Watch out for the personal services income (PSI) rules which aim to tax business profits in the name of the person doing the work. They can often apply to contractors, consultants and professionals. Do they apply to you?

If you are running a business it is important to establish if the PSI rules apply. PSI is income produced mainly from your personal skills or efforts as an individual.

There are 4 steps in determining if the PSI rules apply

1. Have you received PSI?
In this step you need to establish what percentage of income earned from each contract/job performed was for your labour, skills knowledge & expertise, as well as what percentage relates to materials supplied and/or tools equipment used.
• If more than 50% of the income relates to labour, skills and/or expertise, then all your income for that job/contract is PSI.

• If less than 50% of the income was for labour, skills and/or expertise then none of the income for that job/contract is PSI.

If any of the income you received is PSI proceed to step 2, if not then the PSI rules do not apply.

2. Results Test
The results tests focuses on establishing the nature of your contracted performance and the basis you are paid. To pass the results tests you need to meet the following conditions:
• You are paid to produce a specific results or outcomes
• You are required to provide equipment or tools.
• You are required to fix mistakes at your own costs.
Your business contracts must meet these conditions for at least 75% of your PSI for the year in order to pass. If you pass the test your business is a personal services business and the PSI rules don’t apply.
If you don’t pass, move on to step 3.

3. The 80% rule
This test requires you to work out the PSI that comes from each client and their associates in an income year.
• If less than 80% of your PSI comes from one client continue to step 4.
• If 80% or more of you PSI income comes from one client then the PSI rules apply.

4. The remaining tests
• Unrelated clients test: To pass this your PSI must be earned from two or more unrelated clients and contracts must be sourced through offers/advertising to the public
• Employment test: To pass this your employees or contractors must perform at least 20% of the principal work
• Business premises test: To pass this your business premises must be used for personal services work, must be used exclusively for your business, is physically separate from your home and is separate from your clients

Pro Tips

Don’t be fooled! The use of more complex business structures does not stop your income from being assessed as PSI.
You can receive PSI in almost any industry trade, or profession, so be sure to work through the steps even if your profession isn’t synonymous with PSI.

Author: Heather Cox
Email: heather@faj.com.au

Selling a property as part of a business? You may be able to apply the margin scheme to reduce the GST payable on the supply of the property.

The margin scheme is a method of determining the GST payable when property is sold as part of a business. The margin scheme only applies where the sale of the property is a taxable supply.

Normally the amount of GST paid on the sale of a property is 1/11th of the sale proceeds, whereas under the margin scheme the GST to be paid is 1/11th of the margin.

The margin is the difference between the sale price and
• the purchase price of the property, or
• an approved valuation of the property as at 1 July 2000 (if certain conditions are met)

The margin scheme can be very useful for reducing GST payable where GST was not charged on the purchase of the property and also where the purchase price of the property is significantly lower than its market value as at 1 July 2000.

The margin scheme cannot be used if you were charged the full rate of GST upon purchasing the property, as you would have been entitled to claim the GST credits back. It also cannot be used when the seller you purchased the property from applied the margin scheme to the sale of the property.

If the margin scheme is going to be used it is important that this be written in as part of the terms of selling the property. The ATO requires written evidence of the decision.

Pro Tips

Get your facts together. Knowing whether you were charged GST on the purchase of your premises could cut down your GST liability upon to selling the property as part of a business.

Compare the market value of your property as at 01 July 2000 to the cost you paid, the higher of the two will give you the best outcome when using the margin scheme.

Author: Heather Cox
Email: heather@faj.com.au

Superannuation Guarantee (SG) is the official term for the compulsory super contributions that employers must make for their employees. The rate was previously 9.25%. As of the 1 July 2014, the new minimum SG contributions rate is 9.5%.

When does an employer have to pay SG?

Employers have to pay SG for full time and part time employees and some casual employees. Super is paid on:
• ordinary wages or salary
• annual leave & long service leave – provided the employee has not ceased employment prior to being paid these entitlements
• workers compensation (in certain circumstances)

When does an employer not have to pay SG?

