A perfect storm

The latest inflation figures were shocking, but really just told us what we all know, that costs are going through the roof.

The Australian Bureau of Statistics recently released the March 2022 CPI figures. The headline was that inflation for the twelve months is at 5.1% across Australia, but in Western Australia it’s far worse at 7.6%. In bad news for households, the biggest increase was in non-discretionary goods like fuel, health, household and education. For the March quarter alone, WA prices rose 3.3%.

Consumer confidence immediately fell by 6% following the release.

Business owners are being hit on several fronts. Rising costs will challenge many small businesses. Add to this a serious skills shortage, supply issues, escalating interest rates and plummeting consumer confidence and you’ve just about got the perfect storm.

It can be difficult for small businesses to increase their prices to compensate because they often have intense competition from larger competitors.

Some factors are beyond the control of business owners but the challenge is to identify what can be contained, even if it initially seems small or insignificant.

The first thing to look for is unnecessary expenditure. Almost every business has something in this category, whether it’s a forgotten software trial subscription, some excessive entertainment costs or a work vehicle that’s more about form than substance. Locate these and eliminate them.

The next step is to eyeball essential expenses and find ways to shrink them. Are you getting the best interest rate or merchant charges from your bank? What about insurance, software, IT services, phones and maintenance contracts? The best way to approach this project is to take a deep dive into your general ledger and question every significant supplier relationship. If nothing else, service levels might suddenly improve as a result of the enquiry.

The third stage is to look for efficiency gains. Don’t blindly do what you’ve always done. Converting to electronic communications can save a small fortune in postage. Creating an on-line ordering system saves the disruption of taking phone calls and improves accuracy. What about putting solar panels on the roof to reduce power costs (or better still, talk your landlord into paying for it)?

Unless staff are excess to requirements, HR should be just about the last cost you trim. But if you have inefficient or under-performing staff, move them on and replace them with someone that wants to contribute.

Another cost that should not be cut is marketing, but review the effectiveness of your marketing spend to ensure you’re getting value for money.

This won’t be the last inflation shock or interest rate rise and the sooner you take action the better positioned you’ll be to manage the impact.

Related blog:

Why a small business should be using monthly budgeting
You need a business road map
Cash is king

Author: Mark Douglas
Email: mark@faj.com.au

 

 

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What is a non commercial loss?

If you’re an individual in business as either a sole trader or in partnership, and your business makes a loss, you may be able to offset the loss against other income such as salary and wages. This reduces the tax you would otherwise have paid, but first you must prove to the ATO that the loss is real, i.e. it’s not a non commercial loss.

To show that losses are real, you must meet an income requirement and pass one of four tests.

Eligibility

For your losses to be deductible, you first need to meet an income requirement. If you don’t meet this you cannot offset your losses regardless of whether you pass any of the four tests that follow (unless you apply for the Commissioner’s discretion).

To meet the income requirement for non-commercial loss purposes your other income must be less than $250,000.

Your other income includes:

  • taxable income (ignoring any business losses)
  • total reportable fringe benefits amounts (these should be shown on your payment summary from your employer)
  • reportable super contributions (e.g. salary sacrificed and personal deductible super contributions)
  • total net investment loss (e.g. negatively geared property or investment portfolios)

If you pass the income requirement, you must then meet one of the four tests unless either:

  • you are covered by an exception to the rules
  • the Commissioner exercises discretion to allow you to offset your loss against other income

The four tests

Once you meet the income requirement you must then pass one of the four tests. These are:

  • The assessable income test – the business has assessable income of at least $20,000 (can be earnings or capital gains).
  • The profits test – the business had a profit for tax purposes in three out of the past five years, including the current year (note that if a business makes a profit for three years running then it will pass the profits test for the next two years regardless of whether it makes a loss, since three out of five consecutive years will be profit years)
  • The real property test – the value of real property or of an interest in real property that you used in the business on a continuing basis was at least $500,000. This includes land & buildings, but nothing used for private purposes. It also includes leased property.
  • The other assets test – the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000. This can include leased assets.

