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Easy Money: Is This The End For Cash-Only Business?

The prediction of Australia becoming a cashless society by 2020 looks closer to becoming a reality with two developments: the government’s crackdown on cash-only businesses and the imminent launch of instant bank transfers. Let’s take a look at what these mean for you.

 

Ahead of the Black Economy Taskforce delivering its final recommendations, the Government continues to scrutinise businesses who deal largely in cash-only transactions.

 

The crackdown on cash is part of the Government’s campaign to create a fairer playing field for businesses in Australia – large and small – to protect workers by ensuring that employers pay superannuation and other benefits, and to recoup $5 billion lost in unpaid tax due to illegal business practices.

 

You can expect a visit from the ATO if your business meets any of the following criteria:

operate and advertise as a “cash only” business;
ATO data matching suggests you don’t take electronic payments;
are part of an industry where cash payments are common;
indicate unrealistic income relative to the assets and lifestyle of the business and owner;
fail to register for GST or failing to lodge activity statements or tax returns;
under-report transactions and income according to third-party data;
fail to meet super or employer obligations;
operate outside the normal small business benchmarks for your industry; and
you are reported to the ATO by the community for potential tax evasion.

Contact us if you would like to know more and to discuss how your business can transition out of a cash-only model.

 

Industries under the spotlight

The ATO has identified the building and construction, hair and beauty and restaurant industries as high risk, meaning they see that is easier for these businesses to hide cash-only transactions.

 

Examples

Here are some examples provided by the ATO based on their previous round of visits to businesses:

 

Failing to lodge and not reporting cash income
A licensed carpenter failed to lodge tax returns for a number of years. The ATO demanded lodgment and when the tax returns were lodged, it was clear that income from cash jobs was not included. An audit for the 2006 to 2013 financial years revealed that the taxpayer had over-claimed GST input tax credits in addition to not declaring cash income. The ATO said the taxpayer’s record keeping was very poor and they couldn’t explain how some materials and vehicles were funded. The audit resulted in the taxpayer owing additional tax and penalties of over $190,000.

 

Business owner’s lifestyle did not match their reported income
A nail salon business with a number of outlets was selected when data matching indicated anomalies. The ATO’s initial investigation confirmed that the owner kept incomplete records and declared income that did not support their lifestyle and assets. The ATO said it uncovered more than $2 million of undeclared income. After imposing penalties for reckless behaviour of over $241,000, the total amount of GST, income tax and penalties payable by the owner was more than $728,000.

 

Poor tracking of cash payments
During an ATO visit to a restaurant, the ATO said it became apparent that the owner needed to improve their record keeping practices as cash was kept in a cardboard shoe box. The ATO’s profiling work showed five merchant IDs, which the taxpayer said belonged to five different restaurants operating under the one entity. All had the same poor record keeping processes in place. The ATO’s analysis identified several bank accounts, and third-party information identified deposits in excess of $300,000 for 2014 and 2015. It identified $1.3 million of understated income for 2014 and $1.5 million for 2015. The ATO calculated cash not deposited by developing a “cash deposit timeline” for each restaurant. It turned out that no cash had been reported to the ATO, and only EFTPOS income had been included in tax returns and activity statements.

 

Benefits of a non-cash business model

We understand that changing a business model requires planning, but there are many benefits to changing to a non-cash model that can help your business to grow, such as:

-tax incentives you might have missed out on, by not accurately declaring your full income;
-happier customers – people expect to be able to pay by card;
-electronic payment and record keeping facilities give greater visibility over the health of your business;
-avoiding law suits and penalties for non-payment of employee entitlements, or allegations of underpayment.

 

You will undoubtedly be able to access more customers if you consider putting your business online.

 

How can I transform my business?

The best place to start the transition is with your record keeping methods. This means recording every sale and purchase accurately in your accounting software. By providing receipts when you make a sale and requesting an invoice every time you make a purchase, you will have a clear audit trail from which to declare all income and expenses. And if you need assistance – we are here to help you plan and provide advice on what you’ll need to do to ensure the best outcomes for your business.

 

One of the most attractive features of cash is its immediacy in terms of making transactions. But there are compelling changes ahead in the non-cash world.

