Claiming work related deductions

Car expenses

  • When claiming work related motor vehicle deductions remember that you still need to be able to substantiate how you worked out the number of business kilometres you travelled using the cents per kilometre method.
  • In order to claim under the log book method – you must have a complete and valid log book.
  • Under the log book method, a log book will last for 5 years UNLESS you change the vehicle, your useage pattern changes, your employment changes. If any of these things change you MUST complete a new log book.
  • The motor vehicle expense deduction is not available to vehicles over 1 tonne – these expenses get claimed at D2 on the tax return (Travel Expenses).

Travel expenses

  • Remember that just because you receive an allowance from an employer does not automatically entitle you to a deduction. Travel allowance claims are only deductive where the tax payer sleeps away from home.
  • 1 tonne vehicles are not allowed to claim 100% of expenses – private useage must be taken into account
  • Parking expenses are not allowed to be claimed where an employee is traveling to and from work and parking at or near the workplace for more than 4 hours
  • Car washing expenses are not allowed where the vehicle is provided for the employee’s exclusive use

Uniform, Clothing & Laundry Expenses

  • Everyday clothing is not tax deductible, nor can a claim for laundry be made on these items.   This includes heavy duty conventional clothing such as drill shirts and trousers.
  • Only outdoor workers can claim sun protection clothing.
  • If your claim for Laundry expenses exceeds $150 you must have written evidence eg diary entries and receipts An estimate of $0.50 per mixed load or $1 for work clothes only loads can be used.
  • Conventional footwear including non slip are non deductible

If you are unsure as to the deductibility of your clothing and shoes consider the following tax rulings TR 97/12, TD 1999/62 and TR 98/5 or ask your accountant.

Self education expenses

There must be a nexus between the self education expense and the current income producing activity (Employment) otherwise these expenses can not be claimed.

Other work related expenses

  • Sunscreen and sunglasses – outdoor workers can claim these but you must adjust for private useage.
  • Home office – running costs can not be claimed on a floor percentage basis, you must use the ATO rate of $0.45 cents per hour only
  • Home Office – Occupancy costs – (Rent, mortgage interest, rates) you can not claim theses if the home is not a place of business – (A place of business would include signage and stationery nominating the address as a place of business and the area should not be readily suitable or adaptable for use as a private or domestic purpose such as a bedroom) Having a room set aside for doing admin work at the end of the day does not constitute a place of business.
  • Bank fees – you cannot claim these
  • All other expenses including computers, mobile phones, internet etc MUST be apportioned between private and business useage.
  • Vaccinations are not deductible
  • Subscriptions to staff associations or social clubs are not deductible

What are the requirements of your Tax Accountant?

  • Reasonable and direct questions need to be asked, we have also provided various checklists for you to use. (Available on our website)
  • It is not necessary for you to provide to us or have us view/sight all your receipts, we only need you to advise that you have adequate substantiation. REMEMBER, in the event of an audit you will be required to provide that substantiation to the ATO.
  • If we have suspicion that a client is making fraudulent claims we have the right to request to see the substantiating evidence, if the client refuses to provide the substantiation we can refuse to input the deduction and also terminate our services to the client.

What is written evidence?

The following can be used to substantiate your claims:

  • A document in English
  • Document from the supplier of the goods and services showing the name of the supplier, amount of the expense, nature of the goods and services, date incurred
  • Bank statements
  • credit card statements
  • BPAY reference numbers
  • email receipts
  • Invoices
  • Delivery notes
  • PAYG payment summary
  • Paper or electronic copies of documents
  • Warranty documents

work related deductions

Common misconceptions regarding claiming work related deductions

Car expenses

  • When claiming work related motor vehicle deductions remember that you still need to be able to substantiate how you worked out the number of business kilometres you travelled using the cents per kilometre method.
  • In order to claim under the log book method – you must have a complete and valid log book.
  • Under the log book method, a log book will last for 5 years UNLESS you change the vehicle, your useage pattern changes, your employment changes. If any of these things change you MUST complete a new log book.
  • The motor vehicle expense deduction is not available to vehicles over 1 tonne – these expenses get claimed at D2 on the tax return (Travel Expenses).

Travel expenses

  • Remember that just because you receive an allowance from an employer does not automatically entitle you to a work related deduction. Travel allowance claims are only deductive where the tax payer sleeps away from home.
  • 1 tonne vehicles are not allowed to claim 100% of expenses – private useage must be taken into account
  • Parking expenses are not allowed to be claimed where an employee is traveling to and from work and parking at or near the workplace for more than 4 hours
  • Car washing expenses are not allowed where the vehicle is provided for the employee’s exclusive use

Uniform, Clothing & Laundry Expenses

  • Everyday clothing is not tax deductible, nor can a claim for laundry be made on these items.   This includes heavy duty conventional clothing such as drill shirts and trousers.
  • Only outdoor workers can claim sun protection clothing as a work related deduction.
  • If your claim for Laundry expenses exceeds $150 you must have written evidence eg diary entries and receipts
  • Conventional footwear including non slip are non deductible

If you are unsure as to the deductibility of your clothing and shoes consider the following tax rulings TR 97/12, TD 1999/62 and TR 98/5 or ask your accountant.

