ATO Targets Rental Property Deductions

/in , /by

At the start of every year, it looks as if the Australian Taxation Office (ATO) declares its drive to zero in on a specific segment of taxation.

In 2015, the ATO has stated that it is stepping up its focus on rental property deductions. This could refer to many different kinds of deductions, but a major area of concern for income-generating property owners is tax depreciation deductions.

Some of the mistakes that are usually committed, according to the ATO, include neglecting to use a pro-rata method for deductions on a property that is only being rented for part of a year, or making a claim for deductions on properties that are not really being leased.

A significant number of property owners are willing to adhere to ATO rules, but keeping informed and understanding the various rules can be daunting.

Here are the common mistakes that property owners commit when claiming deductions – and how to avoid them:

1.  Making a claim for capital work assets as plant and equipment deductions.

There are two different categories of assets for which you can claim deductions: capital works and plant and equipment. Capital works make up the structural features of a building, such as fixed and removable assets. On the other hand, the value of plant and equipment assets decreases much faster per an effective life established by the ATO. The depreciation for each item is computed correspondingly.

Knowing which assets are suited for which category can be difficult with no guidance from a professional. In some cases, a certain asset may appear to be suited for one category, but the ATO actually pre-determines the category.

A fine example is the TV antennas in homes. It may look like antennas will wear down much faster than other parts of a structure (which is reduced in value over four decades), but the ATO still classifies them as a capital works asset. In other words, if your antennas wear out in only five years, it will still be classified as capital works with deductions at 2.5% over 40 years. You are at risk of being caught by the ATO if you write this asset off at a shorter time period.

2.  Assessing an asset’s effective life span by yourself.

This one is somewhat similar from the one above, in the sense that it can be inviting to believe that you can self-assess the effective life of an asset. Your carpet, for example, may appear old and shabby, so you may think it only has a two-year effective life. But every single asset has a specific effective life assigned by the ATO. At present, the effective lifespan of carpets is 10 years.

There is a provision that allows self-assessment of an asset’s effective life, but you are in danger of setting off a review by the ATO. Many accountants believe self-assessing can prompt the ATO to launch a review of your claim, which can put property owners in danger of being found out. You can avoid this kind of trouble by enlisting a professional to help you determine the correct depreciation for your assets.

3.  Making a claim for capital improvements as repairs and maintenance.

Claims can be made by property owners on repairs and maintenance made to income-generating properties. Then again, what seems to be repairs and maintenance are actually deemed as capital improvements.

You may avoid getting caught by knowing the distinction between these two terminologies. ‘Repairs’ usually entails restoration, while ‘maintenance’ pertains to work that inhibits deterioration. The ATO says that the two have to pertain to wear and tear brought about by renting the property out.

Meanwhile, capital improvements relate to works that improve the property. Claiming deductions for this must be made at a gradual pace of capital works or as depreciation.

4.  Resorting to shortcuts.

Hiring the services of a professional quantity surveyor to create a tax depreciation schedule for you can help you avoid all of the above. You can even claim a tax deduction for the cost of having the schedule created. Then, your property will be paid a visit by qualified depreciation specialists to evaluate the correct assets that you are entitled to make a claim for. They will prepare a depreciation schedule that contains all likely deduction and they will make sure all calculations adhere entirely with ATO rules.

PJS Accountants offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. We serve large companies, SMEs, family businesses and individuals. The ever-changing tax laws and requirements could put businesses and individuals at risk. Putting nothing to chance! If you need tax advice or guidance, contact PJS Accountants.

Checklist for Small Businesses at the End of Financial Year

/in , /by

How ready are you for the end of the financial year?

You can begin to get ready even before the start of June. Start early and ease any end of financial year (EOFY) stress. There are a number of things you can do to be able to lodge your tax promptly and to get ready for the coming year. Here is a checklist for small business owners to help them get ready and minimise end of financial year problems.

Follow ATO rules

There are several EOFY tasks that you must accomplish by the end of the financial year. These tasks are:

  • Lodge your income tax return
  • Complete your Business Activity Statements (BAS)
  • Reconciling your PAYG withholding payment summary report
  • Payroll Tax
  • Fringe Benefits Tax

Businesses that employ 20 or more people must have migrated to the SuperStream system before 30 June 2015. This system is designed to simplify the sending of super contributions by employers on behalf of their employees. Businesses that employ 19 or fewer people have until 30 June 2016 to comply with ATO requirements.

