It’s been an unusual year, so this year more than ever it’s essential you undertake some personal tax planning. Tax planning 2020 will ensure that you maximise the personal deductions you are eligible for, reduce the amount of tax you have to legally pay while reducing the risk of audit by the ATO.

This 2020 end of financial year update outlines the actions to take to do exactly that.

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Working from home tax deductions

From 1 March 2020 until at least 30 June 2020, special arrangements are in place to make it easier for individuals to claim expenses they have incurred while working from home during the COVID-19 pandemic.

If you have incurred work-related expenses and you have not been reimbursed by your employer, you can claim these expenses at a rate of 80 cents for each hour you work. To use this method, you will need a record of the hours you have worked, such as a diary or timesheet.

The claim covers all of your additional running expenses such as:

• Electricity and gas
• Decline in value and repair of capital items such as office furniture
• Cleaning expenses
• Phone and internet expenses
• Stationery
• Decline in value of computers and devices

For example, if you worked from home for 7 hours a day on the weekdays between 1 March and 30 June 2020, that’s 84 working days (in QLD and NSW) or 588 hours. Using the 80 cents COVID-hourly rate, you could claim $470.40. The rate covers all of your expenses and you cannot claim individual items separately, such as office furniture or a computer.

The COVID-hourly rate can be claimed per individual (it is not limited by household). That is, if you have multiple people working from home in your household, each person can claim the 80 cents per hour rate for the hours they have worked from home.

Using the COVID-hourly rate is optional and aimed at people who do not normally work from home. For some, their expenses will be higher, such as those with a dedicated home office, or for those that normally operate their business from home. In these circumstances the normal rules will apply.

The ATO appears to be taking the view that occupancy costs such as mortgage interest payments and rent cannot generally be claimed by those who are temporarily working from home as a result of COVID-19.

Learn more about working from home tax deductions for 2020 including what records you need to keep on our earlier article: Working from home tax deductions 2020

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Tax deductions for home based businesses

In general, if your business is a home-based business, you should be able to claim both occupancy and running expenses. However, if you operate through a company or trust, the ATO’s preference is that there should be a rental agreement in place between the entity and the property owner.

If there is a genuine rental contract, then the property owner should recognise the rental income and should then seek to claim a reasonable portion of their expenses against the rental income. The business entity should generally be able to claim a deduction for the rent that is being paid to the owner of the property.

Without a genuine rental contract, it is difficult for the business to claim a deduction for any of the expenses relating to the portion of the property that it uses in the business.

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Work-related car expenses

The rate at which work-related car expenses can be claimed using the cents per kilometre method will increase from 1 July 2020 from 68 cents to 72 cents per kilometre.

Using this method a maximum of 5,000 business kilometres can be claimed per year per car which works out to be a $3,400 tax deduction if you can show that you traveled at 5,000 kilometres during the 2020 financial year.

If leasing a vehicle check to see whether you can pre-pay lease payments as part of your tax planning 2020.

The ATO has a great website section on Car Expenses here which covers the following:

• When you can and can’t claim car expenses
• Calculating your deductions
• Owned or leased cars
• Damage to a third-party motor vehicle

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ATO target area: Foreign income

The ATO has flagged foreign income as an area of interest. Because your tax residency can be different to your general residency status, it’s important to seek clarification if you are uncertain.

For tax purposes:

Australian resident

Taxed on worldwide income including money earned overseas (such as employment income, directors’ fees, consulting fees, income from investments, rental income, and gains from the sale of assets).

Foreign resident

Taxed on Australian sourced income and some capital gains. Unlike Australian resident taxpayers, non-resident taxpayers pay tax on every dollar of taxable income earned in Australia starting at 32.5% although lower rates can apply to some investment income like interest and dividends.

There is no tax-free threshold. Australian sourced income might include Australian rental income and income for work performed in Australia.

Temporary resident

Generally, those who have come to work in Australia on a temporary visa and whose spouse is not a permanent resident or citizen of Australia. Temporary residents are taxed on Australian sourced income but most forms of foreign sourced income are not taxed in Australia.

In addition, gains from non-Australian property are excluded from capital gains tax.

One of our most popular articles from a few years ago is: Australian resident for tax purposes, explained. Understanding your Australian tax residency status may be important for your tax planning 2020.

Just because you work outside of Australia for a period of time does not mean you are not a resident for tax purposes during that period. And, for those with international investments, it’s important to understand the tax status of earnings from those assets. Just because the asset might be located overseas does not mean they are excluded from Australian tax law, even if the cash stays outside Australia.

Don’t assume that just because your foreign income has already been taxed overseas or qualifies for an exemption overseas that it is not taxable in Australia.

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30 June 2020 deadline for foreign residential property owners

Legislative changes made earlier this year prevent foreign residents from accessing a capital gains tax (CGT) exemption on their Australian family home (the main residence exemption).

