If your business does not meet its superannuation guarantee (SG) obligations, it may have to pay additional penalties or charges on top of the superannuation guarantee charge (SGC).
Note! SG contributions are payable (that is, they must be received by the superannuation fund) by the 28th day of the month following the end of a quarter. If this is not done, the SGC is payable, and an SG statement must be lodged with the ATO by the 28th day of the second month following the end of a quarter.
What are the penalties for not meeting superannuation obligations?
The ATO recently published on its website an overview of the additional penalties and charges.
- Failure to provide an SG statement when required. The maximum penalty is 200% of the SGC. This penalty cannot be remitted to less than 100% if the SG shortfall relates to a quarter in the period from 1 July 1992 to 31 March 2018.
- False or misleading statement. If your business pays less of the SGC than it should because it made a false or misleading statement, the ATO can impose an administrative penalty. The base penalty amount can be up to 75% of the shortfall, depending on the particular circumstances.
- Avoidance. If your business made arrangements to avoid its SG obligations, an additional penalty may be imposed (on top of the SGC avoided).
- Director penalties. f you are a director of a company, you need to make sure the company pays the SGC in full by the due date. If it does not, you’ll be liable for a penalty equal to the unpaid amount. The penalty is reduced if the company pays the outstanding amount at any time. Under some conditions, it may be reduced if the company goes into voluntary administration or liquidation.
- General interest charge (GIC) – This is applied if an SGC assessment is made and the SGC is not paid by the due date. The GIC is calculated on a daily compounding basis.
- Choice shortfall – If your business does not comply with the choice of fund obligations, it could receive a ‘choice shortfall’ penalty. The penalty increases the SGC.
- Failing to keep adequate records – The maximum fine for an individual convicted of failing to keep records is 30 penalty units (a penalty unit is $222 where the infringement occurred on or after 1 July 2020).
- Failing to provide employee’s TFN to their superannuation fund – a penalty (10 penalty units) may be imposed if an eligible employee has provided a TFN to your business and your business does not provide it to the employee’s superannuation fund or retirement savings account within the required time.
For advice on how to never miss a SGC payment again check out our tips here .
Make sure you discuss your business’ SG and choice of fund obligations with us to make sure the business is fully compliant.
According to ASIC, there has been surge of promoters encouraging individuals to set up SMSFs in order to invest in crypto-assets. It warns that crypto-assets are high risk and speculative, as well as being an attractive target for scammers. While SMSFs are not prohibited from investing in crypto-assets, individuals thinking of setting up an SMSF are encouraged to be informed around the decision. Remember, trustees bear all the responsibility for the decisions of the SMSF complying with the law, and breaches may lead to administrative or civil and criminal penalties.
Current record low deposit rates and volatility in stock markets around the world has motivated many retirees to seek alternative asset classes to either protect their investments or get a higher return. In conjunction with these sentiments, there has been a noticeable increase in spruikers encouraging individuals to invest in crypto-assets through SMSFs, with many recommending switching from retail or industry super funds in order to do so.
While promoters of these investments often bill them as high return and low risk, that is far from the truth. ASIC has recently issued a warning to SMSF trustees on the nature of crypto-assets which it says are a high risk and speculative, in addition to being an attractive target for scammers.
For example, late last year, ASIC moved to shut down an unlicensed financial services business based on the Gold Coast that promised annual investment returns of over 20% by investing in crypto-assets through SMSFs. The money obtained from investors was allegedly used by the directors of the business for personal benefit, including acquiring real property and luxury vehicles in their personal names.
Professional advice should be sought before deciding on whether an SMSF is appropriate for your circumstances, as there are risks involved in being the trustee of an SMSF, and any SMSF established must meet the “sole-purpose test”. Remember, trustees bear all the responsibility for the decisions of the SMSF complying with the law, and breach or non-compliance may lead to administrative or civil and criminal penalties. This is the case even if you as the trustee rely on the advice of other people, licensed or otherwise.
