Source: http://m.switzer.com.au/the-experts/joe-kaleb-tax-expert/
Timestamp: 2019-04-24 21:55:58
Document Index: 171536260

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Business & Tax Expert
+ About Joe Kaleb
About Joe Kaleb
Joe Kaleb has a Master of Tax from the University of Sydney, and is a Chartered Accountant & registered tax agent with over 20 years experience in public practice. Joe and his team of dedicated and experienced professionals provide a comprehensive range of income tax, advisory, audit, business and succession planning, profit & cash flow forecasting, and insolvency services to Australian and foreign businesses, professionals, investors and high net worth individuals. The firm also specialises in the establishment and on-going compliance requirements for self managed superannuation funds. Joe is chief executive of the Australianbiz website which provides practical tax and business articles, KPI, budgeting and finance calculators, templates, business insurance, commercial, factoring, residential, car & equipment finance, and other tools to assist business owners and financial decision makers to better manage their business and income tax obligations.
www.australianbiz.com.au
Strategies for managing the 2% debt levy
One of the headline items in the 2014 Federal Budget which is now law is the Temporary Budget Repair Levy (i.e. the 2 per cent Debt Levy). This is the tax we get when they don’t want to call it a tax.
Taxpayers need to consider how the new levy works and how they can avoid paying it or at least reduce the amount they pay.
The levy will apply for three years from 1 July 2014, for the 2015, 2016 and 2017 tax years, and it applies to all individuals with a taxable income in excess of $180,000. The levy will be 2 per cent of the excess, so for example someone with a taxable income of $300,000 for the 2015 tax year will pay a levy of $2,400 (i.e. ($300,000 - $180,000) x 2 per cent).
It is important to note that the debt levy is based simply on “taxable income”, unlike many other income-tested taxes and rebates in recent years that have applied the concept of adjusted taxable income to add back the effect of salary packaging superannuation contributions and fringe benefits. Using just taxable income has the advantage that, similar to the Medicare levy, the debt levy will be easy for the ATO to calculate and collect as part of an individual’s income tax assessment each year.
Several other items in the tax system that depend on the top personal tax rate will also be amended to head off any obvious arbitrage opportunities. For example, the FBT rate will become 49 per cent from 1 April 2015, so that from that date there will once again be no advantage in salary packaging fringe benefits (other than those with specific concessions in the FBT legislation) as compared to paying expenses from after-tax salary.
However there will be a nine month window of opportunity from 1 July 2014 to 31 March 2015 where a 2 per cent differential does exist, and some short-term salary packaging may be worth considering.
Matthew is an executive on a gross package of $400,000 who chooses to salary package private expenditure (e.g. mortgage payments, private school fees, credit card bills etc) totalling $100,000 during this nine month period. Allowing for the FBT payable on the benefits, Matthew will have a net cash saving of $3,773 compared to paying expenses from after-tax salary.
There will now be a greater incentive to maximise deductible (i.e. concessional) superannuation contributions after 1 July 2014. The concessional superannuation caps for the 2014/15 year based on a person’s age have changed as follows:
age 50 and over on 30 June 2015 - $35,000 contribution cap
age 49 and under on 30 June 2015 - $30,000 contribution cap
Another popular and tax effective strategy that taxpayers should consider to also reduce or eliminate the levy is negative gearing of shares and property.
It is likely that there will be an increased focus on earning income through private companies and family trusts during the next three years, especially with the company tax rate reducing to 28.5 per cent on 1 July 2014. Common strategies may include retaining profits in a private company, and delaying paying dividends to individuals until after the debt levy has lapsed.
In those cases where it is not possible or desirable to retain the cash in a private company or family trust, we are likely to see a resurgence of loans to individuals from these entities under the Division 7A provisions. In those situations it will be important to carefully evaluate any likely tax savings and benefits of spreading out repayment of the loan over a number of years against the additional cost of having the individuals pay non-tax-deductible interest to the private company on the funds loaned to the individuals.
In summary, those who the Government expects to pay the debt levy may be able to do some planning to minimise its effect, especially in the short term, but ultimately for most people the potential savings will be relatively small. It is likely that the levy will be reasonably successful in achieving its objective of collecting additional revenue.
Joe Kaleb is a chartered accountant, registered tax agent, ASIC registered SMSF auditor, and businesses advisor. He's also the founder and CEO of the small business tax portal Australianbiz.
The writer acknowledges the contribution to this article by Peter Bembrick, tax consulting partner at HLB Mann Judd.
There are a number of legitimate strategies that you can adopt prior to 30 June 2014 to reduce this year’s tax bill.
The first 2 strategies apply only to small business taxpayers, whereas the others apply to all businesses. A small business is defined as one where the turnover of the business, including connected entities and affiliates, is less than $2 million per annum (GST exclusive). The turnover for either the current financial year or the previous financial year can be used to determine if you qualify as a small business.
Strategy 1 - Instant asset write-off for assets reduced to $1,000 from 1 January 2014
Under the current law, your small business is able to claim an immediate tax deduction for “individual” assets (including motor vehicles) costing less than $6,500 (GST exclusive), including individual assets that form part of a set.
As part of the changes contained in the “mining tax repeal Bill”, the Government has proposed that the instant asset write-off will be reduced from $6,500 to $1,000 for “individual” assets (including vehicles) “first used or installed ready for use” on or after 1 January 2014. It is unlikely that the above bill will be passed by the Senate and made law prior to 1 July 2014. There is therefore uncertainty as to whether the $1,000 limit will apply from either 1 January 2014 or 1 July 2014 when this change is eventually made law.
Strategy 2 – Claim deduction for pre-paid expenses
Your small business can claim an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. The most common expenses that you should consider prepaying by 30 June 2014 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc.
Strategy 3 – Make superannuation contributions by 30 June
Individuals aged 60 and over on 30 June 2014 - $35,000 contribution limit.
individuals aged 59 and under on 30 June 2014 - $25,000 contribution limit.
Note that employer super guarantee contributions are included in the cap. Where a concessional contribution is made which exceeds these amounts, the excess is taxed to the fund member’s account at an effective rate of 46.5%.