 

Cashless business model incentivesThanks to a billion-dollar infrastructure upgrade of Australia’s payments systems, from January 2018 customers of the “Big Four” banks and 50 smaller institutions will be able to benefit from the arrival of real-time funds transfers between accounts. This means that even when transfers occur between account holders from different institutions, or on weekends, public holidays, or anytime of the day or night, the funds should appear in real time. As a result suppliers and vendors can be paid swiftly and your own customers will be able to extend the same courtesy, meaning that delays to payment will be a thing of the past.

 

Plan your transition

Whatever your circumstances, we can help you plan, provide advice and assist your business to transition to a non-cash model.

Super “Opt Out” Choice For High Earners

If you’re a high income-earner with multiple employers, you may be aware of potential traps with compulsory super contributions that can lead to some hefty and unfair penalty taxes – and until now there’s been little anyone can do to avoid the problem. Fortunately, proposed new laws will give high income-earners the opportunity to take proactive steps to overcome any penalties.

 

Are you a medical professional or company director hired by multiple organisations who make compulsory super guarantee (SG) contributions on your behalf? Or perhaps you’re simply a high-income professional with an extra employment arrangement on the side, like a university teaching gig or consulting arrangement? If you have more than one “employer” for super purposes, you may benefit from changes to how the SG is administered for high income-earners.

 

What’s the issue?

A person’s concessional contributions (CCs) are capped at $25,000 per annum and include:

compulsory SG contributions
any additional salary-sacrifice amounts
any personal contributions made by the member for which they claim a deduction.

 

Unfortunately, a problem arises when an individual has multiple employers and inadvertently breaches their $25,000 CC cap because they receive compulsory contributions from each of these employers.

 

While an employer is only required to make compulsory contributions of 9.5% on the worker’s earnings up to $55,270 per quarter (or $221,080 per financial year), this applies on a per employerbasis. An employer must make contributions up to these thresholds regardless of how many other compulsory contributions the employee receives from other employers.

 

Example: Susan, a doctor, earns $215,000 p.a. from employer A, and $85,000 p.a. from employer B. Both employers must make contributions of 9.5% on all of Susan’s earnings because both salaries are below the $221,080 p.a. ceiling. This means Susan has total CCs of $28,500 ($20,425 + $8,075), and has breached her $25,000 CC cap.

 

If you contribute above the $25,000 cap, you will personally incur penalty tax on the excess amount at your marginal tax rate less a 15% offset, plus interest charges.

 

New opportunity to “opt out”

Fortunately, under proposed new laws before Parliament, affected employees will be able to “opt out” of receiving compulsory contributions from a particular employer by obtaining a certificate from the Commissioner of Taxation. The certificate will name a particular employer and a particular quarter of the financial year, and will exempt that employer from having to make SG contributions.

 

This is welcome news for high income-earners who may be at risk of breaching their CC cap. Here are some key requirements to know:

-You’ll need to apply for a certificate at least 60 days before the beginning of the relevant quarter.
-The Commissioner will only be able to issue you a certificate if you’re likely to have excess CCs if the certificate is not issued. To make this assessment, the Commissioner can rely on evidence such as past tax return data, employer payroll data and information provided in your application.
-You’ll be able to apply for certificates for multiple employers. However, you must always have at least one employer who’s required to make SG contributions for you.
-Once issued, a certificate cannot be varied or revoked.

 

If you choose to take advantage of this opt-out, you’ll be able to negotiate with the exempted employer to receive additional remuneration in lieu of super contributions (and you won’t need to show evidence of this to the Commissioner). The employer will still be allowed to make SG contributions (eg if negotiations for additional salary fail), but having the certificate in place means the employer will not be penalised if they don’t make contributions.

 

Start planning now

The legislation to enable the opt-out is likely to pass this year, creating some opportunities for 2020 planning. If you’re receiving SG contributions from multiple sources, contact us to begin your remuneration planning and to explore whether the opt-out may benefit you.

Top 10 Rules For The CGT Replacement Asset Rollover

When you suffer the loss or destruction of assets through natural disasters or through compulsory acquisition, you most likely will be in a position to receive money or another asset (or both) as compensation. You are also left with a choice to either defer any capital gains liability (CGT) or receive an exemption. We look at the top 10 rules for when this occurs.

 

Urban growth often triggers a correlative expansion of our road networks and related civil works. To accommodate these you might find yourself losing your home or a portion or all of your land through its compulsory acquisition by a government agency. Similarly, natural disasters in the guise of hurricanes, floods and fires can lead to wide-scale destruction of property and personal assets.