SMSFs are not generally prohibited from investing in crypto-assets. If you do decide, after receiving appropriate advice, that investing in crypto-assets through an SMSF is right for your situation, you are able to do so. Although, consideration must be given to the following factors:
- fund’s governing rules – trustees need to ensure that any investments in crypto-assets are allowed under the SMSF’s deed;
- investment strategy – documentation of how the SMSF’s investments will meet retirement goals, taking into account diversification, liquidity, and ability of the fund to discharge its liabilities. Trustees need to consider the level of risk of the crypto-assets invested in, and review/update the fund’s investment strategy to ensure the investment being considered is permitted;
- ownership and separation of assets – crypto-assets must be held and managed separately from any personal or business investments of trustees and members. The SMSF must maintain and be able to provide evidence of a separate crypto-asset “wallet”; and
- valuation – SMSFs must obtain fair market valuations for their crypto-assets for the purposes of calculating member balances.
In addition, other considerations include restrictions on related-party transactions (ie if you currently own crypto-assets and want to transfer it to the SMSF for various purposes, you will be unable to do so), and potential CGT consequences when an in specie lump sum payment of crypto-assets occur upon a condition of release.
Need advice?
If you think you would like to set up an SMSF and/or invest in crypto-assets, we can explain in simple terms of what your responsibility will be as a trustee of an SMSF. We can also help you navigate any pitfalls in relation to the administration and regulation of the fund. Contact us today for expert advice.
As investing in cryptocurrency becomes more popular in Australia, there is also a corresponding increase in the amount of scams being reported. Due to the unregulated nature of cryptocurrency and the recent failure of two Australian cryptocurrency exchanges, this investment space has become a risky free-for-all. But are crypto losses from scams tax deductible?
Scamwatch estimates that around $35m were lost to cryptocurrency scams in the first half of 2021. If you’re one of the unlucky ones to have been scammed, depending on your circumstances, a capital loss may be claimed. With the recent collapse of a second Australian cryptocurrency exchange in as many months, along with persistent reports of a range of sophisticated cryptocurrency scams targeting Australians, many owners are asking if you lose money in a scam can you deduct the loss? The short answer is it depends.
Scamwatch, a part of the ACCC (Australian Competition and Consumer Commission), estimates that Australians lost over $70m in investment scams in the first half of 2021. Of this $70m, around half, or $35m were lost to cryptocurrency, especially Bitcoin. Cryptocurrency scams were also incidentally the most commonly reported type of investment scam in 2021, with around 2,240 reports.
While the figure of around 2,000 Australians being scammed does not seem particularly high, keep in mind that most scams go unreported due to embarrassment or other factors, so the real figure is likely to be much higher.
Cryptocurrency scams can come in a variety of forms. The most common being impersonation, where scammers pretend to be from a reputable trading platform and have a legitimate-looking digital assets (e.g. fake trading platforms which look like the real thing, email addresses that approximate a genuine company they are impersonating etc) to lure investors in. Investors who fall into this trap will usually see their initial investment skyrocket on fake trading platforms and may even be allowed to access a small return. Once hooked, the scammers will ask for further investments of large sums of money before cutting off contact and disappearing completely.
So are crypto losses tax deductible?
So, back to the original question of can you deduct a loss? It all boils down to whether you actually owned an asset. For example, if you actually owned cryptocurrency such as Bitcoin in a digital wallet and due to the collapse of an exchange all the cryptocurrency you owned has disappeared, then it is likely that are able to claim a capital loss. Similarly, this would also apply if the cryptocurrency you own is stolen in a scam.
According to the ATO, to claim a capital loss on cryptocurrency, you may need provide the following kinds of evidence:
- when the private key to the cryptocurrency was acquired and lost;
- the wallet address that the private key relates to;
- costs incurred to acquire the lost or stolen cryptocurrency;
- amount of cryptocurrency in wallet at the time of loss of private key or access;
- able to show that the wallet was controlled by you (ie transactions linked to your identity) and that you are in possession of the hardware that stores the wallet; and
- transactions to the wallet from a digital currency exchange for which you hold or held a verified account or is linked to your identity.
If you have the above supporting information, you will be able to claim a capital loss on your tax return in the year that the loss or theft of Bitcoin occurred. This can be offset against current year capital gains, or carried forward to offset future capital gains.
For those individuals that have been scammed into investing in cryptocurrency, although no actual cryptocurrency ownership occurred, it is unlikely that deduction can be claimed, capital or otherwise. This is because you have not technically lost an asset as you did not own it in the first place and under tax law, money is not considered to be a CGT asset.