Financial software

The financial management of a business is founded on financial software. These days an inexpensive yet powerful, robust cloud-based software service is readily available. You will find this service helpful, especially when the EOFY approaches. By using an online accountancy service, you’ll be able to collaborate with your accountant real time, as well as your automated bank data feed.

Accounts reconciliation

The accounts that you have to reconcile include:

  • Your bank and investment accounts
  • Customers who have hefty unpaid debts
  • Your outstanding debts with vendors and other creditors
  • Your leased equipment
  • Office leases

Payroll reconciliation

The internal payroll matters that you need to reconcile include:

  • Outstanding leave
  • Superannuation
  • Long-service entitlements
  • Other payroll issues that have financial commitments attached

Working capital review

It is important to account for all your stock balances. The perfect time to clear out out-dated stocks with a sale is at the conclusion of the financial year. This is also the right time to review your ordering systems to ease your surplus stock issues.

Small businesses that provide professional services must account for work-in-progress. Find out whether any resources are being held up by individual projects and whether clients are paying bills on time for ongoing work.

Determine the market value of assets

For possible investment opportunities, find out how much is the actual market value of your assets. This information can be useful when applying for bank loans for funding the expansion of your business, or when you want to sell assets that are just idle.

Establish financial performance goals

Were you able to hit your objectives this year? And what targets you want to achieve by the end of the financial year the following year? You can stay on track by putting in place achievable targets for the entire financial year.

Set a cash flow projection

It would benefit you to plan your cash flow in advance. You have to be alert of any possible cash flow deficits so that you will be able to pay your employees and vendors.

If you’re sending out invoices to clients, make sure to find out which clients are failing to pay their bills on time. Keep track of dates when invoices are due, together with other important dates that are related to your cash flow.

Avoid stress when the end of the financial year approaches. Enlist the help of professionals to help you stay on top of the tasks you need to accomplish. PJS Accountants, chartered accountants, provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. For enquiries, contact PJS Accountants.

Strategies to Minimise Taxes for Small Businesses

/in , /by

What small business owner wants to pay more tax than they need to? No one! So, here are tips to ensure you get the most out of your money during tax time.

Utilise the $20,000 immediate tax deduction.

In the budget issued on 12 May 2015, the Federal Government announced that qualified small enterprises can claim an immediate tax write off for assets bought for less than $20,000. This law will replace the $1,000 limit until 30 June 2017.

In order for the deduction to qualify for the 2015 financial year, you have to make sure the assets are set up and operational by 30 June 2015. If you don’t need any assets, or have not got the money to pay for one prior to the end of the year, don’t forget that you can deduct the balance of any small enterprise pool with a deductible amount of less than $20,000 and receive an instant write off.

You have to make sure that your assets are qualifying assets. For example, capital works are not covered by the basic depreciation guidelines and are covered by various rates, which are way below the general pool and immediate deduction rates.

Maximise contributions to your super fund.

Plan for your future – in the form of superannuation. The concession limit beginning 1 July 2014 is $30,000 for all persons. However, the limit is $35,000 if you were 49 years old or older on 30 June 2014. When making the most out of your concessional contributions, take note that your mandatory 9.5% is included in the cap and all contributions must be sent to the super fund before 30 June.

Prepayments – a no brainer!

Making prepayments, if you have the available money, is a wise move. Businesses can write off prepayments given in the amount of over $1,000, provided the eligible service is used in under 12 months. Consider making prepayments for part of your rent or interest on loans. You can write off prepayments below $1,000 no matter what the service period is.

Time Capital Gains Tax events appropriately.

Whether you are trading as a single entity or on behalf of a trust, find out if the 50% General Discount is valid for any planned asset sale. This means that it is a prerequisite for you to hold the asset for no less than 12 months. As a result, you have to study the timing of the sale.

Furthermore, you may also have the right to claim more concessions and discounts for your small business, including Rollover Relief or Active Asset. If you’re thinking of selling an asset, it is recommended that you meet with a tax specialist to advise you on the possible outcomes of transactions and the allowances that you are entitled to.

Consider writing off bad debts that you will never collect.