 

In both situations you could receive money or another CGT asset (or both) as compensation, leaving you with a choice to:

-defer your liability to pay tax on any capital gain arising on the disposal (ie, rollover); or

-receive a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

If the asset is property and it qualifies as your main residence, then you can ignore any capital gain or loss that results from the compulsory acquisition.

 

Qualifying for CGT rollover can bring a number of tax benefits for small business and individuals, but navigating the intricacies of CGT exemptions and rollover rules can take some work. To help we have compiled a list of the top 10 rules for application of the rollover, but please get in touch with us for advice tailored to your individual circumstances.

 

Top 10 rollover rules
1. The rollover only applies if the taxpayer has made a capital gain on the compulsory acquisition of a post-CGT asset (or its loss or destruction).

 

2. The rollover applies if either money (ie, compensation), or a replacement asset is received for the compulsory acquisition (or its loss or destruction).

 

3. If money is received the taxpayer must incur expenditure in acquiring a “replacement” asset and the expenditure must begin to be incurred no later than one year after the income year in which the compulsory acquisition occurs – being the income year in which the contract for compulsory acquisition is entered into (or within such further time as the Commissioner allows).

 

4. Basic requirements for a replacement asset are:

it cannot be a depreciating asset;
if the compulsorily acquired asset was used, or installed ready for use, in the taxpayer’s business, the replacement asset must also be used for a “reasonable time” after the taxpayer acquires it
if the compulsorily acquired asset was not used, or installed ready for use, in the taxpayer’s business, the taxpayer must use the replacement asset for the “same” or a “similar” purpose as the compulsorily acquired asset immediately before its acquisition – and for a reasonable time after acquiring it.

 

5. If the compulsorily acquired asset was a pre-CGT asset, the replacement asset will also be deemed to be pre-CGT status provided:

the taxpayer does not expend more than 120% of the market value of the original asset (immediately before its disposal) in acquiring a replacement asset or;
if the asset was destroyed by natural disaster, it is reasonable to treat the replacement asset as “substantially the same” as the original asset.

 

6. Despite the application of the rollover, an immediate CGT liability will arise if the compensation received exceeds the expenditure on the replacement asset. The amount of the capital gain in this case will depend on the following:

If the capital gain that would otherwise have arisen from the compulsory acquisition is greater than the “excess” of the compensation over the expenditure incurred on a replacement asset, then a capital gain will arise equal to that “excess”. See Example 1 below.

 

Example 1

John owns an asset that has a cost base of $10,000. The asset is destroyed and he receives $40,000 in compensation. John spends $24,000 in replacing the asset. There will be a “notional” capital gain of $30,000 (ie, $40,000 compensation less $10,000 cost base). This notional capital gain of $30,000 is greater than the “excess” of $16,000 (ie, $40,000 less $24,000). Therefore, John will realise a capital gain of, $16,000, which is the amount of the “excess”. In calculating any future capital gain or loss on the replacement asset, the cost base expenditure incurred on the replacement asset (ie, $24,000) is reduced by the amount by which the notional gain (ie, $30,000) is more than the “excess”(ie, $16,000); so $24,000 is reduced by $14,000 ($30,000 less $16,000), leaving cost base expenditure for the replacement asset of $10,000.

 

If the capital gain that would have arisen from the compulsory acquisition is less than or equal to the “excess” of the compensation received over expenditure on a replacement asset, then the capital gain is not reduced. See Example 2 below.

 

Example 2

Jenny receives $4,000 compensation for damage to an asset. The cost base of the asset is $1,600. Jenny expends $1,000 repairing it. There will be a notional capital gain of $2,400 (ie $4,000 less $1600) and the “excess” will be $3,000 (ie $4,000 less $1,000). As the notional capital gain of $2,400 is less than the “excess” (ie $3,000), the notional capital gain is not reduced and is taxed as the actual capital gain. Therefore, Jenny would have an actual capital gain of $2,400.

7. If the compensation received does not exceed the expenditure incurred on the replacement asset, then no capital gain arises – but the cost base expenditure incurred on the replacement asset or repair is reduced by the amount of the capital gain that would otherwise have arisen but for the rollover.