Want to learn more?
If you have been dabbling in cryptocurrency and/or NFTs, we can help you understand the tax implications involved, including any income you have to report or any losses you can deduct depending on individual circumstances. Contact us today for expert help and advice.
You’ve worked hard for years, built your business but its now time to consider something else. Usually, selling an asset such as a business would generate a significant amount of tax, however tax legislation has specific exemptions (called CGT small business concessions) that you can take advantage of when selling your business. These exemptions could save you millions in tax. The downside is that the law is very complex in this area and takes significant planning.
Recently, the ATO has noticed that some larger and wealthier businesses have mistakenly claimed small business CGT concessions when they weren’t entitled. By incorrectly applying the concessions these businesses were able to either reduce or completely eliminate their capital gain. The ATO has urged all taxpayers that have applied the small business CGT concessions to check that they were eligible, this firstly means that the business should meet the definition of a CGT small business entity or the maximum net asset value test.
If you’re a small business owner and the pandemic has made you reassess your future, whether it be retirement or selling your business and starting afresh somewhere else, just remember that there may be capital gains tax (CGT) consequences to such a move. However, the tax law does provide four concessions to enable eligible individuals to eliminate or at least reduce the capital gain on a CGT asset provided certain conditions are met.
Eligibility
To be eligible to apply these CGT concessions, the business must have a maximum net asset value of less than $6m (ie the net value of assets owned by the business and related entities), or failing that, the business must qualify as a CGT small business entity.
The definition of a CGT small business entity is essentially the same as a small business entity except that the aggregated turnover threshold to qualify is $2m and not $10m.
In addition, the CGT asset that gives rise to the gain must be an active asset, which just means it is an asset used in carrying on a business by either you or a related entity. It should be noted that shares in a company or trust interests in a trust can qualify as active assets although additional conditions may apply.
Once the basic conditions are satisfied, your small business can choose to apply one or all of the four CGT concessions provided the additional conditions to each concession is also met. Meeting all the conditions means that the concessions can be applied one after another to completely eliminate the entire capital gain in some cases. The concessions consist of the following:
- 15 year exemption – the business may be entitled to a total exemption on a capital gain if the asset has been continuously owned for at least 15 years up to the time of the CGT event. Or in cases where the CGT asset is a share or trust interest, the company or trust must have a “significant individual” for at least 15 years. For individuals (ie sole trader businesses), there is an additional condition that they must be at least 55 years of age and the CGT event occurs due to either retirement or incapacitation.
- 50% reduction – the business may be entitled to an automatic 50% reduction of a capital gain if the basic conditions are satisfied, and the asset does not have to held for more than 12 months.
- retirement exemption – a business that is an individual, company or trust, may be able to choose to disregard all or part of a capital gain made from a CGT event, up to a lifetime limit of $500,000. Note, there is no age limit on using this concession, nor is there any requirement to retire, even though it is called the retirement exemption. However, individuals under 55 who apply this exemption must rollover the exempt amount to a complying super fund.
- roll-over concession – a business can choose to roll-over all or part of the capital gain and then acquire a replacement asset if the basic conditions are met. In the event a replacement asset is not acquired within the required timeframe, the rolled over capital gain will be reinstated.
The 15 year exemption takes precedence over the other concessions listed and is applied without first having to use prior year capital losses. If the 15 year exemption cannot be applied, then depending on the circumstances of the capital gain, the other concessions can be used in any order to reduce the amount of tax payable.
Taxwise, not a lot has changed for individuals this year. We are seeing is a renewed focus by the ATO on outstanding tax returns and ensuring you have substantiation in place.
1. Working from home deductions
Working from home deductions, so simple yet so complex. So what is the difference between 52c and 80c methods?
Over the past year, many of us have been forced to work from home. Last year the ATO introduced a temporary shortcut method to help those affected. You are able to claim 80c per hour working from home. This rate covers everything, including power, internet and depreciation of furniture and equipment. You don’t get to claim both the 80c per hour and your mobile phone for example. It’s also where you were required to perform your duties from home. Just checking email doesn’t count (unfortunately).