Self education expenses

There must be a nexus between the self education expense and the current income producing activity (Employment) otherwise these expenses can not be claimed.

Other work related expenses

  • Sunscreen and sunglasses – outdoor workers can claim these but you must adjust for private useage.
  • Home office – running costs can not be claimed on a floor percentage basis, you must use the ATO rate of $0.36 cents per hour only
  • Home Office – Occupancy costs – (Rent, mortgage interest, rates) you can not claim theses if the home is not a place of business – (A place of business would include signage and stationery nominating the address as a place of business and the area should not be readily suitable or adaptable for use as a private or domestic purpose such as a bedroom) Having a room set aside for doing admin work at the end of the day does not constitute a place of business.
  • Bank fees – you cannot claim these
  • All other expenses including computers, mobile phones, internet etc MUST be apportioned between private and business useage.
  • Vaccinations are not deductible
  • Subscriptions to staff associations or social clubs are not deductible

What are the requirements of your Tax Accountant?

  • Reasonable and direct questions need to be asked, we have also provided various checklists for you to use. (Available on our website)
  • It is not necessary for you to provide to us or have us view/sight all your receipts, we only need you to advise that you have adequate substantiation. REMEMBER, in the event of an audit you will be required to provide that substantiation to the ATO.
  • If we have suspicion that a client is making fraudulent claims we have the right to request to see the substantiating evidence, if the client refuses to provide the substantiation we can refuse to input the deduction and also terminate our services to the client.

What is written evidence?

The following can be used to substantiate your claims:

  • A document in English
  • Document from the supplier of the goods and services showing the name of the supplier, amount of the expense, nature of the goods and services, date incurred
  • Bank statements
  • credit card statements
  • BPAY reference numbers
  • email receipts
  • Invoices
  • Delivery notes
  • PAYG payment summary
  • Paper or electronic copies of documents
  • Warranty documents

www.plantandassociates.com.au

Dodgy Tax Claims

Dodgy Tax Claims – Work Related Expenses and Rental Expenses

ATO Targets Work-related Expenses and Rental Expenses

The tax office have confirmed that they will continue to monitor work-related and rental expenses claimed in 2016 income tax returns. In particular, they will be focusing on work-related car, travel, mobile phone and internet expenses as well as repairs and maintenance for rental properties.

The tax office advise there are 3 key rules for claiming work-related expenses:
– You have spent the money yourself
– It must be related to your current job; and
– Your must a record to prove it.

The tax office is receiving more data from third parties than ever before, including banks, employers, health insurers, state and federal agencies and overseas treaty partners. In some cases, the deductions claimed by tax payers have been disallowed because their information did not match with information provided by these third parties. Some examples include:

– An employee claimed car expenses for their home to work travel on the basis that they transport bulky tools, however the tax office contacted the employer who confirmed that these items can be securely stored at the place of employment.
– An employee claiming travel expenses for an overseas holiday as work-related, however his employer confirmed that he was on annual leave and the trip did not relate to his work.
– A taxpayer claiming expenses for attending an overseas conference, however immigration records indicated that he was in Australia at the time of the conference.
– A taxpayer claiming car expenses based on the log book method, however toll road records did not correspond with the log book and further enquiries indicated that he was out of the country on the dates listed in the log book.

If claiming repairs and maintenance for a rental property, you must ensure that they were genuinely incurred while the property was available for rent and that they were to repair damage caused by the tenants.

If a claim is found to be incorrect, the expense will be disallowed and penalties may be imposed on the taxpayer.

We will also be providing an additional report to employee taxpayers this year. This report will advise if your work-related expense claims are outside the average for your occupation and income level. The tax office will be conducting reviews and may contact any clients whose deductions exceed the average. You should ensure that you are able to substantiate all expenses claimed in the event that this information is requested by the tax office. You are responsible for this proof even when you use a registered tax agent.

If you have any concerns regarding what you can claim in your tax return, please do not hesitate to contact our office.

The ATO have published an Article on Exposing dodgy deductions, to read the full article click here. Below is some case studies from the article:

Case Studies

Case study one

A railway guard claimed $3,700 in work-related car expenses for travel between his home and workplace. He indicated that this expense related to carrying bulky tools – including large instruction manuals and safety equipment. The employer advised the equipment could be securely stored on their premises. The taxpayer’s car expense claims were disallowed because the equipment could be stored at work and carrying them was his personal choice, not a requirement of his employer.

