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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.

Independent ATO Review For Small Businesses

 

The ATO has started a 12-month pilot program for independent ATO review for small business disputes in response to the recent negative media attention it has received. While the pilot only encompasses income tax audits in two States (Victoria and South Australia), the ATO will have the option to expand the program to all areas of tax and businesses depending on the pilot’s success.

 

In response to the media attention around ATO’s alleged harsh treatment of small businesses, the ATO has responded by extending its independent review function regarding tax disputes to certain small businesses via a pilot program from 1 July 2018. Prior to the pilot program, the opportunity for such a review only applied to companies with an annual review of more than $250m.

 

The idea of the pilot program was first floated by the Commissioner of Taxation at a Senate Estimates hearing as a means of restoring confidence in the system and the ATO.

 

“With the intention over time that businesses, regardless of size, have access and rights to a fit-for-purpose review prior to finalisation of audit”.

 

With that in mind, from 1 July 2018, the ATO has started a 12-month pilot limited to small business disputes involving income tax audits in Victoria and South Australia. Small businesses in other states and territories will have to wait for the outcome of the pilot to see whether the system will be implemented nationally.

 

The pilot only concerns disputes involving income tax audits and will not consider GST, superannuation, FBT, fraud and evasion findings, and penalties and interest. It will also not apply to small businesses that do not complete a consent to extend amendment period to allow the review to take place, or in cases where the relevant notice of assessment or amended assessment has already been issued.

 

Eligible small businesses with an audit in progress in the participating States will be contacted directly by their case officer and offered the opportunity to participate in the pilot. An offer of independent review will also be included in any audit finalisation letter issued if the small business is eligible. If your small business would like to take up the offer of an independent review, you will need to email the ATO within 30 days of the date of the audit finalisation letter, and clearly outline the specific issues you dispute from the audit decision.

 

Once your request has been submitted, an officer from the Review and Dispute Resolution area will contact you to discuss your request and other options available for the issues raised. Should you decide to proceed with the independent review, it will be conducted by an officer from the Review and Dispute Resolution area that has not had any involvement in your audit. They will consider the documents setting out both parties’ positions and schedule a case conference with the audit officer and yourself within a month of receiving your review request.

 

The conference will allow all parties to assist the reviewer in understanding the facts and contentions. The reviewer will then consider the positions of each party and prepare recommendations as to the outcome. The outcome will be communicated to both the taxpayer and the audit officer, and the audit team will finalise the audit according to the independent reviewer’s recommendations.

 

Want to know more?

If you run an eligible small business and would like to participate in the pilot, we can help you prepare an outline of specific issues disputed from the audit decision and guide you through the process. We can also help you review the other options available to you to see whether they may suit your business better. Contact us today.

Is Online Shopping About To Get More Expensive

Buying online could soon get more expensive. Previously, purchases under the $1,000 low value threshold were exempt from GST. However, years of pressure from vocal Australian retailers has spurred the Government into passing legislation to collect GST on all purchases from 1 July 2018.

 

According to research conducted by the National Australia Bank, in 2017, Australians spent a total of $22.7 billion online of which about only one fifth was with foreign online retailers. What Australians spent with foreign retailers equated to around 1.5 per cent of retail sales by “bricks and mortar” retailers, which in the grand scheme of things is not all that significant. The recent legislation has been passed by the Government as a way to curb the exponential growth of foreign online retailers and to stop GST leakage.

 

The Government has opted for a vendor collection model, which means that foreign online retailers, such as Amazon and eBay, will be liable for the GST on goods sold to an Australian consumer.

 

Foreign online retailers are only required to collect GST where they make sales to Australians of more than $75,000 per year. This exempts small sellers of goods to Australia; however, most large foreign online retailers will easily meet the threshold.

 

What does this change mean for Australian consumers?

Some foreign vendors may choose to absorb the cost of the GST rather than passing it on to the consumer, but they will still need to include the GST component in the price of their goods and periodically remit this to the Australian Tax Office (ATO).

 

Some other online retailers may choose to pass on the GST component to the Australian consumer, which means the overall price of the product that you buy, could increase.

 

At this stage the large online retailers have not given any indications as to what they will do. It is also not known how the Government will enforce this largely voluntary payment model on retailers situated in foreign jurisdictions.

 

One thing is certain, if you’ve been putting off an online purchase under $1,000, it would probably be wise to get in now.

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.

 

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