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Downsize to Boost Your Super

From 1 July 2018, people aged 65 or over will be able to make additional non-concessional contributions of up to $300,000 from downsizing their home subject to certain conditions. This is in addition to the concessional and non-concessional contribution caps. However, this measure may have unintended consequences if you plan on applying for the Age Pension, so wholistic retirement planning is needed to take advantage of the measure while minimising the downsides.

 

Now all the kids have all flown the coop and you’re left with an empty nest, it might be a good time to consider downsizing to pursue that ultimate retirement dream; fishing beside a river, surfing every morning, or getting up to that fresh country air. Your dream could be one step closer with the measure to allow people to make additional super contributions from the proceeds to selling their home.

 

From 1 July 2018, people aged 65 or over will make able to make additional non-concessional contributions of up to $300,000 from downsizing their home subject to certain conditions:

-the principle place of residence must have been held for a minimum of 10 years and located in Australia;
-contribution must be an amount equal to all or part of the capital proceeds of sale of an interest in a qualifying dwelling in Australia;
-any capital gain or loss from the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or part;
-contribution must be made within 90 days of disposing the dwelling (a longer time period may be allowed by the Commissioner);
-a choice is made to treat the contribution as a downsizer contribution and the complying superannuation fund is notified in the approved form of this choice either before or at the time the contribution is made; and
-the contributing individual has not previously made downsizer contributions or has had one made on their behalf, in relation to an earlier disposal.

 

The advantage with downsizer contributions is that the contribution is neither a concessional nor a non-concessional contribution, so if you have already reached your concessional or non-concessional contributions caps for the year, you are still able to make a contribution through the downsizer scheme, provided you meet all the conditions.

 

If you and your spouse jointly own a home, and decide to downsize, you can both benefit from this measure. For downsizing the same home, you and your spouse could potentially contribute a maximum of $600,000 into your individual super funds or SMSF. The other advantage with this measure is that the restrictions on non-concessional contributions for people with total superannuation balances above $1.6 million will not apply. Therefore, the total superannuation balance of the individual will also not affect their eligibility to make a downsizer contribution. However, any downsizer contributions will still be subject to the $1.6 million pension transfer balance cap.

 

Does this measure seem too good to be true? Well, there is also the Age Pension side you should be aware of. Currently, the family home is totally exempt from the Age Pension assets test, however, downsizer contribution may count towards the Age Pension asset test and any changes in your superannuation balance as a result of using this measure may also count towards the Age Pension Asset test.

 

Want the whole picture?
Need advice on how you could potentially take advantage of this measure and need to know what the downsides are? We can provide you wholistic advice for your planned retirement to make sure you realise your dreams.

 

 

 

Compensation From The ATO

With all the media attention around the ATO’s alleged rough treatment of the small business segment. Many of these small business owners may think that they have a case for compensation from the ATO for everything that they have been through. Although is getting compensation from the ATO even possible? The answer it turns out is yes, but it is very limited in scope.

 

Since the ABC Four Corners program aired allegations of misconduct in some of ATO’s dealings with small businesses, the Inspector-General of Taxation has revealed that complaints to his office has increased significantly. For many of these small business owners, thoughts of justice and compensation may be at the front of their minds. Although getting compensation from the ATO is technically possible, in reality, it is limited in scope and a great deal of supporting information is required for any claim.

 

To apply for compensation, businesses will need to complete the “Applying for compensation form” on the ATO website. The form requires some basic information (such as business name, TFN, address) as well as questions relating to why you think you’re entitled to compensation from the ATO. Once the form is received, the ATO’s service standards indicates that it will be acknowledged in writing within 7 business days of receipt, and initial claims should be processed within 56 days.

 

Broadly, claims for compensation is assessed in two ways, either compensation for legal liability (eg negligence) or compensation under the scheme for detriment caused by defective administration (CDDA Scheme). 

 

The claims are considered by officers in the ATO’s General Counsel and the decision makers are independent of the area which originally dealt with the taxation matter. If it is determined that compensation of either type (ie legal liability or CDDA) is not appropriate, small businesses may still be eligible for an “act of grace” payment.