Deferring losses

If you are not able to deduct your business activity loss in the current year because you don’t pass any of the non-commercial loss rules, you can defer your loss for use in a later year.  If your business makes a profit in a following year, you can offset some or all of the deferred loss against this profit, up to the amount of your profit.

You can also claim the deferred loss against other income in a following year if during that year:

  • you meet the income requirement and the business passes one of the four tests, or
  • the Commissioner has exercised the discretion to allow you to claim the loss

Exceptions

If you don’t meet the income requirement but you meet one of the four tests, you can apply for the Commissioner’s discretion if either:

  • special circumstances occurred that were outside your control such as drought, flood, bushfire or some other natural disaster, which prevented your business activity from producing a tax profit, or
  • due to the nature of the activity, there is
    • a lead time before the business will make a tax profit
    • an objective expectation, based on independent evidence, that it will make a profit in a time that is considered commercially viable for that industry

Summary

  • If you are a sole trader or in a partnership and your business makes a loss, you may be able to offset your business loss against other income (often wages), reducing your income in that financial year
  • To be eligible, you must pass the income requirement and pass one of the four tests
  • The income requirement is that your ‘other’ income must be less than $250,000
  • The four tests are:
    1. The assessable income test – the business has assessable income of at least $20,000
    2. The profits test – the business had a profit for tax purposes in three out of the past five years, including the current year
    3. The real property test – the value of real property or of an interest in real property that you used in the business was at least $500,000.
    4. The other assets test – the value of ‘other’ assets you used in carrying on the business was at least $100,000.
  • If you are not able to deduct your business activity loss in the current year because you don’t pass any of the non-commercial loss rules, you can defer your loss for use in a later year
  • If your business makes a profit in a following year, you can offset some or all of the deferred loss against this profit, up to the amount of your profit

Related blogs:

Company carry back tax losses – what are the rules?

Author: Caleb Datson
Email: caleb@faj.com.au

 

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Guidance on Travel Allowance vs Living Away From Home

It is important to distinguish between a travel allowance and a living away from home allowance (LAFHA) as they are taxed very differently.

A LAFHA is paid from an employer to an employee to cover the additional costs of temporarily living away from their normal residence to perform employment duties. The payment is tax free in the hands of the employee and should not be included as assessable income in the employee’s tax return. The employer will be subject to Fringe Benefits Tax on the LAFHA.

Any expenses incurred by the employee which have been covered by a LAFHA are not deductible as they are deemed to be private in nature and not incurred in the course of earning income.

Travel allowances are classed as assessable income for the employee and the costs associated with the travel are tax deductible. Such costs can include meals, accommodation, transport and incidental costs. To be classified as a travel expense the travel must make the employee stay away from home over night to perform employment duties. These costs are tax deductible as they have a sufficient close connection with employment duties.

The ATO has recently stated at if all the below are satisfied the allowance will be deemed a travel allowance:

The Employer:

  • Provides an allowance to an employee or pays or reimburses accommodation and food and drink expenses for the employee.
  • Does not provide the reimbursement or payment as part of a salary-packaging arrangement and the employee is not given the option to elect to receive additional remuneration.
  • Includes the travel allowance on the employee’s payment summary or income statement and withholds tax (if applicable).
  • Obtains and retains the relevant documentation to substantiate the fact that all of these circumstances are met.

The Employee:

  • Is away from their normal residence for work purposes;
  • Does not work on a fly-in fly-out or drive-in drive-out basis;
  • Is away for a short-term period being no more than 21 days at a time continuously and an overall aggregate period of fewer than 90 days in the same work location in an FBT year;
  • Must return to their normal residence when their period away ends

Other related blogs:

Claiming travel expenses using the substantiation method
Employee travel expenses and deductibility

 

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

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Are donations to crowdfunding platforms deductible?