It is advised that accruals basis taxpayers with bad debts consider writing off those debts prior to 30 June to make sure they can claim tax deductions for the present year. If your GST payments are made on an accruals basis, any changes made to bad debts will probably cause a refund of the GST that has already been paid on a past BAS. When you write off bad debts, comply with the guidelines to make sure that it is really a bad debt and the required measures have been taken to get payment for it.

Ensure outdated stocks are written off.

Always perform an inventory of your stocks prior to the conclusion of the financial year. Make sure you write off obsolete stocks that you have identified. Your tax liability will decrease as a result of this.

Change your tax planning for the better by investing in good online accounting software and heeding the advice and recommendations of your accountant or bookkeeper. PJS Accountants can help you organise your tax, accounting and bookkeeping affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

The Basics of Fringe Benefits Tax

/in /by

You can recognise and reward the important roles that your employees play in your business by giving them benefits. However, remember that certain benefits or perks trigger Fringe Benefit Tax (FBT). This is a tax employers pay on most non-cash benefits they give to their employees.

The Types of Fringe Benefits that are Taxable:

  • The use of a car for non-business purposes
  • Payment of private spending
  • Low-interest loans used for private purposes
  • Some types of entertainment such as meals for when an employee is not on an overnight business trip
  • Other perks if the expense does not exceed certain limits

How to Compute FBT

There are Type 1 and Type 2 Fringe Benefits. The ATO has provided steps to help you compute your FBT.

  1. Determine the amount of all Fringe Benefits you give to your employees that can be taxed.
  2. Ascertain from step 1, the aggregate amount (pre-gross up) of Fringe Benefits you give in which GST credit (Type 1 benefits) can be applicable.
  3. Determine the grossed-up taxable amount of these Type 1 benefits. Do this by multiplying the aggregate taxable amount by 2.1463, the current type 1 gross up rate.
  4. Ascertain from step 1, the aggregate taxable amount of benefits in which GST credit is not applicable. For example, supplies you delivered that were either input taxed (Type 2 benefits) or GST-free.
  5. Determine the grossed-up taxable amount of your Type 2 benefits. Calculate this by multiply the aggregate taxable by 1.9608, the current type 2 gross up rate.
  6. Get the sum of the gross-up values from step 3 and step 5. The amount is your overall Fringe Benefits that are taxable.
  7. Calculate the total FBT value that you must pay by multiplying the aggregate Fringe Benefits taxable value (from Step 6) by 49%, the current FBT rate.

Sample

Let’s say an employee receives $100,000 per year in wages and got a car benefit having a taxable amount of $10,000 in the 2015-2016 FBT year. The annual salary is taxable at the applicable pay as you go (PAYG) withholding rate and the car benefit amount is taxed in this manner:

Taxable Amount                                              $10,000

Multiplied by Gross-up rate x                        2.1463

Grossed-up taxable amount                           $21,463

FBT Rate                                                               49%

FBT Payable (rounded)                                   $10,517

Rules on Reporting FBT on PAYG Payment Summaries:

In case the pre-gross up taxable amount of the Fringe Benefits is over $2,000 during the FBT financial year covered (from 1 April to 31 March), employers are required to report the grossed-up taxable amount of those benefits on the Payment Summary of the employee for the corresponding payroll financial year (from 1 July to 30 June). Certain Fringe Benefits do not have to be included on Payment Summaries.

Sample

For the car benefit mentioned above, the value that must be reported on the employee’s PAYG payment summary for 2016 is as follows:

Taxable Value                                                      $10,000

Multiplied by Gross-up rate x                             1.9608

FBT Reportable amount                                     $19,608

Consider consulting your accountant with regards to FBT because it can be complex. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Are Tradies at Risk with the ATO?

/in , /by

Contractors, or tradies, in the building industry, are being targeted by the ATO (Australian Taxation Office) in an effort to recover undeclared income and unsettled GST. The Tax Office has always been focused on the cash economy, but with the introduction of a new reporting process in 2013, construction companies are now required to report all payments they make to contractors. The ATO hopes that this new rule will allow them to catch more contractors.

Thousands of contractors have been caught, to date…

Over 250,000 tradies with over $2.3 billion in tax liabilities for not paying their income tax and GST have been hit by the ATO. Contractors should heed the warning – the ATO is going after you!