 

If you’re intending to apply for compensation, you should know that the compensation scheme is very narrow and only financial losses with a direct connection to ATO’s actions will be allowed. This includes for example, reasonable professional fees, interest for delays in providing funds in some cases, and bank or other administrative fees incurred due to the ATO’s actions. Losses relating to the following will not be considered:

 

-claims for personal time spent resolving an issue;
-claims for stress, anxiety, inconvenience;
-claims for delay in receiving funds from the ATO where statutory interest was paid;
-claims for costs associated with complying with the tax system including costs associated with audits, objections and appeals, even where it is found you complied with your obligations;
-costs of putting in a claim or conducting a claim for compensation; and
-claims for taxation or other Commonwealth liabilities with substantive review rights that can be or could have been pursued.

 

Further limiting the scheme is the need to provide concise details of the actions of the ATO that you consider have caused your loss supported by evidence. The ATO considers that a claim or allegation that is expressed too “generally or broadly” is difficult to assess and that an allegation no matter how serious or how strongly it is expressed is not evidence itself. Therefore, to be successful at the limited range of compensation available, you will need to provide documentary evidence to support your allegations and detail the financial losses that were suffered (such as invoices or statement of accounts from professional advisers or banks).

 

If you’re unsuccessful in your compensation claim you can apply for an internal review in cases where you can provide new or relevant information in support of your claim. Otherwise, you may also apply to the Inspector-General of Taxation to investigate the ATO’s handling of your compensation claim. Whilst the Inspector-General does not have power to overturn or vary an ATO decision, they may make recommendations to the ATO about how the claim was handled.

 

Ready to pursue a compensation claim?

If you think you have a legitimate compensation claim that qualifies under the scheme, contact us today, we can help you sort out what information you need and make an application to the ATO on your behalf.

Underpayment Of Workers: Are You Liable?

The exploitation of vulnerable workers has been getting a lot of press recently, but did you know that it is not just the company or business involved that may be liable to penalties? In two recent cases, the Fair Work Ombudsman (FWO) has used accessorial liability laws to successfully obtain penalties from a professional services firm and the HR manager of a business for their involvement in the underpayment of workers.

 

Exploitation of vulnerable workers has been covered extensively in recent news, whether it be young naive Gen Ys, desperate for a job, or migrant workers who do not know their rights. The Fair Work Ombudsman (FWO) has recently used accessorial liability laws to obtain penalties against a professional services firm as well as a HR manager for a restaurant for the underpayment of vulnerable workers.

 

Recent cases

The professional services firm was a Victorian-based accounting firm, which had provided payroll services to a company and processed wage payments which facilitated $750 of the underpayments in relation to a foreign worker. The accounting firm was penalised $53,880 for facilitating the underpayment, while the company involved was penalised $115,706. In addition to prosecuting companies and firms, the FWO is also prepared to go after individuals. An HR manager for a restaurant in NSW was penalised $21,760 for her role in facilitating what has been described as “wide-scale exploitation of overseas workers”.

 

These cases show that it does not matter what the quantum of the underpayment to workers are, even a small underpayment to workers will result in a large penalty. According to Acting FWO Kristen Hannah:

 

“[It] is prepared to use accessorial liability laws to hold any party involved in the exploitation of vulnerable workers to account” whether it be the business itself, its internal management, or its advisers.

 

It is clear from the judgments of the accessorial liability cases that anyone that has been knowingly involved in illegal conduct would be open to these accessorial liability claims. In the case of professional services firms, it must put compliance ahead of its business interests. Similarly, if you work in a business that you know is exploiting workers then according to the presiding judge in the case, “there is nothing wrong with sending the message that an employee should indeed resign if that is the only alternative to continuing to participate knowingly in illegal activity”.

 

What this means if you are an employee

If you’re the employee of a business and are knowingly involved in underpaying workers, then you may be liable for accessorial liability. This is the case even if you are or assert that you were acting on someone else’s instructions (as was the case with the HR manager). The Court has made it clear that quitting is a clear alternative.

 

How about if you are an employer?