In order to obtain a deduction in the 2014 financial year, the contribution must to be received by your superannuation fund by 30 June 2014.
Strategy 4 - Defer income & capital gains tax
Realising a capital gain after 30 June 2014 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes.In some cases, the capital gain can be further reduced to Nil under the small business capital gains tax concessions.
Strategy 5 - Write-off slow moving or obsolete stock
All businesses have the option of valuing trading stock on 30 June 2014 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.
Also, in situations where stock has become obsolete at year-end (e.g. fashion clothing), the business may elect to adopt a lower value than actual cost, replacement cost, or market selling value.
Strategy 6 - Write-off bad debts
If your business accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2013/14 so long as the debt is declared bad by 30 June 2014.
Your business will need to show that it has made a genuine attempt to recover the debt by 30 June 2014 to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a company directors minute).
The 2014 FBT year ends on 31 March 2014, therefore businesses should now be planning to ensure that documentation is in place to accurately prepare and lodge the FBT return on time.
Businesses should check whether they are registered for FBT. Many business owners, particularly those who have just set up a business, don’t think that they will provide their employees with fringe benefits, and therefore don’t register. But as the year progresses, they may realise that an FBT return is necessary.
If the business isn’t registered, registration forms can be accessed on the Australian Taxation Office (ATO) website – go to www.ato.gov.au and search for ‘application to register for fringe benefits tax’. Alternatively contact your accountant who can process the registration.
Where the business lodges its own FBT return, the final date for lodgement and payment is 21 May 2014.
If the 2014 FBT return is lodged by a tax agent, the lodgement dates are:
electronic returns – 25 June 2014
paper returns – 21 May 2014
The due date for payment is 28 May 2014.
Businesses that are registered and didn’t provide any fringe benefits during the year must still lodge a ‘notice of non-lodgement’ with the ATO to avoid follow up action.
Following is a checklist of the more common benefits provided together with some useful tips to get documents prepared.
Cars are the most common type of fringe benefit provided to employees and therefore planning for FBT can save money. This includes:
Obtain the odometer readings for each motor vehicle as at 31 March 2014
For new motor vehicles, retain the purchase invoice of the car including a breakdown of all non-business accessories (e.g. window tinting or a cd player). The cost of the car for FBT purposes should include:
Non-business accessories
Dealer & delivery charges
Review entitlements to any FBT reductions. For instance, if the car has been owned for more than four ‘FBT years’, the base value or cost is reduced by one-third under the statutory formula method.
Choose whether to use the ‘statutory formula’ or the ‘operating cost’ calculation method to calculate the FBT payable. Generally speaking, the statutory formula method is more advantageous when the car is used primarily for personal use while the operating cost method is usually best when the car is used mainly for business purposes.
If using the statutory formula method and the car has been acquired or sold during the year ending 31 March 2014, the kilometres travelled will need to be annualised. Note that the statutory rates have changed for cars purchased from 10 May 2011. The move to one statutory rate of 20% is phased in over four years. There are transitional arrangements that apply to any new commitments entered into from 10 May 2011 to 31 March 2014. Where there is a change to a pre-existing commitment (e.g. car refinanced) these transitional arrangements will also apply.
The following statutory rates apply for cars acquired from 10 May 2011 under the transitional provisions and also for cars that continue to apply the old rules:
The above table shows that from 1 April 2014, all cars governed by the new rules (i.e. acquired or refinanced from 10 May 2011) are required to apply the single statutory rate of 20% regardless of the distance travelled by the car.
Note that cars provided under pre-existing commitments (i.e. owned prior to 10 May 2011) will continue to use the old statutory fractions.
If using the operating cost method, ensure the employee has maintained a log book for 12 consecutive weeks. A log book is valid for up to a 5 year period. Records should also be maintained of:
Lease payments or deemed interest/depreciation
Note that an estimate of the business use percentage needs to be made in the next 4 FBT years taking into account the log book percentage and any variations in the use of the car during the relevant FBT year.
Check whether the employee has made any contributions to the business for the provision of the car as this can reduce the FBT liability. These can even take the form of any un-reimbursed expenses the employee has paid for such as fuel or repairs.
Remember to account for the contributions as income in the profit and loss and disclose the GST on the next BAS.
Most businesses provide entertainment to staff and clients during the course of the year. Unlike many other business expenses, it is not tax deductible, unless FBT has been paid on the particular expense. Again, a bit of planning and good record keeping can assist in limiting unnecessary tax.
There are three methods that can be used when reporting FBT and businesses can choose which one is most beneficial in their particular circumstances:
50/50 Method – the total entertainment is divided by 2, and FBT is paid on this amount. Most beneficial when entertaining mainly employees. However businesses won’t be able to apply the $300 ‘minor and infrequent’ and property benefit exemptions.
Actual Method – FBT is only paid on entertainment provided to employees. Most beneficial when entertaining mainly non-employees. When using this method the $300 ‘minor and infrequent’ and property benefit exemptions can be used to reduce each fringe benefit provided.
12 Week Register - due to the amount of records that need to be maintained, this method is not commonly used but works by keeping a logbook of meal entertainment for 12 consecutive weeks and determining what percentage of entertainment relates to employees. That percentage is then applied to the total meal entertainment at the end of the FBT year.
Some questions for business owners to consider when calculating any entertainment FBT include:
Has the business provided entertainment by way of food or drink on or off the business premises to employees? This can include Christmas parties, Friday night drinks, etc.
Has the business reimbursed an employee’s restaurant bill, for instance when entertaining clients?
Has the business provided a benefit that is “recreation” to an employee? This could include a ticket to the football or a concert. If so, ensure that this type of entertainment is recorded separately to meal entertainment.
Has a register been maintained of employees, associates and non-employees who attended functions where meal entertainment and non-meal entertainment was provided?
