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Payroll Reporting: A Touchy Subject

If you are an employer the way you report payments, such as salaries and wages, pay as you go (PAYG) withholding and superannuation is changing from next year. The ATO will need you to report these payments directly from your payroll solution in real-time, at the same time as you pay your employees. This is known as single touch payroll (STP) and is intended to simplify business reporting obligations. It comes into effect in 2018 or 2019, depending on the size of your business. Are you ready for this change and how will it affect you? We can help you to prepare for the move to STP.

 

The introduction of single touch payroll (STP) is in line with the Government’s “digitisation agenda”, to make reporting more streamlined, but many small businesses will feel an extra compliance burden. Those who work in remote areas of Australia may be at a disadvantage as Single Touch Payroll reporting will require a strong internet connection.

 

In a straw poll conducted by Accountants Daily (between 5 September and 14 October), almost 90 per cent of accountants and advisers said that their clients were not ready for the shift to single touch payroll.

 

The Institute of Public Accountants (IPA) chief executive officer, Andrew Conway has said: “While initially STP delivers little benefit to small business, we acknowledge that other benefits exist such as transparency over superannuation guarantee payments.”

 

For small and micro businesses – those who employ less than five people – implementing STP by the deadline will take considerable incentive and support. The IPA supports the notion of a phased and targeted incentive approach as proposed by the Government, along with the consideration of a partial offset of costs. However, Mr Conway said the IPA would “like much more detail” to ensure small businesses are not impacted adversely by the implementation of STP. We will keep you posted on updates to this area.

 

How will this change affect you as an employer?

The change to STP means that employers won’t need to complete payment summaries at the end of the year as these will have been reported in real time throughout the year. If you have a payroll solution (software that you use in order to pay employees), you will need to update this or make sure it is updated by your service provider. If you do not have a payroll solution, you can speak to us about how to find the best solution for your business. We may be able to report using STP on your behalf. The first 12 months of STP will be considered to be a transition period, during which time you could be exempt from an administrative penalty for failing to report on time. There are other exemptions, including if you operate in an area with an unreliable internet connection or you are classed as a substantial employer for only a short period during the year (for example, if your employees are seasonal).

 

How about if you run a small business?

Mr Conway said the IPA’s concern is for 70,000 small businesses that will struggle to implement STP without help and support. If you do not use digital software for your payroll you may also need our help to adopt new technology.

 

What does it mean for employees?

With the move to STP, employees will be able to log on and make sure they are being paid the correct amount for their superannuation contributions so “this level of transparency is most welcome”.

 

What is the timeframe?

Single touch payroll will be compulsory for employers (including those in a wholly-owned group) with more than 20 employees from 1 July 2018. If your business has less than 19 employees, you have a bit longer, but you will need to get on board by 1 July 2019, subject to legislation. If you are unsure about whether you are a “substantial employer”, the advice is to do a headcount of all of your employees who are on your payroll on 1 April 2018; a total headcount includes all full-time, part-time, casual employees, those based overseas, absent employees and seasonal employees, not just your full-time equivalent (FTEs).

 

Want to find out more?

You may not feel ready to meet your compliance needs in relation to STP. You could qualify for a deferral (due to circumstances beyond your control) and you will need to make a request for this. Contact us to discuss the changes to payroll and what you need to do to make the transition seamless.

Is Insurance Always Super?

Taking out insurance is all about minimising financial risk, but is having insurance with your super compulsory, or can you make a choice? We look at what basic cover might include and some of the pros and cons of having insurance through super.

 

Many super funds offer basic insurance to you as a benefit of being a member. It is often difficult enough to decide which super fund to join, but understanding what insurance cover you need, and what you don’t need, adds yet another layer of complexity.

 

It is a good idea to find out more about how you are covered and what that cover includes.

 

Depending upon your individual circumstances, you may not need the default level of insurance you are given automatically within your super fund, or you may need more.

 

For instance, if you are in your early twenties and single, your insurance needs will probably be less than someone who is 45 and has a family.

 

Paying for insurance through super will reduce your super balance though, as premiums are deducted from your fund at source. The Insurance Superannuation Working Group reported recently that paying for unnecessary insurance premiums is eroding the savings of younger members “to the amount of up to $9,000 in some cases”. As a result, one particular super fund is offering ‘opt-in’ insurance to those under 25, and others may follow.

 

What type of insurance is on offer within super?

Insurance within super can be broken into three types of cover:

Income protection (IP) insurance – this cover protects you if you are temporarily unable to work due to short-term illness or injury.
Total and permanent disability (TPD) insurance – this cover will protect you if you suffer serious illness or disability and as a result are not able to work again.
Life insurance (or death cover) – will protect your family/beneficiaries if you die in service; payment can be paid gradually over time or via a lump sum.

 

Benefits of insurance through super

-Insurance premiums through super may be less than those outside. Super funds can get a discount on premiums due representing a number of people, under a ‘group’ policy and this discount will be passed on to you.

-Your insurance premiums within super will come out automatically without you having to manage the process.