What does this mean for your business? You will need to make sure your workers are getting paid the correct awards, allowances, overtime, and penalty rates. Businesses also need to be aware that the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 has now come into effect. This means that the maximum penalties are now increased for certain conduct, including the deliberate exploitation of workers and keeping false records.

 

Need more information?

Unsure of what your liabilities are? There are many resources available on the FWO website, or you could consult us, or your payroll services provider, for more information.

Cash is No Longer King: Moving Your Business out of the Cash Economy

EFTPOS, payWave, Apple Pay, Android Pay, PayPal – electronic payment is increasingly the transactional method of choice. But cash still feels good in the hands, and is seen by many as the “real currency,” particularly in times of financial crisis. So why is it no longer king? The ATO is cracking down on businesses and individuals who – whether deliberately or by accident – fail to declare their cash income or use cash to avoid paying employee benefits and the appropriate rates of tax.

 

Historically, many Australian businesses have favoured the cash model and, regrettably, also favoured non-disclosure of “cash-in-hand” earnings and outgoing payments. Cash is untraceable, an attribute that has seen it play the role of an accomplice in the “black economy” and allow the production of wealth and avoidance of tax and employment laws to be hidden. This costs the Australian economy an estimated $15 billion in lost taxes and welfare payments each year. Not everyone who uses cash does it to get around the rules, of course, but all cash-only businesses are now under greater government and ATO scrutiny.

 

We take a look at what this means for your business, including why you might need to transition to a non-cash model.

 

Who is the ATO targeting?
The ATO has been investigating many small service sector businesses that use a cash-in-hand model. In its sights are cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building tradespeople, road freight businesses, waste skip operators and house cleaners.

 

Typically there are three types of problem player in the cash economy:

-businesses and people who don’t understand the law;
-businesses and individuals who deliberately avoid their tax obligations; and
-people who use cash payments to hide income, to avoid losing Centrelink payments, or who are breaching visa restrictions.

Through its extensive data-matching programs, the ATO can now easily create a profile of a business in any geographic area and compare its income, profit margins and level of profitability with similar others. This means that if you’re not providing the whole story in your records and tax returns, the ATO will be able to pick up on the gaps and you may face penalties.

 

 

Benefits of a non-cash business model
There are many benefits of a non-cash model that can help your business to grow, such as:

-access to tax incentives that you might not have been aware were on offer if your cash activities mean you have been, even accidentally, not accurately declaring your full income;
-more and happier customers – many people expect to be able to pay, even for small items and services, with a card or smartphone;
-increased access to your market through the digital world – you could consider adding an online aspect to your business;
-the clear visibility of your business’s financial health that comes with electronic payment and recordkeeping facilities; and
-avoiding possible penalties for tax debts and allegations about improperly documented or underpaid employee entitlements.

 

Further incentives to move away from cash are on the horizon. As part of its terms of reference, the Federal Government’s Black Economy Taskforce will look into possible tax and other incentives for small businesses that adopt a non-cash business model.

 

How can you transform your business?
We understand that changing a business model requires planning and time to implement, but whatever your circumstances, we can help your business to transition to a non-cash model.

 

Where should you start? With your recordkeeping. This means accurately recording every sale and purchase in your accounting software, providing a receipt whenever you make a sale and collecting an accurate invoice whenever you make a purchase. This will give you a clear audit trail to prove that you are declaring all income. Talk to us about your particular activities and needs – we’re here to help you plan, and can provide advice on what you’ll need to do to ensure the best outcomes for your business.

Your Business Website: Are the Costs Deductible?

 

Setting up, maintaining and modifying a business website can involve significant costs. When considering whether spending related to a website is tax deductible, business owners need to take into account Taxation Ruling TR 2016, which sets out the Commissioner of Taxation’s views for the purposes of the Taxation Administration Act 1953.

 

Taxation Ruling TR 2016/3 discusses the deductibility of expenditure on a commercial website (as generally applies to income years commencing both before and after 14 December 2016). It is a significant ruling that has the potential to affect every business in Australia that has a website.The first issue the ruling addresses is to identify what qualifies as a “commercial website”. The Commissioner’s view is that a commercial website is one used in the course of a business, irrespective of whether it is used directly to produce income.