The 52c per hours method covers things like depreciation of equipment (eg a desk), heating and power, but does not cover internet and mobile usage. The ATO has a very detailed guide on work from home expenses.
And what about coffees? I know your office has an espresso bar for its employees (and beers and wine on Friday), but unfortunately, the ATO considers these domestic in nature and hence you can’t claim them.
Note that you have to be able to substantiate the hours worked from home – if you usually work part-time, you can’t claim 40 hours a week. A logbook or online time tracker of hours and days worked would be strongly recommended. Additionally, you can only claim the work from home deductions where you are required to work from home. If you’re a builder, for example, it’s probably a bit hard to argue you work from home – especially if you have to be on-site to generate income.
2. Superannuation – unused superannuation concession cap
This one gets forgotten about sometimes, but it can be useful if you want to top up your super. Normally concessional contributions are capped at $25,000 per annum. However, if you contribute less than that amount, the gap can be rolled forward to later income years. Very useful if you wanted to add to your superannuation.
From 1 July 2021, the concessional cap increases to $27,500 per annum.
3. Car – got a lot book?
We see a lot of people looking to claims car expenses, but who don’t have a logbook in place. Without a logbook, you are limited to the cents per kilometre basis. That is, you can’t claim petrol, service, insurance etc. on the car – just the standard 72c per kilometre travelled. If you drive a lot for work (remembering that home to your usual place of employment doesn’t count), then you should consider keeping a logbook.
4. Substantiation
Substantiation is often key to claiming many tax deductions. If you can’t substantiate something, then your deduction is likely to be denied by the ATO. But substantiation doesn’t just mean keeping a receipt – it also means being able to justify why something was “incurred in gaining or producing your assessable income”. A classic example is car-related travel deductions. If you catch the bus into the CBD every day for work and work in the same office every day, it becomes a little hard to substantiate.
5. Investment Properties
One thing I’m seeing as we head into this tax season is a smaller and smaller number of people with negatively geared investment properties because falling interest rates have reduced the number of tax deductions available. The impact is some people will find they have to pay tax on their investment property income.
Also, don’t forget that you can no longer claim a tax deduction for travel costs to a residential investment property and that costs for holding vacant land are also no longer deductible.
Finally, if you sell an investment property generate a capital gain and have to pay CGT on it. I do get asked from time to time “will the ATO catch me” and the answer is a strong Yes. The ATO and powers that be match the data from property sales with their records. This means trouble if your investment property is sold with no CGT reported. You’ll more than likely get a please explain letter from the Commissioner of Taxation.
6. Crypto
These are the hottest assets around right now and the ATO is making an extra special effort this year to identify transactions that might be caught in the tax net. If you have bought and sold any form of cryptocurrency, these are treated as capital gains and taxed under CGT sections of the Tax Act.
Example
Here is a nasty little example that catches a lot of people out. Let’s say you purchased A$1,000 equivalent of Bitcoin. Its price goes up (and you make a paper gain of, say A$2,000 to give you A$12,000). If you purchase goods worth A$12,000 with your Bitcoin, then you have made a capital gain of A$2,000 – which you have to pay tax on.
With 30 June fast approached, its time to have a little think about your year end tax position. Its been a relatively slow year for tax changes, with the new Labour government taking a cautious approach to much needed tax reform. As we head towards the end of the financial year, its now time to start thinking about what your year end financial position looks like. Here are 8 1/2 year end tax tips for businesses to consider now, in order to get yourself prepared for year end.
Important changes to work from home deductions
1. Bring forward deductions, push back revenue
Its a perennial comment, but important. Make sure you bring forward deductions and, where possible, push revenue into next year. Review your trading stock and make sure you formally write off any items that are slow moving or obsolete. Same with bad debts – review your outstanding invoices and if an amount is not recoverable, formally write it off. Its useful to make a note of why you’re writing off a balance. It could be that its over 90 days and the client is no longer contactable – whatever the reason make a note of it.
2. Don’t forget prepayments
Another one for businesses with turnover less than $50 million. Determine whether there is an immediate deduction for prepayments. If you have prepayments due soon, make the payment this side of 30 June, rather than waiting for 1 July.