Forget about fishing for a while and focus on catching up with your bookkeeping to keep the ATO off your back. Gather your receipts, invoices and records and input the figures into a good accounting software solution. This will take away your worry and you can think about visiting your favourite fishing spot.

Breathe easy

Make sure your accounting records are correct and all your lodgement obligations are up to date. If you do not have the time, then enlist the help of a bookkeeper.

Using accounting software offers many benefits:

  • You’ll gain better insight into the workings and performance of your business. You can record and save all accounting information in a single convenient location. You can print financial reports to know if your business is performing well or not with a press of a button.
  • It allows you to meet your tax requirements such as income tax and GST without any trouble.
  • You save time doing your tax every year because all information is already entered into the software during the year. You don’t have to be overwhelmed going through all the paperwork. This gives you more time to focus on making money instead of doing paperwork.
  • Better business decision-making is the result of having up to date information. Accounting information can be accessed anytime and this would help you to easily compare business performance over diverse periods of time.
  • It helps if you get audited by the ATO. You have all your accounting information on hand.
  • You can easily track the payments you make to your customers and suppliers, allowing you to organise your cash flow better.

With the ATO focusing more than ever on contractors, builders and tradies with regards to income tax and GST payments, be proactive.

For tax advice or guidance, contact PJS Accountants. We offer expertise in managing your tax affairs with a full range of compliance, corporate and individual tax services, whether you are a large company, SME, family business or individual. Tax laws and requirements change constantly, potentially putting you or your businesses at risk. Have a chat with one of our expert advisers now and ensure you are meeting your tax obligations.

Guide to Home Office Deductions

/in /by

The need to have a fixed place of business outside the home is no longer as important as it was once with the advent of cloud technology. As a result, many business owners are favouring to operate their business from home. A good café is a far more comfortable and welcoming environment for meeting your clients than a formal little serviced office.

You can run your business from home in comfort, but there are all sorts of problems from doing this.

  • What are the home costs that I can claim as a tax deduction?
  • How do I divide expenditures that are part private and part business?
  • Are the kilometres my car ran when I used it for business related trips during the year deductible?

Here are the do’s and don’ts for claiming home deductions to help business owners make sense of expenditures that would typically be considered as non-deductible, or private:

Household Costs

These types of expenses are referred to as occupancy expenses by the ATO. The items included in this category are: rent payment, or if the house is yours, items like home and contents insurance, interest on your mortgage, and council rates. The list can be further expanded to include utilities such as the electricity, water, gas, telephone and internet.

Do file a claim “occupancy expenses”

Before filing a claim for all of your rent in your next tax return, take note of some of these important rules.

First, an actual Home Office must be set up. Working with your laptop sitting on the sofa in front of the TV does not qualify. You need to have a space in your home that is strictly used to operate your business.

Don’t file a claim for the kitchen sink (or the floor area that is not used for your business)

Second (and the most important), you must apportion your home costs using either of these two methods: (1) your home office’s floor area or (2) the actual usage based on which cost you want to claim.

The calculation for claiming occupancy costs based on the floor area of your home office is as follows:

(Floor Area of your home office)    x   $ amount of the expense
(Floor Area of your entire house)

Here is an example: If my home is 200 square metres and my 5 square metre bedroom has been allocated as a home office, I can file a tax deduction of 2.5% of my rent and other occupancy costs in my business’s income tax return.

Do divide up your expenditures

Normally, some costs will have a greater business use percentage than that computed using the floor area method. For instance, you may be using your home internet and your mobile phone closer to 90% (perhaps 100%) of the time for business, hence utilising this method would greatly trim down the deduction that you can claim.

For this situation, you can establish a fair estimate using the actual usage method. If you estimate that you are using your home internet for business 75% of the time out of the total hours consumed, you can file a claim for that percentage of your monthly internet bill as a tax deduction.

So which method is appropriate for each type of home cost? The answer is: the method that will bring in the greatest deduction portion and will not give your problems in case the ATO asks for proof.

Do pick the method that gives the highest deduction

Normally, occupancy expenses will be best claimed using the floor area method. For other home expenditures, the most appropriate is usually the actual usage method.

In case the above seems difficult to deal with, the ATO lets you claim extra electricity and any furniture used with a flat rate deduction for home office costs. The rate for this deduction is $0.45 hourly for each hour consumed working at home.