Under the SG legislation, employers are not required to pay SG contributions for employees who are:
• earning less than $450 month
• under 18 years of age and working less than 30 hours per week
• taking parental leave and leave without pay

The SG rate is expected to increase to 12% by 2025, but will stay at 9.5% until 2021.

Author: Heather Cox
Email: heather@faj.com.au

At the end of each year, every business undergoes a procedure with regards to payroll. There’s nothing to fear about the process and things will run smoothly if you go through these steps.

Step 1 – Process final pay runs.
Ensure all pay runs are complete for the financial year.

Step 2 – Reconcile end of year payroll to your accounting ledger.
For this step review all the earnings, superannuation and tax amounts recorded in your payroll software and match them to the amounts in the general ledger.

Step 3 – Review & check employee Payment Summary amounts.
This is where you check the placement of amounts on the payment summary. You should review each employee’s payment summary and pay particular attention to:
• Allowances
• Reportable employers superannuation contributions
• Reportable fringe benefits; and
• Union fees (if they are deducted from earnings)
You should also check that the authorised person, employer details (e.g. ABN) and the payment period are correct
This is the information that employees will use in preparing their tax return to proper care must be taken in completing this step to ensure information is accurate.

Step 4 – Distribute Payment Summaries to employees.
After ensuring all payment summaries are completed correctly, you can then distribute them to employees by mail, email or whichever way preferred. It is important to have security on the file when sending payment summaries via email to ensure privacy of TFN. This can be done by having passwords needed in order to open the file. Employers are required to distribute payment summaries by the 14th of July each year.

Step 5 – Send annual payment summary report to the ATO.
An annual payroll report must be sent to the ATO. This can be done through the ATO business portal or with the tax agent through BAS. This report is due on the 14th of August each year.

Author: Heather Cox
Email: heather@faj.com.au

Benefits of Obtaining Pre-Approval

Getting a clear guidance of your spending capacity when purchasing a property can be very beneficial. It will allow you to have leverage when negotiating with agents or during an auction.

This also displays to your estate agent that you are serious about purchasing a property as in some cases agents won’t spend their time showing you homes in-case you don’t come through with the financing.

Getting pre-approval is free of cost and approvals are valid for up to three months. This lets you shop the market thoroughly for the right property.

It is important to remember that while there are several offers and products out there regarding obtaining pre-approvals, you should secure a formal pre-approval to ensure validity.

To get more detailed information on your situation, talk to Kristian Moore from FAJ Home Loans, our in-house mortgage broker

 

Author: Adrian Wardlaw
Email:adrian@faj.com.au

Most people know that main residence = exemption from Capital Gains Tax.

Usually you (and your spouse) can only claim one main residence at a time.

If you are changing houses then for a limited time you can treat two dwellings as your main residence.

The concept is that you can buy your new home first and within six months sell your old home.

There is some fine print.

  • Your old house must be your main residence for at least three months of the last twelve months.
  • You cannot have earned any income (e.g. rent) from the old house in the last twelve months.
  • Your new house becomes your main residence (i.e. you can’t just elect for it to be your main residence, you have to actually move in).

Pro Tips
If you are outside the six month period you may wish to elect for the old home to be your main residence (see the six year rule post) so that there is no capital gains tax payable on that home. You would only do this if the taxable gains on the old home is considered to be higher than the potential gains on the new home.

Author:  Stacey Walker
Email: stacey@faj.com.au

Most people know that main residence = exemption from Capital Gains Tax.

But what happens if you start to rent out your home?

You have the 6 year rule that you could potentially use.  This will be covered in a future post.

If you first rented your house after 20 August 1996 then the ATO allow you to take a market value of the property at the date you first rented the property.  That’s your starting point for capital gains tax.  You will only pay tax on the increase in value above that value.

Why would the ATO allow that?