Have the GST implications been considered? The GST treatment of meal entertainment-related expenditure will depend on the meal entertainment method used:
If using the 50/50 method, only 50 percent of the GST can be claimed. The other half is added back to the profit and loss account and is not available as a tax deduction
If using the actual method, only claim the GST on that portion of entertainment that is subject to FBT. Otherwise, GST is treated as a profit and loss expense and is not available as a tax deduction
Some employee benefits are exempt from FBT and are worth considering as part of a salary package arrangement for employees. Generally speaking, these benefits must be primarily used for work purposes, or to enable people to do their job more efficiently. These exempt benefits include:
Membership expenses, items such as a subscription to a trade, professional body or even an airport lounge membership
Other work related items (e.g. power drill)
The employer can generally only provide each item ‘once’ to an employee every FBT year to take advantage of the FBT exemption. For example, the employee can receive both a laptop computer and mobile phone in the one FBT year.
These benefits do not need to be recorded on the FBT return as they are ‘exempt’ benefits and are also not reported on the employee’s PAYG Payment Summary (see below). They are also not counted as wages for payroll tax and workcover purposes.
In-house benefits arise when an employee (or their associate) receives goods and services from their employer that are identical or similar to those provided to customers For example, a clothing retailer provides free or discounted clothes to employees
From 22 October 2012, the concessional FBT treatment of up to $1,000 of in-house fringe benefits accessed by way of a “salary sacrifice” arrangement has been removed. A transitional measure will allow salary sacrifice arrangements already in place on 22 October 2012 to continue to access the concession up to and including 31 March 2014.
Reporting on employee’s PAYG payment summaries
Businesses are required to include the following two items on employee’s PAYG payment summaries:
Reportable fringe benefits - Where the total ‘non-grossed up value’ of fringe benefits provided to employees exceeds $2,000, the amount multiplied by 1.8692 must be reported on an employee’s PAYG Payment Summary. This requirement is often overlooked by businesses. The two most common benefits that are excluded from the $2,000 threshold are meal entertainment and car parking benefits.
Reportable employer superannuation contributions (RESC’s) - Since 1 July 2009, employers have been required to disclose an employee’s RESC’s on their PAYG Payment Summary. These are basically salary sacrifice contributions where the employee has been able to influence either the size of the contribution or the way the amount is contributed. Excluded are super guarantee contributions, contributions made out of pre-tax income and contributions under industrial instruments.
ATO audit focus on cars
Since cars are the most common fringe benefits provided to employees, the ATO continues to target cars from an FBT compliance perspective. The main areas of focus include:
Car logbooks. The ATO is focusing on the business use percentage claimed over the particular three month log book period to ensure that this takes into account any variations in the pattern of use for the current FBT year and the next four FBT years). In other words, employees cannot simply choose to use a three month period when business use is the highest.
Exempt cars. The ATO is targeting employers who have claimed an FBT exemption for certain cars (e.g. dual cabs and utes with a carrying capacity greater than 1 tonne) as well as utes and panel vans that carry less than 1 tonne.
Employee contributions. These contributions reduce the taxable value of the car fringe benefit. The ATO are concerned that many employers are not reporting these contributions as assessable income and also not including the GST component on their next BAS.
Lodgements dates - These can vary (as mentioned above) so avoid interest on unpaid FBT liabilities by checking when the FBT return is due for lodgement.
Travel diaries: Are they needed? When employees travel for more than five consecutive days but the travel is not exclusively for work, they should keep a record of:
Dates travelled
Places visited and work/activity undertaken
What the nature, time and duration of the work/activity that was undertaken
Make sure that any required declarations have been signed and received by the time that the FBT return is lodged e.g. when an employee declares that there is no private use of a fringe benefit provided.
Gross up rates used when calculating the gross taxable value of a benefit:
Type 1 - 2.0647, if GST is included in the expense
Type 2 - 1.8692, if GST is not included in the expense
GST 1: Make sure that FBT is calculated on the GST inclusive value of the benefit provided.
GST 2: Don’t forget that when the $300 minor and infrequent exemption is used for meal entertainment, any GST input tax credits cannot be claimed.
Record keeping: Keep invoices and source documents in order to substantiate the claim.
With the 2014 year now in full swing we look at some important business and wealth strategies that business owners should implement to improve their overall financial health.
Strategy 1 - Profit and loss & cash flow budgeting
Business owners should prepare monthly profit and loss budgets for at least a 12-month period and more importantly to assess the impact that these projections have on the future cash flow of the business. Budgets should be compared to actual results and variances acted upon on a timely basis.
For more accurate reporting, particularly in respect of manufacturers, wholesalers and retailers, it is preferable that the profit and loss and cash flow budgets are linked and have a number of in-built features including:
The profit and loss budget should have columns that separate income and expenses that include GST or have no GST. Note the amounts in the profit and loss budget are recorded on a GST-exclusive basis, whereas on the cash flow budget, they appear on a GST-inclusive basis.
The cash flow budget should automatically calculate GST owed to the ATO depending on whether the business is using either monthly or quarterly GST reporting and whether GST is paid on either a cash or accruals basis.
It is common for operating expenses on the profit and loss budget to be amortised evenly during the 12-month period and the cash flow budget records these payments on either a monthly or quarterly basis. For example rates and taxes, insurance, light and power, and fringe benefits tax are usually paid quarterly, whilst all other operating expenses are usually paid monthly.
Opening balances (for example, bank overdraft/credit balance, GST liability/refund, debtors and creditors) need to be recorded on the cash flow budget.
The collection and payment percentage rates for debtors and creditors (for example, current, 30 days, etc.) should be recorded to better reflect the impact of sales and purchases on the cash flow budget.
The cash flow budget should include common items such as PAYG instalments/income tax, loan repayments, plant & equipment purchases, dividends, and loans made to the business.
Strategy 2 - Managing business risk
Monitoring business performance and understanding the areas of risk faced by the business can help to avoid future financial problems. Examples include:
Regular financial reporting and timely knowledge of business performance allows decisions to be made from an informed position, with monthly comparisons to budget and exception reporting ensuring that problems are identified and acted upon quickly.
Establish key performance indicators (KPIs) for the business and monitor them regularly. These include gross profit margin, debtors turnover, stock turnover, average mark-up, average monthly breakeven sales & return on investment.
