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Varying PAYG Installments

You can vary your PAYG installments so the amount you prepay is closer to your expected tax for the year.

If you pay PAYG instalments using the instalment amount (option 1 on your activity statement), you may want to vary if there has been a significant change in your instalment income this year.

If you calculate your PAYG instalments using the instalment rate (option 2 on your activity statement):

  • you do not need to vary simply because your income has changed – the payment you calculate will go up and down in line with your income;
  • you would usually only vary if the taxable proportion of your income has changed – for example, if your income has fallen significantly but your deductions for running costs have stayed the same.

You make your variation when you lodge your activity statement or instalment notice. You must lodge:

  • on or before the day your PAYG instalment is due; and
  • before you lodge your tax return for the year.

Your varied amount or rate will apply for the remaining instalments for the income year, or until you make another variation.

Underestimating installment amount or rate

When you vary your PAYG instalments, it is important to not underestimate your instalment amount or rate. If you underestimate, you could be left with a substantial tax bill when you lodge your tax return at the end of the year.

Also, when your tax return is lodged, the ATO compares your actual instalments to the total tax payable on your instalment income for the income year.

If your varied instalments are less than 85% of your total tax payable, you may have to pay interest (the general interest charge) on the difference, in addition to paying the shortfall. Depending on the circumstances there may also be penalties.

If you are not sure, it is best to not vary your instalments. Any overpaid instalments will be refunded to you after you lodge your tax return.

Varying your installments due to flood and other disasters

You may need to vary your PAYG instalments due to the impact of the 2022 floods or other disasters.

The ATO has said that it will not apply penalties or charge interest on variations if you have taken reasonable care to estimate your end of year tax liability. This means making a reasonable and genuine attempt to determine your liability. When considering if a genuine attempt has been made, the ATO considers what a reasonable person would have done in your circumstances.

Want to find out more?

Talk to us about whether you should vary your PAYG instalments. We can also talk to the ATO on your behalf if you are unable to pay an instalment amount.

The importance of record keeping

You are legally required to keep records of all transactions relating to your tax and superannuation affairs as you start, run, sell, change or close your business, specifically:

  • any documents related to your business’s income and expenses;
  • any documents containing details of any election, choice, estimate, determination or calculation you make for your business’s tax and super affairs, including how any estimate, determination or calculation was made.

You should make sure that you understand what records are needed for your business and make accurate and complete record-keeping practices a part of your daily business activities. Talk to your tax advisor about what records your business needs to keep and for how long.

What is a record?

A record explains the tax and super-related transactions conducted by your business.

The record needs to contain enough information for the ATO to determine the essential features or purpose of the transactions.

The minimum information that needs to be on the record is generally:

  • the date, amount, and character (for example, sale, purchase, wages, rental) and the relevant GST information for the transaction;
  • the purpose of the transaction; and
  • any relevant relationships between the parties to the transaction.

Five rules for record keeping

The ATO has 5 record-keeping rules, which are based on law and the ATO’s views.

  1. You need to keep all records related to starting, running, changing, and selling or closing your business that are relevant to your tax and super affairs – if your expenses relate to business use and personal use, make sure you have clear documents to show the business portion.
  2. The relevant information in your records must not be changed (for example, by using electronic sales suppression tools) and must be stored in a way that protects the information from being changed or the record from being damaged – you need to be able to reconstruct your original data if your record-keeping system changes over time.
  3. You need to keep most records for 5 years – generally, the 5-year retention period for each record starts from when you prepared or obtained the record, or completed the transactions or acts those records relate to, whichever is later. However, in some situations, the start of the 5-year retention period is different. For example, for super contributions for employees, the 5 years starts from the date of the contribution. You need to keep all information about any routine procedures you have for destroying digital records.
  4. You need to be able to show the ATO your records if they ask for them. The ATO will also need to be able to check that your record-keeping system meets the record-keeping requirements – if you store your data and records digitally using an encryption system, you will need to provide encryption keys and information about how to access the data when asked. You also need to ensure the ATO can extract and convert your data into a standard data format (e.g. Excel or CSV).
  5. Your records must be in English or able to be easily converted to English.