 

The ruling explains that such a website is an intangible asset of the business, consisting of software installed on a server or servers and connected to the internet. Software provided on the website for installation on the user’s device is not considered part of the website, but the content available on that website is part of the website (unless the content has an independent value to the business). Hardware, such as a business server or computer, and the right to use the domain name are not considered part of the website.

 

In terms of how expenditure on a commercial website is treated, the website is not a depreciating asset, except to the extent it can be classified as “in-house software”. Accordingly, the ruling focuses on the deductibility of expenditure under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Under this provision, tax deductibility depends on whether the expenditure is revenue or capital in nature.

 

The ruling explains the treatment of a range of common types of business website expenditure, including:

 

–acquiring or developing a website: this type of expenditure is capital in nature;

 

–maintaining a website: this expenditure is revenue in nature, and includes expenditure on modifying the website, as long as the modifications do not alter the website’s functionality, improve its efficiency or extend its useful life (in which case the expenditure may be capital instead) – this capital/revenue distinction is a matter of “fact and degree” according to the ruling; spending on a routine modification with minor enhancements is more likely to be considered revenue, but spending on substantial modifications or changes as part of a program of work is more likely to be considered capital;

 

–periodic operating, registration, web hosting and licensing fees: this type of expenditure is deductible over the period the expense relates to (eg a year’s hosting fees are deductible over that 12 months);

 

–software: if the software qualifies as “in-house software”, the special depreciation rules in Div 40 of ITAA 1997 apply, but if it is not “in-house software”, the expenditure’s tax treatment depends on the nature of the asset – the ruling states that the cost of periodically licensed “off-the-shelf” software is a revenue expense; and

 

–regular upgrades to existing website software: this type of expenditure is generally considered “operational” in nature and is therefore deductible.

 

Under the ruling, a business’s social media presence is a capital asset, and separate from the business’s website, but if the cost of setting up the presence (eg a profile page) is trivial and the profile is maintained mainly for marketing, the expenditure is revenue in nature. The Commissioner’s view on other considerations are also set out, including the cost of domain names, the cost of leasing a website, and the possibly depreciable status of any copyright held by the website owner.

 

Although labour costs are usually on revenue account, they may be of a capital nature if there is a direct link between the employee or contractor in question and a capital asset, for example where the employee or contractor is engaged to develop a business website.

 

Finally, if expenditure on a commercial website is not deductible under s 8-1 of ITAA 1997 or the capital allowances rules, then the capital gains tax (CGT) regime will recognise it as part of the cost base of a CGT asset. It is unlikely that a deduction will be available under the “blackhole expenditure” provision in s 40-880 of ITAA 1997.

 

Need to know more?

The ruling makes it clear there are plenty of factors to take into account when establishing if you can claim the costs of setting up and running a website for your business. If you want to know more, contact us to talk about how the ruling could affect your business’s tax deductions.

 

Avoid an ATO Audit: Your Essential Guide to Small Business Benchmarks

The Australian Bureau of Statistics recently estimated that unreported business income totals around $24 billion, or 1.5% of our nation’s gross domestic product. To reduce the amount of money circulating under the radar, the ATO constantly monitors the cash economy to ensure small business owners report all of their income. Small business benchmarks are one set of tools the ATO uses to do this. Understanding how the benchmarks apply to your business can help you keep the right records and avoid an ATO audit.

 

Small business benchmarks explained
Small business benchmarks are financial ratios the ATO uses to compare the performance of your business against similar businesses in your industry. It calculates them from the income tax returns and business activity statements of over 1.3 million Australian small businesses. The ratios include figures such as cost of sales, labour, rent and materials, given as percentages of business turnover.

If your business falls outside the benchmarks, you may be flagged for an ATO audit. However, benchmarks can also be useful for finding out how your small business compares to others in your industry, and whether you could benefit by reviewing your business costs or prices.

 

Small business benchmarks can be a valuable resource for small business owners who want to optimise their pricing and overheads. They can also be the best way to ensure that your business is audit-proof.