Developing and reviewing the business plan. Developing a business plan that supports a vision of where the business is heading and helps it get there is a critical tool. All business decisions can then be made within the context of the plan to ensure that resources are not wasted on areas that don't add to the overall direction of the business. Note that business plans are never static and need to be constantly revised in light of new information and circumstances.
Planning for growth. When planning for growth businesses should anticipate the resources that growth will require. This goes beyond budgeting for extra sales staff. Matters that should be considered including impact on working capital, premises requirements, management time required and systems capacity.
Succession & estate planning. Business owners should also have a formal plan that deals with the transfer of the business upon the owner's retirement, permanent incapacity, or death. This should cover issues such as the proposed method of structuring and financing the planned succession (i.e. having a buy/sell agreement with shareholders/partners which includes appropriate life insurance policies), taxation implications, timing for the transfer of ownership and management roles of family members.
Other areas of risk that need to be constantly addressed include relying too heavily on one or a small number of major customers, relying too heavily on one supplier, and protecting the goodwill and intellectual property by entering into agreements with employees that include job descriptions.
The business also needs to implement processes with adequate segregation of duties to minimise the risk of employee fraud.
Strategy 3 - Reviewing investment portfolios
It’s a good idea to regularly review the performance of assets held both personally and in your superannuation fund.
Due to the global financial crisis, many people continue to invest in the safety of cash and term deposits, but with interest rates now at historic lows, this approach is less likely to suit long term goals. Consider talking to a financial advisor about rebalancing back into other asset classes which have the potential for growth.
Strategy 4 - Planning and monitoring super contributions
Individuals should be planning to maximise the annual “concessional” (tax deductible) and “non-concessional” (undeducted or after-tax) contributions to superannuation for the year ending 30 June 2014.
In addition to planning to maximise super contributions, individuals should also be reviewing and monitoring superannuation contributions made personally or by their employer (e.g. as salary sacrifice) on an on-going basis to ensure that they do not exceed the relevant contributions cap. Excess contributions are a major focal point of current ATO compliance.
For the year ending 30 June 2014 the maximum amounts that can be contributed to superannuation for a person is summarised below:
1. Concessional contributions (tax deductible)
Individuals aged 60 and over on 30 June 2014 are subject to a $35,000 contribution limit
Individuals aged under 60 on 30 June 2014 are subject to a $25,000 contribution limit
Note that employer super guarantee contributions are included in these concessional contributions caps.
2. Non-concessional contributions (undeducted)
Where an individual is under the age of 65 on 1 July 2013, there is a 3 year averaging rule whereby the individual will be able to utilise the $150,000 cap for the current year and for the next two income years. This means that the individual can in effect contribute a maximum of $450,000 as an undeducted contribution during the income year and the subsequent two income years. The $450,000 limit is automatically triggered in an income year where the individual makes an after-tax contribution in excess of $150,000.
The work test needs to be satisfied once an individual reaches the age of 65 before concessional or non-concessional contributions can be made. This requires the person to be gainfully employed for at least 40 hours during a consecutive 30 day period each financial year. Unpaid work does not meet the definition of gainfully employed.
Strategy 5 - Consider setting up a self-managed super fund
Running a self-managed superannuation fund (SMSF) is becoming a popular wealth accumulation and asset protection vehicle for business owners, investors and high net worth individuals. However, there are many rules and pitfalls involved in establishing and running a SMSF which need to be considered on an on-going basis.
Strategy 6 - Paying super guarantee contributions to a MySuper account
From January 1 2014, super guarantee contributions for employees who have not nominated a super fund are required to be paid to a fund with an authorised MySuper account. MySuper accounts are simple and cost effective products that ensure members do not pay for any unnecessary features they do not need or use.
Business owners need to ensure that the default fund they are now using for effected employees provides a MySuper product.
Strategy 7 - Reviewing personal & business debt
A good new year’s strategy is to rid of bad credit card debt, ideally by budgeting to repay it as soon as possible.
Avoid adding short-term debt incurred by spending on consumables to a long-term mortgage. Redraws on home loans should not be used as a solution to over-spending.
Business owners should also be regularly reviewing and comparing their financing to ensure that it is appropriate and that the current financier remains competitive.
Strategy 8 - Reviewing personal & business insurances
Where appropriate, individuals should have the right level of life insurance, income protection insurance, and trauma or disability insurance in order to protect your loved ones if anything happens. It is worthwhile reviewing your insurance arrangements every few years to take account of changed circumstances.
It’s usually more tax effective to have life and disability insurance paid by your superannuation fund.
Business owners need to also ensure that they have adequate insurance to cover events such as loss of profits, fire, theft and breakage, claims against faulty products and claims made against professionals for particular advice or services provided.
Strategy 9 - Estate planning
With Australians having more savings in superannuation and owning other assets, an up-to-date Will is very important. As well, a Will should be updated when there is a change in personal circumstances (e.g. divorce, the birth of a child or entering into a new relationship).
The consequences of dying intestate (i.e. without a Will) is that your assets may not be distributed to the people you want them to go to and also cause unpleasantness for the people left behind.
It’s important to note that superannuation does not automatically form part of an estate and it may be possible to allocate this to specific people by way of a binding death benefit nomination.
Strategy 10 - Seek professional help
It is very important that you consult with your accountant or financial advisor prior to making any important business or investment decisions. The benefits of obtaining such advice will usually far outweigh any cost.
The current instant tax write-off for “individual” assets costing less than $6500 (GST exclusive) will be reduced back down to $1000 (GST exclusive) from 1 January 2014 if legislation currently before parliament is made law in the new year.
From 1 July 2012 small business entities (businesses with a turnover of less than $2m per annum) are entitled to claim an immediate deduction for plant & equipment costing less than $6,500. Legislation has been introduced into Parliament to reduce this immediate deduction to $1,000 for all assets acquired after 31 December 2013.
To be eligible for the higher $6,500 immediate deduction, the asset must be either first used, or installed ready for use on or before 31 December 2013. It is not sufficient to simply have placed an order for the asset.
The $6,500 immediate deduction also applies to improvements that have been made to existing items of plant & equipment, provided that the cost of these improvements have been incurred on or before 31 December 2013.