Case study two

A wine expert, working at a high end restaurant, took annual leave and went to Europe for a holiday. He claimed thousands of dollars in airfares, car expenses, accommodation, and various tour expenses, based on the fact that he’d visited some wineries. He also claimed over $9,000 for cases of wine. All his deductions were disallowed when the employer confirmed the claims were private in nature and not related to earning his income.

Case study three

A medical professional made a claim for attending a conference in America and provided an invoice for the expense. When we checked, we found that the taxpayer was still in Australia at the time of the conference. The claims were disallowed and the taxpayer received a substantial penalty.

Case study four

A taxpayer claimed deductions for car expenses using the logbook method. We found they had recorded kilometres in their log book on days where there was no record of the car travelling on the toll roads, and further enquiries identified that the taxpayer was out of the country. Their claims were disallowed.

Case study five

A taxpayer claimed self-education expenses for the cost of leasing a residential property, which was not his main residence. The taxpayer claimed he had to incur the expense of renting the property as he ‘required peace and quiet for uninterrupted study which he could not have in his own home’. This was not deductible.

In addition to the rental expenses, the cost of a storage facility was claimed where ‘the taxpayer needed to store his books and study materials’. They claimed they needed this because of the huge amount of books and study material associated with his course and had no space in his private or rented residence where these could be housed. This was not deductible.

The cost of renting the property was around $57,000, with additional expense of $7,500 for the storage facility. The actual cost of the study program he attended that year was only $1200.

Cardinal rules to keep you out of trouble with the ATO

  1. Never ‘back-date’ documents
  2. Only claim what you know is a genuine tax deduction
  3. Declare all of your income
  4. Don’t estimate your deductions, and always double-check figures and numbers before you submit your tax return
  5. File your tax return on time in order to avoid penalties
What to do when you’re being audited
  • Don’t freak out. You are innocent until proven guilty
  • If you have done the wrong thing then fess up to the ATO straight away and limit the damage
  • Keep your receipts and have them all in order and ready for the tax office
  • Make sure you have a depreciation schedule from a quantity surveyor if you are claiming depreciation for rental properties
  • Have a 13-week log book for car deductions
  • Seek professional advice from a tax lawyer/accountant who has experience in dealing with ATO tax audits
  • Get everything prepared in advance – bank statements, records, invoices and receipts
  • Be honest, and explain anything relevant in as timely a fashion as possible
  • Don’t sign anything until you fully understand the document, and agree with the conclusions that it has come to
  • If necessary, seek a payment plan or a retraction of penalties

16 serious mistakes that would trigger an ATO audit

  1. Estimating rather than getting the actual figures
  2. Claiming a deduction for interest on the private portion of the loan. The interest expense must be apportioned between the ‘deductible’ and the ‘private’ portion of the total borrowings.
  3. When depreciating assets, new assets acquired for less than $1,000 during the year are allocated as ‘low cost assets’ to the pool but the decline in value for these assets in the first year is at a rate of 18.75%, or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year and eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool. For subsequent years they are depreciated at the normal pool rate of 37.5%.
  4. Claiming initial repairs or capital improvements as immediate deductions. Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property is generally capital and not deductible, even if you carried out these repairs to make the property suitable for renting. However, it may be claimed as capital works deductions over 40 years.
  5. Not showing dividends from dividend reinvestment plans in your tax return
  6. Claiming a deduction for the cost of travel when the main purpose of the trip is to have a holiday and the inspection of the property is incidental to that
  7. Not having receipts to justify the deductions you are claiming, and you cannot justify the connection between the expense and deriving the income (eg, it was for a private purpose).
  8. Omitting overseas income – taxpayers are subject to tax on their world-wide income and the ATO has agreements with over 42 countries with data-sharing.
  9. Claiming deductions for a rental property that is not genuinely available for rent, ie, a holiday house
  10. Incorrectly claiming deductions for a property that is only available for rent for part of a year
  11. Incorrectly claiming deductions for a rental property when it has been used by relatives or friends free of charge for the part of the year. A deduction is not allowable for the periods involving that free occupancy.
  12. Incorrectly claiming for the cost of land in a claim for capital works. Only the original cost of construction is included in the calculation and the cost of the land forms part of the cost base when calculating a capital gain or loss.
  13. Incorrectly claiming deductions on depreciating assets that are only eligible for a capital works deduction
  14. Incorrectly claiming a deduction for conveyancing costs when they should form part of the cost for capital gains tax purposes
  15. Incorrectly claiming all deductible borrowing expenses greater than $100 in the first year they are incurred instead of spreading over five years or over the term of the loan, whichever is less
  16. Not splitting the income and expenses in line with their legal interest in a property where purchased by a husband and wife as co-owners
Posted in Asset Protection, Bookkeeping, Capital Gains Tax, Tax

6 Ways To Legitimatly Reduce Your Tax Bill

1. Franked dividends

One of the great benefits of investing in stocks listed on the Australian market is the franking credit system – providing shareholders with a tax credit for corporate tax paid on company profits.