Crowdfunding platforms like gofundme have become an increasingly popular method for individuals, businesses and charities to fundraise online. It generally involves the entity setting a fundraising target, then appealing to the public for donations in order to reach that target. Many taxpayers are aware that donations made to charities are tax deductible, but what most find surprising is that donations to crowdfunding platforms generally are not deductible. The reason is to do with the Australian Tax Office’s definition of what is considered to be a ‘deductible donation’.

In order for a donation to be tax deductible, it must meet the following criteria:

  • The donation must be made to a deductible gift recipient
  • It must truly be a gift or donation, meaning you voluntarily transfer the money without expecting to receive any material benefit at all
  • The donation must be money or property
  • It must comply with any relevant gift conditions (this is applicable to some deductible gift recipients)

The issue with individuals, businesses and charities on crowdfunding platforms is that commonly they are not registered as deductible gift recipients (DGR), therefore any donations to these entities are not tax deductible as per the ATO.

The best way to confirm that the charity you wish to donate to is a DGR is to check that they are listed on the ABN Lookup’s list of DGR funds & endorsed entities. This can be found by following the link below.

https://abr.business.gov.au/Tools/DgrListing

Related blogs:

ATO reminder about deductibility of donations
Is my deduction tax deductible?

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

 

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What happens to employees on sale of a business?

Changes in the structure or ownership of a business is a common thing in modern society, however this does not automatically mean that when a business is sold, that everybody, from employees to employers, always know what they are entitled to or is required by them.

A share or equity sale occurs when an employer purchases a business structure (such as a company or trust) and the business stays the same. In this situation the employer will also take on the employees and will be responsible for their existing entitlements. It is important for the buyers to ensure that the employees entitlements are being calculated and paid correctly as they will inherit any associated liabilities.

An asset sale occurs when the buyer opts to purchase the assets of a business, such as client lists, business name and trademarks, and these assets are transferred to the buyer’s existing business structure as opposed to taking over the seller’s entity.

After a business has been sold by way of asset purchase, the new employer must recognise an employee’s service with the prior employer in reference to entitlements such as:

  • Sick & carer’s leave
  • Requests for flexible work arrangements
  • Parental leave

However there are also a variety of entitlements which the new employer is not obligated to recognise and includes the following:

Redundancy

  • A new employer who is not associated with the previous employer can choose not to recognise an employee’s redundancy entitlements, and in this case the previous employer will be required to pay the entitlements upon the employees termination.
  • An employee will not be entitled to receive redundancy entitlements if they reject the new offer of employment, which was on similar terms to the previous contract.

Annual Leave

If the employers are not associated entities then the new employer is not obligated to recognise an employee’s annual leave, and in this case the old employer will be required to pay out the employee’s annual leave upon the transfer. Often annual leave obligations are negotiated as part of the sale contract.

Long Service Leave

A new employer may choose not to recognise an employee’s prior service in terms of long service leave if the following occur:

  • If at 31st December 2009 the employee was not entitled to a long service leave agreement under a registered agreement.
  • There was a new agreement made from 1st January 2010 that replaces the old agreement.
  • The new agreement says that the employees prior service under the old agreement does not count towards their long service leave entitlements.

Unfair Dismissal

A new employer is not obligated to recognise prior service in relation to unfair dismissal if the following apply:

  • The employee is a transferring employee
  • The employers are not associated entities
  • The new employer provides the employee with a written notice prior to employment commencing that prior service would not be recognised

Notice of Termination

When a business is transferred, an old employer is required to give notice of termination to employees or alternatively provide payment in lieu. This is because when a business transfers the employee’s position is terminated with the old employer.

If however, an employee is terminated by the new employer after the transfer has taken place, then the employer must also give notice of termination and the termination pay amount will be calculated based solely on the service after the sale or transfer has taken place.  