A transitional rule enables foreign residents who have held their property continuously from 9 May 2017 to access the exemption if they sell by 30 June 2020 (or sign a sale contract).

After 30 June 2020, if you are a non-resident for tax purposes at the time you sell your main residence, you will no longer be able to access the main residence exemption and you will need to pay CGT on any gain you make. These new rules apply regardless of whether you were an Australian resident for part of the time you owned the property and no apportionment applies – the exemption simply does or does not apply depending on your residency status for tax purposes at the time the CGT event is triggered. The CGT event is generally triggered when the contract of sale is signed.

However, if you are a resident of Australia at the time of the CGT event, then you may be able to access the main residence exemption, even if you have been a non-resident for some or most of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if applicable, access the main residence exemption (the rules contain provisions that will deny the exemption where someone attempts to avoid the new rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party).

An exclusion also applies where the individual has been a foreign resident for six years or less and a ‘life event’ occurs such as death or a terminal illness.

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Commercial and residential rental properties: COVID-19

Rental properties are always high on the ATO’s agenda and this year will be no different.

If COVID-19 has impacted commercial or residential premises you own and rent out, from a tax perspective there is very little that has changed.

• If tenants remain in the property or the property remains genuinely available for rent, you can continue to claim expenses as usual, even if the rental rate has been reduced on a temporary basis or tenants have been unable to pay rent for a period of time.
• If you negotiated with your bank to defer mortgage repayments, you can continue to claim interest as the deferred interest is capitalised.
• If you received an insurance payment for rent defaults, or your tenant made a back payment of rent they owe, this income is taxable and will need to be declared in your tax return.

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Rental property tax deductions 2020

Outside of COVID-19 related issues, the ATO continues to find errors in rental property claims made with up to 90% of tax returns containing an error, particularly for ‘other’ deductions and interest.

Common issues to consider as part of your tax planning 2020 include:

• Claiming deductions for properties that are not genuinely available for rent
• Claiming deductions for an entire property when only part of the property was available for rent
• Claiming deductions for loan interest expenses when a portion of the loan was used for private purposes
• Incorrect categorisation of expenditure incurred in order to repair or improve the property
• Not having records to substantiate income received and deductions claimed. If you are claiming a rental property expense it is important to substantiate the claim. In the event of an ATO audit, if you cannot produce a tax invoice or other evidence for an expense, it is likely the deduction will be denied.
• Incorrectly apportioned claims for interest deductions

If your rental property is outside of Australia, and you are an Australian resident for tax purposes, you must recognise the rental income you received in your tax return (excluding any tax you have paid overseas), unless you are classified as a temporary resident for tax purposes. You can claim expenses related to the property, although there are some special rules that need to be considered when it comes to interest deductions. For example, if you have borrowed money from an overseas lender you might be subject to withholding tax obligations.

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Deductions no longer available for vacant land

From 1 July 2019, new rules prevent some taxpayers from claiming a deduction for interest and other holding costs for property that they own. Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs.

Mum & Dad developers are the focus of these changes. Since the new laws apply retrospectively to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in place, the amendments not only impact those intending to develop vacant land but those who have acquired land to develop.

The rules seek to ensure that deductions cannot be claimed during periods where a residential dwelling is being constructed or substantially renovated until the work has been completed, an occupancy certificate is issued and the property is either rented out or genuinely available for rent.

Where holding costs cannot be claimed as a deduction, then they will generally be added to the cost base of the property for CGT purposes. This means that they can potentially reduce a capital gain made when you dispose of the property in the future. However, holding costs cannot be added to the cost base of a property unless it was acquired after 20 August 1991 and these costs cannot increase or create a capital loss on sale of a property.

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Superannuation: Carry forward unused concessional contributions

Superannuation contributions should be an essential part of your tax planning 2020, especially now with the ability to make catch-up contributions as well as being able claim a personal tax deduction in addition to contributions made by your employer up to your annual $25,000 cap.

If you have unused concessional contributions, that is, you did not contribute the full $25,000 in 2018-19 or 2019-20, then you can carry forward these amounts for five years on a rolling basis if your total superannuation balance is below $500,000 on 30 June (of the year you intend to access the unused amount).

The ability to carry forward concessional contributions applies from 1 July 2018, with 2019-20 financial year being the first year an individual can access their unused carry forward concessional amount.

Concessional contributions include employer contributions (super guarantee and salary sacrifice) and personal contributions where you have claimed a tax deduction.

For example, if your total concessional contributions in the 2019-20 financial year were $10,000 and you meet the eligibility criteria, then you can carry forward the unused $15,000. You may then be able to make a higher deductible personal contribution in a later financial year. If you are selling an asset and likely to make a taxable capital gain, a higher deductible personal contribution may assist in reducing your tax liability in the year of sale.