Take the example of a retired couple over 55 who jointly own a $1 million share portfolio, producing a fully franked yield of 5%. The grossed-up dividend (which takes into account the value of the franking credits) is 7.14%. This means that in the first year, the portfolio would produce combined cash dividends of $50,000 plus $21,428 in franking credits.

As the couple in this case study has no other taxable income (their superannuation pensions are not included in their taxable income), they will receive a cash refund totaling about $14,000 for excess franking credits. (Excess franking credits occur when franking credits exceed the amount of tax payable.)

2. Franked dividends in super

What if the same $1 million portfolio were held in, say, a self-managed super fund whose assets support the payment of superannuation pensions to each spouse? The key to this tax position is that superannuation assets backing the payment of a pension are not taxable. If the fund – for the sake of simplicity in this example – held no other assets apart from the $1 million, fully franked portfolio, it would receive a cash refund of all $21,428 for excess franking credits.

Under superannuation law, a person can take a transition-to-retirement pension from age 55, and their super assets supporting the pension immediately gain this tax-free treatment. And if the members receiving the pension are over 60, the pension payments are tax-free in their hands.

3. Income-splitting

One of the simplest ways to reduce tax is to hold nonsuperannuation investments jointly or in the name of a lower-earning spouse. Another way to split income to reduce tax is to setup a discretionary trust to distribute income and capital gains to adult family members with low tax rates.

Be warned, individuals under 18 are no longer be eligible for the low-income tax offset on their so-called unearned income (such as dividends, interest and rent). This means that unearned income paid to children – perhaps through family trusts – is subject to the full penalty rates applying to minors.

4. Salary-sacrificed super

This is the last tax year before the standard cap for concessional contributions by members over 50 is halved from $50,000 to the indexed $25,000 cap that already applies to other fund members. (Members over 50 with low super savings will not have their concessional caps halved.)

Concessional contributions comprise superannuation guarantee and salary-sacrificed contributions as well as personally- eductible contributions by the selfemployed and eligible investors. The immediate tax benefits of maximising salary-sacrificed and personallydeductible are that the amounts within the annual contribution caps are taxed at 15% upon entering the concessionally-taxed super system – instead of marginal tax rates.

5. Transition-to-retirement pensions

The strategy of taking a transition-to-retirement pension while simultaneously making salary sacrificed contributions  otentially can produce excellent tax breaks that should not be ignored.

The strategy has four main tax advantages. Salary-sacrificed contributions are taxed at 15%, not marginal tax rates; the taxable portion of the pension is taxed at marginal rates with a rebate of up to 15% to age 60; and the pension is tax-free from age 60. And most importantly for members with larger balances is that super fund assets backing the pension payments are tax-exempt.

Further, amounts taken as a transition-toretirement pension – a set minimum must be taken each year – can be recontributed to super as nonconcessional contributions, which have an annual contribution cap of $150,000. The making of non-concessional contributions will help minimise tax on any of your super death benefits eventually paid to non-dependants including financially independent adult children. And, of course, large contributions will replenish or boost super balances.

6. Small business CGT concessions

These concessions together with the standard discount CGT discount for assets held at least 12 months means that owners of eligible small businesses can potentially greatly reduce or wipe-out capital gains tax upon the sale of their enterprises – even if there have been multi-milliondollar gains.

Astute business owners keep a close watch on whether their businesses remain eligible for the small business CGT concessions and gain a full understanding of how the various concessions operate. It is possible to adopt a series of strategies so a business remains eligible for the concessions as long as possible.

Posted in Tax, Tax Minimisation

Payroll tax

Payroll tax is a state tax calculated on wages paid, or payable, by employers and applies in all Australian states and territories.

For payroll tax purposes wages include:

  • salaries
  • allowances
  • director’s fees
  • super
  • the grossed-up value of fringe benefits.

Contractors

Any payments made to contractors under a relevant contract are taxable.

Exemptions and rebates

You may be able to claim an exemption or rebate for payroll tax.

Common exemptions and rebates are listed below:

Exempt allowances—includes motor vehicle and accommodation.
Exempt employees—includes apprentices, trainees and certain other employees.
Exempt leave—includes maternity/paternity, adoption, surrogacy, volunteer worker and defence/military leave.
Film and TV rebate—includes rebates for certain feature films, telemovies and television series.

Queensland Payroll Tax Facts

  • Payroll tax is paid by businesses or groups of businesses that pay more than $1.1 million a year in Australian wages.
  • You must register for payroll tax within 7 days after the end of the month in which you:
    • pay more than $21,153 a week in Australian taxable wages
    • or, become a member of a group that pays more than $21,153 a week in Australian taxable wages.
  • The current payroll tax rate is 4.75%.
  • To calculate your payroll tax liability:
    • determine your total taxable wages
    • subtract any deductions
    • multiply this amount by the current tax rate of 4.75%.
  • You can lodge either periodic or annual returns. Periodic returns are due monthly, 7 days after the end of the return period. Annual returns are due by the 21st July each year.

