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

Claiming vehicle expenses using a logbook

You can claim motor vehicle travel that is directly connected with your work as a tax deduction.

To do so it is important to be able to distinguish between what is considered work related and what is private. Travel to and from your normal place of employment is generally considered private, however the ATO has provided examples of the exceptions where travel is considered to be work related:

• You are required to carry bulky tools or equipment (such as an extension ladder) for work and are unable to leave the tools on site in a secure location.
• You’re attending conferences or meetings.
• Delivering items or collecting supplies.
• Travel between two separate places of employment, provided one of the places is not your home (for example, when you have a second job).
• Travel from your home or normal workplace to an alternative workplace and back to your normal workplace or directly home.
• When your work requires you to perform itinerant work.

If you fall into any of the above categories, or one similar there are two possible methods to make a claim on motor vehicle expenses in your tax return. The first is known as the cents per kilometer method. As the name suggest the cents per kilometer method uses a pre-determined rate established by the ATO (multiply by the number of kilometers traveled throughout the year). There is currently a maximum limit of 5,000 kilometers per vehicle.

The alternative is to use the logbook method which establishes the work-related motor vehicle use by way of a percentage. The percentage is then applied to your motor vehicle expenses associated with that vehicle.

To work out your work-related percentage, you must record all business journeys made in your own motor vehicle over a 12-week consecutive period, detailing;

• When the log book period starts and finishes
• The start and finish odometer readings for the logbook period
• Date of each journey
• Start and finish time of each journey
• The number of kilometres travelled for each journey
• The purpose for the journey
• The total number of kilometres travelled during the 12-week period.

At the end of the 12-week period the work-related percentage can be determined. To do this, divide your business use kilometres by your total kilometres, then multiply by 100. For example: You’ve travelled a total of 5,000Km; 3,000km relate to work, the calculation is therefore 3,000 / 5,000 x 100 = 60%.

Now that you’ve determined your work-related percentage, it’s important to know what expenses you are entitled to include as part of your claim. These expenses include:

• The running cost such as fuel and oil
• Registration
• Insurance
• Repairs and maintenance
• Depreciation
• Interest on motor vehicle loan
• Lease payments

Your total motor vehicle expenses are added up and then apportioned based on your logbook percentage. Continuing on with the above example, your logbook percentage is 60% and your total motor vehicle expenses are $10,000 so your deduction will be 10,000 x 0.60 = $6,000.
Reminder: You will need to keep receipts for all expenses to be able to claim them.

Pro tip #1

A logbook has a potential effective life of five years. A new logbook is required if your motor vehicle or job role changes.

Pro tip #2

If you started to use your car for business purposes less than 12 weeks before&aqucr8ruQuc&aqucr8ruQuc the end of the income year, you can continue to keep a logbook into the next year so it covers the required 12 weeks.

Pro tip #3

If you want to use the logbook method for two or more cars, the logbook for each car must cover the same period. The 12-week period you choose should be representative of the business use of all cars.

Author: Georgia Burgess
Email: Georgia@faj.com.au

The ATO crackdown on cash businesses

Over 85% of Australians believe it’s unfair to use cash to avoid paying their fair share of tax and the ATO is undertaking an initiative to identify cash businesses that may be avoiding tax.

The ATO are cracking down on businesses that are pushing cash sales by not offering other payment facilities. Restaurants, cafes, pubs, hairdressers, beauty salons and home based businesses are those typically associated with having a high amount of cash transactions. Businesses in those industries are expected to be targeted first.

This doesn’t intend to implicate all businesses in those industries, but it does send a message that the industry is under close scrutiny.

Sophisticated data matching tools have been developed to assist them to identify businesses that are deemed to be high risk. Information is being collected from a number of sources, including banks, other government agencies and industry suppliers. The ATO will also receive information regarding purchasing major items including boats/cars and real property which they can use to deduce whether or not your taxable income reported in your tax returns reflects the lifestyle you are living.

Equally the ATO will compare reported income and expenses to industry benchmarks to identify anomalies.

Most businesses do the right thing and will have nothing to worry about, however an ATO audit can be costly and time consuming, even when no wrong doing is found. Many accounting businesses offer accounting audit insurance to mitigate these costs.

Author: Nick Vincent
Email: nick@faj.com.au

What are the benefits of super salary sacrifice?

Salary sacrificing is an arrangement between an employee and their employer whereby part of the employee’s salary is sacrificed for benefits of a similar value. When you salary sacrifice superannuation, you are electing to have part of your salary paid to your superfund instead of receiving this amount as wages. In doing so, you are making before-tax super contributions to your superfund, referred to as concessional contributions.