Remember:

• Your total superannuation balance must be below $500,000 on 30 June of the prior year before you utilise any carried forward amount (within the 5 year term); and
• In some cases, an additional 15% tax can apply (30% total) to concessional contributions made to super where income and concessional contributions exceeds certain thresholds ($250,000 in 2019-20). Your income could be higher than usual in the year when you sell an asset for a capital gain.

This is an excellent concession to help you top up your superannuation, especially where you are out of the workforce at some stage.

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Making your tax planning 2020 and tax return preparation easy

Once you’ve completed for tax planning 2020, you need to ensure your records are in order.

Preparing your end of year documents and information prior to coming to see us will save you time and money. This is a general list of what to have ready to enable us to most efficiently complete your returns.

• Income Statement
• Interest income from banks and building societies
• Dividend statements for dividends received
• Tax statements of managed investment funds
• Rental property statements from real estate agent and details of other expenditure incurred
• For share sales or purchases, the purchase and sale contract notes
• For real estate sales or purchases, the solicitor’s correspondence for the purchase and sale
• Any expenses related to your work you have not claimed from your employer
• Self-education expenses
• Travel expenses
• Donations to charities
• Payments for income protection or sickness and accident insurance
• Health insurance and rebate entitlement
• Family Tax Benefits received
• Commonwealth assistance notices
• Medical Expenses (if they relate to disability aids, attendant care or aged care services)
• IAS statements or details of PAYG Instalments paid
• Details of any transactions involving cryptocurrency (e.g., Bitcoin)
• Details of any income derived from participating in the sharing economy (e.g., Uber driving, rent from AirBNB, jobs completed through Airtasker etc.,)

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Tax Planning 2020: Companies, Trusts and More

If you have a company, trust and SMSF, or are running a business, the following tax planning 2020 articles may assist:

• Tax Planning 2020: Businesses (Companies, Trusts, Sole Traders and Partnerships)
• Tax Planning 2020: Investment Trusts

As many employees and businesses have migrated to working from home in the interests of employee safety as a result of the enforced Government shutdown, the Australian Taxation Office (ATO) has announced special arrangements this financial year due to COVID-19 to make it easier for people to claim working from home tax deductions for costs and expenses incurred due to remove work.

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Maximise your working from home tax deductions

The ATO has released a short-cut method to more easily enable people working from home to more easily calculate running expenses that can be claimed as working from home tax deductions.

The short-cut method allows people to claim a rate of 80 cents per hour for all their running expenses, rather than needing to calculate costs for specific running expenses.    Multiple people living in the same house can claim this new rate. For example, a couple living together could each individually claim the 80 cents per hour rate. The requirement to have a dedicated work from home area has also been removed.

This new simplified arrangement does not prohibit people from making a working from home claim under existing arrangements (see below).

Claims for working from home expenses prior to 1 March 2020 cannot be calculated using the shortcut method and must use the pre-existing working from home approach and requirements.

For more information on claiming running expenses, refer to the ATO’s website: Working from home tax deductions during COVID-19.

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Working from home tax deductions for 1 March 2020 to 30 June 2020

There are three ways that you can choose to calculate your additional running expenses for the 1 March 2020 to 30 June 2020 period:

1. claim a rate of 80 cents per work hour for all additional running expenses;
2. claim a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture, plus calculate the work-related portion of your phone and internet expenses, computer consumables, stationery and the decline in value of a computer, laptop or similar device;
3. claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis.

The ATO is also reminding people that the three golden rules for deductions still apply. Taxpayers must have spent the money themselves and not have been reimbursed, the claim must be directly related to earning income, and there must be a record to substantiate the claim.

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Working from home tax deductions prior to 1 March 2020

Claims for working from home expenses prior to 1 March 2020 should be calculated using the existing approaches and are subject to the existing requirements.

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Records you must keep

If you use the simplified method, you only need to keep a record of the hours you worked at home, for example timesheets or diary notes.

If you use the other methods, you must also keep a record of the number of hours you worked from home along with records of your expenses

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Working from home expenses you can’t claim

If you are working from home only due to COVID-19, you:

• cannot claim occupancy expenses such as mortgage interest, rent and rates
• cannot claim the cost of coffee, tea, milk and other general household items your employer may otherwise have provided you with at work.

The ATO will review the special arrangement for the next financial year as the COVID-19 situation progresses.  If you have any further queries please do not hesitate to contact us.

More information:

• ATO – Home office expenses
• Quill Group – Tax advisory services

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ATO example

Bianca is an employee who works as a copywriter and editor. Bianca starts working from home on 16 March as a result of COVID-19 and replaces her face-to-face meetings with online video conferencing.