For more information about payroll tax or to find out if you are liable to pay any payroll tax, contact the revenue office in your state or territory:

Australian Capital Territory – phone (02) 6207 0088 or visit www.revenue.act.gov.au
New South Wales – phone 1300 139 815 or visit www.osr.nsw.gov.au
Northern Territory – phone 1300 305 353 or visit www.revenue.nt.gov.au
Queensland – phone 1300 300 734 or visit www.osr.qld.gov.au
South Australia – phone (08) 8204 9880 or visit www.revenuesa.sa.gov.au
Tasmania – phone (03) 6233 2813 or visit www.sro.tas.gov.au
Victoria – phone 13 21 61 or visit www.sro.vic.gov.au
Western Australia – phone 1300 368 364 or visit www.dtf.wa.gov.a

Posted in Tax

Fringe Benefits Tax (FBT)

Fringe benefits tax is a tax paid on certain benefits you provide to your employees or your employees’ associates. FBT year runs from 1 April to 31 March.

What is a Fringe Benefit?

A fringe benefit is a benefit provided in respect of employment to an employee (or their associate) because they are an employee. An employee can be a current, future or former employee.

You provide a fringe benefit when you:

  • Allow your employee to use a work car for private purposes.
  • Have a salary package arrangement with your employees.
  • Reimburse an expense incurred by your employee, such as school fees.
  • Provide entertainment by way of food, drink or recreation.
  • Provide employees with living away from home allowances.

Fringe Benefits less than $300 in value
A minor benefit is a benefit which has a taxable value of less than $300. This benefit is an exempt benefit.
Where you provide an employee with separate benefits that are in connection with each other (for example, a meal, a night’s accommodation and taxi travel) you need to look at each individual benefit provided to the employee to see if the taxable value of each benefit is less than $300.

Employer Contributions can reduce your FBT liability

You can reduce the amount of FBT you pay by:

  • Using employee contributions – generally a cash payment by the employee to the employer or the person who provided the benefit, however, an employee can also make an employee contribution towards a car fringe benefit by paying for some of the operating costs (such as fuel) that the employer does not reimburse.

Car Fringe Benefit

To calculate a car fringe benefit, an employer must work out the taxable value of the benefit using either:

  • Statutory formula method (based on the car’s cost price)
  • Operating cost method (based on the costs of operating the car).

Statutory Formula Method

Use the following formula to calculate the taxable value of car fringe benefits under the statutory formula method:

Taxable value = (Base Value of Car x Statutory % x Days used for private use) = Employee Contribution
Days in FBT year

The move to one statutory rate of 20% will be phased in over four years. The statutory rate is based upon the number of kilometres travelled in an FBT year:

Total kms                                                                                                    Statutory rate
travelled during
FBT year                                  From 10 May 2011          From 1 Apr 2012          From 1 Apr 2013              From 1 Apr 2014

Less than 15,000                                   0.20                               0.20                                   0.20                                    0.20
15,000 to 25,000                                   0.20                               0.20                                   0.20                                    0.20
25,000 to 40,000                                  0.14                                 0.17                                   0.20                                    0.20
More than 40,000                                0.10                                 0.13                                   0.17

Example:
An employer purchases a car for $30,000 (including GST) on 1 August 2011; however, it was only available for private use by the employee for 183 days from 1 October 2011. From 1 August 2011 to 31 March 2012 the car travelled 18,000 kilometres (the annualised kilometres for the full 2011-12 FBT year would be 27,109 (18,000/243 x 366), so the relevant statutory percentage is 14%). The employee pays fuel costs of $1,000 and provides the employer with the necessary declaration.

Taxable value     =    ($30,000 x 14% x 183) – $1,000 = $1,100
366
Operating Cost Method

Use the following formula to calculate the taxable value of car fringe benefits under the operating cost method:
Taxable value = (Total operating costs x % of private use) – Employee Contribution

Example:
A car purchased by an employer in January 2011 is used privately by an employee throughout the FBT year 1 April 2011 to 31 March 2012. The operating costs (including GST, as appropriate) for that period (fuel, insurance, registration, repairs and so on) total $5,000. The depreciated value at 1 April 20011 is $20,000, so that depreciation at 25% to 31 March 2012 would be $5,000 (that is, 25% of $20,000). The statutory interest rate is 9.00%, so that the interest component to 31 March 2009 would be $1,800 (that is, 9.00% of $20,000). The percentage of private use established under the procedures outlined above is 25%. The employee spent $1,000 on fuel and has provided the required declaration to the employer.