Need help with record keeping?

Keeping correct records is very important. Failing to do so could have financial consequences. We can help you with your records. Contact us today for more information.

Professional Firm Profit Allocations: ATO View

If you run a professional services firm there are many tax issues to consider in the allocation of profits. The ATO is particularly concerned about individual professionals with an ownership interest who redirect their income to an associated entity, such as a trust, with the effect of significantly reducing their tax liability – raising the prospect that anti-avoidance provisions could apply. From 1 July 2022, new guidelines explaining the ATO’s compliance approach to profit allocations will commence. These guidelines assist taxpayers to identify their particular risk level and understand whether their profit allocation arrangement may attract attention from the ATO.

The new guidelines (PCG 2021/4) are significantly different to previous ATO guidance. Importantly, the ATO acknowledges that some arrangements that were previously considered “low risk” may now have a higher risk rating.

Before speaking to your advisor, it may help you to understand the new two-step process for identifying your risk.

Step 1: Pass the “gateways”

For the guidelines to apply to your profit allocation arrangement, you must satisfy two “gateway” tests.

Firstly, does the arrangement have a sound and genuine commercial rationale? The ATO suggests that a change in tax performance, absent any other non-tax related practical changes, strongly indicates a lack of commercial rationale.

Secondly, are you satisfied that the arrangement has no “high risk” features? This includes anything flagged in a Taxpayer Alert, as well as the following:

  • Financing arrangements related to non-arm’s length transactions. For example, where an associated entity borrows to acquire the individual’s ownership interest and claims deductions for interest expenses.
  • Exploiting artificial differences between taxable income and accounting income.
  • Where a non-equity partner assigns their fixed-draw income to their associated entity.
  • Multiple classes of shares and units held by non-equity holders.

If you don’t meet these two tests, the guidelines don’t apply and you should seek professional advice.

Step 2: Identify your risk

If you pass the gateways, the next step is to consider three risk assessment factors (or two, if the third is impractical) and use the tables in the ATO’s guidelines to identify your “score” for each factor. The total of your scores – adjusted for whether you apply two or three factors – will determine which risk “zone” the arrangement falls into: low, moderate or high risk.

The three factors are:

  1. Proportion of the income entitlement assessed in the hands of the individual professional (as opposed to their associated entities) – the greater this proportion, the lower your risk score.
  2. Total effective tax rate for income received from the firm by the individual and associated entities – the higher the effective tax rate, the lower the risk score.
  3. Remuneration assessed in the hands of the individual as a percentage of a commercial “benchmark” for the services provided to the firm (optional) – higher percentages yield a lower risk score.

Your advisor can help you perform these calculations.

If your arrangement is in the “low risk” zone, you can have confidence that the ATO will generally not dedicate compliance resources to testing your arrangement. If it rates as “moderate” or higher, the ATO is likely to analyse your situation further. Arrangements that were previously “low risk” but now have a higher rating may qualify for a transitional period until 30 June 2024 in which to apply the ATO’s previous guidance.

Now is the time to take action

The ATO says taxpayers should self-assess their risk annually, document the assessment and be able to provide supporting evidence in the event the ATO fact-checks the assessment. Contact our office for expert assistance in assessing and managing your risk.

ASIC Focus Areas for 2022 Reporting

As COVID-19 begins to lose its place in the public consciousness, the uncertainty felt during the pandemic has been replaced by the economic challenges presented by high inflation, an increase in energy costs and higher interest rates. ASIC has reminded directors and preparers of financial statements for the year ended 30 June 2022 to review and be aware of the impact of these uncertainties.

For the 30 June 2022 reporting period, ASIC will be focusing on areas of concern. One of these is uncertainties and risks which may affect asset values, liabilities, and assessments of solvency and going concern. This includes factors such as COVID-19 conditions and restrictions during the period, the discontinuation of financial and other support from governments/parent companies/lenders etc., and the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities.

