WHY TAX PLAN?
Tax planning is the process of organizing the affairs of a taxpayer so that, as far as legally or commercially possible, the liability of the taxpayer to income and other taxes is minimised. – (definition from the Australian Master Tax Guide)
Some common strategies of reducing one’s tax liability are:
- Reduce assessable income
- Increase deductions and offsets
- Divert income
- Select a tax planning vehicle
The implementation of these strategies differs from taxpayer to taxpayer depending on many variables. Tax planning should address each strategy and identify whether they are appropriate to each taxpayer undergoing the planning process.
The process we follow with our clients is to review the 9 months’ results to 31 March. We then project the results to year end and prepare a tax computation. Once we have a projected taxable income for the year we put our thinking caps on and identify opportunities that are available to reduce the tax burden. In 95% of cases we are able to achieve some permanent tax savings for each client.
The cost of carrying out the review is approximately $1,000. The savings normally far outweigh the cost!
Some Examples of Permanent Tax Savings Recommended to our Clients
We identified that our client’s tax position allowed her to take full advantage of the co-contribution rules and advised her to make an undeducted contribution of $1,000 into her superannuation fund before the end of the financial year. The government then made a contribution of $500 into the fund on her behalf.
A return of 50%!
Minor benefits/light lunches
Looking for more deductions? – why not get the employer to provide employees with minor benefits of up to $300 per benefit and some lunches in the office? All these are treated as exempt fringe benefits.
Additional superannuation benefits
Our client is the owner of a business services company. He had made some good profits during the year. The strategy which was appropriate for him was for his company to make an extra contribution on his behalf into his superannuation fund. This reduced the company’s taxable income to NIL and the superfund was taxed on the contribution at 15%.
A permanent saving of 15% was achieved in this case.
SUPERANNUATION CHANGES – NOW LAW
On 23 November 2016, the government passed The Fair and Sustainable Superannuation Bill into law. The Government estimates that 96% of individuals with superannuation will either not be affected by these changes or will be better off. The majority of the 4% of individuals that are adversely affected are in any case unlikely to rely on the age pension in retirement.
With the majority of the changes to take effect from 1 July 2017, this article examines how these measures may impact you, and any action you may wish to consider before this time.
Superannuation Changes Applying from 1 July 2017
Concessional contributions (CC)
Concessional contributions include employer contributions (such as the Super Guarantee) and contributions under a salary sacrifice arrangement and personal contributions claimed as a tax deduction.
From 1 July 2017, the annual CC cap will reduce from $30,000 or $35,000 (depending on age) to $25,000 for all individuals. This cap will be indexed to inflation.
Previously, to be eligible to claim a tax deduction for personal super contributions, you could earn no more than 10% of your income from an employer. From 1 July 2017, this deduction can be claimed regardless of your employment status.
An additional 15% tax on concessional contributions will be payable by those whose incomes exceed $250,000 (currently $300,000).
Non-concessional Contributions (NCC)
Non-concessional contributions include personal contributions made to super from your after-tax pay or savings, and super contributions received from your spouse.
From 1 July 2017, the annual cap on NCCs will reduce from $180,000 to $100,000. The maximum NCCs that can be made over three years, by bringing forward up to two years’ worth of future contributions, will reduce from $540,000 to $300,000. The last opportunity to utilise the current bring-forward rules and make a NCC of up to $540,000, expires on 30 June 2017.
If your superannuation balance at the start of the financial year is more than $1.6 million, you will not be able to make any further NCC contributions.
$1.6 million ‘transfer balance cap’
From 1 July 2017, a $1.6 million cap, indexed in line with inflation, will apply to the amount of superannuation which can be held in a tax-free pension account. Both members of a couple may access this cap, allowing a $3.2 million combined balance.
If you currently hold more than $1.6 million in pension phase, you will need to reduce this balance to $1.6 million prior to 1 July 2017. Amounts above this can remain in the superannuation accumulation environment, where they will attract tax of 15%, or be withdrawn from super and taxed at personal marginal tax rates.
Subsequent growth in the pension account due to earnings will not be restricted or capped, and minimum age-based pension drawdowns will continue to apply.
Capital gains Tax relief
Those whose super balance exceeds $1.6 million will need to transfer the excess to an accumulation account prior to 1 July 2017. There is a special Capital Gains Tax (CGT) relief concession available for those with pensions currently in place. This relief allows superannuation funds to reset the cost base of pension assets which need to be transferred to accumulation under the new rules. This is designed to ensure that only capital growth after the introduction of the $1.6 million cap is taxed.
These relief provisions are complex, and choices made cannot be reversed. This area needs careful consideration to maximise tax outcomes.