If you are considering claiming home office costs on a house you own, don’t forget the possibility of Capital Gains Tax (CGT) concerns that occur due to utilising your primary place of residence to run a business.

Motor Vehicle Costs

When you have set up your residence as a home office, trips to attend to business related tasks such as visiting works and meeting with clients qualify as tax deductible.

The rules for claiming motor vehicle costs for business owners are similar to those set for employees.

The ATO allows claims of as much as 5,000 work related kilometres per car in a particular year with no logbook. All your motor vehicle costs such as registration, fuel, maintenance, insurance, depreciation, etc. should be covered under this deduction.

If the number exceeds the given amount, business owners must maintain a logbook for a 12 week period, which should start in the financial year they want to file a claim.

The actual “Do”

The most important tip you should take from this article is to never forget to come up with fair estimates with supporting evidence when you file a claim. This tip not only applies to home office expenditures but to all aspects of tax as well.

If you are fair with the ATO, they will typically treat you with fairness in return! Contact PJS Accountants for tax advice or guidance. We offer expertise in managing your tax affairs with a full range of compliance, corporate and individual tax services, whether you are a large company, SME, family business or individual. Tax laws and requirements change constantly, potentially putting you or your businesses at risk. Have a chat with one of our expert advisers now and ensure you are always compliant with ATO rules.

The Tax Issues Experienced by a Unit Trust as a Property Investment Medium

/in /by

This article was originally written by Eddie Chung in a blog post titled:  The Tax Issues Experienced by a Unit Trust as a Property Investment Medium

 

Unit trusts have been popular property investment channels for a long time, particularly if several owners are participating. Much like shareholders owning stocks in a business, unit holders can indirectly own their proportionate shares in an underlying property managed by a unit trust, which is a fairly easy concept to understand, though companies and unit trusts are basically different according to the law.

Tax breaks of unit trusts as property investment channels

In terms of investment property ownership, unit trusts are generally favoured over companies as they can pass on whatever net cash profit from the property that embodies non-cash depreciation and capital works deductions to the unit owners. These cash distributions, or “non-assessable amounts,” generated by a unit trust will normally lower the units’ cost base and do not bring about instant tax implications.

But in the case where the cumulative non-assessable sums surpass the units’ overall cost base, any surplus will generate a taxable capital gain. As long as the underlying units have been owned by the unit holder for a minimum of 12 months and the unit holder is either a trust or an individual, the capital gain will be split under the 50% capital gains tax (CGT) discount (unit holders who are a complying superannuation fund are entitled to a 33.33% CGT discount).

In comparison, if a company made this type of distribution to a share owner, it will be typically considered as an assessable dividend straight away, which may result in an immediate tax liability.

Unit trusts are also preferred over companies when a capital gain is generated as a result of selling the investment property. As long as the property has been owned for no less than 12 months, whatever capital gain made by the unit trust will be covered by a 50% CGT discount. For example if the unit holder that gets the capital gain is paying tax at a marginal tax rate of 49% including the temporary Budget Repair levy and the Medicare levy. The discount capital gain’s effective tax rate will be 49% x 50% = 24.5%.

On the other hand, if a company made the capital gain, there is no CGT discount and a 30% tax will be levied on the capital gain. In the case of a divided ascribed to the capital gain being issued to an individual shareholder who is paying tax of 49% (the highest tax rate) as a franked dividend, the capital gain would have an effective tax rate of 49% after the individual shareholder has used the franking credits.

With these dissimilarities in tax application, it’s easy to appreciate the reason for unit trusts being generally favoured as property investment channels over companies. With that said, taxation is not the only factor that you should take into accounting when you make any structuring decision. For example, you have to consider that the treatment of stamp duty relating to the allocation of shares and units may be considerably dissimilar, depending on the area where the dutiable transaction took place.

Tax issues encountered by unit trusts as property investment channels

There are some less well known technical tax issues with regards to utilising unit trusts as property investment channels that property investors are unaware of. There may be far reaching tax implications with some of these problems.

Possible double taxation

Double taxation may inadvertently occur because the existing tax regulations include a cost base reduction system called “CGT event E4” and a “capital works deduction drawback.”

Imagine an innocent scenario where a single unit owner of a unit trust makes a contribution of $1M to purchase units in the trust. Subsequently, the unit uses the money to buy an investment property.