 

How small business ratios are calculated
Small business benchmarks reflect the financial performance of businesses with turnovers of up to $15 million, across over 100 industries. Each benchmark ratio is published as a range to account for the variations between businesses that arise from factors such as business models, locations and regions.

 

Three different turnover ranges are provided for each industry. For instance, if you own a courier business with annual turnover of $250,000, the applicable business ratios are in the $150,000 to $300,000 range.

 

The ATO identifies a key benchmark ratio for each industry. In the catering industry, for example, this ratio is cost of sales to turnover; for courier services, it is total expenses to turnover. The ATO considers this ratio the most accurate indicator of cost of sales or expenses versus turnover.

 

A detailed overview of how small business ratios are calculated can be found on the ATO website.

 

Industry classifications
The ATO will use the business industry code and the business activity description in your tax return to determine your industry benchmark. Key words in your business activity description and trading name also tell the ATO which industry subgroup(s) your business falls into.

 

A business can fall into more than one industry subgroup, which allows for the fact that some businesses have diverse product lines. For instance, if you run a meat and poultry retailing business, its performance should be compared against benchmarks for both the meat retailing and fresh poultry retailing industry subgroups.

 

When you receive your tax information from us, it’s important to check that the industry code and description in your tax return accurately reflect your type of business. If not, you should let us know immediately to have it changed.

 

Types of benchmarks: performance versus input
There are two types of benchmark that the ATO monitors.

 

Performance benchmarks
These benchmarks use a number of different ratios to check your business’s performance against other businesses in your industry. They help the ATO identify any businesses that may not be reporting all of their income. Performance benchmarks include:

-income tax ratios such as cost of sales to turnover, total expenses to turnover, and rent to turnover; and
-activity statement ratios, including non-capital purchases to total sales, and GST-free sales to total sales.

 

Input benchmarks
Input benchmarks apply to tradespeople who purchase their own materials to perform jobs for household customers. These benchmarks show an expected range of income based on the total cost of labour and materials used.

 

They are calculated from information provided by trade associations and other industry participants. For example, the West Australian Solid Plastering Association helps the ATO set input benchmarks for plasterers who work with domestic customers.

 

Benefits of small business benchmarks
Any business owner who has experienced an audit knows it can be a stressful experience that will often stretch on for months. Looking at small business benchmarks can be an effective way to check that your tax records accurately reflect your business’s income and costs.

 

As well as helping the ATO monitor the cash economy, input benchmarks can help sole traders set their prices. For example, a painter can check how their current prices compare against the industry’s per-square-metre or per-hour price benchmarks, which are based on information that Master Painters Australia provides to the ATO.

 

Keeping track of your business
It’s important to check your benchmarks regularly throughout the year. The best way to do this is to review your financial ratio reports – talk to us if you’d like more information about how to obtain them.

 

It’s also a good idea to talk to us about how your business is performing against your industry’s benchmarks. This should be analysed when we prepare your tax return at the end of the income year, or at the end of every BAS quarter if you are registered for GST. If any figures are outside the benchmark ranges, we can give you guidance on how to fix the problem.

Tax Treatment of Compensation Payments Can Be Tricky

If you receive workers compensation or other similar payments, it’s important to find out how to properly account for them in your tax return. Working out the correct tax treatment for these sorts of payments can be tricky at times, so it may be a good idea to seek professional advice.

 

The primary question to address is whether a payment you have received is assessable as your income, or is exempt from tax. Generally, payments will be assessable as income to the extent that they are factually and legally made to compensate for lost income (whether past, present or future). On the other hand, amounts will be exempt from tax to the extent that they are compensation for injury or lost capacity to earn.

 

This distinction between assessable and exempt components of a payment may not always be easy to draw. There may also be capital gains tax (CGT) considerations to take into account – in particular whether a particular payment is exempt from CGT under the rules for the exemption of payments for personal injury.