 

8. If the taxpayer receives a replacement asset instead of money, any capital gain made on the original asset is disregarded. If the original asset was post-CGT, the taxpayer is taken to have acquired the replacement asset for an amount equal to the cost base of the original asset. If the original asset was pre-CGT, the replacement asset is also taken to be pre-CGT.

 

9. If both money and a replacement asset are received each part of the compensation is treated separately, in accordance with the rules for the receipt of money or the receipt of an asset.

 

10. If the compulsorily acquired asset was an “active asset” (ie, used in a business) then the taxpayer would also qualify for the CGT Small Business Concession (SBC) and could choose to apply them instead (with better tax outcomes). This would include the CGT small business rollover. Note, that the advantages in applying the CGT SBC is that the replacement asset does not have to be acquired until two years after the relevant income year and it can be a depreciating asset.

 

If you need help to understand the rules listed above, please talk to us.

Capital Gains Tax And Death: It’s Not The End Of The World

There’s nothing as certain as death and taxes, but tax on death is not so clear. The good news is that when an asset passes to a beneficiary, capital gains tax (CGT) generally does not apply. But down the track when the beneficiary decides to sell that asset, there are many forks in the path.

 

There is enough pain and anguish when someone dies, so fortunately there is, in most cases at least, no duty on assets that form part of the deceased’s estate and are passed to a beneficiary, or their legal personal representative (LPR). But as with life, the rules regarding death and CGT are not meant to be easy, particularly when that asset is a “dwelling”.

This article will explore the CGT consequences for the deceased estate and the beneficiary of:

-the transmission on death, of an asset, specifically a dwelling

-the subsequent sale of that dwelling.

 

CGT on the inheritance of a dwelling

Generally, the law says that there is no CGT liability for the deceased on the transmission of an asset to a beneficiary.

 

The beneficiary is considered to be the new owner of the inherited asset on the day the deceased person died and CGT does not apply to that asset.

 

This applies to all assets, including a dwelling.

The exception is where the beneficiary is a “tax advantaged entity” (TAE), such as a charity, foreign resident or complying superannuation entity. In this case the deceased estate (not the TAE) is liable for any capital gain or loss attached to the asset. This will need to be taken into account in the deceased’s final tax return in the year in which he or she died.

 

CGT on the sale of an inherited dwelling

If the beneficiary subsequently sells the bequeathed asset, this may create a CGT “event”, depending on the status of the property, when it was purchased, when the deceased died and whether the sale qualifies for the CGT “main residence” exemption.

 

CGT liability on the sale will be determined by whether:

-the deceased died before, on or after 20 September 1985 (when CGT was introduced); and

-the dwelling was acquired before, on or after 20 September 1985; and if acquired post-CGT, whether the deceased died before, on or after 20 August 1996.

 

The following table identifies when CGT applies to the sale of an inherited dwelling and the relevant cost base. It refers to these two conditions:

 

Condition 1: Dwelling was sold (note that this means settlement must have occurred) within two years of the person’s death. This exemption applies regardless of whether the beneficiary used the dwelling as their main residence or produced income from it during this period. The two-year period can be extended at the Commissioner’s discretion. New safe harbour rules allow executors and beneficiaries to self-assess this discretion provided a number of conditions are met.

 

Condition 2: From the deceased’s death until the sale, the dwelling was not used to produce income, and was the main residence of one or more of the following:

-the deceased’s spouse;

-an individual who had a right to occupy it under the deceased’s will; or

-the beneficiary.
 

CGT on the sale of an inherited dwelling

Dwelling acquired by deceased (D)                  Date of death                         Subsequent disposal by beneficiary (B)
Pre-CGT (ie before 20 September 1985)                      Pre-CGT                                                    No CGT

Exception: dwelling subject to major capital improvements post-CGT  and used to produce assessable income

 

 

Pre-CGT                                                                            Post-CGT                             No CGT if: Condition 1 or 2 is satisfied
If CGT applies, B’s cost base is the dwelling’s cost base in D’s hands at the date of death

 

 

 

Post-CGT                                                                  Before 20 August 1996                    No CGT if:

 

Condition 2 is satisfied; and D always used dwelling as main residence (MR) and did not use it to produce assessable income

If CGT applies, B’s cost base is the cost base of the dwelling in D’s hands at the date of death

 

On or after                                No CGT if:

21 August 1996

 

Condition 1 or 2 is satisfied; and just before D died dwelling was used as MR and was  not being used to produce assessable income

 

If CGT applies, B’s cost base is the market value of the dwelling at the date of  death

 

In calculating the CGT, the beneficiary or the LPR cannot use any of the deceased’s unapplied net capital losses against the net capital gains.

