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

Asset Protection

The key asset for most people is the family home.    Asset protection is for anyone at high risk,  not just high wealth individuals.

So who is an “at risk individual”?
  • Anyone who has their own business no matter whether you trade as a sole trader or another entity
  • Anyone with a investment property
  • Anyone working in a high risk of being sued industry
  • Essentially if you need to have landlord insurance, or professional or public indemnity insurance then you are most likely at risk.  The main reason for being at risk is due to under insurance.
Transfer of family home to spouse or trust
The typical asset protection solution for individual at risk is to move the family home into the spouse who is not at risk, or move it into a family trust.
The main issue concerned with moving the family home into the family trust is that it loses its CGT exemption for Primary place of residence.
Generally the transfer of property to a spouse will be exempt for Capital Gains Tax purposes and may also qualify for stamp duty exemption.  (You should check with your solicitor on this).
Gift and loan back strategy
Another strategy used which is not 100% asset protection but offers some protection, is the gifting of the equity in the property to the family trust.  The trust then takes a second registered mortgage over the property (assuming the bank has a first registered mortgage).  This strategy involves stamp duty, financier consent, Capital gains tax and has top up issues (that is, as the equity increases, you need to top up the amount gifted to the trust)
IMPORTANT NOTE – When considering transfer of a property, if you declare bankruptcy within 4.5 years of the transfer, the administrator of your bankruptcy can claw back the property.
WARNING – As part of your estate planning you should consider that if something happens to the spouse of the at risk individual, the will may set out that the property transfers back to the at risk person – thus undoing the careful plans you have made.
It is vital to talk through your plans with a solicitor to ensure that the asset protection and estate planning techniques you put in place are suited to your needs.
Keeping your tax compliance up to date
When considering asset protection it is important to note that if you have not lodged your tax return for many years and would have tax to pay if you did, then you can be deemed as being bankrupt from as early as the last tax return you did lodge.  This would allow an administrator of your bankruptcy to claw back any transactions such as gifting of money or transfer of property that may have occurred since the date of the last tax return lodged to present.
Posted in Asset Protection

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

Questions to ask your accountant

1.     When buying business insurance is it best to work with a broker representing various carriers or should I go direct to insurance companies?

2.     I am in the market for a bank loan. What kinds of information should be included in the business plan I present to the bankers? How should this information be presented

3.     Which indicators of my company’s performance should I be tracking weekly, monthly, annually? Should I calculate these key indicators, or should I ask my accountant to do it?

4.     How do I prepare cash flow statements and how do I use them as management tools?

5.     How can I tell if my company has reached the limit of its borrowing capacity? Can I comfortably handle additional debt?

6.     How do my financial ratios and percentages compare with the averages of other businesses in my industry?

7.     What taxation implications are there for me when I go to sell my business?

8.     What strategies can I use to defer my income tax?

9.     When buying business insurance is it best to work with a broker representing various carriers or should I go direct to insurance companies?

10.   Which indicators of my company’s performance should I be tracking weekly, monthly, annually? Should I calculate these key indicators, or should I ask my accountant to do it?

11.   What types of salary packaging are available to my business? What are the fringe benefits tax implications?

12.   How do I introduce a performance measurement system for my staff?

13.   What business structure is most appropriate for my circumstances – a company, trust, partnership or proprietorship? What are the relative advantages and disadvantages?

14.   How can I protect myself against fraud or other unauthorised use of funds? Should I have controls over internet banking and what should they be?

15.   How can I establish a succession plan that ensures continuity in my business when I retire or die?

16.   Can I sell off part of my business without losing control?

17.   Am I pricing my products and services correctly?

18.   What business structure is most appropriate for my circumstances – a company, trust, partnership or proprietorship? What are the relative advantages and disadvantages?

19.   What kind of questions can I expect from bankers when they review my company’s financial ratios and percentages as part of the borrowing process?

20.   How can I establish a succession plan that ensures continuity in my business when I retire or die?

21.   Can I sell off part of my business without losing control?

22.   When buying business insurance is it best to work with a broker representing various carriers or should I go direct to insurance companies?

23.   I am in the market for a bank loan. What kinds of information should be included in the business plan I present to the bankers? How should this information be presented?

24.   Which indicators of my company’s performance should I be tracking weekly, monthly, annually? Should I calculate these key indicators, or should I ask my accountant to do it?

25.   What types of salary packaging are available to my business? What are the fringe benefits tax implications?

26.   How do I introduce a performance measurement system for my staff?

27.   How can I tell if my business has reached the limit of its borrowing capacity? Can I comfortably handle additional debt?