The taxable value of the car fringe benefit for the 2011-12 FBT year would be:

Taxable value = ($11,800 x 25%) – $1,000 = $1,950

Payment of home telephone and home internet services

Expense payment fringe benefits, such as telephone expenses
Expense payment fringe benefits arise when an employer reimburses an employee for an expense incurred by the employee, or when the employer pays a third party for expenses incurred by an employee.
If entities do not hold otherwise deductible declarations signed by employees, the total payment for home telephone and home internet services becomes a fringe benefit, even if part of the use was for work-related purposes. The only exception is where the entity reimburses specific work-related calls and, therefore, there is no requirement for a declaration as the benefit is an exclusive employee expense payment benefit.

Calculating taxable value of expense payment fringe benefits
The taxable value of expense payment fringe benefits is the amount of the reimbursement or payment, reduced by the component that the employee could claim as a once-only income tax deduction (the otherwise deductible component) and reduced by any contribution made by the employee. The otherwise deductible component does not relate to deductions that span several income years, such as depreciation.
When calculating the taxable value of an expense payment fringe benefit, employees can help by completing an otherwise deductible declaration prior to an expense being reimbursed or paid. This enables the taxable value of the benefit to be calculated, and the RFBA to be recorded, at the time of reimbursement rather than requiring otherwise deductible declarations to be collected at year end.

Posted in Tax

Tax-free threshold when you have income form two sources and changing jobs during the year. – article by Skye Lee

 

How tax is withheld if you are paid by two or more payers at the same time. For example:

  • You work four days a week for one employer and one day a week for another employer.
  • You receive a taxable pension and also have a regular part time job.
  • You receive a taxable Australian Government allowance or payment and also have a regular part time job.

Calculating the amount of tax to be withheld

Tax-free threshold

If you are an Australian resident for taxation purposes, the first $18,200 of your yearly income is not taxed. This is called the tax-free threshold. If you have more than one payer at the same time, we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage (this is known as your primary source of income).  If you earn additional income (for example, from a second job or a taxable pension) your second payer is required to withhold tax at the higher, ‘no tax free threshold’ rate.

If your second payer does not withhold a higher rate of tax this may lead to a tax debt at the end of the financial year.

However, if you are certain your total income for the year will be less than $18,200 you can claim the tax-free threshold from each payer.

The tax-free threshold increased from $6,000 to $18,200 on 1 July 2012. If you have claimed the tax free threshold from more than one payer, you will need to provide a new withholding declaration to one of your payers if your total income increases to be above $18,200.

 

Withholding tax tables

Your employer or payer uses tax tables to work out how much tax to withhold from your payment.

In most cases, where you have income from one payer, the amounts withheld will be sufficient to cover the tax payable on your payments at the end of the financial year.

When a person has more than one job or payer, the total tax withheld from all sources may result in too much tax being withheld (that is, over-withholding) or insufficient tax being withheld (that is, under-withholding).

Examples and what you can do

Example 1: Over-withholding and yearly income less than $18,200

Jeff has a taxable pension of $384.61 per fortnight ($10,000 for the year) and also a part time job earning $307.69 per fortnight ($8,000 for the year).

Jeff claims the tax-free threshold on his pension and no tax is withheld during the year.

If Jeff does not claim the tax-free threshold through his employer for his part-time job, $66 per fortnight would be withheld and the total tax withheld from Jeff’s payments during the year would be $1,716.

Assuming that Jeff does not have other income, Jeff’s tax payable at the end of the financial year would be nil. He would receive a refund of the total tax withheld of $1,716.

In this case, Jeff could also claim the tax-free threshold for his part time job through his employer so that no tax is withheld from payments made to him throughout the year. This can be done by completing a withholding declaration.

Example 2: Over-withholding and yearly income more than $18,200

Sue has two jobs. As a part time retail sales assistant she earns $538.46 per fortnight ($14,000 for the year). She also works in a restaurant earning $384.62 per fortnight ($10,000 for the year).

Sue claims the tax-free threshold from her retail employer and has no tax withheld.

If Sue does not claim the tax-free threshold from her restaurant employer, $82 per fortnight would be withheld and the total tax withheld from Sue’s payments during the year would be $2,132.

Assuming that Sue does not have other income, her tax payable when she lodges her return would be:

Taxable income: $24,000
Income tax payable on $24,000 $1,102
Less
Low income tax offset		 $445
$657
Plus
Medicare levy (10% of income over $20,542)		 $345.80
Total tax and Medicare levy $1,002.80
Credit for total tax withheld (26 x $82) $2,132.00
Refund due $1,129.20

The refund of $1,129.20 arises due to Sue having over-withholding on payments she received from her employers during the year. Sue can apply to the ATO to arrange for a withholding variation to reduce the over-withholding so that she receives extra net pay during the year, rather than a large tax refund at the end of the financial year.

Example 3: Under-withholding

Pierre receives a taxable pension and is employed in a part-time job. Over the course of the 2012-13, year, he receives:

    • $30,000 from the pension, and
    • $30,000 from the part-time job.