Bianca has just bought a new laptop, desk, chair and stationery. She also wants to claim some additional gas, electricity, phone and internet costs due to working from home.

Under the shortcut method, Bianca can now claim all her expenses under a rate of 80 cents per hour. All she needs is her timesheets.

Bianca can also decide to claim using existing working-from-home calculations. Under that method, she can claim the desk, chair, gas and electricity under the 52 cents per hour, but she would need to work out the decline in value of the laptop and calculate the work-related portion of the laptop, stationery, phone and internet.

The Queensland Government has recently announced that property owners will be given land tax relief where their tenants have been impacted by Coronavirus.

Land tax relief Queensland measures

There are three Coronavirus land tax relief measures property owners may be eligible for:

• a land tax rebate reducing land tax liabilities by 25% for eligible properties for the 2019-20 assessment year
• a waiver of 2% land tax foreign surcharge for foreign entities for the 2019-20 assessment year
• a 3-month deferral of land tax liabilities for the 2020-21 assessment year.

Property owners do not need to apply for the foreign surcharge waiver or the 3-month deferral however the 25% Queensland land tax rebate must be applied for by 30 June 2020.

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25% Land Tax Rebate

The land tax rebate will only apply to each property that meets the eligibility requirements and conditions.

Where there are multiple tenants for a single property, including mixed-use developments, if the eligibility requirements and conditions are met for at least one tenancy, then the whole property is eligible for the land tax rebate.

Property owners may be eligible for the land tax rebate if at least the following circumstances applies:

1. Property owner is a landowner who leases all or part of a property to one or more tenants and all the following apply.
   • The ability of one or more tenants to pay their normal rent is affected by the coronavirus (COVID-19) pandemic.
   • The property owner will provide rent relief to the affected tenant(s) of an amount at least commensurate (in proportion) with the land tax rebate.
   • The property owner will comply with the leasing principles even if the relevant lease is not regulated.
2. Property owner is a landowner and all the following apply.
   • All or part of the property is available for lease.
   • The ability to secure tenants has been affected by the COVID-19 pandemic.
   • Relief required to meet financial obligations.
   • The leasing principles are complied with even if the relevant lease is not regulated.

If you are eligible for the land tax rebate under both the above circumstances, it is expected you will apply the rebate paid firstly to provide rent relief to your tenants. You can then apply any remaining rebate to your own financial obligations (e.g. in relation to debt and other expenses).

Please find below the leasing principles referred to in the criteria lists above:

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Relief package for landlords and tenants – leasing principles for a commercial landowner

To be eligible for land tax relief, a landowner must commit to comply with the principles set out below. These principles will also be introduced into Queensland law.

If you are a commercial landowner, the principles are as follows:

1. You will negotiate in good faith with your tenant to seek a mutually agreeable resolution if their ability to pay is impacted by COVID-19;
2. You will not evict your tenant if they are in financial distress and unable to meet their commitments due to the impact of COVID-19;
3. You will not increase rent, except where rent is linked to turnover;
4. You will not penalise a tenant who stops trading or reduces opening hours;
5. You will not charge any interest on unpaid or deferred rent; and
6. You will not make a claim on a bank guarantee or security deposit for non-payment of rent.

In addition to these principles, the Prime Minister announced a mandatory code of conduct for small and medium enterprise commercial tenancies on 7 April 2020.  The Palaszczuk Government will consult with stakeholders on the development of systems and implementation of the code in Queensland. Compliance with this code is not a requirement to receive land tax relief, but landowners with small and medium enterprise commercial tenancies are advised to familiarise themselves with the code. Visit www.australia.gov.au for further information.

There has not yet been a lot of guidance as to whether or how, you need to show you have passed the land tax rebate on to your tenants.  Until further guidance is provided by the OSR/Qld Government we would suggest the following:

For properties where you as landowner pay the land tax – We suggest that when providing the rent reduction to your tenants, you clearly state the rent reduction is partly due to the Queensland land tax relief package.  This should then be evidence you have passed on the rebate to your tenants by way of rent relief.

For properties where the tenant already pays the land tax – If you determine each property is eligible and you claim the land tax rebate of 25%, as your tenant pays the land tax directly, by applying for this rebate you are effectively giving them a rent reduction by reducing their outgoings to an amount equal to the land tax rebate you get.

If you meet the criteria and would like to apply for the rebate, please find below the link and information from the OSR website:

How to apply

1. Log onto OSR Online (or create an account if you don’t already have one).

Your 2019–20 land tax assessment notice will have the details of your land holdings. (If you have not received your notice, you can find it under the Assessments tab once you log onto OSR Online).

1. Select My Land.
2. Select Manage details.

To receive the rebate, you must include or update your contact details (including email and telephone number) and bank details so that we can contact you if necessary and pay the rebate into your nominated bank account.

