a land tax assessment within 60 days of the issue date of the assessment, including an objection as to the value placed on the land

Fun fact:

  • Land held in the Northern Territory is exempt from land tax. It is the only state in Australia that does not charge land tax, although they will levy vacant or derelict CBD land and buildings from 1 July 2019.

Other related blogs:

New tax rules for property sales above $2m from 1 July 2016
Benefits of obtaining pre-approval on purchasing a property
Buying a property – tenants in common v joint tenants

Author: Joe Siragusa
Email: [email protected]

Pros and Cons of Negative Gearing

In the lead up to the recent federal election the hot button topic of negative gearing was a key election point. So what is it, and what are the pros and cons of negative gearing?

Negative gearing, while commonly used in the context of real estate assets, can apply to any income producing asset including listed shares. It is essentially where the tax deductible expenditure related to the asset (including interest payments) exceeds the income the asset generates (i.e. you are spending more than you are receiving) and the amount of loss incurred is allowed to reduce your taxable income from other forms of income like wages.  This lowers overall tax payable and often results in a year end tax refund. A tax incentive to buy property should in theory stimulate economic growth and keep the housing market active.

A lot of investors who buy assets do so with the intention of making a profit on the long term growth of the asset, so while they may have negatively geared the asset during the period they held it, the intention is for the capital growth of the asset upon sale to exceed the losses they incurred while holding the property after factoring in selling costs and potential capital gains tax liabilities.

The Pros?
Every dollar of negative gearing loss can potentially get back your marginal tax rate as a tax credit (up to 47c for every dollar spent depending on your earnings)

Borrowing against an asset may allow you to purchase in higher growth that may have been out of reach with lesser borrowings.

The Cons?
The tax break you receive will for the most part never be greater than the loss, which can make cash flow an issue when it comes time to pay mortgage repayments and ongoing property expenses.

First home buyers and owner occupiers find it more difficult to secure property when the market is shared heavily with investors looking to secure a property for their portfolio.

The purpose of an investment is to make money – if you negatively gear it and then sell the property for the same or less than what you purchased it for you would be worse off financially than before you purchased the property.

Pro-tip

Already negative gearing? Don’t wait until you lodge your tax return to get the tax benefit of negative gearing. The ATO allows you to vary the amount of tax your employer withholds so you can effectively get your negative gearing benefit throughout the year.

Other related blogs:

Changes to depreciation for rental properties
Changes to rental property deductions
Less known rental property deductions

Author: Nick Vincent
Email: [email protected]

Claiming travel expenses using the substantiation exception

Work related travel expense claims have become an audit target in recent times. Especially for those claiming travel expenses who use the substantiation exception and claim deductions within the ATO’s published “reasonable” amounts. These claims can be quite significant and can result in large refunds which is why the ATO have set their sights on catching out the illegitimate claims.Claiming travel expenses

When an employee receives a travel allowance for work related travel they are not required to provide receipts for travel expenses incurred (e.g. meals, accommodation and incidentals) provided that the following three conditions are satisfied:

  1. The travel allowance received is a bona fide (genuine) travel allowance. A travel allowance is considered bona fide if it is an amount that can be reasonably expected to cover accommodation, meals or other incidental expenses associated with the travel. The ATO does not have a minimum set amount per day to be considered bona fide, rather, it is determined on a case by case basis focusing on whether the allowance would be expected to cover the travel costs.
  2. The travel allowance must have been paid to cover a specific overnight trip. It cannot be an amount paid at an hourly rate for certain hours worked; this does not constitute a specific trip.
  3. The travel expense claims must not exceed the relevant reasonable travel amounts prescribed by the ATO, which provide specific daily rates for accommodation, meals and incidentals depending on salary and location of travel. For the substantiation exception to apply, the travel claim must not exceed these daily rates.

If the above conditions are met then you do not need to provide receipts under the substantiation exception when claiming travel expenses. However, the ATO still require that you provide evidence on how you calculated the travel claim and that the amount claimed was actually incurred. This can often be through bank and/or credit card statements.

Pro Tips:

There is a common misconception that if you receive a travel allowance you are entitled to claim up to the ATO’s reasonable amounts. This is not the case; you can only claim expenditure for amounts which you can show were incurred.

Regardless of the substantiation exemption, keeping receipts for all travel expenses will avoid any uncertainty about what travel expenses you can claim.

Related blogs:

Employee travel expenses
Home to work travel – is it deductible?
What can I claim in my tax return without receipts?

Author: Allan Edmunds
Email: [email protected]

 

Do I need a Binding Death Benefit Nomination?

Did you know that your Will does not control who your superannuation benefits go to upon death?

On death, a members super benefit becomes payable as either a lump sum or a pension. The trustee of the super fund, in accordance with the fund’s trust deed, makes a decision as to who these benefits are paid to.

However, as a member you are able to make a written direction, known as a Death Benefit Nomination, to your super fund specifying who receives your death benefit. This notice can be binding (known as a Binding Death Benefit Nomination or non-binding (known as a Non-Binding Death Benefit Nomination).

If you make a valid Binding Death Benefit Nomination, the trustee must pay your death benefit in accordance with your nomination. If you make a Non-Binding Death Benefit Nomination, the trustee can have regard to your nomination, but does not have to follow it.

Additionally, your nomination can be lapsing or non-lapsing. A lapsing nomination must be renewed after it lapses (usually every three years) and a non-lapsing nomination stays in place until it is revoked or replaced.

However you can’t nominate anyone you like to receive your superannuation death benefit. Under super law you can only nominate either the executor of your Will or a superannuation dependant (e.g. spouse and children). If it is paid to the executor of your Will, the benefit then forms part of your personal estate and must be paid out in accordance with the terms of your Will.

The importance of Binding Death Benefit Nominations was highlighted in the 2013 case of Wooster v Morris. Mr Morris (the deceased) had two adult daughters from a previous marriage, and a second wife (Mrs Morris). Mr & Mrs Morris were joint trustees of their self-managed super fund and Mr Morris had made a Binding Death Benefit Nomination in favour of his two daughters.

Mr Morris subsequently died, and Mrs Morris appointed herself as sole trustee of the SMSF. She argued that the Binding Death Benefit Nomination that Mr Morris made was not binding, and paid herself the entire death benefit of $924,000.

The daughters challenged this in court and the court found that the nomination was binding and held in favour of the plaintiffs. Without the Binding Death Benefit Nomination, the daughters would have had no claim to the death benefit. This was a good result and shows the importance of having a properly drafted and executed Binding Death Benefit Nomination that has regard to the contents of your Will, your SMSF trust deed, and your estate plan.

Pro tips:

Make sure you ask your lawyer or other professional advisers about Death Benefit Nominations when doing any of your estate planning

Appointing an Enduring Power of Attorney is another important aspect of estate planning, which enables another person to make a decision on behalf of someone that becomes incapacitated

If you have a lapsing Death Benefit Nomination, make sure you diarise to have this extended immediately on the expiry date.

 

Author: Heather Cox
Email: [email protected]