3. Instant Asset Write Off
Introduced as a COVID-19 measure, the instant asset write off was due to expire at 30 June 2023, but has been extended for small businesses until 30 June 2024 for amounts up to $20,000. It allows businesses with less than $10 million in aggregate turnover to immediately deduct the cost of a new asset in place prior to 30 June 2024. It applies on a per asset basis.
The full expensing of assets is primarily a cashflow question. It’s very useful when you have planned capital acquisitions in the pipeline.
4. Superannuation contributions
Superannuation is only tax deductible when its paid. That is, either paid and received into the superfund or paid if the Small Business Superannuation Clearing House is used. Therefore, if you want your superannuation to be tax deductible in the current year, you need to make sure it has been paid well prior to 30 June – I would suggest 28 June at the latest.
5. Trust distributions and dividends
The days of fixing up a 30 June dividend or trust distribution paperwork sometime in October are long gone. In order to be legally valid, a dividend or trust distribution must be made prior to 30 June. Back dating paper work is also illegal (its fraud), so make sure you get this in order prior to the end of the month.
If you have a family trust tax election in place, be conscious of who you are distributing income to. Ensure all distributions remain within the family tax group.
It’s something you should be planning with your accountant or tax advisor now.
5. Loans to shareholders and associates – Div 7A
Loans to shareholders are very common among privately held businesses. However, there are very strictly anti-avoidance rules around them. Essentially, the ATO views a loan from a private company to a shareholder as an unfranked dividend, unless certain steps are followed. This includes documenting the loan and making minimum yearly repayments on the loan.
8. Single Touch Payroll Changes
Most businesses are now reporting on single touch payroll. From 1 July 2021 the remaining various exemptions from STP fell away, including for micro employers (less than 4 staff) and closely held employees (think owners and family members). That means, unless you have exceptional circumstances, you will be reporting all payments made to directors, family members and beneficiaries of discretionary trusts.
Don’t forget that finalisation of STP reporting to the ATO is required by 14 July.
The 1/2 tax tip
And the final year end tax tip?
Get your tax planning in order. Your business is constantly evolving and changing – make sure your tax structures keep up with it. I usually start by asking clients what their long term goals are. Is it growing the business and pulling dividends out or is a sale sometime in the next few years on the cards? Each of these require a different business structure to be efficient for tax purposes.
There are some things in life that go together well and others that definitely do not. Business and personal finances are in the category of items that should not be mixed. Although it may seem like a headache to keep them separate—who wants to manage all those bank accounts?—your life will be greatly simplified once you separate your personal and your business finances, especially your expenses.
Paperwork and taxes will be easier to manage and you’ll have a better idea of how much money you spend on your business. Here are some tips to keep your personal and your business expenses separate.
Understand the difference between personal and business expenses
Most times, the line between personal and business expenses is clear. Any expense that is directly linked to your business earning an income is a business expense. If you buy something to be used for your business, it’s a deductible business expense. If you buy something to use privately, that’s a personal expense. Pretty simple in theory, but gets hard in practice.
If something is mixed between business and personal, such as a laptop that you use partially for business and partially for personal use, you can only claim a deduction for the amount that you use for business. So if you use the laptop for business 75 percent of the time and for personal use 25 percent of the time, you can only deduct 75 percent of the laptop.
Whether you use something entirely or partially for business, you need to have a record of the purchase.
Open a business credit card and/or bank account
So, what’s the simplest way of solving this issue?
Having a separate business account provides you with an easy way to keep your private and business expenses apart. It also gives you an easy way to track your business expenses. When you use the same accounts for business and personal use, everything is mixed up on the same statement. It can be difficult to determine—or remember—which transactions were related to your business and which were for your private life.
With business accounts you know that every transaction is related to your business and should therefore be deductible. You don’t have to search through every statement at tax time to highlight the deductible expenses because every transaction is business related.
You can also easily check your statements to see how much money your business is spending. That’s incredibly difficult to do if your business and personal transactions are all linked to one account.
Where possible, buy separate business items
Depending on how small your business is, you may not be able to keep all items separate, but buying devices that are used for both business and personal use gets complicated. In an ideal world, you have a separate computer for home and work, a separate work and personal cell phone and even separate vehicles.