Other considerations also include the increased likelihood of ongoing geopolitical risks, such as the Ukraine/Russia conflict and the flow-on effects for the broader Australian economy and the industry the business is in. This is compounded by the difficulty in obtaining sufficiently skilled staff and expertise due to the slow ramping up of migration activity after COVID-19.

It is perhaps no surprise then that ASIC considers industries that may be particularly affected this year to include the construction industry, owners of commercial properties and large carbon emitters.

Flowing on from these uncertainties, one of the other important areas that ASIC will be focusing on will be asset values, which encompasses the following:

  • impairment of non-financial assets – including goodwill, indefinite useful life intangible assets and intangible assets not yet available for use. The appropriateness of key assumptions and disclosure of estimation of uncertainties will need to be reviewed and justified.
  • value of property assets – factors that could adversely affect commercial and residential property values should be considered, including levels of migration, changes in shopping habits and future economic or industry impacts on tenants.
  • expected credit losses on loans and receivables – key assumptions used in determining expected credit losses should be reasonable and supportable.
  • value of other assets – including the value of investments in unlisted entities, whether deferred tax assets will be realised, and the net realisable value of inventories.

According to ASIC, financial report preparers and directors should also pay close attention to disclosures. It notes that when considering what information should be provided in the financial report, those responsible should consider what their backers and potential investors would want to know. Salient changes from the prior year should also be disclosed.

Given the challenging economic conditions, the adequacy of provisions for such things as onerous contracts, leased property make good, financial guarantees and restructuring need to be carefully considered. In addition, subsequent events after the reporting period which may affect assets, liabilities, income, expenses or disclosures also need to be reviewed and disclosed.

While companies may experience differences depending on their industry, where they operate and how their suppliers and customers are affected, what remains consistent is that all companies will face some level of uncertainty about future economic and market conditions. ASIC encourages companies to ensure that impacts on the business are appropriately disclosed, and that underlying estimates and assessments for financial reporting purposes be reasonable and supportable.  

Need help preparing your financial statement?

With the end of financial year drawing closer, we can assist in preparing financial statements and ensuring that all estimates and assessments are reasonable. Contact us today for help and advice.

Rising interest rates: what Australian SMEs need to know

Key Points:

  • The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually
  • Most small businesses have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them

The world has changed a lot since the global financial crisis of 2008, but one thing has remained constant: record low interest rates. No matter what turbulence they faced, Australian businesses could rely on the fact that borrowing remained cheap.

Now, we are finally coming to the end of the cheap lending cycle. Inflation is rising globally, spurred by pandemic-induced supply chain shortages, rising commodity prices, including oil and gas, thanks to Russia’s recent invasion of Ukraine.

In the US, inflation hit 7.9 per cent in March, causing the Federal Reserve to raise rates for the first time since 2018. This has, rightly, put Aussie businesses on notice to expect a rise in interest rates, with Commonwealth Bank already tipping that cash rates will increase in June.

While Australia is far behind the US on inflation, pressure will likely increase. The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually. Just this week the RBA has increased the cash rate target by 25 basis points, which was swiftly passed on by the major banks, despite there being some abnormal economic factors caused by COVID over the last two years.

But what does all this mean for small businesses? Many business owners, particularly those running high-growth, eCommerce companies, will be focused on supply chain issues that will negatively impact their ability to secure stock, which in turn will restrict their cashflow. The rising interest rate environment is only going to further impact on a business’s freedom to operate.

The end of cheap money

Until this point, businesses have enjoyed record low borrowing rates from traditional banks due to the all-time low cash rate and fierce competition from non-bank lenders, enabling them to fund their growth cheaply.

This has meant it has often been considered ‘best practice’ to borrow to fund growth. Most small businesses, therefore, have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them. Since these are often long-term debts that will take years to repay, this will mean carrying the debt for longer, incurring more interest.