 

Guidance at hand

If you have inherited a dwelling and are in the dark about the CGT impact of hanging onto it or selling it, we can guide you through the minefield and minimise any tax consequences.

Employees Benefit From New Insolvency Decision

Do you know if the company you work for is a corporate trustee of a trust or a company trading in its own right? Many employees wouldn’t have a clue and until recently, if you were an employee of a corporate trustee and it became insolvent, your claim for employee entitlements wouldn’t have any more weight than all the other unsecured creditors calling for their piece of the liquidated pie. A series of court cases, most recently a decision by the Federal Court, has now changed that in your favour.

 

If you worked for a company and it goes bust, the law gives you priority to be paid your entitlements including wages and superannuation. There is what’s called a priority regime that applies when a company becomes insolvent.

 

Until recently, the priority status enjoyed by employees of a company trading in its own right did not apply to employees of a corporate trustee when it became insolvent. In the latter case, employees would have the same priority as, and have to compete for payment with, the unsecured creditors.

 

Courts say priority regime applies to trusts

A landmark court case in the Full Federal Court has recently decided that employees of an insolvent corporate trading trust should be paid their entitlements subject to the same order of priorities that applied to employees of an insolvent company.

 

This confirms the decision of a Victorian case, decided on appeal earlier this year. In the Victorian trial case, before the decision was successfully appealed, the judge held that the priority regime didn’t apply to trust assets and therefore employees of an insolvent corporate trustee should be denied the priority payment of their unpaid entitlements. This decision would leave the employees on equal pegging with the other unsecured trust creditors, instead of receiving preferential treatment for their employee entitlements.

 

The appeal decision recognises that employees need a leg up the creditors’ ladder when a company goes under and they should not be disadvantaged by working for a company that operates through a trust rather than for a company trading in its own right.

 

There have been many conflicting court cases over the years in this area of employee entitlements in the event of insolvency.

This uncertainty has for now been resolved by the Federal Court, confirming the decision in the Victorian appeal court that there is a level playing field for employees: whether they work for a corporate trustee of a trust or a company trading in its own right, they are entitled to the same priority of payment.

 

Help in a complex area

If you work for a business that’s becoming or is insolvent, and you need help to get your fair share of the proceeds, we can provide the experienced advice you need.

Valuing Your SMSF’s Assets: Know The Requirements

Recording the market value of your SMSF’s assets is an important trustee responsibility. But how do you prove “market value”, how often must you value assets and when do you need to hire an expert valuer? Fortunately, with some help from the ATO’s guidelines and your professional adviser, asset valuation needn’t be a headache for trustees.

 

To keep your SMSF’s auditor and the ATO happy, it’s essential to take asset valuation seriously. By law, SMSFs must record all of their assets at “market value” – an important requirement that allows funds to accurately report the value of members’ benefits. Additionally, there are a number of SMSF investment rules that specifically require a “market value” to be assessed, so failing to correctly value assets could land SMSF trustees in hot water.

 

For example, SMSFs are generally prohibited from acquiring assets from related parties – with some notable exceptions such as “business real property” (broadly, 100% commercial property) and listed shares. However, these exceptions only apply if the assets in question are acquired at market value. Knowing the market value of fund assets is also essential to complying with the in-house asset rules and certain laws covering the sale of collectables and personal use assets.

 

What is market value?

Under superannuation law, “market value” is defined as the amount that a willing buyer would reasonably be expected to pay in a hypothetical scenario where all of the following conditions are met:

-the buyer and seller deal with each other at arm’s length;
-the sale occurs after proper marketing of the asset; and
-the buyer and the seller act “knowledgeably and prudentially”.

 

How does this work in practice? In an audit, your SMSF’s auditor (and ultimately the ATO) will expect you to be able to provide evidence supporting your valuation. This should be based on “objective and supportable” data, and should demonstrate a “fair and reasonable” valuation method.

 

The ATO says a method is fair and reasonable if it is a good faith, rational process that takes into account all relevant factors and can be explained to a third party.