 

Where compensation is assessable as income and is received as a lump sum, a new question arises: in what income year (or years) will the compensation be assessable and will tax be payable? The answer generally depend on whether you are a cash basis or an accruals basis taxpayer. In the case of a cash basis taxpayer – such as an employee receiving salary and wages – a lump sum payment will be assessable in the year it is received, regardless of whether it may relate to several years of lost salary. However, a special rebate or “tax offset” may be available to alleviate any inequitable tax consequences.

 

It’s important to remember that the tax treatment of compensation and similar payments will depend on their precise nature – and there are a range of such payments, varying from state to state.

 

In the recent Administrative Appeals Tribunal case of Re Edwards and FCT [2016] AATA 781, ComCare had made a lump sum payment of $86,000 to a former Australian Federal Police officer for arrears of workers compensation. This payment was ruled assessable in the year the former officer received it, and not over the six income years to which it related. However, the taxpayer was entitled to a “lump sum payment in arrears tax offset” to, in effect, “even out” the tax liability as if amounts had been earned in each of the six income years.

 

It is important to remember that the tax treatment of compensation and similar payments will depend on their precise nature – and there are a range of such payments, varying from state to state.

 

For example, Tax Determination TD 2016/18 deals with whether a “redemption payment” received by a worker under the South Australian Return to Work Act 2014 is assessable income of that worker.

 

It provides that this type of payment is ordinary income of the worker, and is therefore assessable in the income year in which they receive it. Equally importantly, the Determination defines exactly what a “redemption payment” is, by referring to the extent that the amount received is:

-made under subs 53(1) of the Return to Work Act 2014 (SA);
-made to redeem a liability to make weekly payments under ss 39 or 41 of that Act; and
-not an employment termination payment (ETP) under the tax law.

 

Illustrating the initial observation in this article that establishing the tax treatment of workers compensation and similar payments can be tricky and specific at times, this particular Determination only applies to redemption payments made under agreements from 10 August 2016. This is because the Commissioner of Taxation had already made private rulings in earlier years that substantially similar payments were not assessable income.

 

Need to talk?
These are complex matters to consider, especially if you’re already dealing with a difficult situation that has lead to compensation. Contact us if you’d like help working out how receiving payments may affect your tax obligations.

Tax Time Focus Areas For Businesses

With the ATO’s compliance targeting of large businesses in the past few years reaping rewards, this tax time, its turning its attention to small businesses. As a small business owner, what do you need to be aware of to stay out of the ATO spotlight?

 

A recent interview with Tax Commissioner Chris Jordan revealed details of what the ATO will be paying particular attention to this year. Perhaps not surprising, the ATO will be targeting businesses that deal in cash. As a part of its cash and hidden economy operation, the ATO has compiled “data-maps” of cash-only businesses and those that do not frequently or readily use electronic payment facilities.

 

Using the data-maps the ATO is homing in on particular suburbs which have a high incidence of cash-only businesses. In Sydney, Cabramatta and Haymarket were cited as examples of areas that the ATO visited in relation to its operation. According to the Commissioner:

 

“People say to me: ‘it’s terrible – people steal the money, you’ve got to count it, you’ve got to reconcile it, you’ve got to have security around it, you’ve got to take it to the bank’ … There’s no compelling business reason to have cash only.”

 

With these cash and hidden economy visits the ATO is conducting, it is looking for several things: whether the business has undeclared income; whether the employees are allowed to work (visits in the past have been made in conjunction with the Fair Work Commission or the Department of Immigration); and whether the employees are receiving the correct amount of wages, conditions and superannuation.

 

Therefore, the other areas the ATO is targeting this tax time also include unpaid superannuation guarantee contributions and cash payments of wages without the associated conditions and benefits. According to the ATO, with the introduction of the single-touch payroll (STP), it will be able to receive information on unpaid superannuation contributions much earlier and act on it.

 

Even if you’re not running what the ATO deems to be a “cash business” there are other areas you will still need to be aware of this tax time. In particular, the ATO will be looking at small businesses wrongly claiming private expenses, and unexplained wealth or lifestyle.