From 1 January 2014, plant & equipment costing $1,000 and more (GST exclusive) will need to be added to the small business depreciation pool, and depreciated at 15% in the year of acquisition, then 30% in subsequent years.
Also included in the legislation before Parliament is the proposal to remove the accelerated depreciation rules which apply to motor vehicles purchased by small business entities.
Under these accelerated depreciation rules, a small business is entitled to claim an immediate deduction equal to the first $5,000 of the purchase price of a motor vehicle which was acquired on or after 1 July 2012. The balance of the purchase price is then added to the small business depreciation pool and will be depreciated at 15% in the year of acquisition, then 30% in subsequent years.
Motor vehicles costing between $5,000 and $6,500 can currently be written off in the year of purchase under the $6,500 accelerated depreciation rules.
If the proposed amendments are made law, the accelerated depreciation rules will only apply to motor vehicles purchased on or before 31 December 2013. From 1 January 2014, the entire purchase price of the motor vehicle will be added to the small business depreciation pool.
If you are operating a small business and are considering purchasing a motor vehicle or item of plant & equipment in the near future, you may wish to consider doing it soon. There may be significant tax advantages in bringing forward the purchase of these assets prior to 31 December 2013.
This article is provided by the leading small business tax portal www.australianbiz.com.au
The application of fringe benefits tax (FBT) means that it’s more tax effective to provide staff with non-entertainment gifts (see below) at Christmas rather than hosting a party.
This article examines some of the most common benefits provided at Christmas and outlines the various income tax, GST and FBT implications. It is assumed that the business is not electing to use either the 50–50 split method or the 12 week register method for calculating the taxable value of meal entertainment expenditure.
Christmas parties constitute "entertainment benefits" and as such are subject to FBT unless specifically exempt, or the "minor benefits" exemption apples. A minor benefit is one that is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, which is not a reward for services, and the cost is less than $300 “per benefit” inclusive of GST.
Holding the Christmas party on the business premises on a working day is usually the most tax effective. Expenses such as food and drink (including alcohol), are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. However, where employees' families (i.e. associates) also attend and the cost attributable to each associate is $300 or more inclusive of GST, there is FBT on the associates portion of food and drink, and a tax deduction and GST credit can be claimed on that portion. The cost of clients attending the party are not subject to FBT, but no income tax deduction or GST credit can be claimed on their portion of the cost.
Christmas parties held off the business premises are exempt from FBT where the cost for the employee and their associate is each less than $300 inclusive of GST but no tax deduction or GST credit can be claimed. The cost of clients attending the party is not subject to FBT, and no tax deduction or GST credit can be claimed on their portion of the cost.
Certain benefits provided to employees at the Christmas function are considered separately when applying the $300 minor benefits exemption. For example, a Christmas party is held at a restaurant costing $220 per head, and at the same time employees are provided with a Christmas hamper (considered a non-entertainment gift), costing $150. Although the total cost is more than $300, the provision of both benefits will usually be exempt from FBT under the minor benefits exemption.
Taxi travel to and from the party
While taxi travel provided to employee would generally attract FBT there are two specific exceptions
1. When the trip either starts or ends at the employee’s place of work, or
2. Where the travel is required because of sickness or injury to the employee.
Where the employer pays for an employee’s taxi travel home from the Christmas party, and the party is held on the business premises, no FBT will apply and the cost of the taxi fare will be tax-deductible. Where the party is held off the premises and the employer pays for a taxi to the venue, and then also pays for the employee to take a taxi home, only the first trip will be FBT exempt under the provision dealing with taxi travel.
In that scenario, if the employee does not regularly receive taxi travel paid for by the business, however, then the second trip might still be exempt as a minor benefit (assuming the cost is also less than $300). As the provision of meal entertainment is defined to include “…travel in connection with …the provision of entertainment by way of food and drink” then the business would be unable to claim a tax deduction for any taxi travel that is FBT exempt as a minor benefit.
(i) Non-entertainment gifts
As noted above, non-entertainment gifts provided to employees are usually exempt from FBT where the total value is less than $300 inclusive of GST. A tax deduction and GST credit can also be claimed. These include skincare & beauty products <http://www.australianbiz.com.au/Ultra_Premium_Swiss.aspx> , flowers, wine, perfumes, gift vouchers and hampers.
Given that the cost of hosting a Christmas party is not tax deductible (where the $300.00 minor benefit exemption applies), for a given dollar spend per employee it would be more tax-effective for the business to instead provide staff with these tax deductible non-entertainment benefits.
There is an interesting twist with providing staff with say beer or wine which is consumed at the workplace or at a work social gathering. In this situation, the expense is treated as non-tax deductible entertainment. However if the employee consumes the alcohol at home, the cost is tax deductible up to the $300.00 limit.
Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules as they are not provided to employees. Generally a tax deduction and GST credit can be claimed for these gifts provided they are not excessive or overly valuable.
(ii) Entertainment gifts
Changes to ATO Director Penalty Notice Regime
Recent changes to the Director Penalty Notice Regime (DPN Regime) have extended the personal liability of company directors to include unpaid and unreported superannuation guarantee amounts. Traditionally it has only applied to unpaid Pay as You Go (PAYG) withholding tax liabilities. This article examines:
1. How the changes will affect directors;
2. How directors can protect themselves from being personally liable;
3. What to do if you get an Director Penalty Notice (DPN); and
4. Whether the legislation has any retrospective effect, that is, whether the provisions apply to outstanding liabilities existing prior to the commencement of the new DPN Regime.
Director Penalty Notice Regime
On 29 June 2012, the Tax Laws Amendment (2012 Measures No.2) Act 2012 (Cth) received Royal Assent to amend the current DPN Regime contained in the Taxation Administration Act 1953 (Cth) (TAA). Prior to these amendments, the regime made directors personally liable for PAYG withholding liabilities when their companies failed to meet their obligation to pay these amounts.
This was achieved by making directors personally liable to the ATO through the imposition of a “penalty”, equal to the amount that should have been paid (Director Penalty) if they do not comply within 21 days of the being issued with a DPN.