TAX OFFICERS”HIT THE STREETS” TO “HELP SMALL BUSINESSES”
The ATO is visiting more than 400 businesses across Perth and Canberra over the next month as part of a campaign to “help small businesses stay on top of their tax affairs”.
Assistant Commissioner Tom Wheeler said: “Our officers will be visiting restaurants and cafes, hair and beauty and other small businesses in Perth and Canberra to make sure their registration details are up to date. These industries are on our radar because they have ready access to cash, and this is a major risk indicator.”
“We know that the majority of businesses get it right, so our aim is to help businesses by checking they are properly registered and provide them with an opportunity to ask questions in person”.
“We then work to protect honest businesses from unfair competition by taking action against those who do the wrong thing”.
PLANNED CHANGES TO GST ON LOW VALUE IMPORTED GOODS
From 1 July 2017, overseas clients with an Australian turnover of $75,000 or more will need to register for, collect and pay GST on goods up to $1,000 that they sell to consumers in Australia.
If Australian clients are registered for GST and buy low value imported goods for their business from overseas, they will need to supply their ABN at the time of purchase so they won’t be charged GST.
If their business is not registered for GST, they will be treated as a consumer and unable to recover the GST charged by the overseas business.
These proposed changes are currently before parliament (in Treasury Laws Amendment (GST Low Value Goods) Bill 2017).
A draft Law Companion Guideline (LC 2017/D2) and other guidance are available on the ATO’s website.
CR 2017/14 – USING BANK/CARD STATEMENTS AS EVIDENCE
This class ruling considers the question: “will the transaction item for a gift in a bank or credit card statement meet the requirements of a receipt under S.30-228 of the ITAA 1997?”
It looks at this question in the context of a company that has developed a ‘donation collection device’, being an EFTPOS terminal which can be used by deductible gift recipients (DGRs) and others.
It operates such that a donor can make a donation by tapping their contactless debit or credit card, or mobile phone, on the terminal.
The amount donated for each tap will be preset by the relevant DGR (eg. if the donation amount is set at $10, each card or mobile phone tap will cause $10 to be donated to the relevant DGR)
However, by its nature, the system is unable to issue receipts. Nonetheless, amounts donated using this system will be recorded in the bank or credit card statement of a donor.
DGRs are not required to issue receipts, but when they do they must include certain information on the receipts.
In this case, the transaction item in a bank or credit card statement will not be a receipt for the purposes of S.30-228, but will be written evidence of a deduction for the purposes of substantiating the expense under S.900-110 provided the transaction item identifies:
- The date of the donation (transaction);
- A description of the transaction in the following format:
- GIFTDGR (ABN of DGR) eg
- The amount of the gift.
Editor: The ATO has previously provided guidance that they will accept third-party receipts (which could include bank statements) as evidence of a gift to a DGR if the receipt identifies the DGR and states the fact that the amount is a donation to the DGR.
The transaction item in a bank or credit card statement as outlined above will be accepted as written evidence of a gift, and will substantiate a deduction being claimed under S.30-15 of the ITAA 1997.
IT’S FRINGE BENEFITS TAX TIME
CAR FRINGE BENEFITS
Operating Cost Method
If you use the Operating Cost Method to calculate FBT on motor vehicle usage, in order to calculate the private use percentage (and therefore the FBT payable), you will need to maintain a valid log book recording your usage of the vehicle over a 12-week sample period. Failure to do so will result in the entire use of the vehicle being subject to FBT (therefore, it’s vital to have a valid log-book).
Provided there has been no substantial change in the usage of your vehicle (in terms of the mix between work and personal use) a new log book must be prepared if one was not prepared for any of the previous four years.
Therefore, if you first kept a log book for the 2011/ 2012 FBT year, you are required to have kept a new log book for the current 2016/2017 FBT year.
Leading up to the end of March, if you do not yet have a valid 2016/2017 log book, don’t panic! Although we are now right at the end of the FBT year, it is not too late to keep a log book to substantiate the private use of the vehicle for 2016/2017.
Log books can commence as late as right at the end of the FBT year even though the end of the 12-week period for which it needs to be maintained may extend beyond the end of the FBT year in which the log book commenced. You can purchase a log book from your local newsagent or you can download one of the innumerable log book apps on the market, either from the AppStore or GooglePlay as the case may be.
Upon completion, ensure the log book contains the following information, in English:
• Car details, including registration number
• The date the journey began and the date the journey ended
• Odometer readings at the commencement and conclusion of each journey
• Number of kilometres travelled by the car in the course of the journey
• A description of the purpose or purposes of the journey (generic descriptions such as ‘business trip’ are not adequate)
• Business and private kilometres travelled although this is not a legislative requirement, it may help with collating data for FBT purposes).