 

Under tax law, you can generally deduct a business expense if it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, provided the expense is not capital, private or domestic. Commissioner Jordan noted that small businesses intermingling their private expenses with their business expenses have been an issue for a long time, but this year he has decided to “renew the discussion to highlight that we are going to be focusing on these areas”. Hence if you’re running a small business you should make sure all your expense claims are in fact business related, any expenses that are both business and personal needs to be apportioned on a reasonable basis.

 

The unexplained wealth or lifestyle targeted by the ATO includes instances of business owning families that have low or average reported incomes, but have a lifestyle that far exceed those modest incomes. Commissioner Jordan considers that having kids in private schools and taking frequent business class flights on overseas trips would be considered to be unexplained wealth. He said the ATO will use all its resources including obtaining information from other government departments (ie Department of Immigration) and social media (ie Facebook posts).

 

Want to find out more?

If you think your business may have some issues with ATO’s tax time focus areas, we can help you sort them out before the ATO get involved. If you’re thinking of moving away from cash and transitioning into electronic payments, we can assist with those first steps.

Pay your way: tax and the sharing economy

The desire to pay less for goods and services coupled with the convenience of being able to conduct such transactions online or via apps, has lead large numbers of people to use the “sharing economy”. Demand for greater flexibility in employment and the way we access services and purchase products collectively have contributed further to this boom. Unfortunately, however, none of this removes the need to pay tax!

 

It is reported that over two-thirds of Australians now earn and spend money via the sharing economy. We noted in an earlier article the ATO advice that tax law applies in the same way to sharing economy ventures as it does to more conventional business activities.

The ATO has recently sharpened its focus on this area, updating its information on the “sharing economy and tax”.

If you are a provider of any of the services detailed below, here is a brief refresher on the sharing economy and how tax applies.

 

Are you part of the sharing economy?
The sharing economy is usually defined by buyers (users) connecting with sellers (providers), but it is much broader than that. It extends to cover many direct access services, offered by way of websites and apps, which include the following:

-renting out all or part of your home (eg, Airbnb or Stayz);
-letting out a vehicle-parking space (eg, Parkhound and Spacer);
-‘ride-sourcing’ services in exchange for a fare (eg, Uber, SheSafe, Shebah and GoCatch);
-providing services for delivery (eg, Deliveroo, Mad Paws); or
-offering a personal service (such as graphic design or creating websites).

 

If you earn income in any of these ways, the chances are that you are already part of the sharing economy. Here is a quick summary of the latest updates from a tax perspective and what you should keep in mind, but if you are in any doubt please contact us to find out more.

 

Register your income

When you provide a service for a fee then you need to declare it in a tax return. This is no different in the sharing economy and income tax and goods service tax (GST) are due under the usual circumstances.

 

GST or no GST?
The threshold over which you need to pay GST, even within the sharing economy, is still $75,000. If you are uncertain whether you will reach this threshold you can register for GST to be on the safe side. See further details below on the requirement to register for a GST if your business is connected to ride-sourcing.

 

Are you an enterprise?
If you are carrying on an enterprise you will need to apply for an Australian Business Number (ABN), lodge activity statements and, potentially, to register for goods service tax (GST) especially if you are providing a ride-sourcing service. This gets a little more complicated depending on the type of goods or services you provide as some will include GST.

 

Keep a trail
You may not end up with an obvious paper trail for your income-earning activities in the sharing economy, but you still need to keep records of what you earn. Being able to account for income and expenses by keeping up-to-date records is vital so that you can declare it in your tax return and claim any relevant deductions.

 

Claiming deductions
You will be able to claim deductions for expenses you incur while conducting your business as part of the sharing economy. Such deductions must be apportioned according to whether they relate wholly to work purposes or in part to work and partly for personal use.

 

Renting out part or all of your home
If you plan to rent out a part of or your entire home via a website (such as Airbnb, Stayz or similar) you still need to declare income on your tax return; deductions for expenses incurred apply as well.

 

How does GST apply?Goods service tax (GST) does not apply on residential rent, but if you provide accommodation such as a hotel room, serviced apartment, a bed and breakfast, or even if you rent out a function room or office space (for commercial use), you will need to pay GST on income received.

 

How about CGT?