The amendments seek to reduce the scope for companies to engage in fraudulent phoenix activities or escape liabilities and payments of employee entitlements by:
(a) Extending the scope of Director Penalties to also include a company’s Superannuation Guarantee Charge (SGC) as well as PAYG withholding;
(b) Ensuring that directors cannot discharge their Director Penalties by placing their company into administration or liquidation when PAYG withholding or SGC remain unpaid and unreported three months after the due date; and
(c) In some instances, making directors and their associates personally liable to PAYG withholding non-compliance tax, where the company has failed to pay PAYG withholding on amounts paid to them.
Retrospective Application – Liabilities Prior to 29 June 2012
The amendments to the DPN Regime applies retrospectively to the extent that any unpaid and unreported PAYG liability outstanding (for more than 3 months) as at 29 June 2012, may result in a director being personally liable for the same amount.
The provisions affecting SGC do not have a large scope in terms of retrospective effect. With superannuation, the amendments will only apply to relevant financial quarters if the day by which the company must lodge Superannuation Guarantee Charge Statement (SGC Statement) is on or after 29 June 2012. Any such amounts that are over 3 months outstanding and unreported from the due date can no longer be remitted by putting the company in administration or liquidation.
New directors have a grace period of 30 days (previously 14 days) from the date of their appointment to ensure that the company’s obligations are met before they become personally liable. This has been increased to give directors more time to ensure these obligations are met given the fact that they now can be liable for SGC. New directors will also have up to 3 months from the date of their appointment to remit themselves from any personal liability on any PAYG withholding and SGC obligations that were already 3 months outstanding and unreported as at the date of their director’s appointment by placing the company into administration or into liquidation.
Unlike new directors, no such grace periods exist for existing directors. Existing directors can immediately be held personally liable if PAYG withholding is outstanding and unreported from the due date. If these obligations are more than 3 months outstanding from the due date, then the director cannot remit themselves of this liability by placing the company into administration or liquidation.
1. Ensure that any outstanding Business Activity Statements (BAS) are lodged by the due date or as soon as possible. They also need to ensure that these statements are as accurate as possible as directors may be liable for amounts outstanding if the liabilities are greater than those reported;
2. Pay all PAYG withholding and SGC or lodge a SGC Statement with the ATO by the relevant due date; or
3. If you cannot pay the required tax obligations, promptly cause your company to go into voluntary administration or liquidation (within 3 months of the due date).
The new legislation seeks to deter companies from ignoring their tax liabilities by imposing significant personal liabilities on the company’s directors. To avoid personal liability, company directors should at least make sure that proper reporting to the ATO is complied with. Even if the disclosed debt is not settled by the due date, by reporting these obligations, directors will be able to protect themselves from personal liability by subsequently placing their company into administration or by winding it up within 21 days of receiving a DPN (if necessary). Reporting means lodging a properly completed BAS and/or a SGC Statement by the relevant due date. Please see Schedule 1 of this paper for the relevant due dates.
Options Available to Avoid Personal Liability if You Receive a DPN
1. If the DPN is received (in circumstances where PAYG withholding and SGC obligations are unpaid and unreported) within 3 months of the due date, then you must either:
(a) Cause the company to pay the outstanding amount detailed in the DPN to the ATO within 21 days;
(b) The company can elect to make an arrangement with the ATO to pay the amount owing under DPN in instalments. However, the director will immediately become personally liable upon a default of the company on one of these payments; or
(c) Place the company into voluntary administration or in liquidation.
2. If you receive a DPN (in circumstances where PAYG withholding and SGC obligations are unpaid and unreported) after 3 months of the due date, a director will not have the option to remit themselves of personal liability by placing the company into administration or liquidation. Accordingly, the only options available to a director to avoid personal liability are:
(a) Cause the company to pay the Director Penalty to the ATO within 21 days; or
(b) The company can elect to make an arrangement with the ATO to pay the amount owing under DPN in instalments. However, the director will immediately become personally liable upon a default of the company under such a payment arrangements.
Allocation of Payments by the ATO
Notwithstanding your intention to pay PAYG withholding and/or SGC obligations (to avoid a Director Penalty), the ATO has a discretion to decide on how payments are allocated.
How the ATO allocates your payment between two or more tax debts where payments are not made in full is not a straight forward exercise. For further information, please refer to the ATO’s practice statement ‘PS LA 2011/20’ which gives an outline on payment allocations. The link to this practice statement can be located at: http://law.ato.gov.au/atolaw/view.htm?Docid=PSR/PS201120/NAT/ATO/00001. There appears to be some scope for a taxpayer (whether it be a company or an individual) to direct the ATO on how they want their part payments to various tax debts allocated. However, any direction by the taxpayer is not binding and the outcome will ultimately depend on the practice statement and/or the discretion of the ATO.
Under the new legislation, directors have 3 months (from the due date) to make sure any outstanding PAYG withholding and SGC obligations are in order. It is important for directors to take appropriate steps to meet these obligations within the 3 months period, in order to avoid personal liability.
Impact of Carbon Tax â Tools, Techniques & Grants for SMEs â Part 3 of 3
In part 1 of this series, we provided an overview of the carbon tax, explained the carbon pricing mechanism and its possible indirect impact on SMEs. This was followed by part 2 which focused on how business can prepare for carbon economy and the opportunities a focus on clean energy solutions may create for businesses to transition to a more resilient and sustainable basis.
This third and final part looks at the tools, techniques and resources available for SMEs to draw on as they engage with the low carbon economy.
Following on from the 5 steps outlined in the previous article, a good starting point is to identify people from within your organization who best understand your business’s operations, accounting function and supply chain. This expertise will be valuable when working through each of these steps with minimal effort:
· Mapping your Supply Chain - starts with identifying your most valuable suppliers and customers:
o Determine how energy intensive or exposed they are (identify other carbon emissions they may be liable for such as landfills). You supply chain has the potential to exert a carbon pressure or expectation on your business, especially if they are one of the ~500 large emitting companies that are liable under the carbon tax.
o Share your ideas with them and find out what expectations they have or are likely to have of your business. This approach is good risk management and it may unearth business opportunities. If the end product of your supply chain has high embedded energy, and hence carbon emissions due to the energy required to make the product, then it’s likely to be impacted and so will your business by association.
o Review existing contracts and consider the potential ramifications of the carbon tax
o Note - that mapping your supply chain is largely a manual exercise requiring little leg-work and good communication.