1. Select Manage exemptions then Lodge new exemption.
2. Select COVID-19.
3. Complete the application by certifying your eligibility and selecting the applicable land parcel(s).
4. Complete the declaration.

To access future assessment notices electronically through OSR Online (rather than by post), select Assessments. If you select this option, you will receive an email when an assessment is available.

If you have not yet paid your land tax assessment for 2019-20 or are paying by instalments, and are eligible for land tax relief, we will issue a reassessment and adjust your instalment payments.

Please take the time to read our other articles relating to COVID-19.

The Fringe Benefits Tax (FBT) year ended on 31 March. We’ve outlined the hot spots for employers and employees.

FBT updates and problem areas

1. Car parking under scrutiny
2. Motor vehicle problem areas
3. Mismatched FBT and income tax amounts
4. Mismatched information for entertainment claimed as a deduction and what is reported for FBT purposes
5. Business assets personally used by owners and staff
6. Not lodging FBT returns
7. Salary sacrifice problem areas
8. Did you provide assistance to employees during a crisis?
9. Housekeeping essentials

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Car parking under scrutiny

Important impending changes

A controversial draft ruling from the ATO could expand the scope of the FBT rules dealing with car parking benefits. This is because the draft ruling changes the ATO’s view on what constitutes a commercial parking station. Where an employer provides:

1. Car parking facilities for employees within 1km of a commercial parking station, and
2. That commercial car park charges more than the car parking threshold ($8.95 for year ended 31 March 2020)

a taxable car parking fringe benefit will arise unless the employer is a small business and able to access the car parking exemption.

The draft ruling is not finalised as yet but the ATO has stated it intends to apply the new definitions from 1 April 2021. If you provide car parking facilities to team members, it is important that you either have certainty that you are able to access the small business exemption or understand the implications of the ruling to the car park facilities you provide.

Common errors

The ATO has noticed that where car parking benefits are being declared (that is, where an employer provides parking to an employee), the value of what is being declared is significantly less than what you would expect to pay.

Common errors include:

1. Market valuations that are significantly less than the fees charged for parking within a one kilometre radius of the premises on which the car is parked;
2. Using parking rates or facilities not readily identifiable as a commercial parking station;
3. Rates charged for monthly parking on properties purchased for future development that do not have any car parking infrastructure; and
4. Insufficient evidence to support the rates used as the lowest fee charged for all day parking by a commercial parking station.

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Motor Vehicle problem areas

Private use of work vehicles

Just because your business buys a motor vehicle and it is used almost exclusively as a work vehicle, that alone does not mean that the car is exempt from FBT. If you use the car for private purposes – pick the kids up from school, do the shopping, use it freely on weekends, garage it at home, your spouse uses it – FBT is likely to apply. The private use of work vehicles is firmly in the sights of the ATO.

Private use is when you use a car provided by your employer (this includes directors) outside of simply travelling for work related purposes.

If the work vehicle is garaged at or near your home, even if only for security reasons, it is taken to be available for private use regardless of whether or not you have permission to use the car privately. Similarly, where the place of employment and residence are the same, the car is taken to be available for the private use of the employee.

Finding out that a car has been used for non-work-related purposes is not that difficult. Often, the odometer readings don’t match the work schedule of the business. These are areas the ATO will be looking at.

When is the motor vehicle exempt from FBT?

A motor vehicle is exempt from FBT when:

1. The vehicle is a taxi, panel van, utility or other commercial vehicle that is not designed principally to carry passengers; and
2. The private use of the vehicle is limited to:
   1. Travel between home and work;
   2. Travel that is incidental to travelling in the course of performing employment‑related duties; and
   3. Non‑work related use is minor, infrequent and irregular.

The ATO also provides a ‘safe harbour’ for employers to help overcome the issues of deciding when private use is minor, infrequent and irregular. To qualify for the exemption:

1. The employer provides an eligible vehicle to the employee to perform their work duties. An eligible vehicle is generally a commercial vehicle or one that is not designed mainly for carrying passengers. The requirements are very strict and guidance on this is published on the ATO website.
2. The employer takes reasonable steps to limit private use and they have measures in place to monitor this – this might be a policy on the private use of vehicles that is monitored using odometer readings to compare business kilometres and home to work kilometres travelled by the employee against the total kilometres travelled.
3. The vehicle has no non-business accessories – for example a child safety seat.
4. The value of the vehicle when it was acquired was less than the luxury car tax threshold ($75,526 for fuel efficient vehicles in 2019-20 and $67,525 for other vehicles).
5. The vehicle is not provided as part of a salary sacrifice arrangement; and
6. The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip. If there is some purely private travel using the vehicle, the total distance for the FBT year must be no more than 1,000 km and no single return journey for a wholly private purpose can exceed 200 km.