If you rent out a room in your home via the sharing economy (such as for Airbnb or similar) you may need to pay capital gains tax on a proportion of your income received when you sell your home or property. This applies even if the home you rent is your main residence; renting out even just a part of it can mean that you lose part of your CGT main residence exemption.

 

Ride-sourcing
Whether you call it ride-sourcing, ride-sharing, ride-hailing, or some other name, if you provide an ongoing service to charge passengers a fare, or make a car/vehicle available for public hire, you need to register for an ABN and pay GST from day one. If your business is classed as a ride-sourcing enterprise you need to declare and pay GST on the full amount of every fare and keep records of income and expenses. You will be able to claim GST credits if you are an enterprise.Avoid tax debt
Rather helpfully, the ATO provides tips on how to get ahead and avoid receiving a nasty tax bill. They suggest that if you think you will be close to the threshold to pay tax (over $18,200) you can make a pre-payment of tax; any pre-payment of tax made before any tax is due will stay on your account until such time as you, or your tax adviser, ask for a refund. You can also pay in instalments.

 

What next?
If you think you may be part of the sharing economy talk to us about how to avoid a surprise tax bill and pay the correct tax.

 

Tax Time Focus Areas For Individuals

Tax time has come around for another year, and this year the ATO is focusing on “other” work-related expense deductions and work-related car expenses.  It says taxpayer must remember that they are not automatically entitled to claim standard deductions and that all expenses need to be substantiated. Taxpayers need to be able to show that they spent the money themselves and were not reimbursed, the expense was directly related to earning their income, and they have a record to prove it.

 

It’s tax time again, as you gather your receipts and other assorted tax documents, you should also turn you mind to what the ATO is paying close attention to this year. This year, the ATO is focusing on taxpayers who claim “other” work-related expense deductions at label D5 on individual tax returns.

 

According to the ATO, taxpayers need to be able to show that they spent the money themselves and were not reimbursed, the expense was directly related to earning their income, and they have a record to prove it. Where the expense is for both work and private use, only the work-related portion can be claimed. The ATO urges taxpayers to remember that they are not automatically entitled to claim standard deductions and that all expenses need to be substantiated.

 

As a part of their focus on other work-related expense claims, the ATO will also be closely scrutinising work-related car expenses which around 3.75m individuals claimed in 2016-17 totalling $8.8bn. Assistant Commissioner Kath Anderson said:

 

“While most people want to do the right thing, we know the rules can be a bit tricky for some and we are seeing a lot of mistakes. We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed.”

 

There are two ways a deduction for car expenses can be calculated under tax law, the cents-per-kilometre method (which limits claims for work-related travel up to 5,000 km) and the log-book method in which a log book is kept for a continuous 12-week period to determine the work-related percentage of the actual expenses incurred.

 

Around 870,000 individuals claim the maximum amount under the cents-per-kilometre method each year, and the ATO is concerned that there is an erroneous belief among taxpayers that the maximum claim is a standard deduction that does not require evidence of any travel. While it notes that using the cents-per-kilometre method does not require a log book, taxpayers will still need to show evidence of the number of kilometres travelled by using a diary for example, if required.

 

This year, the ATO is using enhanced technology and data analytics to identify unusual claims, which includes comparing taxpayers to others in similar occupations earning similar incomes. It says its models are particularly useful in identifying individuals claiming things like home to work travel or trips not required as a part of their work.

 

The ATO is advising taxpayers that it may request proof that the travel for work was required, this is especially significant in circumstances where individuals may claim the transport of bulky tools or equipment as required by their work. It warns individuals this year, it’ll be on the lookout for false logbooks, claiming home to work travel, claiming for expenses paid for by the employer, incorrect claiming of home to work travel where bulky tools are not involved, and claiming expenses for a car which is under a novated lease.

 

Need help at tax time?

Bring in your receipts and associated tax documents, we can help you navigate the murky water of deductions and get you the maximum claim you are entitled to. If you’re thinking of claiming other work-related expenses or car expenses this year, let us look over your claim to make sure it’s all above board to avoid a future ATO investigation.

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