Pierre is paid fortnightly.

Using the Pay as you go (PAYG) withholding Schedule 3 – Fortnightly tax table and applying the Medicare levy and tax-free threshold to the first job and Medicare levy and no tax-free threshold to the part-time job, the tax withheld is:

Annual income Fortnightly income Fortnightly Tax withheld
Pension $30,000 $1,153.84 $102.00
Part-time job $30,000 $1,153.84 $306.00
Total $60,000 $2,307.68 $408.00

At the end of the financial year if Pierre continues to have tax withheld of $408.00 each fortnight, he will have paid a total of $10,608 in income tax ($408 x 26 fortnights).

When Pierre lodges his tax return for the year, the actual amount of income tax that he will have to pay will be:

Taxable income: $60,000
Income tax payable on $60,000 $11,047
Less
Low income tax offset		 $100
$10,947
Plus
Medicare levy (1.5% of $60,000)		 $900
Total tax and Medicare levy $11,847
Credit for Total tax withheld (26 x $408) $10,608
Tax payable $1,239

Pierre will have tax debt of $1,239 as insufficient tax was withheld during the year on payments he received from his pension fund and employer.

Pierre can choose to ask one or both of his payers to withhold extra tax to cover the shortfall, by supplying them with a completed Withholding declaration – upwards variation. Alternatively, he can put money aside to ensure that he can pay his tax bill when it falls due.

 

Posted in Tax

30 Tax planning strategies

DEFERRING INCOME

  1. Cash or Accruals – Determine whether you should use “Cash” or “Accruals” tax accounting.  On the cash basis, taxable income is the net of amounts that are actually received less amounts actually paid at year end.  The proceeds of pre – 30 June sales which have not yet been received, are excluded from income for the current year.
  2. Unearned income – Make sure that you exclude any income that you may have received but not yet earned. Defer the income until the next year.
  3. Defer Billing – If your cashflow can stand it, think about deferring your invoicing until after 30 June.  A one month delay in billing will mean you pay tax on the income a whole year later.  Mind you, your customers might want you to bill pre-June so that they can claim the deduction.  And a few days delay in billing will usually mean that you get paid a whole month later.
  4. Interest – For most taxpayers interest is only assessable when actually received.  If you are lucky enough to have a few term deposits, arrange to have them mature after 30 June rather than just before.

BUSINESSES DEDUCTIONS

  1. Bad debts – Trade Debtors should be reviewed prior to 30 June to identify and write off any bad ones.
  2. Scrap assets – Review your asset ledger and write off all assets that have been scrapped or which have outlived their useful economic lives.
  3. Low Value Pool – Assets which have been written down to where their value is quite low can be pooled together and depreciated at a higher rate.
  4. Low value assets – Assets costing $300 or less can be written off immediately under certain conditions.
  5. Obsolete Stock – Obsolete trading stock with no value can be written off and a tax deduction claimed this year.
  6. Slow moving Stock – Slow moving stock can be written down to net realisable value.
  7. Stock Valuation – Stock can be written down from cost to a lower replacement value; not a common adjustment but one that is more relevant these days with the stronger Australian dollar making imports cheaper.
  8. Maintenance – The work car is due for a service or some new tyres, why not get it done pre-June rather than just after?  For the sake of paying a few days earlier you accelerate the effect of the tax deduction by a whole year earlier.
  9. Superannuation – Employees’ superannuation contributions should be actually paid before 30 June to obtain a deduction, and to avoid the Superannuation Guarantee Charge.
  10. Personal Superannuation – You can claim a deduction for personal superannuation contributions if your salaries and wages income is less that 10% of your total income.
  11. Self Education deductions – If you receive a Youth Allowance, you are allowed a deduction for certain self-education expenses.

CAPITAL GAINS TAX

  1. Small Business Concessions – You should consider the availability of other small business CGT concessions which have the effect of reducing or deferring a capital gain arising from the disposal of a business asset.
  2. CGT Discount – The CGT discount is not available when you sell an asset that you have held for less than 12 months. Consider deferring the disposal of these assets until the 12 months threshold has past.
  3. Roll gain into Superannuation – In some circumstances you can avoid paying tax on capital gains if you use some or all of the funds to make a personal superannuation contribution.
  4. Roll gain into another asset – CGT law allows you to roll over a capital gain into a replacement asset, effectively deferring the tax on the gain.