 

In general, it’s not compulsory to use a qualified external valuer (that is, someone who holds formal valuation qualifications or has specific skills or experience in valuing certain assets). It’s the methodology and supporting evidence that makes a valuation sound, not the identity of the person who performs the valuation. However, there are some situations where using a qualified valuer is compulsory or recommended:

 

-If your SMSF holds collectables or personal use assets (eg artwork), you must by law use a valuation from a qualified independent valuer before disposing of such assets to related parties.

-The ATO also recommends that you consider using a qualified independent valuer for any asset that represents a large proportion of your fund’s total value, or if the valuation is likely to be complex or difficult given the nature of the asset.

 

Specific assets

As noted above there are specific requirements for collectables, and the ATO has also developed guidelines for other classes of assets.

The ATO says real estate doesn’t need to be valued each year, unless there has been a significant event since the last valuation that may affect the value. This could include market volatility or changes to the property.

Listed shares and managed units are easy to value, and should therefore be valued at the end of each financial year. Unlisted shares and units (eg investments in private companies or trusts) are more difficult to value than listed assets and require consideration of a range of factors. Trustees should seek professional assistance with valuing unlisted investments.

 

Need help getting it right?

For some assets, determining market value can be a complex process that requires professional input. Don’t go it alone – get the right advice and ensure your valuations stand up to ATO scrutiny. Contact our office to discuss the ATO guidelines in more detail or to begin assessing your SMSF’s valuation needs.

ATO Clamping Down On Clothing Deductions

 

Planning to claim some clothing or laundry expenses this tax time? These deductions are on the ATO’s watch list again this year, and there are many traps for the unwary. For example, did you know that non-branded work uniforms are not deductible? Find out what categories are allowed and what records you need to keep.

 

Taxpayers who claim deductions for work-related clothing and laundry expenses may find themselves under the ATO’s microscope this tax time. Even if your claim is relatively small, penalties can apply for making incorrect claims.

 

What clothing is eligible?

If your work-related clothing falls into one of the following three categories, you can claim the purchase cost and the costs of laundering that clothing:

1. Uniforms. To qualify, your uniform must be both unique (designed only for your employer) and distinctive (with your employer’s logo attached, and it must not be available to the public). This means you can’t make claims for generic, non-branded uniforms. And if your uniform is compulsory, you may also be able to claim shoes, socks and stockings provided they’re an essential part of the uniform and their characteristics (such the required colour, style and type) are outlined in your employer’s uniform policy.

Non-compulsory uniforms have much tighter rules, so check with your adviser before claiming.

2. Occupation-specific clothing. This is clothing that is unique to your occupation, is not “everyday” in nature and allows the public to identify your occupation. Examples include a chef’s checked trousers or a barrister’s robes. In contrast, a bartender’s black trousers or a swimming instructor’s swimwear wouldn’t be allowable.

3. Protective clothing. To be eligible, the clothing must offer a sufficient level of protection against injury or illness in your work setting. Typical examples include high-visibility clothing, steel-capped boots, non-slip shoes, smocks/aprons and fire-resistant clothing.

 

The ATO is particularly concerned that many taxpayers incorrectly claim for ordinary clothing, like suits or black work trousers. It says the following are not valid reasons for deducting clothing:

 

-Your employer requires you to wear a certain colour (eg trousers must be black).
-You bought formal clothes to wear to work functions such as awards nights where you represented your employer.
-You bought clothes just to wear to work.

 

Record-keeping

 

For total clothing and laundry claims of up to $150, you aren’t required to keep detailed records. However, the ATO stresses that taxpayers aren’t “automatically” entitled to a $150 deduction – you must have actually incurred the expenses you claim. The ATO can still ask you to substantiate your claim, and can contact your employer to verify its clothing requirements.

 

If your total claim is under $150, you can calculate your laundry claim using a simple rate of $1 per load where all the clothing is work-related, and 50 cents per load where other clothes are part of the load.

If your total claim for clothing and laundry exceeds $150 (and your total claim for work-related expenses exceeds $300), you’ll need to keep receipts.

 

To prove your laundry costs, you’ll need to keep a diary for a representative one-month period. Your adviser can help you ensure you have the correct records in place.

 

Reimbursements and allowances

To claim a deduction, you must have incurred the expense yourself. So, if your employer reimburses you for an expense, you can’t deduct that amount.