For those businesses looking to obtain shorter-term funding to invest in growth or cover them until more cash arrives, this funding will become more expensive. Banks and other lenders that require physical assets to secure finance to, will likely set more stringent terms. As any business owner who has taken out a bank loan knows, the prospect of losing your house because you can’t make payments really ups the pressure.

Borrowing to stay ahead

The issue is that, now more than ever, businesses need to have cash to get ahead. Competition in the supply chain is fierce, with suppliers, particularly those in Asia, able to select which buyers they want to sell to. Australian businesses are also facing record high container prices, with shipping operators preferring to focus on larger markets, such as the US.

All this means that Australian businesses may not be getting the best terms from suppliers, meaning that stock is slower to arrive, and margins are cut (or costs are passed onto customers).

Companies that have emerged cashflow-positive from the pandemic are in an excellent position to get ahead of competitors by buying stock more quickly and in greater volume from suppliers, in order to secure themselves better rates and more immediate availability. But those companies that can’t fund this may fall behind.

Finance, for supply chains

There are a range of so-called ‘non-bank lending’ products out there which businesses can turn to that will be much more flexible to the needs of smaller, high-growth businesses across a range of industries.

Many non-bank lenders won’t require a business to specify a physical asset to secure lending to, making them more suitable for eCommerce or other similar businesses. Plus, funding types such as Debtor Finance (sometimes known as invoice finance) mean that companies can receive cash from unpaid invoices early, without waiting for the usual 30, 60 or 90 days to pass. An innovative supply chain financier, such as Octet, can provide the facility for this, and will take a small fee, but ultimately that funding is still yours from your own sales, and, therefore, is less prone to interest rate rises.

Take advantage of any available early payment discounts, whilst receiving your goods quicker than the competition. The next few years are going to be uncertain and challenging, but savvy businesses shouldn’t settle for high-interest bank funding to see them through, without at least considering the alternatives. For more information, book a consultation with us today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

How to take advantage of the Government’s digitalisation incentives this financial year

Key Points:

  • $1 billion is being provided to support small businesses digitalise their operations with a new bonus tax deduction
  • For every $100 a business spends on digital economy technologies, they get a $120 tax deduction

As part of the Australian Government’s Digital Economy Strategy, $1 billion is being provided to support small businesses digitalise their operations with a new bonus tax deduction. 

SMEs with an aggregated turnover below $50 million per annum will be able to deduct an additional 20 per cent of the cost incurred on business expenses and depreciating assets that support their digitalisation. So, for every $100 a business spends on digital economy technologies such as flexible work solutions, cyber security, cloud adoption, e-commerce, or new software services, they get a $120 tax deduction.

This is a huge win for SMEs as it will help fund their digital transformation for the future. And yet most business owners are unaware of the current digitalisation incentives, whether it applies to them or how they can benefit. As the tax incentive is only available until 30 June 2023, it is simply a wasted opportunity to not capitalise on the investment boost being offered. It’s time to do your research and analysis, identify the areas within your business that would benefit from digitalisation, prioritise those needs and choose the right partners to leverage.

Senior leadership involvement in software purchasing was up 7 per cent since the start of the pandemic, and over the last two years, demands have caused IT budgets to skyrocket. Yet these budget increases cannot continue, so one critical solution is for SMEs to focus on optimising their tech stack. The question is, how do you get started?

1. Conduct a full business evaluation and digital audit

Analyse all pillars of your business to work out what can be done more efficiently and effectively and how can technology be the enabler. Assess the tech stack you already have and see if there’re ways to consolidate and optimise for performance.  Based on the known gap, research the digital tools, platforms, or solutions that will complement and enhance your current tech stack and enable you to increase productivity, profitability, and assist in improving the way of working for the future.