A major benefit of salary sacrificing super is that you pay less tax on the sacrificed amount. For example, say you are contemplating sacrificing $10,000 of your salary to super. If you salary sacrifice this amount, the $10,000 will be treated as a concessional contribution and therefore will be taxed in your superfund at a rate 15%. If you decide against salary sacrificing, the $10,000 will be taxed as ordinary income at your marginal tax rate, which depending on your income, could be as high as 47%. This means you could potentially have a tax saving of up to 32%. So not only are you boosting your retirement savings when you salary sacrifice super, you are also paying less income tax.

Salary sacrificing to super is more beneficial to individuals with middle to high incomes. If you are in a low income tax bracket, there may be minimised or no tax savings. The downside to salary sacrificing super is that you will not have access to that money until you reach your preservation age and/or meet a condition of release, so it may be more as you get closer to retirement age.

Individuals with incomes of over $250,000 for the 2018 financial year will pay and extra 15% on their concessional contributions due to Division 293. This means any amount sacrificed to super will be taxed at 30%. Although these individuals will be paying more tax on their concessional contributions, they still benefit from salary sacrificing to super as their marginal tax rate would be 47% on ordinary income, meaning they have a tax saving of 17%.

Pro Tip #1:
Concessional contributions include your employer’s 9.5% super guarantee contributions to your superfund as well as your own salary sacrificed contributions. Be aware that the combined total of these cannot exceed $25,000 for the 2018 financial year.

Pro Tip #2:
Another change in the 2018 financial year is that employees can now claim a tax deduction for after tax super contributions within the $25,000 cap. This allows you to make the decision closer to year end and can help with tax planning.

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

What can I claim in my tax return without receipts?

Tax time can be a chaotic period, so finding your receipts for work related deductions can be a huge hassle. Fortunately, there are some legitimate work related deductions that can be claimed without proof of receipt. Taxpayers may be entitled to claim the following:

Up to 5000 kilometres of work related travel
This might include carrying bulky tools and travel required out of office by your employer.

Laundry and maintenance
Maintenance of work related clothing such as compulsory uniform, protective clothing and occupational specific clothing may be claimed to a maximum of $150 without proof of receipt.

Home office expenses
You may be entitled to claim for the costs of work you have done at home. If so, then simply record the amount of hours worked per week, multiply it by the amount of weeks worked during the financial year and then by a set rate (cents per hour) as set by the ATO.

Claiming work related deductions up to $300 at item D5 in your tax return
This can include any stationery or tools purchased to assist your work.

Pro tip:
Although these claims require no substantiation via receipt, the ATO still requires any claim to be genuine and incurred. The ATO may seek further information about the legitimacy of the claim. It is best to keep a record to support the basis of any claims to mitigate the risk of further investigation by the ATO.

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

Single Touch Payroll

What is Single Touch Payroll?

Single touch payroll (STP) is a reporting change for employers that the Australian Government are currently rolling out. Essentially it is streamlined reporting from your accounting software directly to the ATO.

What this means for you the employer

From 1st July 2018, if you have 20 employees or more, you can say goodbye to end of year ATO reporting for payroll. Information typically provided to the ATO at the end of financial year such as salary and wages, pay-as-you-go PAYG withholding and superannuation must now be reported to the ATO when you pay your employees, every time that you pay them.

How can you report?

To prepare, check with your respective accounting software providers if they will be compliant by the deadline. Employers may need to consider updating their accounting software to report through STP. Most accounting software platform providers like Xero, MYOB and Quickbooks are currently working to be compliant by the deadline and are keeping customers updated on their progress.

Pro Tip:

The Australian Government has announced it will expand Single Touch Payroll to include employers with 19 or less employees from 1 July 2019, subject to legislation being passed in parliament.

Not sure where to start?

Contact one of the friendly team at FAJ Bookkeeping to assist with accounting software compliances.

Author: Jasmina Nesic – Senior Bookkeeper
Email: jasmina@faj.com.au

Changes to rental property deductions

The 2017 federal budget introduced a number of changes to rental property deductions. The proposed changes are to prevent taxpayers from exploiting certain deductions and also to decrease the impact of negative gearing.

From 1 July 2017 deductions for travel expenses for inspecting and maintaining a residential property will not be allowed. This includes all types of travel whether it be via car to collect rent or travel interstate to the property for an inspection. This proposed change will only affect travel by the owner. Costs undertaken by a property manager to inspect the property is still deductible.

Also as of 1 July 2017 there will be a limit to plant and equipment depreciation deductions incurred by investors in residential real estate. Investors who purchase plant and equipment after 9 May 2017 will be able to claim depreciation over the useful life of the asset (as per normal). However, after 9 May 2017 you must have purchased the asset yourself to be able to claim depreciation on the asset. This means if you received the asset on purchase of the property and the previous owner paid for the asset, you can no longer claim depreciation on those assets. This proposed change only applies to ‘plant & equipment’ items, this usually means the asset can be easily moved and is not fixed to the property e.g. dishwasher & ceiling fans.

The proposed two changes will only apply to residential properties. Travel to non residential investment properties (business facilities, factories) is still claimable as before.

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