Having duplicate items for work and personal use makes it much easier to track expenses. Rather than determining how much of your cell phone bill you can deduct for business, you know that your business phone is 100 percent deductible. Same with your computer and your vehicle. It costs more—especially the separate vehicle—but it keeps your personal life separate from your business life.
Final thoughts
It can be tempting to try to write everything off as a business expense but don’t fall into that trap. Open separate accounts, buy duplicate items where you can and keep receipts of your business expenses.
Talk to a financial advisor about what activities count as a tax deduction and which do not if you are unsure. An advisor will answer your questions and can even help you come up with a system to track your expenses.
The Personal Services Income (PSI) rules are designed to prevent income produced through personal labour from being taxed at a lower rate than if it were in your own name.
The PSI rules apply where an entity (that is a company, trust or partnership) generates income mainly from the personal efforts or skills of an individual person. This often comes up as an issue for professionals (such as doctors, dentists, engineers, lawyers, accountants, consultants, entertainers or construction workers, etc). Basically, anyone who uses their personal skill or knowledge to generate income can be caught.
The rules are based on the principle that the money you earn from your labour, expertise or skills should normally be subject to income tax. That is, you shouldn’t be able to hide the income in a company ot prevent it from being taxed at a higher marginal tax rate. The rules are therefore designed to stop you from trying to reduce, or delay, your personal income tax bill by trying to channel your income through a different business structure.
The PSI rules work by:
- Allowing income to be attributed to you directly as an individual (ignoring the company or other structure that the income flows through) – therefore making you liable for income tax on that income.
- Limiting the available tax deductions to only those that can normally be claimed by individuals.
Unfortunately, the PSI rules are complex. Over the years there have been quite a few court cases involving PSI rules. The ATO recently releases draft guidance on how to interpret the rules, bringing together numerous examples.
What happens if the Personal Services Income rules apply?
If the PSI rules apply to your business, then there are two main consequences.
- There are limitations on the types of expenses you can deduct for tax purposes. You can only claim the same deductions you could as an employee, rather than as a business. The aim of the PSI rules is to align the tax consequences of employees with those who perform the same services, just via a company or trust structure.
- You are tax as though you are an employee, not a separate company and you have specific reporting obligations in your tax return.
Do the Personal Services Income rules apply to me?
What’s not caught? The selling of goods or where you receive a salary and wage as an employee.
The first step is to determine whether you earn personal services income. If you do, you still may be exempt from the rules if you qualify as a personal services business (PSB). To see if the PSI rules apply, or whether you are a PSB, work through each of the following steps:
- Step one – working out whether you receive personal services income.
- Step two – seeing if you satisfy the “results test”. Are you engaged in your work to produce a result (as opposed to just charging for your time)?
- Step three – whether you pass the “80% test”. Whether 80% or more of the income come from a single client.
- Step four – this introduces three final tests, which look at the way your business operates. If any of these tests are satisfied, the PSI rules will not apply:
- Do you advertise and provide services to “unrelated clients”,
- whether you operate from business premises; and
- whether you employ others to do work.
We will now guide you through each of these steps.
Step one – do you receive personal services income?
What are the conditions under which you earn income? For example, what the terms and conditions are in the contract, your invoices and any other written agreements you have entered into.
For this step, calculate for each contract what proportion of your income derives from your efforts, labour, knowledge, expertise or skills versus what proportion derives from other sources. Other sources include supplying goods or materials, providing tools, leasing property or equipment or licensing an asset such as software. If more than half your income comes from your personal efforts, then all the income for that contract is treated as PSI.
If income from any of your contracts counts as PSI, you then need to look at steps two to four to see if the PSI rules apply.
Step two – the “results test”
To pass the results test, you need to satisfy all three of the following conditions:
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- You are paid to produce a specific result or outcome. This will usually not be satisfied if you are being paid based on an hourly or daily rate.
- You provide the plant, equipment or tools (or the job doesn’t require them).
- You are required to fix any mistakes at your own cost. This will not usually be satisfied if you can charge for your time spent in fixing defects in your work.
If you satisfy all three of these conditions, your business is a PSB, which means the PSI rules don’t apply. But if you don’t pass this test, you must instead progress to step three.
Step three – the “80% test”
In this step, you look at the mix of clients from which you earn PSI.