· Undertaking a Carbon Footprint - can be done manually or with the help of readily available on-line tools (and their assumptions):
o Identify and account for all your emissions (direct and indirect) starting with reviewing your electricity, gas, fuel and waste invoices for the last 12 to 24 months to determine the total amount of energy units used.
o Convert these units to tonnes of carbon dioxide equivalent (CO2e).
o Note - the department of climate change can provide you with the appropriate conversion factors (they vary according to region and energy source such as brown or black coal). See below for links to on-line tools.
· Communicating and Acting - on your findings is perhaps the most important step as this:
o Informs your business strategy, product mix, distribution channels, training plan, investment strategies and your suppliers and customers
o Provides motivation to get close to your supply chain partners and share both risk and opportunity with them.
· Systems and Processes – capturing, monitoring and reporting your carbon performance can be a relatively simple and inexpensive process:
o Refer to carbon footprint above
o These units can then be converted to a corresponding amount of carbon emission (CO2e) using factors provided by your energy retailer or the federal department of climate change and energy efficiency (DCCEE)
o Consider options to streamline data capture using your accounting system, production system, or a dedicated on-line carbon calculator tool (available via various government agencies)
o By understanding your carbon footprint will help you over time to systemize this process with greater accuracy and identify what part of your business is most carbon intensive and what steps might be possible to reduce your carbon through reduction and avoidance actions.
· Developing a Carbon Management Strategy – now that you are learning more about the impact and opportunities associated with carbon:
o You are ready to formalize an approach to carbon management;
o This requires the articulation of clear objectives, targets, strategies and actions, in much the same way as you manage and execute your business strategies.
The primary policy framework underpinning the proposed carbon pollution tax is the Australian Government’s Clean Energy Future Plan http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future/.
In support of the delivery of this plan, they have developed several standards and guidelines to facilitate carbon emission reporting, mitigation and reduction outcomes (such as energy efficiency). Underpinning the Plan there are tool, guidelines and systems that detail how carbon is calculated and accounted for, such as Australia’s National Greenhouse Accounts (NGA). http://www.climatechange.gov.au/climate-change/emissions.aspx
Another relevant standard of interest to SMEs is the National Carbon Offset Standard (NCOS) that outlines what is required in order to claim carbon neutral status. For SMEs that have customers (e.g. some banks) with a commitment to carbon neutrality it may be wise to calculate your business’s carbon footprint and identify possible steps to reduce it. This can lead to a competitive advantage during tendering negotiations. NCOS is intended to ensure that consumers have confidence in the voluntary carbon offset market and the integrity of the carbon offset and carbon neutral products they purchase. http://www.climatechange.gov.au/government/initiatives/~/media/publications/carbon-accounting/revised-NCOS-standard-pdf.ashx
The Carbon Farming Initiative (CFI) allows farmers and landowners to earn carbon credits by storing carbon or reducing greenhouse emissions on the land. These credits can then be sold to people and businesses wishing to offset their emissions.
This scheme is a central part of Australia’s carbon market. http://www.climatechange.gov.au/
Resources and On- line tools
So what resources are SMEs likely to need and where should they go to find them? This includes skilled people, training providers, on-line tools, other documentation resources and case studies. For example, to learn about:
· Carbon footprint – contact your energy retailer, your EPA or local state Government sustainability related agency, or identify an appropriate industry consultant through your industry association; many TAFE colleges offer accredited carbon accounting courses
· Capturing, monitoring and reporting systems – templates to facilitate this are available through the various Government agencies such as Sustainability Victoria, Office of Environment and Heritage NSW, ZeroWaste SA and Federal DCCEE
· General information and advice – speak with your supply chain partners, in particular your customers, as it usually is in their interest to help you reduce your carbon footprint in a commercially viable manner
Relevant grants and support initiatives (such as energy efficiency) aavailable from both federal government and state government to businesses that are keen to reduce their carbon footprint include but are not limited to:
· Federal: AusIndustry (http://www.ausindustry.gov.au/Pages/default.aspx):
o $800 million Clean Technology Investment Program for Manufacturers
o $200 million Clean Technology Investment Program for Food and Foundries
Example: The Clean Technology Investment Program ($1Billion over 6 years) offers to SMEs matching (1:1) funding to invest in low carbon technology solutions from $25,000 to $500,000 and at ratio of 2:1 for investments from $500,000 to $10 million.
o $240 million fund to help eligible small businesses reduce energy consumption
o $40 million Energy Efficiency Information Grants
o The Small Business Support Line working through industry associations such as the AIG, VECCI, Industry Capability Network
o Support to commercialise emerging low carbon technologies
· Federal: Australian Tax Office
o R&D Tax Concession and R&D Tax Incentive
o Instant Assets write-off increase from $5000 to $6500
· Federal: Low Carbon Australia
o $100m available through various loan financing options
· State: Sustainability Victoria, NSW Office of Environment and Heritage, ZeroWaste SA amongst others
· State: VEET (Victoria Government Initiative “Energy Saver Incentive”)
· Australia’s National Greenhouse Accounts (NGA): http://www.climatechange.gov.au/climate-change/emissions.aspx
· NGA Factors have been designed for use by companies and individuals to estimate greenhouse gas emissions.: http://www.climatechange.gov.au/en/publications/greenhouse-acctg/national-greenhouse-factors.aspx
· The National Carbon Accounting Toolbox applies national accounting methods for tree carbon sequestration including on-farm.