COMPANIES

  1. Tax Losses – Check to see if your company has any tax losses carry forward from prior years.  These will be able to be offset against this year’s income.  You’ll need to make sure that the company passes either the Continuity of Ownership or the Same Business tests.
  2. Loans treated as dividends – Companies are allowed to make loans or payments to their shareholders or associates (or even forgive debts).  There are onerous tax consequences however unless the loans are put on a legitimate footing with proper loan agreements with interest being charged, principal repayments made and, in some case, genuine security taken.  Alternatively, the loan can be repaid by the earlier of the due date for lodgement of the company’s return for the year or the actual lodgement date.  It’s important to get some good tax advice or suffer the tax consequences.
  3. Tax Consolidation – If you’ve got a few companies that make up your group, you may want to consider consolidating them for tax purposes before the end of the year.  The resultant single tax entity allows you to offset profits and losses from the different entities.
  4. Personal Services – The company tax rate on income is currently 30%.  Individual tax rates can be much higher.  If you provide services through a company where those services are virtually all from your personal exertion, you could well l find that the income will be considered to be all yours and not the company’s.  There are a couple of hoops to jump through to make sure that the income is treated as income of the company.  You need to look at these well before the end of the tax year to give you time to comply.

TRUSTS

  1. Distribute all income – You need to make sure that you effectively distribute all income each year otherwise undistributed income may be taxed at 46.5%.
  2. What constitutes trust income – A recent High Court case has challenged the historic advantages of using a trust to reduce the rate of tax that you pay.  Nothing has been outlawed; the rules for some have just changed a little.  It all swings on the wording of your trust deed as the deed dictates how trust income is defined and whether capital gains are treated as normal income or not.
  3. How income is assessed – When some accounting expenses are not tax deductible, the net income of the trust for tax purposes exceeds its accounting income. Recent tax law resolved that the distribution of the taxable income must align proportionately with the distributions made for the accounting income.  This can create a problem if you want to limit the income of some beneficiaries to a set dollar amount eg: children under 18.  It pays to leave a little leeway in your accounting distributions to allow for potential rejection of some tax claims.
  4. Unpaid present entitlements – If a trust has an unpaid present entitlement to a corporate beneficiary, complex tax issues arise.  If you can, you should pay the entitlements back before you lodge the trust’s income tax return.

SUPERANNUATION

  1. Co-Contribution – Let’s start with the easy money.  Low-income earners should think about making a personal superannuation contribution so that they qualify for the government’s superannuation co-contribution payment.
  2. Re-contributions – Currently, strategies exist that allow you to draw a pension from your fund and re-contribute amounts to the funds, reducing tax significantly, while maintaining your same net cash.  Don’t leave it to the last minute to set this up though.
  3. Contribution caps – Make sure that you don’t contribute more than the annual concessional contribution cap or risk being subject to an excess contributions tax of 46.5%. Taxpayers are often brought undone by forgetting salary sacrificed superannuation while also contributing to an industry fund.
Posted in Tax Minimisation

Private Company Loans – (Loans to shareholders – Division 7A) by Claire Chapman

Loans to shareholders (paid outside ordinary wages and dividends eg ‘drawings’) made by private companies can be deemed to be dividends unless they meet strict requirements.  The ATO is focusing risk review and audit activity on loans to shareholders.

The documentation and repayment requirements are very strict.  Tax planning provides an opportunity to review these issues prior to year end and also plan for dividends that you may need to declare personally to meet the minimum repayments.

We are seeing an alarming increase in the number of clients taking large drawings from their companies with no tax planning to deal with it.  When they bring their historical information in to us to prepare the tax returns, it is too late to do anything about it and as a result they are left with very large tax bills.

DIRECTORS’ LOAN ISSUES

There are strict laws and regulations in place to prevent directors, shareholders and their associates of private companies withdrawing amounts from those companies for private purposes.

The only means by which a company can pay amounts to directors, shareholders or associates are as follows:

  • Wages (if the person is an employee of the business)
  • Directors fees
  • Dividends (either franked or unfranked)

Wages and Directors’ Fees
The company may be able to pay amounts out as wages or directors fees where the person is employed in the business. It is important to note that if they are classified as employees, all entitlements relevant to other employees will also apply. E.g. Compulsory superannuation contributions will be required to be paid and the company will be required to withhold tax on the payments and declare this to the tax office. They will also need to include these amounts in their calculations for workers’ compensation insurance premiums.

Dividends
For shareholders, the company can declare and pay dividends to distribute the profits. Preferably these would be franked dividends, however this will be dependent on the amount of tax credits available in the company.

Wages, directors’ fees and dividends will need to be declared as income in the personal income tax return of the director or shareholder.

Under limited circumstances, the company may enter into a loan agreement with the director or shareholder for the amount to be repaid. Under these circumstances, the parties must have a written loan agreement (prepared by a solicitor) and the loan must be repaid within 7 years from the date that it commenced. In addition, the company is required to charge interest on the loan and there will be tax payable on this interest. Also the director or shareholder is required to make a minimum repayment each year as calculated by the tax office.

Failure to comply with these regulations can result in severe penalties being imposed on the company, directors, shareholders or associates. This may result in them being liable to pay significantly higher amounts of tax than they would otherwise be liable for..

It is important that clients contact us to discuss their circumstances prior to withdrawing any amounts from their company for personal purposes.

Posted in Tax