28.   What do my bankers expect from me in terms of financial reports? How can I maintain professional and productive relationships with them?

29.   Should I look for a general computer accounting package or am I better off looking for an industry specific system. What are the benefits and drawbacks of each?

30. When is it time to eliminate low profit items from my product / service line?

Posted in Accountant

Spend Money to Save Money – CGT Concessions

Believe it or not, there are times when taking an overseas holiday, upgrading your family home, buying a holiday home or perhaps swapping your Holden for a top-of-the-range BMW may actually save you money. Perhaps you could consider saving even more by helping your children pay the deposit on their first homes. Or what about becoming more financially secure by making an extra-large super contribution?

The spending of money to save money may seem ridiculous. But some Small to Medium Enterprise (SME) owners who are planning to sell their businesses may find themselves in the fortunate position of being able indulge themselves and their families in order to become eligible for the highly valuable small business CGT concessions. Access to the concessions potentially can drastically cut or even wipeout multi-million dollar CGT bills that would otherwise be payable on the sale.

As SME owners should understand, various small business CGT concessions are available to businesses with either an annual net turnover of less than $2 million or a maximum net asset value of $6 million. Eligible business owners are entitled to CGT exemptions, discounts or rollover relief on the sale of “active” business assets. These tax breaks are in addition to the 50% general CGT discount for individuals, trusts and super funds.

Here are 10 strategies that may help business owners fall within the asset test for the small business CGT concessions:

1. Understand what assets are included in the asset test

Know what assets are counted for the threshold and then – if possible and practical – adjust your spending accordingly. The net market value of the business assets, personal bank accounts, personal investments – together with those of affiliates – are included in the test.

2. Understand what assets are excluded from the asset test

These are your main residence, superannuation and assets “solely for personal use and enjoyment” (such as holiday homes, luxury boats and exotic cars). A key consideration is how the assets are used.

3. As your business grows, closely monitor how asset values measure against the threshold

This is crucial even if you have no intention of selling at this stage.

4. Consider restructuring your business

A restructure, such as changing from a trust to a company, could trigger CGT liabilities which, depending on the circumstances, could be significantly reduced or eliminated through the general CGT discount and the small business CGT concessions. The restructure should still make good commercial sense, and not solely motivated by tax cuts.

5. Upgrade your family home

Buying a more costly home could possibly help to fall within the $6 million asset threshold. In addition to homes not being included in the asset test, their future capital gains are exempt from CGT.

6. Make extra-large super contributions

By making the contributions, the value of assets counted for the small business CGT concessions is reduced, and business owners are maintaining their personal wealth, and future earnings within the super fund which are concessionally taxed.

7. Help your children pay the deposit on their first homes

This spending is not caught within the small business CGT asset test and – like upgrading your family home or making big super contributions – is likely to be beneficial for family wealth.

8. Buy a holiday home

Again, this personal-enjoyment asset does not count towards the asset test, and its value may increase over the long-term.

9. Buy a luxury yacht and/or car

Although these assets are not caught within the test if used only for your personal enjoyment, their value will almost inevitably decrease. Whether their purchase is a smart move may well depend largely on the amount of tax is saved, if any, by reducing the value of assets included in the small business CGT asset test.

10. Go on a long overseas holiday

Certainly, spending a large amount on an overseas holiday will reduce the worth of your assets.

It is important to seek financial advice before taking any of the suggestion up.

Posted in Tax Minimisation

Interest Deductibility After Income-Producing Activity Ceases

Issue

The issue is whether a deduction for interest expenses incurred in respect of funds borrowed for use in a business or investment activity remain deductible even though those incoming-earning activities may have ceased.

Taxation Ruling

TR 2004/4 refers to the Full Federal Court decisions in the cases of Brown and Jones. The ruling refers to investments in businesses, rental properties and shares.

Brown’s Case

The taxpayer partners borrowed to acquire a Delicatessen business. After a number of years, the business was sold at a loss. The proceeds on the sale were insufficient to cover the loan. The court held that the interest expense incurred on the outstanding loan balance remained deductible.

Jones’s Case

The taxpayer and her husband borrowed money to fund a trucking and equipment hire business. After the husband’s death, the taxpayer sold the assets of the business but the proceeds were insufficient to repay the loan. Subsequently, the taxpayer refinanced the loan because she was able to obtain a lower interest rate through an alternative lender. It was held that the interest costs incurred were deductible as the new loan was considered to have taken on the same character as the original borrowing.

Establishing a nexus

The commissioner states that a sufficient nexus between the former income earning activities and the interest expenses incurred following cessation of those activities, must continue to be maintained.