-You may not require a health check before you are accepted for insurance within super.

-You should have a choice about the amount for which you are covered.

 

How about the disadvantages?

-You may be paying for insurance that you just don’t need.
-Paying insurance will reduce your super balance.
-The cover may be limited, eg minimum life insurance cover.
-You may not be able to move your insurance cover if you change your super fund or your employer’s contributions stop.
-Life insurance through super ends at retirement age (usually 65 or 70) and then you will need cover outside of super.

 

Who are your beneficiaries?

Should the unthinkable happen and those close to you need to make a claim, insurance that is paid out to dependants is tax free, whereas any pay-outs to non-dependants are subject to tax. If you do have life insurance and other cover, make sure you are clear to nominate your beneficiaries, those you most wish to benefit if you die in service.

 

What happens if you decide to consolidate or switch super funds?

If you are thinking of consolidating more than one super fund, or indeed switching funds, do check what this might mean in terms of your insurance cover. It might be possible for you to transfer the cover, but you need to know this first. Your situation may be more complicated if you are over the age of 60 or if you are suffering from a medical condition.

 

Opt-in life insurance?

It may be possible to avoid paying life insurance in super altogether in future, as the new approach of funds offering insurance as an opt-in choice could become more widespread. However, if you take this route your decision needs to be weighed up carefully.

 

Want to understand insurance options better?

Speak to us about your individual circumstances, what insurance you already have, and if it this is the right amount of cover for you. It is important that you review the insurance you have throughout your life, too, as your circumstances change.

Taxable SMSF Assets Double: Is Your Fund Affected?

New research has shown the transfer balance cap and reduction of tax concessions for transition to retirement pensions have achieved their policy outcome and made more SMSF assets taxable. This may be considered bad news for the SMSF sector, however, one ray of sunshine to emerge from the research is the policies’ unintentional outcome of improving gender imbalance in SMSF assets and balances. Find out whether your SMSF has been affected and how strategies could be implemented minimise the impact.

 

It’s been a little over a year since the dual changes of the pension transfer balance cap and the reduction of tax concessions for transition to retirement pensions were implemented by the government. Recent research has indicated that these changes has achieved their policy outcome by making almost 25% of previously tax-free SMSF assets lose their status and become taxable.

 

To recap, a pension transfer balance cap of $1.6m applied from 1 July 2017 to limit the total amount of accumulated superannuation that can be transferred to the retirement phase, where the earnings on assets are tax-exempt. The transfer balance cap is indexed but adjustments are unlikely to occur until at least 2023-24.

 

The ATO uses the concept of a transfer balance account to track each person’s net pension amounts against their transfer balance cap. Where an individual’s transfer balance accounts exceed their transfer balance cap, the ATO will issue a determination requiring the excess amount to be removed from retirement phase.

 

In addition, these excess transfer balance amounts are subject to tax, initially at 15% but increasing to 30% for breaches in subsequent years.

 

Similarly, the tax exemption on earnings for pension assets supporting Transition to Retirement Income Streams (TRISs), also known as transition to retirement pensions (TTRs) was removed from 1 July 2017. From that date, earnings from assets supporting TRISs were taxed at 15% instead of 0%. TRISs have traditionally been used by individuals who have reached their preservation age but do not want to retire.

 

According to recent research, at June 2018, one year after the sweeping superannuation changes came in, SMSF asset value in accumulation phase was approximately $422bn. This was a 90% increase from March 2017 (before the changes) when asset value in accumulation was around $222bn.

 

Based on simple modelling (not taking into account of contributions tax, deductible expenses, and rebates), assuming a modest return of 5% on assets for the 2018 income year, this increase of SMSF asset value in accumulation phase would result in $3.2bn worth of tax on SMSF earnings. This equates to a $1.5bn increase from the 2017 year.

 

However, it’s not all doom and gloom for the SMSF sector after the changes, one ray of sunshine in the research is that the changes have led to new strategies being implemented which significantly improved gender imbalance in SMSF assets and balances. Two of the most notable strategies used include:

-contributions splitting which involve a member of an accumulation fund splitting superannuation contributions with his or her spouse to equalise their total superannuation balances to counter the $1.6m transfer balance cap.
-recontributions strategy which involve withdrawal and recontributions to a spouse’s superannuation account to equalise total superannuation balances up to $1.6m each (subject to the non-concessional contributions limits).

 

Are you affected?

Is your fund affected by this? Talk to us today, we may have a strategy to help you reduce the taxable proportion of your SMSF assets. Alternatively, if you’re thinking of commencing a TRIS we can help you navigate the tricky laws around this area and make sure you get the maximum benefit from your hard-earned superannuation.

Got Clearance To Sell Your Home?

 

Did you know that if you’re selling your home you may need a capital gains withholding clearance certificate from the ATO? If you don’t, you may find a chunk of the sales proceeds from your home going to the tax man. The online process to obtain the certificate is quick and simple. Make sure you don’t get stung and get the certificate early.