2. Prioritise your digital requirements

In Frost & Sullivan’s research, the top five selection criteria for businesses choosing a new IT solution were:

  • supporting IT processes automation 28 per cent
  • improving employee productivity 25 per cent
  • ensuring performance & reliability 25 per cent
  • value for money 23 per cent
  • improving IT administration/management 22 per cent.

The research also found that one of the most important digital solutions to invest in, is one which ensures the business can successfully run from anywhere. Yet SMBs are often lacking in a simple, reliable and scalable solution for the hybrid and remote working world in which we now live in and is here to stay.

3. Do your research

Decide which provider is the right fit for your business now and in the future. Conduct online research, talk to peers, and seek out expert advice to identify a shortlist of providers. Choose a solution that is suitable and cost effective for SMEs, yet with the capability and capacity to grow as the business scales, with on-demand support as and when required. For example, GoTo provides flexible work software that enables businesses to achieve a sustainable, resilient, and future-proof work-from-anywhere strategy. Significantly, it provides enterprise-grade technology specifically designed for SMEs, combining unified communications and collaboration as well as IT management and support solutions in one affordable application that can scale to facilitate future growth.

4. Invest

Don’t wait. The market is constantly transforming, and you don’t want to be left behind. The bonus deduction applies for qualifying expenditures up to $100,000 per annum incurred between 29 March 2022 until 30 June 2023. Consult us for advice on how to maximise this tax incentive today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

Home as a place of business: CGT implications

The COVID-19 pandemic has resulted in more employees working from home than ever before. This, in turn, has resulted in such people being able to claim a range of deductions for various “running expenses” associated with working from home. These expenses include electricity, phone service, cleaning, decline in the value of equipment, furniture and furnishing repairs, and so on. To make things easier, the ATO even provided several “short-cut” options to claim “working from home” expenses (as opposed to claiming the relevant proportion of the actual costs).

In addition, many people who operate a business (e.g. as a sole trader or in partnership) have been required to use part of their home as a place of business – or may have been doing so for many years anyhow. They, too, are entitled to claim various “running expenses” associated with working from home.

Moreover, if part of the home has the character of a place of business and is set aside as such, then such persons would generally also be able to claim a portion of occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums) in addition to running expenses. This is because part of the home is an asset that is used in carrying on their business. However, where part of a home is being used as a business to generate assessable income, the homeowner will not be able to sell their home CGT-free. Instead, a partial CGT main residence exemption will apply on the basis that part of the home has been used to produce assessable income (in the same way it would apply if part of the home had been rented at arm’s length).

The rules for calculating a partial CGT main residence can be difficult to apply – particularly in determining the appropriate apportionment and correctly applying any exclusions. A professional’s expertise here is invaluable.

More importantly, in cases where a partial exemption may apply because of part-business use of a home, then the CGT small business concessions may be available to eliminate, reduce or roll over any assessable capital gain. The ATO accepts this as being possible: “You may be able to apply one or more of the small business CGT concessions to reduce your capital gain unless the main use of the house was to produce rent.” (See the ATO website here).

However, the CGT small business concessions are difficult to apply at the best of times – let alone in the case where part of a home is used as a place of business. For example, issues may arise as to whether the homeowner meets the basic threshold requirement for the concessions (including the holding period rule), the effect of joint ownership of the home and, in the case of the 15-year exemption, whether the sale of the home (or CGT event) that gives rise to the capital gain is made in connection with the retirement of the taxpayer.

And of course, where a company or trust carries on the business, a crucial issue also arises as to whether the part of the home used in the business qualifies as an active asset, which is required for the CGT small business concessions to apply.

These (and related) issues require the expertise of a professional. So if you find yourself in this position, your first port of call should be your trusted accountant.

The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners.

Liability limited by a scheme approved under Professional Standards Legislation.

ATO Turns Its Attention To Crypto

The meteoric rise of cryptocurrency (crypto) and NFTs (non-fungible tokens) has raised many eyebrows and has now also caught the attention of the ATO. Whether you’re trading crypto or NFTs as an individual or business, capital gains tax (CGT) applies to any gains you make regardless of whether the gain is in foreign currency or Australian dollars.