As an employee it is important to know that your prior service and entitlements should generally be recognised by the new business owner. If not, you should question this with the new employer and you can contact FairWork for further information and advice.

 

Author: Molly Ingham
Email: molly@faj.com.au              

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The R & D Tax Concessions – Is your Company Eligible?

In order to promote research, development and innovation in Australia, the Australian Government offers tax incentives to eligible Companies.

Currently, the R & D Tax concessions entitle an eligible Company to a 43.5% refundable tax offset if the entity’s turnover is under $20 Million, or a 38.5% tax offset for Companies with turnover more than $20 Million. This means a Company making a profit would pay less tax and a Company that makes a loss can receive a cash refund based on their R & D expenses.

To work out if your business is eligible, you need to work through a couple of steps:

Step 1 – The operating entity must be a Company and be either incorporated in Australia, an Australian resident Company or both a resident of a Country with which Australia has a double tax agreement and carrying on a business in Australia through a permanent establishment.

Step 2 – The R & D activities must meet the requirements in the R & D Tax Incentive guidelines. You need to register your R & D Activity with AusIndustry within 10 months of the end of the income year in which you conduct your R & D activities. If your R & D activities meet the requirements you are issued with a registration number which then allows you to claim the R & D Incentive Offset in your Company tax return.

The R & D tax incentive registration process is a self-assessment system, but AusIndustry may review your application, so you need to make sure you meet the requirements yourself before applying.

At a high level, R & D activities are experimental activities:

  1. Whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
    • Is based on principles of established science
    • Proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions; and
  2. That are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

You are expected to search worldwide for an existing way to achieve your outcome before you start your R & D activity. That is, if it already exists, then your R & D activities are not eligible.

Record keeping is very important when making R & D tax incentive claims. As an example, the AusIndustry R & D tax incentive guide lists the following expectations:

“We expect you to be able to provide evidence that shows how you conduct, or plan to conduct, core R&D activities:

  • that are based on principles of established science
  • whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience worldwide
  • whose outcome can only be determined by applying a systematic progression of work – hypothesis, experiment, observation and evaluation, leading to logical conclusions
  • for the purpose to generate new knowledge
  • that are not excluded from being core R&D activities

We expect you to keep records of activities that you register or plan to register for the R&DTI

In your systematic progression of work, we expect to see details of how you:

  • develop your hypothesis
  • design your experiment
  • observe and record the results of your experiment
  • evaluate your results
  • reflect conclusions about your results. Do they support your hypothesis or generate other new knowledge?”

Claiming the R & D Tax Incentive can be a complex process requiring both scientific knowledge, along with excellent record keeping and the correct accounting set up to keep track of core and supporting activity costs. Due to this, many businesses wanting to claim the incentive turn to specialists in this area.

If you don’t want to engage a specialist, another option to determine your Company’s eligibility is to submit an ‘Advance Finding’ form. This online form takes you through a long series of questions about your R & D activities and once submitted and assessed will give you assurance about your eligibility.

Advance Finding forms can be found at:

https://business.gov.au/grants-and-programs/research-and-development-tax-incentive/apply-for-an-advance-finding

For more detailed information on claiming the R & D tax incentive visit

https://www.ato.gov.au/Business/Research-and-development-tax-incentive/Checklist-for-claiming-the-R-D-Tax-Incentive/

This page has a link to the ‘R & D tax incentive guide to interpretation’ which is a great starting point if you are thinking about claiming the incentive.

Other related blogs:

What is the research and development tax offset?

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

 

 

 

 

 

 

 

 

 

 

 

 

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ATO guidance for distribution of professional firm profits

If you operate a professional services firm now is the time to assess how your professional firm profits are being distributed. The ATO has recently issued new guidance that expresses concerns about profit allocations that might allow professional practitioners to avoid paying their fair share of tax on the profits of the firm.