Ignoring other rental expenditures and income, let’s say the unit trust claims $5k in capital works deduction during the first year and issues the cash attributable to the deduction to the unit owner as a non-assessable sum (since the deduction isn’t a cash expenditure and the trust’s income covered by the deduction is not exempt from the trust’s assessable income but is issued to the unit owner) – the non-assessable sum will activate the “CGT event E4,” which will entail the tax cost base of the units maintained by the unit holder to be trimmed down to $1M – $5k = $995k. As stated above, the cost base reduction alone does not activate a tax liability directly.

If the property is sold by the trust at year’s end for $1.2 M, for example, the assessable capital gain earned by the trust, disregarding the impact of the 50% CGT discount to make things simple, is computed as:

Capital proceeds $1.2M
Original cost of property $1M
Less: Cumulative non-assessable amounts clawbacks ($5K) ($905K)
Taxable capital gain $205K

The unit holder will receive the $205 as a taxable capital gain, although the cash attributable to the capital gain issued to the unit holder is just $200k since the capital works deduction clawback amounting to $5k is just a tax correction.

When the time comes that the units held by the unit holder are either cancelled or claimed, the capital proceeds on the sale of the units will remain at $1M, although the units have a cost base of $995K because of the past activation of CGT event E4. Thus, a taxable capital gain of $1M – $995K = $5K will be made to the unit holder as a result of the sale of the property.

Combining all the elements above together, the following is the economic benefit that is due to the unit holder:

Non-assessable amount sheltered from tax $5K
Actual capital gain in cash1 ­­­$200K
Total overall economic benefit $205K

But the taxable amount all in all for the unit holder is:

Taxable capital gain distributed by trust $205K
Taxable capital gain on disposal of units $5K
Total capital gain that is taxable $210K

This means the capital works deduction of $5K underwent double taxation!
The double taxation problem was discovered a long time ago, but it still happens today, and investors either don’t know about it or just consider it a trade-off for doing business.

Probability of not recouping tax losses

A more major concern in using unit trusts as property investment channels is the technical problem that relates to the possibility of transforming any unit trust into a “fixed trust” in Australia. There are many taxation policies that may be impacted by the matter of “fixed trust.” One of these is trust loss policies, which cover the capability of a unit trust to recover carried forward tax losses.

To put it simply, the trust loss policies, in general, allow fixed trusts to recover tax losses provided most of the unit holders of the applicable trust remain the owners of the units of the trust from the time the tax losses were acquired. Thus, a unit trust can in allowed to recover its tax losses if it is a “fixed trust”. If it is not, it must pass a series of more difficult trust loss recovery tests before it can recoup its tax losses.

It was believed, for quite a while, that a significant number of unit trusts are really fixed trusts. This changed when several fairly new legal precedents implied that it is very hard, from a technical standpoint, for an Australian unit trust to be eligible as a fixed trust. As a result of these instances, the risk is now greater that unit trusts with carried forward tax losses will not to be able to recoup tax losses.

It seems that the Commissioner of Taxation has been active in tackling this problem, but it is not far fetched for him to exploit the technical issue and dare taxpayers who have utilised unit trust for different reasons, including property development and investment.

Considering all of these issues, circumstantial evidence appears to imply that individuals and their advisers who still utilise unit trusts and may likely face this technical problem are either ignorant of its existence or are aware of the problem but paying no attention to it. There are also people who think that the court decisions were erroneous and continue to hope that regulations will be changed sometime in the future to right the wrong.

Whatever your views and approach are, and in spite of the fact that a resolution will be found eventually, doing nothing is a bad idea as there may be practical actions that you can do to lessen your exposure to risk.

For tax advice or guidance, contact PJS Accountants. We offer expertise in managing your tax affairs with a full range of compliance, corporate and individual tax services, whether you are a large company, SME, family business or individual. Tax laws and requirements change constantly, potentially putting you or your businesses at risk. Have a chat with one of our expert advisers now and significantly minimise your exposure to financial risks.

Guide to Setting Up a Business in Australia

/in , /by

Setting up a business in any part of the world is a major decision. You need to research and plan carefully before you launch your business. In Australia, you have to learn all statutory requirements before applying for a business registration. You have to factor in certain things before starting a new business.