If you meet all these specifications, the ATO has stated that it will not investigate the use of the FBT exemption further. However, the employer will still need to keep records to prove that the conditions above have been satisfied and to show that private use is restricted and monitored.

If these conditions are not met then this doesn’t necessarily prevent the exemption from applying, but you can expect that the ATO would devote more time and resources in checking whether the conditions have actually been met. Employers who do not take active steps to check the way commercial vehicles are being used are at high risk of significant FBT liabilities.

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Mismatched FBT and income tax amounts

Another area the ATO is picking up is mismatches between the amount reported as an employee contribution on an FBT return compared to the income amounts on an employer’s tax return.

The ATO focuses on mismatches between the employee contributions relating to the fringe benefits, which are reported on the employer’s fringe benefits tax return, and reporting those contributions as income on their income tax return or where the employer has incorrectly overstated the employee contributions that they have received on their fringe benefits tax return to reduce the taxable value of the fringe benefits provided (and thereby, the employer’s FBT liability).

The ATO’s approach is very evidence-based, there needs to be documentation to back up whatever the business is claiming.

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Mismatched information for entertainment claimed as a deduction and what is reported for FBT purposes

One of the easiest ways for the ATO to pick up on problem areas is where there are mismatches. When it comes to entertainment, employers are keen to claim a deduction but this is not recognised as a fringe benefit provided to employees.

Expenses related to entertainment such as a meal in a restaurant are generally not deductible and no GST credits can be claimed unless the expenses are subject to FBT.

Let’s say you taken a client out to lunch and the amount per head is less than $300.  If your business uses the ‘actual’ method for FBT purposes then there should not be any FBT implications. This is because benefits provided to client are not subject to FBT and minor benefits (i.e., value of less than $300) provided to employees on an infrequent and irregular basis are generally exempt from FBT. However, no deductions should be claimed for the entertainment and no GST credits would normally be available either.

If the business uses the 50/50 method, then 50% of the meal entertainment expenses would be subject to FBT (the minor benefits exemption would not apply). As a result, 50% of the expenses would be deductible and the company would be able to claim 50% of the GST credits.

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Business assets personally used by owners and staff

Private use of business assets is an area that crosses across a whole series of tax areas: FBT, GST, Division 7A and income tax.

Take the ATO’s example of the property company that claimed deductions for a boat on the basis that it was used for marketing the company. Large deductions were claimed relating to running the boat. This attracted the ATO’s attention and a review was carried out.

The ATO discovered the boat was used by the director and other employees for private trips, and to host parties for people who had paid to attend the company’s property seminars.

When looking at the overall business activities, the ATO determined the director had purchased the boat primarily for their own private use. As a result, they disallowed the deductions and the private use of the boat was a fringe benefit for the employees of the company. The company had to lodge an FBT return and pay the resulting FBT liability, as well as the income tax shortfall, interest and penalties.

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Not lodging FBT returns

The ATO is concerned that some employers are not lodging FBT returns or lodging them late to avoid paying tax. Given late FBT returns are a problem, it’s likely the ATO will place close attention to any employer that:

1. Is registered for FBT but lodges late; or
2. Is not registered for FBT. If your business employs staff (even closely held staff such as family members), and is not registered for FBT, it’s essential you have reviewed your position and are certain that you do not have an FBT liability. If the business provides cars, car spaces, reimburses private (not business) expenses, provides entertainment (food and drink), employee discounts etc., then you are likely to be providing a fringe benefit. Make sure you have reviewed the FBT client questionnaire we sent you!

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Salary sacrifice problem areas

Calculating superannuation guarantee on salary sacrifice

From 1 July 2020, new rules will come into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the employer.

Under current rules, some employers are paying SG on the salary less any salary sacrificed contributions of the employee. Currently, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and they choose whether or not to include the salary sacrificed amounts in OTE.

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.

Employee contributions for FBT purposes and salary sacrifice

An issue that frequently causes confusion is the difference between the employee salary sacrificing in order to receive a fringe benefit and making an employee contribution towards the value of that fringe benefit.

To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (e.g., before the period in which they start to perform the services that will result in the payment of salary etc.).

Where an employee has salary sacrificed on a pre-tax basis towards the fringe benefit provided – laptop, car, etc., they have agreed to give up a portion of their gross salary on a pre-tax basis and receive the relevant fringe benefit instead.

As a starting point, the taxable value of the fringe benefit is the full value of the expense paid by the employer. The salary sacrifice arrangement doesn’t actually reduce the FBT liability for the employer.

The employer recognises a lower cost of salary and wages provided to the employee as their ‘cost saving’, which results in lower PAYG withholding and superannuation contribution obligations, but they still recognise the full value of the fringe benefit as part of their taxable fringe benefit which is subject to FBT.

The employee recognises that they have a reduced amount of salary and wages, and a non-cash benefit in the form of the fringe benefit.