The new guidelines will apply from 1 July 2022 to assist professional firm practitioners to assess if their current arrangements are within the ATO’s expectations and considered low risk. Professional firms can include but are not limited to, engineering, architecture, accounting, law, financial services, law, medicine and management consulting.

Under the new guidelines, you will need to assess the firms profit allocation arrangement against two ‘gateways’.

The first gateway is the ‘Commercial Rationale’ of the arrangement. The decisions behind the arrangements of the firm and the way in which profits are distributed should be commercially driven. For example, the remuneration received by a professional from the firm should be paid on commercial terms as reward for their personal efforts and skills. Actions taken to gain a tax advantage rather than achieve a commercial objective will not meet the first gateway.

The second gateway is concerned if the practitioner’s arrangement contains any ‘high-risk features’. The guideline outlines a number of high risk features to consider such as non-arm’s length finance arrangements or issuing multiple classes of shares to non-equity holders.

If both gateways can be satisfied, the individual practitioner may use the risk assessment framework to self-assess which risk category they belong, which in turn gives an indication to the potential ATO attention they may receive.

 

Risk Assessment factor Score
1 2 3 4 5 6
(1)  Proportion of profit entitlement from the whole of firm group returned in the hands of the individual professional practitioner

 

  

>90%

  

>75% to

90%

  

>60%

to

75%

  

>50% to

60%

  

>25% to

50%

  

25%

or

less
(2)  Total effective tax rate for income received from the firm by the individual professional practitioner and associated entities

 

  

>40%

  

>35% to

40%

  

>30%

to

35%

  

>25% to

30%

  

>20% to

25%

  

20%

or

less
(3)  Remuneration returned in the hands of the individual professional practitioner as a percentage of the commercial benchmark for the services provided by the firm  

>200%

  

>150% to 200%

  

>100% to

150%

  

>90% to 100%

  

>70% to

90%

  

70%

or

less

When applying the risk assessment factors, you may use factors one and two only, or alternatively all the three. The third factor relies on a commercial benchmark which may be hard to ascertain.

After determining which score your arrangement falls into, you can then self assess if you are low, moderate or high risk. The lower the risk level, the less likely the ATO will analyse the arrangement and potentially proceed with an audit.

Risk Zone Risk Level Aggregate score against the first two factors Aggregate score of all three factors
Green Low 7 or less 10 or less
Amber Moderate 8 11 and 12
Red High 9 or more 13 or more

For example, an individual professional practitioner who receives 100% of the profit would fall into the category of low risk.

By assessing your risk level you can determine if a change is needed and potentially reduce future headaches from the ATO. The risk assessment and guidelines can be complicated; it is important to speak to your accountant if you are concerned about the commerciality of your firm’s arrangement or profit allocations.

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

 

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Finalising Single Touch Payroll at year end

Finalising Single Touch Payroll (STP) is the equivalent of writing up Group Certificates in the “old days”. Here’s how you now do it.

Firstly, at least one pay run needs to be filed using your STP software before you can finalise your STP data for that financial year and it’s important to make all wage payments prior to the end of June 30 so that they will be included in that financial year. Pays recorded in July which include June pay dates aren’t included in the finalised year.

You should fix any incorrect pay runs and check that all pay runs have been accepted by the ATO.

Ensure you have entered all pay runs for the financial year and notified the ATO of any terminated employees. Check the verification report year to date totals in your software against your payroll reports.

Enter any Reportable Fringe Benefit amounts if applicable and check any termination amounts paid to employees.

You need to finalise your STP declaration by the 14th July each year. Once the STP finalisation has been accepted by the ATO you can notify your employees that their Income statements are tax ready. Your employees will then be able to access their Income Statement via their myGov account and lodge their year end tax returns.

Please contact us if you need any assistance in finalising your STP at year end.

Other related blogs:

Single Touch Payroll STP starts for closely held payees from 1 July 2021

Author: Kay Giles Email: kay@faj.com.au

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How to record your crypto transactions

The tax implications of crypto trading are not yet well understood. Every time you sell or swap one cryptocurrency for another, a capital gain event is likely to have occurred, and knowing how to record your crypto transactions can be a challenge.