 

Most people are now familiar with cryptocurrency, which is a type of digital money created from code and usually takes the form of tokens or coins. The most well-known of which include Bitcoin, Ethereum, and Dogecoin. Non-fungible tokens are a comparatively more recent development which basically consists of a unit of data stored on a ledger to certify that a digital asset is unique. This has mostly been applied to artwork but can also include photos, videos and other types of digital files.

 

Based on its data holdings, the ATO will be writing to around 100,000 taxpayers with crypto assets explaining their tax obligations and urging them to review their previously lodged returns. It will also prompt another 300,000 taxpayers as they lodge their 2021 tax return to report their crypto capital gains or losses.

 

Individuals or businesses that dispose of crypto must work out if they made a capital gain or loss and report the resulting gain or loss in their tax return. Disposal of crypto can include exchange of one cryptocurrency for another cryptocurrency, trading, selling or gifting cryptocurrency, converting cryptocurrency to a government issued currency (ie Australian dollars).

 

Transfers of cryptocurrency from one wallet to another while maintaining ownership is not considered to be a disposal, however, if your crypto holding reduces during this transfer to cover a transaction fee, this fee is a disposal and has CGT consequences. In addition, if you acquire a small amount of crypto and use it within a short time to make personal purchases, the crypto may be considered to be a personal use asset and not subject to CGT.

 

In conjunction with contacting taxpayers, the ATO is also conducting a data-matching program which will consist of account identification and transaction data from cryptocurrency designated services providers from the 2021-2023 financial years. These details include the usual client identification information such as name, address, date or birth, phone number and email, but interestingly, now also includes social media account details. Transaction details will also be obtained which includes bank account details, wallet addresses, transaction dates/time/type, deposits, withdrawals, transaction quantities, and coin type.

 

It is estimated that records relating to approximately 400,000 to 600,000 individuals will be obtained each financial year under the program.

 

According to the ATO, while crypto appears to operate in an anonymous digital world, it closely tracks where crypto interacts with the real world through data from banks, financial institutions as well as online cryptocurrency exchanges to trace the money back to taxpayers. It will then match the data obtained from cryptocurrency designated service providers to either individual or business tax returns to ensure that the right amount of tax is being paid.

 

Need help to work out whether you need to pay CGT?

 

If you or your business has been dabbling in crypto and need help to work out whether those transactions are subject to CGT, we can help. The ATO is keeping a close eye on this relatively new financial area and it pays to get it right. Contact us today for expert help and advice.

 

Financial Help For Relocating Job Seekers

Job seekers can now take advantage of the government’s relocation assistance of up to $9,000 when they relocate to take up an on-going work, including an apprenticeship, provided the position (both work and apprenticeship) is for more than 20 hours a week with a duration of more than 6 months. The scheme commenced 1 May 2021 and is designed to help job seekers with the cost of relocating to take up vacant job positions.

 

Job seekers who are participating in employment service programs such as jobactive, Disability Employment Services, ParentsNext, Transition to Work, or Community Development Programs may be immediately eligible for help with their moving costs.

 

Where you relocate to take up ongoing work, the new location must be within Australia, be at least 90 minutes away from where you currently live (based on your normal mode of transport), and not be within the same capital city. Those individuals that relocate to a regional area may be eligible for up to $6,000 with an extra $3,000 available if a dependent is also relocating. For those relocating to another capital city, $3,000 of relocation assistance may be available with an extra $3,000 if relocating with a dependent.

 

However, relocation assistance for capital cities are only available if the destination city has a lower unemployment rate than the capital city you’re relocating from. For example, according to the latest unemployment rate published by Australian Bureau of Statistics, the NSW unemployment rate is 5.4% and Victoria is 6.1%. So, it is likely that an individual moving from Melbourne to Sydney would get the relocation assistance although they would not receive the assistance if they were moving from Sydney to Melbourne.