It’s practical.  When you first buy your home your intentions may have been for it to remain your home and always free from tax.  In the meantime you have improved the property and you would not have kept receipts for those improvement costs because at the time it was not needed.  The market value rule just side steps this issue.

Pro Tips
This method is only available where the property became your main residence when you first acquired it (if you rented it out then, you should have known to keep receipts for improvements).

There are small modifications where the property is partly used to produce income.

CGT only applies to properties purchased after 19 September 1985.

 

Author:  Stacey Walker
Email:  stacey@faj.com.au

 

When two or more people are buying a property it is important to identify which ownership structure will be used. Will you be a tenant in common or a joint tenant?

I am a Joint Tenant. What does that mean?

If you are a joint tenant then you and the other owners will have an equal interest in the property. Joint tenancy creates a right of survivorship whereby in the event that a joint tenant dies; the surviving owner will take full ownership over the property. It also means your part of the property cannot be sold or given way without the agreement of all owners.

I am a Tenant in Common. What does that mean?

If you are a tenant in common then you and the other owners will have a stipulated ownership percentage; for example one person may have 25% ownership and the other person may have 75%. This ownership structure is often used when unrelated parties (i.e. friends, business partners) have pooled their funds together to purchase a property, but can also be used by married couples. In the event of a party’s death, their estate will continue to own the percentage of the property. This ownership structure is regularly used when there are unrelated parties or to take advantage of different ownership percentages for tax purposes.

E.g. A couple own a rental property which results in a net loss with one spouse earning considerably more than the other. For a greater tax benefit, it may be beneficial if the higher earning spouse claims more of the rental loss. Therefore, having a tenants in common ownership structure would be ideal so as to allocate a larger percentage of property ownership to the higher earning spouse in order to claim more of the loss. Under a joint tenant structure, the couple would share the net rental loss equally.

To change tenancy, we recommend receiving legal advice.

Pro Tip:
To remember the difference I use the saying – tenants in common – the only thing they have in common is the property so percentage of ownership must be stated (not necessarily true but an easy way to remember the difference).

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

It is very important to not exceed your concessional contribution caps in your super fund.

Concessional contributions represent pre-tax contributions to your super fund. These include your employer mandated contribution, salary sacrifice contributions and any member contribution where you are claiming a tax deduction for it.

The contributions are recorded when they are received and not the period they relate to.

Contributions exceeding the cap are subjected to excess contributions tax. This penalty tax is imposed on the individual and is calculated using marginal tax rates. Other interest charges and tax offsets will apply.

Pro Tips

Be careful of the timing when your employer pays the contribution. Last years contribution paid in July will count towards this years cap.

Know your cap limits! There have been changes with the recent budget, so you may be able to contribute more than you think.

Author: Heather Cox
Email: heather@faj.com.au

Have you recently received a Division 293 Notice from the ATO?

You may have received one of these notices recently. Sounds technical but what is it?

It’s basically a money grab from the Australian Government.

Where an individual earns more than $250,000 in a year then they are charged an additional 15% tax on their concessional (read as pretax) super contributions. Concessional contributions include contributions by your employer, member contributions where you claim a tax deduction and salary sacrifice.

Concessional contributions are already taxed at 15% so the additional 15% brings the total tax to 30% on super contribution.

Is it worth it?

If you’re subject to this tax then you’re probably paying 47.0% tax so there is still a saving of 17.0%. Still worth it but less exciting (well for an accountant)..

How to Pay?

You can pay the bill using your own funds or the super funds. If you want to use your super to pay the bill then you need to complete the release authority which should be attached to your notice of assessment.

Pro Tips

Income for Div 293 purposes is not just taxable income. The ATO make adjustments such as adding back rental losses and including fringe benefits (amongst other things).

Using a trust?

Potentially you could stream your income to certain family members to avoid the additional tax.

State higher level office holder or Commonwealth Judge?

You’re in luck, there are some exemptions for yourselves.

Here’s a link to some further information from the ATO.

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