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Did you provide assistance to employees during a crisis?

If your business assists employees during an emergency, for example floods, bushfires, COVID-19 etc., then fringe benefits tax is unlikely to apply to the assistance you provide. While we doubt anyone would be thinking about FBT during a crisis, it’s good to know that the tax system does not disadvantage your generosity.

Examples of the kinds of benefits exempt from FBT include immediate relief you provide to an employee in the form of:

1. emergency meals or food supplies
2. clothing, accommodation, transport or use of household goods
3. temporary repairs, for example on the employee’s home or car. Long-term benefits are not exempt from FBT, such as providing a new house or car to replace one destroyed in the emergency event.

First aid or other emergency health care you provide to an employee is also exempt if it is provided by an employee (or a related company employee), or is provided at your premises (or those of a related company), or at or near an employee’s worksite.

The exemption applies in a range of scenarios including natural disasters, accidents, serious illness, armed conflict, or civil disturbances.

Just check that your region is listed as one of the affected areas before assuming the exemption applies.

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Housekeeping

It can be difficult to ensure the required records are maintained in relation to fringe benefits – especially as this may depend on employees producing records at a certain time. If your business has cars and you need to record odometer readings at the first and last days of the FBT year (31 March and 1 April), remember to have your team take a photo on their phone and email it through to a central contact person – it will save running around to every car, or missing records where employees forget.

If you have any questions regarding the above, please reach out to your Relationship Manager.

Tax Audit Insurance is important for every business to ensure you are covered for any unexpected circumstances, Every good accountant aims for perfection and accuracy when preparing their client’s tax returns.

However when dealing with the Australian Taxation Office (ATO) and other federal, state and territory based agencies, their clients can still come under scrutiny.

Audit and compliance activity is on the rise

The ATO has stepped up audit and compliance activity over the years in a bid to recover significant amounts of unpaid or underpaid taxes. This activity will only continue to grow in the coming years.

By using third parties such as banks, employers and insurance providers, the ATO can cross-check and monitor information provided in your tax return. If the ATO believe you are not complying with your obligations, or if they believe a mistake has been made on your return, they may conduct a review or an audit to look at your affairs to ensure all the information given to them is accurate.

This can turn out to be a long and expensive process as they endeavour to gather the information needed from your accountant to conduct the audit. It can start with a phone call or letter from an ATO representative, and potentially develop into a full audit or investigation where they will conduct various meetings with your accountant and have open access to all your records and systems.

The duration of the process to resolve the issues varies from case to case and can take anywhere from a couple of days to many long, anxious months. Depending on the nature of the audit you may be out of pocket for a very substantial amount of money.

Minimise your costs in the event of an audit

In circumstances like these it is a great idea to cover yourself for any large unexpected out of pocket expenses if the tax man comes knocking. This is where audit insurance can be a valuable choice for peace of mind in the case of an audit.

Audit insurance is an optional service which provides clients with cover for professional costs (up to a prescribed limit) in the event of an audit or review by the ATO or other relevant government revenue agencies. The audit insurance service fee is paid annually, directly to the accounting practice that holds the policy. You are then added to the policy once the fee has been paid.

There are no unplanned fees – Where amendments are needed to be done to your lodged returns, the audit service will cover the cost of the professional fees, including specialists who may need to be engaged to assist the accountant on your behalf.

Income Tax, GST and BAS, Superannuation Guarantee, PAYG Withholding, Fringe Benefits Tax, Payroll Tax, Land Tax, Stamp Duty, WorkCover and Self Managed Superannuation Funds (SMSFs) are just a few inclusions of what is covered under the service.

In the event of a phone call or letter from the ATO to advise you they are conducting an audit, you have the potential to be covered for the current financial year and any previous financial years whether the returns were prepared by your current accountant or another firm.

For the duration of the time that your accountant acts as your registered agent, you will be able to benefit from this service they offer. It is also tax deductible – a bonus of this service is you can add it to you tax deductions each year.

If you would like to discuss audit insurance further and how it can benefit you, give us a call.

From 1 July 2017, Simpler BAS is the default reporting method for small businesses with a GST turnover of less than $10 million. If you are a small business, you will now have less GST information required to be reported on your BAS.

The Simpler BAS will only require you to report:

• G1 Total sales
• 1A GST on sales
• 1B GST on purchases

The following GST information is no longer required:

• G2 Export sales
• G3 GST-free sales
• G10 Capital purchases
• G11 Non-capital purchases

What do you need to do?

If you are eligible, you don’t need to do anything as the ATO will automatically transition you. However, if your estimated annual GST turnover is $10 million or more, you will still be required to use the full reporting method.