Do Research

You can save time, money and stress by doing research. Seeking assistance from a financial planner or business advisor is always recommended. Conducting a feasibility study is also beneficial. Moreover, be honest when you ask yourself whether this is just a hobby or a genuine business. This will help you draw up your goals in terms of revenue, deductions and losses.

Choose the Right Business Structure

It is also essential to choose the business structure. Choose the one that best fit your needs. You save time and money if you choose right. Every structure has its own pros and cons that you will have to study and learn as it will help you determine the right licenses to run your business. There are four major types of structures:

  • Sole trader – a single person operating the business on their own
  • Partnership – a group of individuals or entities collectively operating a business, not as a company
  • Trust – an entity that oversees property or income on behalf of others
  • Company – a legal entity distinct from its shareowners

Tax Obligations

Whichever structure you pick, there are important things you need to accomplish. You must properly handle invoices, payments and other paperwork and obviously you have to fulfil your tax obligations. You must also learn the laws and obligations as an employer before hiring people.

Individuals are required to file a tax return annually. Your return states your income for the year and the amount of tax you paid. In Australian, individuals in the labour force are required to file a tax return if they fall in any of the following cases:

  • tax was taken out from any payment you received for the financial year;
  • you reside in Australia and your taxable income exceeded the tax-free limit; and
  • you are an expatriate with an income of over $1.

Tax returns are filed from July 1 to October 31 for the past income year. If a registered tax agent prepared and filed your tax return on your behalf, you can file later than October 31 but your tax agent has to make this arrangement before October 31.

BAS & GST

For Australian businesses, a BAS (Business Activity Statement) is used to report and a pay multiple tax obligations, including fringe benefits, PAYG (pay as you go) instalments, PAYG withholding and GST. A BAS is also used by individuals who are required to pay PAYG instalments every quarter.

To assist in reporting against identified obligations, a BAS is tailored to each individual or company. Businesses make a self-assessment of their indirect taxes. The tax return can be filed and the amount paid electronically by person or by mail. File on time so you don’t incur fines and interest.

For businesses, they can file their activity statements using a paper form or online. Filing online is faster, and most of those who file quarterly receive an additional couple weeks to file (terms and conditions are applicable). An activity statement is used to report and pay the GST (Goods and Services Tax) that a business has accumulated and apply to get GST credits. A good number of companies report and pay GST quarterly and have an annual or monthly option.

GST is a 10% tax levied on most goods and services. It is imposed mostly on transactions in the manufacturing process, but is returned to all businesses in the manufacturing chain except the final consumer. Typically, businesses will add a GST in the products and services, and reimburse the GST collected from the sale of their goods and services.

Businesses and other enterprises, and specifically those with a GST turnover of $75,000 or higher, must register for GST (the cap for non-profit organisations is $150,000 or higher). Taxi drivers are required to register whatever their turnover is.

For registered businesses, GST is applicable to all goods and services you sell in Australia except if they are input-taxed or GST-free. GST is included in the price if the goods or service is taxable. Some education courses, most basic foods, and some medical, health and care products and services are GST free. All GST-registered businesses must provide tax invoices to their customers, collect GST and remit it to the ATO with your BAS.

Does your business need tax advice or guidance? Contact PJS Accountants. We offer skills and knowledge in managing your tax affairs with a full range of compliance, corporate and individual tax services. We service large companies, SMEs, family businesses and individuals. The ever-changing tax laws and requirements could put your businesses at risk. Avoid this risk by engaging the services of experts.

Learn About Personal Service Income (PSI)

/in /by

What is Personal Service Income (PSI) and what are its disadvantages?

According to the Australian Taxation Office, PSI is money earned as a result of personal skills or efforts, and usually applies to contractors or consultants.

PSI regulations are relevant to single traders, companies, partnerships, or trusts. Personal services income can be made only by individuals.

For a start, you can check out the personal services income tests to find out how they apply to you. The tests are:

  1. Results Test
  2. The 80% Rule
  3. Unrelated Clients Test
  4. The Employment Test
  5. Business Premises Test

The Results Tests

This entails you getting paid per a contract or arrangement when you complete a particular work. You don’t pass the first results test if you get paid on an hourly or daily rate because you are not paid after you finish the work. You are getting paid a rate based on the time you spent on the work, rather than on your skills that are required to accomplish the work.