Depending on your level of crypto trading calculating the capital gain or loss made on each sale can be a timely process. This is due to a number of factors such as –

  • The total number of crypto transactions made during the financial year – for some it’s hundreds or thousands.
  • The dates and amounts for both the original purchase and sale are required.
  • At times you might only dispose part of your holding at a time, requiring an apportionment of the original cost to be applied to the sale.
  • At times you may also be swapping one coin directly for another coin, each swap is considered as a buy & sell transaction.
  • You may also be purchasing a number of coins at once as part of a bundle purchase.

Most platforms used to trade cryptocurrencies (such as Coin Spot, Coinbase & Swyftx) provide you with a year end trading report, however generally these reports just give you a transaction listing for each buy and sell made using that platform. They don’t actually calculate the capital gain or capital loss made on each transaction for that financial year. Asking your accountant to manually work through the year end report generated by your trading platform is a timely process and will result in a significantly higher fee for the time taken to prepare your income tax return.

Fortunately there are now some third party software providers that can assist if you are happy to upload or link your trading data. We do not endorse any particular provider but have provided some sites that we’ve seen clients using to date:

It’s important that you do your own research before you subscribe to a particular service as there are different packages and options – such as allowing direct access to your trading platform to automatically obtain future transactions.

Also be mindful that it’s fairly new territory and the software might not be perfect. It’s always your responsibility to review the report to ensure that it is accurate and reflects your trading activity. We haven’t noticed any major issues so far, although we’re aware there may be reporting inaccuracies where clients have transferred the coins from one wallet to another and not necessarily sold them.

The subscription cost to these platform will be tax deductible so please remember to keep a copy of your invoice.

Other related blogs:

Tax treatment of crypto trading
Buying Bitcoin will I pay tax?

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

 

 

 

 

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New director ID rules

In June 2020, the Australian government announced new director ID rules and established the Australian Business Registry Services (ABRS) which will be responsible for the implementation and administration of the new Director ID regime. This regime introduces the Director ID – a 15 digit unique identifier given to a director, or someone who intends to become a director. This identifier stays with the individual permanently.

Purpose of a Director Identifier Number (DIN)

The DIN is the first service to be implemented by the ABRS, which aims at creating a single source of reliable information. The aim is to help:

  • Prevent the use of false or fraudulent director identities
  • Make it easier for external administrators and regulators to trace directors relationships with companies over time
  • Identify and eliminate director involvement in unlawful activity such as phoenix activities

Who needs a Director ID and when?

You will need a Director ID if you are an eligible officer of:

  • A Company, a registered Australian body or a registered foreign company under the Corporations Act 2001.
  • An Aboriginal or Torres Strait Islander corporation registered under the Corporations Act 2006.

You can apply for a Director ID now. If you plan to become a director, you can apply before being appointed. Below are some important deadlines for having your Director ID.

Date you become a director Date you must apply
On or before 31 October 2021 By 30 November 2022
Between 1 November 2021 and 4 April 2022 Within 28 days of appointment
From 5 April 2022 Before appointment

Applying for a Director ID

The process is not difficult provided you have set up your myGovID first. In order to set up your myGovID online, you will be required to provide information such as your TFN, address and two documents to verify your identity. Alternatively you can call the ATO or complete a paper form and lodge it with certified documents.

Once you get your ID you keep it forever even if you cease to be a director. Any details that change after applying for your Director ID may be changed through the ABRS website.

If you’re currently a director of a company, or about to become a director you may as well apply for your Director ID now. There’s little point in deferring and risking a penalty down the track.

Visit the ABRS website for more information about director ID.

Related blogs:

What company debts can a directors be personally liable for?

Author: Caleb Datson
Email: caleb@faj.com.au

 

 

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