Employee or contractor – the risks of getting it wrong

employee or contractorThe difference between an employee and a contractor is not always easy to distinguish. If an employer incorrectly classifies their employee as a contractor, they could face significant penalties. Therefore it is imperative that employers understand the differences between an employee or contractor and correctly categorize their workers.

There are many factors which help determine whether a worker is an employee or contractor. A few of these are listed below.

Factors that may indicate you are an employee:

  • The employer has a high degree of control over you. The employer determines what, how and where the work needs to be done.
  • You are paid at an hourly or daily rate.
  • The employer bears the risk of injury, insurance and rectification costs.
  • You wear a company uniform.

Factors that may indicate you are a contractor:

  • You have the discretion to decide what, how and where the work needs to be done and have the right to delegate your work to someone else.
  • You are only paid to achieve a result.
  • You have to fix mistakes at your own cost – you do not get paid to fix your errors.
  • You provide your own tools or assets necessary to complete the job.

If an employer incorrectly classifies an employee as a contractor, the employee would not have received the 9.5% super guarantee that they should have been entitled to. Because the employer has failed to make these superannuation payments, they will be liable to pay the super guarantee charge. This is made of the following components:

  • The employee’s super shortfall,
  • Interest of 10% per annum, and
  • An administration fee of $20 per employee per quarter.

As a further penalty, unlike normal super guarantee contributions, the super guarantee charge amounts are not tax deductible to the employer.

Further, businesses can also be liable to pay PAYG withholding penalty for failing to deduct the tax from an employee’s payments and an additional super guarantee charge of up to 200%.

Given the severity of the penalties, it is extremely important for businesses to ensure they correctly classify their workers as employees or contractors. The ATO has a decision tool that can assist you with this on their website.

Pro Tip:

Apprentices, trainees, labourers and trades assistants are always treated as employees as per the ATO.

Related blogs:

When do I need to pay super for contractors?
Do I need to pay payroll tax?

Email: tessa@faj.com.au

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Can I claim expenses when salary packaging a car?

Salary packaging a car through a novated lease arrangement has become a popular choice for employees and under the right conditions this can improve an individual’s overall tax position. However, it is important to be aware of the rules that apply to these arrangements.salary packaging a car

Firstly, it’s important to understand the arrangements for salary packaging a car.

When purchasing a car, there will be an arrangement between the employee, the employer and a finance company. This is known as a novated lease arrangement. The finance company owns the vehicle and the employee is leasing it from them. The employer generally makes the car repayments as well as running costs on the employee’s behalf. The employee’s wage is reduced to offset the costs paid by the employer. This is known as salary packaging.

Salary packaging may save the employee from paying some income tax, however it does open up another tax regime known as Fringe Benefits Tax (FBT). This is tax payable by the employer on the private portion of a benefit, and is usually passed on to the employee.

Depending on the arrangement between the employer and the employee, either can be expected to pay the running costs of the vehicle such as the fuel and services. In a situation where the employee pays the running costs of the car, some would expect that they would be entitled to claim a deduction for these expense. However, a fundamental factor in being able to claim motor vehicle expenses as a tax deduction is that the individual must own the vehicle. As mentioned earlier, under a novated lease arrangement, the finance company owns the vehicle, not the employer. As such, a tax deduction would be denied.

Even though the employee cannot claim the out of pocket running costs as a tax deduction, there can still be a benefit. The expenses should be recorded and given to your employer to reduce the FBT payable. Less FBT means more salary in the hand.

There is usually a fairly complex calculation to try to work out the arrangement that will give the best result to the employee, taking into account the type and value of the vehicle, estimated running costs, potential tax savings, and FBT costs. Employers may need to engage their accountants or novated lease companies to make these calculations.

Other related blogs:

New Guidelines for FBT Exempt Motor Vehicles

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

 

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You need a business roadmap

Being in small business is tough. Sometimes it feels like every force is opposing you. High rents, on-line competition, staffing issues, government or council policy, foot traffic, economic conditions and the list goes on. business roadmap

Some of these factors are within your control and some aren’t, and understanding this is critical to your success. You can’t fix what you can’t control.

On many occasions I have seen business owners put more energy into complaining about conditions than trying to do something about them.

One of the best things you can do for your business is stop ‘doing’ and start planning – you know the old adage “work on your business rather than in it”. Allowing yourself regular planning time away from your business gives you an opportunity to think openly and logically about where your business is now, where you want it to go, and how to get there. For me this means a regular trip to my local coffee shop with nothing other than a notebook and an open mind.

The first thing I do is to categorise my challenges into those that I can control, and those that I can’t. And I know that you can influence almost anything if you’re determined enough, but you need to put your energy into the easiest wins. I could spend a load of time lobbying to reduce council rates and I might eventually be successful, but I would have been far better spending that time developing a new product or service that has potential to bring recurring revenue, or reviewing current processes to find an efficiency.

The sort of things you can control or influence include sales, marketing, culture, team satisfaction, efficiency, costs, on-line presence, risk management, products and customer service.

But you are unlikely to have much influence over foot traffic, economic conditions, government policies or the rate of technological change. So accept these for what they are, and find ways to be successful within those parameters.

I’m a big fan of simple but focused business plans. Importantly, the business planning process forces you to spend time thinking strategically about your business. The completed plan gives you focus and direction. Sharing your ideas with others gives you motivation and accountability.

But if you’re looking for guidance on how to write a business plan, don’t google ‘business plan template’. You’ll end up with a 100 page document that addresses a heap of issues not necessarily relevant to your business. A business plan should address what’s important to you, and it may well fit on two or three pages. Maybe it will have three headings, “Where am I Now?”, “Where do I Want to be?”, and “How Do I Get There?” At FAJ we like to call this a Business Roadmap.

My key messages are to make some time to plan, focus only on what you can control and don’t over-complicate the solution. If you can identify three or four significant actions and stay focused on implementing these, you will make a positive difference to the success of your business.

Preparing a Business Roadmap is one of FAJ’s new Planning and Growth services. Click here for more information.

Other related blogs:

Cash is king

Email:mark@faj.com.au

 

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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: jake@faj.com.au

 

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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: rhys@faj.com.au

 

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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.

Preparing a Business Forecast is one of FAJ’s new Planning and Growth services. Click here for more information.

Other related blogs:

Record keeping for small business

Email:mark@faj.com.au

 

 

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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: stacey@faj.com.au

 

 

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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: jasmina@faj.com.au

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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: danielle@faj.com.au

 

 

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

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