The 80% Rule

This is the case where you earn 80% or more of your personal services income from a single client (the entire income year), so you can’t determine if you pass the other tests. You have to go to the Australian Taxation Office to obtain a personal services business determination. Doing this is a must, or you forfeit the PSI.

Unrelated Clients Test

This involves you providing a service to client/s after you have made an offer to the public for your services.

The Employment Test

You have to answer a set of questions to find out if you meet the requirements of this test.

Business Premises Test

Like the employment test, you have to answer a series of questions to know if you pass this test. You have to answer “yes” to all questions in order to pass the Business Premises Test. Some examples of these questions include:

  • Did you own or lease your business premises throughout the income year?
  • Are your business premises utilised for personal services work over 50% of the entire income year?
  • Are your business premises located apart from your residence or the residences of your associates?

After you have determined which personal services income test is applicable to you, start working to move out of the personal services income regime. Take note that if your business is set up as a company or trust, the personal services income made by your business will significantly impact your capability to carry out tax planning strategies.

Because taxation is complicated, investing in good accounting services is highly recommended. PJS Accountants offers expertise in steering your business in the right direction and answering your questions about Personal Services Income and how your tax affairs can be impacted by it. We collaborate with our clients to ensure we give only the best and quality accounting services, including assisting clients with enquiries about Personal Services income.

For more information contact PJS Accountants and talk to one of our team members about how to go about moving your business away from earning personal income services to generating business income. This move allows you to expand your business by taking on more clients and spending more resources on hiring other people to do principle tasks, thus letting you capitalise on other people’s work and prepare to take on business risks.

New Vehicle Purchase: Novated Lease vs Bank Loan

/in /by

If you are considering purchasing a new car, it might be worth your while to learn about the pros and cons of two possible ways you can own your dream ride.

Novated Lease

This involves a business, on behalf of an employee, leases a vehicle from a finance company. The deed of novation, or contract, is between the employer/ employee and the finance company.

Novated Lease Pros

Lease payments are made through salary sacrificing, which means deducting the sum from your pre-tax income. In this situation, your taxable income is reduced, resulting in your total taxation liability being reduced as well. Since you are paying for a share of the car’s full value, not the whole amount, your payments are lower than loan payments.

With a Novated Lease, you can easily upgrade your car every few years after you have finished the lease. Industries that utilise perception to achieve commercial viability or those that rely on vehicles a lot will find this option attractive. Depending on the terms of the lease, maintenance costs and running costs may be added, which is advantageous when a car’s running costs are made a part of the budget.

Novated Lease Cons

One of the disadvantages of entering into a novated lease is that you will not be the owner of the car at the expiration of the lease. Moreover, a lot of companies will forbid salary packaging because of the administrative costs that it associated with. If you terminate your employment with the company that you have entered into a novated lease with, you have to personally take care of all obligations and your new employer may refuse to get involved in the novated lease. As a result, you might be paying the remaining lease payments in after tax dollars.

For personally using the motor vehicle, the employee would be obligated to pay Fringe Benefits Tax. This ups the cost to the business owner. In effect, you guarantee the vehicle’s residual value at the expiration of a novated lease, despite the fact that the vehicle’s value would depreciate much faster. And you also have to consider that the value of cars drops over time, instead of rise.

Loan

You can consider another option for buying a motor vehicle: a personal or a bank loan. This option entails entering into a loan agreement personally with a finance company.

Loan Pros

You own the vehicle when you take a personal or bank loan. Moreover, you can make changes to the vehicle, and you own the vehicle outright at the completion of the loan agreement.

This type of loan option allows you to sell the vehicle and clear up the loan at any time (of course, you may incur penalties depending on what type of loan you’ve chosen).

You are entitled to an income tax deduction, as long as utilise the vehicle for work using one of these three methods: cents per kilometre method, 12 per cent of the original value method, one third of actual expenses method and logbook method.

Loan Cons

With a bank or personal loan, the repayment costs are higher, you take care of the vehicle’s ongoing maintenance and running expenses, and you may not be able to claim tax deductions if the vehicle’s use is not work related.

By giving you an idea of the pros and cons of a Novated Lease vs a Bank Loan for the procurement of a vehicle, we hope to help you decide the best option for you. If you would like to seek our advice about the best options for your particular financial situation, or if you have any enquiries about our portfolio of chartered accounting and business services, please contact PJS Accountants.