· Carbon Calculators are available from:
o Carbon and Energy Savings Calculator from AusIndustry: http://www.ausindustry.gov.au/programs/CleanTechnology/CTFFIP/Pages/CarbonAndEnergySavingsCalculator.aspx
o Carbon Neutral: http://www.carbonneutral.com.au/carbon-calculator
o NewsCorp http://www.1degree.com.au/carbon_calculator
o Vic EPA Ecological Footprint: http://www.epa.vic.gov.au/ecologicalfootprint/calculators/default.asp
This is the third and final article in our three part series on the impact of the Carbon Tax on SMEs. During this series we introduced the carbon pollution tax, its purpose and rationale, the likely costs and opportunities it will present to business, and how and what SMEs can do to prepare themselves for its introduction (post July 1, 2012). Importantly we outlined that SMEs are not directly liable (i.e. taxed) for their carbon emissions nor do they have to report or monitor energy use. In this final article we have provided an overview of tools, techniques, support resources and grant funding opportunities.
In summary, in an increasingly carbon constrained world where carbon could become the world’s biggest commodity market, business would be well advised to steer their business model towards a lower carbon business model. This is achieved through the adoption of innovative value-adding business practices (involving less energy, less waste, wiser choice of materials purchased and enhanced operational and office/facility efficiency), leading to optimised profits and a more sustainable and commercially viable business.
This article was written by Deane Belfield of HLB Mann Judd Consulting (dbelfield@hlbvic.com.au) and is provided in association with software company MYOB and the small business tax and management tools portal www.australianbiz.com.au.
How SMEs can prepare for the Carbon Tax â Part 2 of 3
In part 1 of this 3 part series we provided an overview of the carbon tax, explained why it is being introduced, linking it to the need to drive down carbon pollution, lessen our impact on the environment, curb excessive resource consumption and improve business efficiency. Furthermore we explored the underpinning mechanisms of the Government’s approach to pricing carbon and its likely impact on business, large and small, noting that SMEs are not directly impacted by the legislation, although indirect impacts will arise.
This second part will focus on how business can prepare for carbon economy and the opportunities a focus on clean energy solutions may create for businesses as they transition to a more resilient and sustainable basis.
What can your business do to prepare for a carbon price?
If we accept that the carbon tax is both a risk and an opportunity to business, let us first look at the risks and what you might do to mitigate them. Later in this article we will look at how this may also be an opportunity for business.
If your business is either a high consumer of energy or your suppliers or customers are, you will be impacted. This is because somewhere along your supply chain will exist one or more of the large emitters impacted by the carbon pricing mechanism and they will be focused on reducing their emission liability, including seeking to have their suppliers reduce theirs. You could be one of those businesses and already we are seeing many examples in Australia of large companies (producers and service providers) informing their suppliers that in the near future preference will be given to those that can demonstrate a lower carbon footprint and more sustainable business practices (refer to the Sustainability Reports and CSR policies of these larger organisations for further evidence). Some are adopting a two-year horizon in order to give their suppliers sufficient time to adjust. So that rather than it become a cost to suppliers, the converse is possible, especially where the larger ‘customer’ is providing assistance and transferring skills to facilitate the transition. It’s a win-win, with both parties collaborating to identify new innovative solutions.
There are several means by which your business can prepare itself, such as mapping your supply chain, reviewing your own products/services, undertaking a carbon footprint of your business and educating your staff and supply chain partners.
One simple approach is to identify where you are (e.g. carbon footprint), determine where you’d like your business to be (strategy), and develop a suitable response (i.e. how do we get there).
The following five step process may be a useful guide:
· Step 1: Map your supply chain from an energy consumption perspective (electricity, gas, fuel)
· Step 2: Undertake a full carbon footprint in accordance with national standards (refer to Department of Climate Change and Energy Efficiency) and identify potential risks and opportunities
· Step 3: Communicate with your staff and supply chain partners (you may be surprised by the potential for collaboration)
· Step 4: Review your own systems and processes to identify what changes may be required and the value of implementing such changes
· Step 5: Develop a simple carbon management strategy, with targets and actions (note that this should not be done until the opportunity side of the ledger has been considered)
For further information on energy efficiency and the carbon tax consult you state Government agency and/or your industry association.
Emerging business opportunities for SMEs
The good news is that by the Government putting a price on carbon pollution, business is presented with the opportunity to take a fresh look at the energy requirements of their products and services, identify areas of inefficiency and whether their current approach is aligned with future needs of customers. This creates an opening for innovation and appropriate product/service design, with the early movers likely to benefit most.
Recent history has shown that in every recorded case, businesses that make a commitment to becoming more sustainable (including reducing their carbon footprint) actually prosper, not the converse. Local examples of SME’s having undertaken the steps outlined above include manufacturers that have been above to reinvent themselves resulting in significant reductions in energy, smarter choices of raw materials and purchased items, less waste (including people’s time), and products and services better suited to their customers’ needs. Consequently they have been able to reduce costs, attract (and retain) talented staff, be more innovative, competitive and create additional revenue streams.
A good case in point is the printing industry and it’s supply chain, from the paper manufacturers, distributors, and printers through to end-users. This supply chain is represented by both large business and many SME’s. Under the Federal Government’s National Carbon Offset Standard (NCOS) paper manufacturers make carbon neutral paper. The distributors add value and retain the carbon neutrality through efficiency, life cycle analysis and carbon offsets. The printers do likewise and the end customers meet their community commitment of purchasing carbon neutral products and services. Innovation has played a major role in this supply chain and those printers embracing carbon neutrality have gained a competitive edge with their products better meeting the needs of customers, whilst building a stronger brand.
The upside is bright for those prepared to look, learn, innovate and communicate their story.
In our third and final article we will explore more closely the range of tools, techniques and grants available to your business to undertake the 5 steps to a lower carbon business model leading to a more sustainable, resilient and commercially viable foundation for doing business.
How the carbon tax impacts SMEs (Part 1)
Business and financial resolutions for 2012
Proposed carbon tax â impact on households and businesses
Tax planning for SMBs
Budget 2011/12 â small business tax changes
Do family trust deeds require amendments?
Six New Yearâs financial resolutions for 2011
Tax-effective Christmas benefits to staff
Super planning strategies for 2010/11
Asset protection strategies for family businesses
Year-end procedures for businesses
Budget 2010 Tax Changes
2010 Business tax planning strategies
FBT hot spots for 2010
12 tips to find the right business accountant
Traps with salary sacrificing into super
Financial performance indicators for businesses
ATO Audit Targets for 2009-10
ATO provides tax debt relief for small businesses