In particular, the commissioner notes that the interest is still considered to be incurred in gaining or producing ‘assessable income’ if the ‘occasion’ of the outgoing is to be found in whatever was productive of that income in an earlier period.

Interest expenses may still be deductible irrespective of:

  • The loan not being for a fixed term
  • The taxpayer having legal entitlement to repay the principal before maturity, with or without penalty, or
  • The original loan being refinanced.

Breaking the nexus

The commissioner does state that the nexus would be broken if it could be concluded that the taxpayer:

  • Has kept the loan on foot for reasons unassociated with the former business activity, or
  • Has made a conscious decision to extend the loan to obtain a commercial advantage which is unrelated to the previous attempts to earn assessable income.

Factors to determine whether the nexus is broken include:

  • Is the taxpayer entitled to fully repay the loan or is there a fixed term in which interest is required to be paid?
  • What is the financial capacity of the taxpayer following the cessation of income earning activity?
  • Does the taxpayer hold liquid assets? If so, are these asset holdings substantial?
  • Have assets held by the taxpayer been realised/disposed? If so, have the proceeds from the realisation of those assets been used to repay the loan principal?
  • Has a significant amount of time elapsed since the cessation of the income earning activites?
  • Has the taxpayer refinanced the loan following the cessation of income producing activities?
Posted in Investments

Trading Name

Business name

Do I need to register a business name?

If you are using your own name – your given name(s) and/or initial(s) followed by your surname – as a business name, it does not have to be registered.

You need to register your business name with the Australian Securities and Investments Commission (ASIC) if:

  • you include other words with your name, such as Joan Smith Party Hire or John Smith & Sons
  • you are trading under a name that is different from your own name
  • you are operating a company (Pty Ltd) and want to trade under a different name to your company name.

A business name (e.g. Acme Trading Services) is different from a company name (e.g. Acme Pty Ltd). A business name is used by consumers to identify the company or persons behind a trading name. A company is a separate legal entity from its directors and shareholders.

You must register your business name with the Australian Securities and Investments Commission (ASIC). You must then adhere to several legal obligations to avoid fines and the possibility of losing the name you trade under.

  • Register your name before you spend money on signage, printed material, name tags or uniforms displaying your business name.
    You can apply for an Australian business number (ABN) and a business name at the same time. You will use your ABN to manage your tax and deal with other businesses or government departments.

How to do a business name search

After choosing a natural and fitting name for your business, you must conduct a business name search to ensure it is available and acceptable to register.
The Australian Securities and Investments Commission (ASIC) will check the suitability of your name, but it is good to check it first yourself to avoiding having your application rejected.
You can check if a name is available for registration by searching the ASIC register. The register will compare your name against an index of Australian corporations, businesses and government bodies.

How to register a business name?

Once you have chosen an appropriate name, you can contact the Australian Securities and Investments Commission (ASIC) to:
check that the business name is available
register your business name nationally with ASIC Connect.
In your application, you will need to provide:

  • your Australian Business Number (ABN) or ABN application reference number
  • your proposed business name and registration period
  • the business locations or addresses
  • the full names and addresses of all business owners.

Once your business name is registered, you will receive a record of registration effective for 1 year or 3 years, depending on the term you chose on your application. You will also need to meet legal obligations, that may include:

  • displaying your business name
  • renewing your registration to keep it active
  • informing ASIC of any changes to your registered details within 28 days after the change occurs – including if you cease to trade under the business name.

Once you’ve registered your business name you can use ASIC’s business name services to renew your business name, cancel your business name or update your business name and address details.

Renewing your registration

To keep using your business name you need to renew your registration before the expiry date. The minimum registration period is 1 year. A discount is available if you renew for 3 years. If you don’t renew your registration, your business name will be removed from the register and another business will be free to use it. You could then be stopped from using the name you have been trading under.

Changing your details

If you have any changes to business ownership, the names of business owners or your business addresses, you must tell ASIC within 28 days of the change.
If you decide you want to change your business name, or if you have made a spelling error on your application, you will also need to contact ASIC.

Closing your business

If you plan to close your business, you must send ASIC a request to cancel your business name at least 28 days beforehand. ASIC will then notify the business name holder (and any other people recorded in the business names register). This prevents unauthorized attempts to cancel a business name.

Tips for creating a business name

Your business name should accurately reflect your business. It should clearly convey to potential clients the type of products or services you offer.
When you are choosing your business name you should make sure that it is:

  • not too long
  • easy to pronounce
  • easy to spell
  • memorable
  • not likely to date
  • logical
  • not offensive
  • not misleading.

If you think you might want to trade overseas, you should check the suitability of your business name in other countries.

Posted in Business

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