On the other hand, if you receive a clothing allowance you must declare that allowance in your tax return. You can then deduct your costs for eligible clothing, but only the amount you actually spent.

 

Take the stress out of tax time

Talk to us for expert assistance with all of your work-related expense claims. We’ll help you claim everything you’re entitled to, while keeping the ATO happy.

Hiring Independent Contractors: Do You Need To Pay Super?

Your business may be required to make superannuation contributions for some independent contractors, even if they have an Australian Business Number (ABN). Contractors hired under a contract “principally for labour” are captured – but what does that mean? Find out what test the ATO applies and check whether your business has its super obligations covered.

 

Hiring independent contractors can be a flexible staffing solution for many businesses, not only to meet fluctuating workloads but also to help fill gaps with specific skills. But did you know that some workers who are genuinely independent contractors are still entitled to compulsory superannuation contributions?

 

If a worker is not an employee in the general sense but is hired under “a contract that is wholly or principally for the labour of the person”, the worker is deemed an employee for super purposes, even if they have an ABN.

 

This means the hirer must make superannuation guarantee (SG) contributions of 9.5% (in relation to the part of the contract that is for labour). Hirers can’t meet this obligation simply by paying the worker an additional 9.5% – they must actually make contributions to the worker’s superannuation fund.

 

So what sort of contracts are captured? The ATO’s view is that a contract is “wholly or principally for labour” when three key requirements are all met.

 

First, the person must be paid “mainly” for their labour (if not entirely), and the ATO interprets this as “more than half the dollar value” of the contract being for labour. Labour includes not only physical work, but also mental and artistic effort.

 

The second requirement is that the person is paid for their labour, not to achieve a result. Being paid by the hour suggests the person is paid for their labour. In contrast, when a person is paid a fixed sum for a specific output, this suggests they’re paid for a result.

 

Third, the person must personally perform the work and must not be able to delegate to someone else. The ATO notes that many contractors are often hired based on their personal skills, qualifications and experience, so many contractors will typically be unable to delegate their work.

 

What types of work can this affect?

All kinds of workers can be captured. Typical examples might include freelancers such as programmers, editors, graphic designers or administrative support workers who are paid by the hour (not for a specific result) and can’t delegate the work to someone else. Similarly, labourers and other contractors performing physical work could be captured.

 

The rule can also extend to individuals in sophisticated business structuring arrangements. In a recent decision (Moffet v Dental Corporation Pty Ltd), the Federal Court found that a dentist who had sold his dental practice to a third party and continued to work as a dentist for that practice was an independent contractor, but had been working under a contract “wholly or principally for labour”. The new dental practice owners were therefore required to make minimum SG contributions for him.

 

The dentist was earning a percentage commission of the fees collected from patients, but was also contractually required to pay a “shortfall” amount to the dental practice in the event the practice’s annual cash flow fell below a set target – a risk not usually born by a worker in an employment-like arrangement. This case illustrates how even individuals like former business owners who agree to perform services under complex contractual arrangements can potentially be entitled to SG contributions.

 

Not sure about your contractors?

Don’t wait for the ATO to come knocking. Contact us today for assistance in reviewing your contractor arrangements and ensure your business is protected.

“Ipso Facto” Escape Hatch Prohibited Under Insolvency Reforms

There was a time when, if a company got into financial difficulty the contracting party could terminate the contract, even if the company had been meeting all its obligations. The “ipso facto” clause was the contract’s device that allowed this termination to take place. A Latin term that means, rather unhelpfully, “by the fact itself”, the ipso facto clause acted like a trip switch in a fuse box that the contractor could flick at the occurrence of an insolvency event, pulling the plug on the contract and bringing an end to the business trading. Not so now.

 

As part of the sweeping insolvency reforms that came into operation on 1 July 2018, new legislation has prohibited ipso facto clauses that once provided for a contract to self-destruct in the event of insolvency.

 

An insolvency event can include voluntary administration, receivership and schemes of arrangement. These are all processes where the company is trying to work its way out of financial difficulty.

 

The activation of the clauses has been particularly prevalent in the construction industry where parties seek to withdraw the obligation to continue providing their services in what they consider to be a risky business environment.