 

In the market to sell your house? Before you call in the real estate agents and home stylists, you probably know that you’ll need to have a contract of sale handy. Did you know that you may also need to get a capital gains withholding clearance certificate from the ATO? This certificate allows ATO to identify whether withholding is required from the sale of Australian property and applies to any property where the contract price is $750,000 or above.

 

In the current market conditions, the $750,000 threshold means the need to obtain the clearance certificate would apply to the majority of real estate sales in capital cities and some larger regional centres around Australia. If you’re an Australian resident selling your home or investment property, applying for a certificate means that the purchaser will not have to withhold 12.5% of the purchase price. The online application process with the ATO is simple and requires only a few personal details, such as name, DOB, address, and TFN, in the case of an individual applicant.

 

For company applicants, name, TFN and ABN information are usually required. For trusts and superannuation funds, if the entity that has legal title to the asset is the trustee (in its capacity as either a company or an individual), then the trustee should apply for the clearance certificate using their own TFN or ABN (ACN can also be included as an attachment to the application).

 

It should be noted that even though the clearance certificate does not have to be provided to the purchaser until on or before the date of settlement (to ensure no withholding occurs), the online form should be lodged as soon as possible as it can take up to 14 working days to process.

 

If you’re a foreign resident and you’re selling a property in Australia, you do not need to complete a capital gains withholding clearance certificate as it doesn’t apply to you and you will be subject to the 12.5% withholding. However, you can apply to the ATO for a variation of the withholding rate in certain circumstances or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.

 

Just signed a contract to purchase a property for over $750,000? You should check with your conveyancer or lawyer that the vendor has provided the capital gains withholding clearance certificate or a declaration specifying that withholding isn’t required before settlement. Otherwise you must withhold 12.5% of the contract price of the property and remit the amount to the ATO upon settlement of the property.

 

Confused?

If you are selling your property, we can help you obtain your clearance certificate as well as outline any CGT consequences of such a sale and whether any exemptions are available. We can also help you determine whether you are a foreign resident if you’re unsure. Before you embark on perhaps one of the biggest financial decisions of your life contact us to ensure everything is as safe as houses.

Beware Of Clothing Deductions This Tax Time

Beware of work-related clothing and laundry expense claims this tax time, the ATO is cracking down on individuals making unsubstantiated and exaggerated claims. It has reminded taxpayers that only uniform, protective or occupation-specific clothing that you are required to wear to earn your income can be claimed as work-related clothing. In addition, laundry expenses can only be claimed in relation to the reasonable laundering (washing, drying and ironing) of work-related clothing and not normal clothing.

 

Have you previously claimed work-related clothing expenses and laundry expenses in your tax return? You should beware this tax time because the ATO is cracking down on clothing and laundry expenses. According to the ATO, clothing claims went up nearly 20% over the last 5 years and last year around 6 million people claimed expenses totalling nearly $1.8bn. In addition, around a quarter of all clothing and laundry claims were exactly $150, which is the threshold that requires taxpayers to keep detailed records.

 

Assistant Commissioner Kath Anderson said: “[we] are concerned that some taxpayers think they are entitled to claim $150 as a ‘standard deduction’ or ‘safe amount’, even if they don’t meet the clothing and laundry requirements…just to be clear, the $150 limit is there to reduce the record-keeping burden, but it is not an automatic entitlement for everyone”.

 

So what can you claim under work-related clothing and laundry expenses? First of all, work-related clothing must be for uniform, protective or occupation-specific clothing that you are required to wear to earn your income, and you must be able to show that you have spent the money. Normal clothing such as suits and dresses cannot be claimed as work-related clothing. This is the case even if you have been told by your boss to wear a certain colour (ie white shirt and/or black pants), or items from the latest fashion clothing line, or if you bought the item specifically for work and do not wear it anywhere else.

 

If you’re claiming expenses for laundry, you should note that you can only claim laundry expenses for work-related clothing (ie uniform, protective, or occupational specific clothing). Again, normal clothing does not count. To calculate the laundry expense (including washing, drying and ironing), the ATO uses the figure of $1 per load if the load is made up only of work-related clothing, and 50c per load if you include other laundry items. If you claim laundry expenses for work-related clothing, you may be required to show how often you wore the clothing including evidence of number of shifts and weeks worked per year.

 

To assist in weeding out dodgy work-related clothing expenses and laundry expenses this tax time, the ATO will be using sophisticated analytics on every tax return to identify unusual claims. This includes comparing taxpayers to others in similar occupations earning similar income. If a “red flag” is raised by the analytics, the ATO will investigate the amounts claimed, which may be as simple as checking whether you are required to wear uniforms, protective clothing, or occupation specific clothing with your employer. The ATO warns those taxpayers who are unable to substantiate their claims should expect to have them refused, and may be penalised for failing to take reasonable care.

 

Want to find out more?

Are you required to wear work-related clothing and not sure how to calculate a claim? Or maybe you have laundry expenses for work-related clothing and are unsure what the reasonable amount to claim is? We can help you navigate the treacherous waters this tax time.

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.

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.

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