• Online lodger:You don’t need to do anything to set up for Simpler BAS reporting. The ATO will automatically send you a BAS with requesting less information.
• Paper lodger:You only need to complete Total sales (G1), GST on sales (1A) and GST on purchases (1B).

If your software is cloud based, there will be an update to enable Simpler BAS. There is nothing you need to do.

So, is it really much simpler?

If you lodge your own BAS or do your own bookkeeping, then yes, you will no longer have to determine between GST on Purchases and GST Capital purchases, etc. The GST categories will be simplified. However, you will still need to determine if a purchase has a GST-free component and separate these as per the tax invoice. The difference is, you will no longer have to report the GST-free portion of your purchases and sales on the BAS lodged to the ATO. Essentially, correct GST and account allocation will still be required. You will still need to keep records, such as tax invoices, as proof of any claims you make in your BAS and income tax return lodgements. To be honest, you may not notice a lot of change as the bookkeeping in your file remains the same.

Simpler BAS does not affect how other taxes are reported (e.g. PAYG income tax instalments or PAYG tax withheld), or how often you lodge your BAS. If you report annually now, you will continue to report annually after 1 July 2017.

If you learn better by watching, following is a link to the ATO video about Simpler BAS.

https://www.ato.gov.au/Business/Business-activity-statements-(BAS)/Goods-and-services-tax-(GST)/Simpler-BAS/

 

Still have questions or need a hand? Let us help you, contact us on 07 5528 2000

The ATO is increasing attention, scrutiny and education on work-related expenses (WREs) this tax time.

Assistant Commissioner Kath Anderson said: “We have seen claims for clothing and laundry expenses increase around 20% over the last five years.  While this increase isn’t a sign that all of these taxpayers are doing the wrong thing, it is giving us a reason to pay extra attention.”

Ms Anderson said common mistakes the ATO has seen include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

“I heard a story recently about a taxpayer purchasing everyday clothes who was told by the sales assistant that they could claim a deduction for the clothing if they also wore them to work,” Ms Anderson said.

“This is not the case.  You can’t claim a deduction for everyday clothing you bought to wear to work, even if your employer tells you to wear a certain colour or you have a dress code.”

Ms Anderson said it is a myth that taxpayers can claim a standard deduction of $150 without spending money on appropriate clothing or laundry.  While record keeping requirements for laundry expenses are “relaxed” for claims up to this threshold, taxpayers do need to be able to show how they calculated their deduction.

The main message from the ATO was for taxpayers to remember to:

• Declare all income;
• Do not claim a deduction unless the money has actually been spent;
• Do not claim a deduction for private expenses; and
• Make sure that the appropriate records are kept to prove any claims.

Capital gains withholding, a new threshold

From 1 July 2017, where a foreign resident disposes of Australian real property with a market value of $750,000 or above, the purchaser will be required to withhold 12.5% of the purchase price and pay it to the ATO unless the seller provides a variation (this is referred to as ‘foreign resident capital gains withholding’).

However, Australian resident vendors who dispose of Australian real property with a market value of $750,000 or above will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds.

Therefore, all transactions involving real property with a market value of $750,000 or above will need the vendor and purchaser to consider if a clearance certificate is required.

The following is from the ATO’s website:

• Australian resident vendors can avoid the 12.5%  withholding by providing one of the following to the purchaser prior to settlement:
  • for Australian real property, a clearance certificate obtained from the ATO
  • for other asset types, a vendor declaration they are not a foreign resident.
• Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.
• Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.

 

From July 2017, any outstanding tax debts could have an impact on your business credit rating, as the Australian Taxation Office (ATO) will be allowed to disclose information to credit agencies.

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The crackdown

This is central to an effort by the Government to recover the $19 billion of outstanding tax owed to the ATO. Small businesses, with earnings of less than $2 million, owe around two-thirds of this amount.

A credit rating note, which lasts five years, can affect the ability of a business to obtain finance from banks, secure suppliers, and access services such as equipment hire. For sole traders, personal credit ratings will also be at risk.

Central to the new regime, any tax debt over $10,000 that is at least 90 days overdue, will be reported to credit agencies.

Business who contacted the ATO before 30 June and put in place a payment plan will not be reported to credit agencies – the initiative is targeting those businesses that have not cooperated with the ATO.

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Get out of debt

If you currently have any outstanding tax debt, it is essential that you contact the ATO to discuss your debt as soon as possible.

It’s best that you also address the underlying issues behind your tax debt, which will likely be related to your cash flow.

There are several steps to take control of your cash flow:

• Keep your net GST collected and any PAYG withheld from staff in a separate bank account;
• Have a procedure in place to chase up and keep on top of money owed to you;
• Review your pricing and costs to ensure you are making an acceptable profit;
• Have a budget and cash flow forecast in place;

We can help you and your business set up systems to aid with your cash flow monitoring. If you need assistance, please contact one of our team.