 

Ipso facto and safe harbour share common purpose

The new ipso facto provisions and the safe harbour reforms (discussed in previous articles) share a common purpose – to discourage directors and contracting parties from bailing down the escape hatch, and to get them to keep trading.

 

This essence of the ipso facto reform, that only applies to contracts, agreements or arrangements entered into after 1 July 2018, is to provide for a “stay” against the enforcement of those ipso facto clauses.

 

In other words, any action taken by a party relying on that ipso facto clause to weasel its way out of a commitment to stay the distance of the contract, would be suspended to allow the company to continue trading for the benefit of its creditors and employees, until the administration ends or the company is wound up.

 

A contracting party can apply to the court for an order that a stay on enforcement rights be lifted if it is appropriate in the interests of justice or, in the case of a scheme of arrangement, if the scheme was not for the purpose of the company being wound up in insolvency.

 

The very positive side of the change for creditors and employees is that the company experiencing financial difficulty can continue to trade while it still meets its obligations under the contract – without the other party pulling the contractual rug from under its feet.

 

Help at a time of change

With all the changes taking place in insolvency, we can guide you through the opportunities provided by the complex reforms.

Moving Overseas? Three Options For Your SMSF

Taking an extended job posting overseas? If you currently have an SMSF, you’ll need a strategy for managing your super to ensure your fund doesn’t breach any residency rules. Know your options and plan before you go.

 

When SMSF trustees travel overseas for an extended period, there’s a risk their fund’s “central management and control” (CMC) will be considered to move outside Australia. This causes the SMSF to become non-resident, resulting in very hefty penalty taxes. It’s essential to plan for this before departing overseas.

 

The first step is to consider whether your absence will be significant enough to create a CMC risk. A temporaryabsence not exceeding two years isn’t a problem, but whether the ATO considers your absence temporary or permanent will depend on your particular case. Your adviser can take you through the ATO’s guidelines. If you think you’ll have a CMC problem, the next step is to consider possible solutions.

 

Option 1: Appoint an attorney

Usually, every SMSF member must be a trustee (or director of its corporate trustee). However, an SMSF member travelling overseas can avoid CMC problems by appointing a trusted Australian-based person to act as trustee (or director) for them, provided that person holds the member’s enduring power of attorney (EPOA).

 

Sounds simple? Just a word of caution: the SMSF member must resign as a trustee (or director) and be prepared to genuinely hand over control to their attorney.

 

If the member continues to effectively act like a trustee while overseas – for example, by sending significant instructions to their attorney or being involved in strategic decision-making – there’s a risk the CMC of the fund may really be outside Australia.

 

You’ll also need to comply with the separate “active member” test, which broadly requires that while the SMSF is receiving any contributions, at least 50% of the fund’s total asset value attributable to actively contributing members is attributable to resident contributing members. To illustrate this, in a Mum-and-Dad SMSF where both spouses are overseas, a single contribution from either spouse could cause the fund to fail this test and expose the fund to penalties. In other words, you may need to stop SMSF contributions entirely while overseas. Consider making any contributions into a separate public offer fund.

 

Option 2: Wind up

Not prepared to give control of your super to an acquaintance? You might consider rolling your super over to a public offer fund and winding up the SMSF. This option completely removes any CMC stress (as control lies with the professional Australian trustee), and you can make contributions into the large fund without worrying about the “active member” test.

However, you’ll need to sell or transfer out the SMSF’s assets first – real estate, shares and other investments – and this may trigger capital gains tax (CGT) liabilities. These asset disposals will be partly or even fully exempt from CGT if the fund is paying retirement phase pensions, so talk to your adviser about your SMSF’s expected CGT bill if you choose this wind-up option.

 

Option 3: Convert to a small APRA fund

Another option is converting the SMSF into a “small APRA fund” (SAF). Like SMSFs, SAFs have a maximum of four members but instead of being managed by the members they are run by a professional licensed trustee. This takes care of any CMC worries, and on conversion the fund won’t incur any CGT liabilities because the assets remain in the fund – only the trustee structure changes.

The downside is that an SAF may be expensive because you’ll be paying a professional trustee to run your fund. You’ll also need to comply with the “active member test” so, as in Option 1, you may need to stop all contributions into the SAF.

 

Let’s talk

If you’re moving overseas for a while, contact us to start your SMSF planning now. We can help you explore your options and implement a strategy to protect your superannuation against residency problems.

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