 

The relocation assistance received can be used for a variety of costs including rent, travel costs, and some employment-related expenses. The assistance can be received either as a reimbursement or the employment services provider can make payments directly to the supplier. Individuals experiencing hardship may also be able to obtain $2,000 up front to help with the cost of relocating. In addition, only one member of a couple may apply for relocation assistance.

 

To apply for the relocation assistance, individuals are encouraged to contact either their local employment services provider or the employment services information line. Evidence that you’ve received an accepted an offer for an eligible job in an eligible location will be required. Furthermore, you must also sign a relocation assistance agreement with an employment services provider and make available any quotes, invoices, and receipts of relocation costs.

 

If after accepting relocation assistance, you leave your job without valid reason, or you don’t commence employment or relocate, penalties may apply. However, in instances where you lose the job through no fault of your own, for example, a redundancy or a business closure, penalties would not apply.

 

Want to apply?

 

If you’re relocating by yourself or with your family for a job, we can help you work out whether you’re eligible for this assistance to reduce the up front costs associated with the move. Remember this assistance is also available for individuals on apprenticeships. Contact us today for expert help and advice.

 

Boosting Super: Low And Middle Income Earners

 

If you’re a low or middle-income earner, you can take advantage of the government super co-contribution scheme to boost your super. The scheme works like this, for eligible individuals, depending on the amount of personal contributions you make to your super account, the government will contribute a maximum of $500 to your super account.

 

For the 2021-22 income year, you are able to get the maximum $500 government co-contribution if you earn less than $41,112 for the financial year and make a personal contribution of $1,000 to your super account (provided you satisfy the other criteria). The $41,112 threshold includes your assessable income, reportable fringe benefits and total reportable super contributions for the year, less any allowable business deductions.

 

Remember, personal contributions do not include the compulsory super contributions that your employer makes on your behalf or contributions made through a salary sacrifice arrangements, and are typically made from your after-tax income.

 

Those individuals that have a total income of more than $41,112 but less than $56,112 for the 2021-22 income year are still able to get a co-contribution, although not at the maximum $500 amount. The entitlement to the co-contribution reduces progressively as income rises with a minimum contribution amount of $20 (if the co-contribution is worked out to be less than $20, the minimum amount of $20 will be paid).

 

In order to be eligible for the scheme, individuals must also satisfy the 10% test, which requires that 10% or more of your income be from either employment-related activities, carrying on a business, or a combination of both. The ATO notes that for this test, your total income is not reduced by allowable business deductions to ensure that self-employed individuals are not disadvantaged if they have low income/profit in any financial year.

 

  1. In addition to the two income tests above, there are also other eligibility criteria including:
  2. being an Australian resident or permanent visa holder (with the exception of New Zealand citizens on a prescribed visa);
  3. being under 71 years of age at the end of the financial year;
  4. have a total super balance less than the general transfer balance cap at the end of 30 June of the previous financial year (($1.6m before 1 July 2021 and $1.7m on or after 1 July 2021);
  5. have not contributed more than the non-concessional contributions cap ($110,000 for 2021-22 income year); and
  6. have not claimed a tax deduction for the personal contribution you have made.

 

Where you meet the eligibility criteria, the government co-contribution is automatically determined by the ATO when you lodge your tax return. In most cases, the amount is paid directly to the super fund to which the personal contributions were made. There are exceptions however, including situations where you’re retired and no longer have a super account, in those instances, the co-contribution will be paid directly to you.

 

If you think you’re eligible for super co-contribution but have not received a payment, you can contact the ATO either via phone or in writing to request and explanation. Where you’re eligible to the co-contribution and it has not been paid within 60 days of receiving all the required information, the ATO will pay interest as a way of compensation.

 

Want to take advantage?

 

If you’re a low or middle income earner and would like to take advantage of the government co-contribution, we can help you work out the optimal amount of personal contribution to boost your super. We can also help if you think you’re eligible and have not received a co-contribution. Contact us today.

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