Also ensure that if using the Operating Cost Method, you capture the odometer reading at every 31 March. Furthermore, the Statutory Formula Method is the default option therefore to use the Operating Cost Method the employer should have an election in place.
Statutory Formula Method
The taxable value of a car fringe benefit calculated using the statutory formula method (ss9(1)) is valued by applying a statutory percentage (20% in most cases) by the cost of the car at the date of purchase or lease. The employer’s liability is reduced by the number of days the car was not used or available for private use and any after-tax employee contributions made towards the running and maintenance costs of the car.
According to the ATO the most common log book mistakes uncovered during audits are:
• Entries not made in a timely manner
• Drivers fail to enter opening and closing kilometres of each trip
• Details of registration and model of car not included
• The 3 month sample is not a representative sample of the true business/private usage
• Purpose of the journey is omitted
• Name of the driver is omitted.
Over the Summer months just passed it’s not uncommon for people to have earned some extra money by taking on casual jobs where they are paid cash. Of itself there is nothing wrong with this, however both employees who receive cash payments and employers who make them, need to be aware of some basic rules:
If you are paid in cash, you should request a pay-slip from your employer if they have not provided you with one. You should then check the pay-slip to ensure that tax is being withheld, and withheld at the correct rate. If you are uncertain as to the rate that should be withheld, use the ATO’s ‘Tax withheld for individuals’ calculator by entering those words into the search box on the ATO’s home page www.ato.gov.au
If you are paid cash without tax being withheld, you will be required to pay tax on these amounts when you lodge your 2016/2017 tax return from 1 July 2017. This could result in a significant tax bill (all other things being equal). If you determine that tax is being withheld, then if the employer is not forwarding the withheld amounts onto the ATO … they will be targeted by the ATO, not you. You will still receive the withholding credit when you lodge your tax return.
At financial year-end, you should also receive a Payment Summary from your employer setting out how much tax has been withheld and your salary for the financial year. You then use this as a basis for preparing your tax return. Ensure on your return that you declare all cash payments you have received.
Employees should also check with their nominated superannuation fund that they are receiving superannuation from their employers. Even casual employees paid cash for work over the summer months are generally entitled to superannuation provided they earn $450 or more per month (before tax) and are over 18 years of age or under 18 and work at least 30 hours per week. Superannuation is paid by employers every three months on 28 January, 28 April, 28 July, and 28 October (for the previous quarter).
It’s not illegal to make cash wage payments. However, you must retain accurate records of the cash payments made. You also must withhold PAYG tax and remit the withheld amounts to the ATO on your business’s Activity Statement.
Superannuation Guarantee must also be paid on cash payments, and employees paid in cash must also be provided with a Payment Summary from their employers by 14 July (for the previous financial year) setting out these cash payments and the tax that has been withheld. As stated earlier, employees who are paid in cash nonetheless must receive pay-slips from their employer.
RENTING OUT YOUR HOME
With the advent of Airbnb many more residential home owners are now landlords – renting out their entire house, or one or two rooms. The ATO is particularly targeting those that rent out part of their property via Airbnb. Whether you are renting out your entire home or part of your home through Airbnb or just traditionally by advertising it or through a real estate agent…the tax consequences are broadly the same as follows:
Any rental income will be assessable. You should keep records of your rental income, even where it is paid by the tenant in cash.
Where your rental income is assessable, you are generally entitled to tax deductions for expenses incurred in deriving that income. For landlords, these generally fall into 3 categories:
1. Expenses claimable in full
These may include repairs and maintenance relating to the rented area, depreciation of furniture and other items in the rented area, commercial cleaning of the rented area, commissions charged by real estate agents or by Airbnb.
2. Expenses that relate to the entire property
These may include mortgage interest, council rates, utilities and insurance. These will need to be apportioned if only part of the home is being rented (as is typically the case with Airbnb). Apportionment is generally done on a floor area basis (for example, if an Airbnb tenant has access to 70% of the house, but 30% is for your exclusive use such as your bedroom and ensuite, then only 70% of the above expenses are claimable).
3. Expenses of private areas
If only you as landlord have access to part of the residence (as is typically the case with Airbnb where the host may retain sole use of their ensuite and bedroom for example) expenses relating to this portion of the house cannot be claimed.
WARNING: Where non-commercial rent is being charged (for example, you may be renting out to a family member or relative at a discounted rate), the ATO will generally cap your deductions to the amount of rental income you declare (i.e. you will not be permitted to negatively gear the property).