Firstly calculate what amount of PSI from each client. This includes “associates” – that is, income that comes from family members, business partners or related trustees, beneficiaries or corporate entities is all treated as coming from the single client.
If 80% or more of your PSI comes from a single client (including associates), the PSI rules will apply. It might still be possible for you to apply for a “PSB determination” from the ATO if you think you will pass the employment or business premises test (see step four).
If you don’t have a single client that accounts for 80% or more of the PSI you earn, you can progress to step four.
Step four – the final tests
If you’ve reached this step four, you’re still at risk of the PSI rules applying. However, if you can pass any of these three final tests, you will be allowed to characterise your business as a PSB and the PSI rules will not apply.
These final tests are:
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- The unrelated clients test. You pass this test if your PSI comes from at least two different and unrelated clients and you also promote your business generally to the public (for example, via a website, by applying for tenders or advertising).
- The employment test. This test applies if you employ others or engage contractors to do at least 20% of the principal work that generates the PSI. “Principal work” refers to the fee-generating work (and not ancillary tasks, such as business development or invoicing).
- The business premises test. To satisfy the test, your business premises must be used mainly for the personal services work, be used exclusively by you and be physically distinct from your client’s or your own private premises. That is, it cannot be a home office.
You should note that if your business is structured as a company, partnership or trust, and employs more than one individual who generates PSI, the unrelated clients test and the employment test must both be considered in relation to each individual separately. That’s because it’s possible for the business to be a PSB in relation to one individual, but not the other.
If you have been through each of the steps, and you are still not able to satisfy any of these final tests, it is likely that the PSI rules will apply to your income.
Keeping records
If you think there is a chance that your income could be characterised as personal services income, of if you are relying on one of the tests being satisfied, for your business to be classed as a PSB, it’s important that you keep comprehensive and accurate records. This is especially the case where your income comes from different sources, and where you might be required to show how you calculated which proportion was PSI and which proportion was not.
Examples of the types of evidence that you should consider retaining include:
- Contracts with your customers, or other terms and conditions, or correspondence.
- Timesheets or work diaries.
- Tax invoices.
- Records of bank transactions.
- Employee or staffing records.
Getting advice
Even when you understand the concepts underpinning the ATO’s personal services income rules, the application to individual circumstances can still be quite complex. Each of the steps and tests described above are subject to further and more detailed rules, and the interpretation of these rules is not always straightforward. Whether you are looking to set up a business, think that you might fall within the scope of the PSI rules, want to be able to rely on one of the exemptions or wish to apply for a PSB determination, it is always worthwhile getting some expert advice to confirm your position – and to identify and deal with any issues before they might start to become a bigger problem.
When it comes to managing your financial and tax affairs, most people know that trusts can be a useful tool. However the tax treatment of trusts can be very complex. Making a “family trust election” can simplify the rules, however it comes at the cost of reduced flexibility and heavy penalties for breaching the election. This article explains in simple terms what is the election, how its made and the consequences.
What is a family trust?
The starting point is to understand how tax law distinguishes between different types of trust. Tax law recognises two types of trusts:
- Fixed trusts, where the beneficiary has a fixed entitlement to the capital and income (for example, a listed unit trust for property investments).
- Non-fixed trusts, also called discretionary trusts.
A family trust is a special type of discretionary trust, where the trustee makes an election to be a “family trust”.
As we’ll see, there are various reasons the trustee might wish to do this.
Why should I make a family trust election?
Over the years tax law has evolved numerous anti-avoidance measures to stop tax avoidance through trusts. Some of these laws make it very difficult for discretionary trusts to use tax losses and franking credits from dividends.
By making a family trust election, a trust is able to avoid many of the onerous anti-avoidance rules and reporting that most trusts have to undertake.
- If the trust receives income in the form of dividends, it can pass on any related franking credits to the beneficiaries.
- A very common structure is for the business in a company to be owned by a discretionary trust. If the the company makes a capital tax loss these losses can be lost, unless strict rules are followed. A family trust election makes it easier for the company to satisfy the one these rules called the “continuity of ownership” test. This allows the company to carry forward capital losses and offset them against future gains, therefore reducing capital gains tax liability.
- The trust may have previous revenue tax losses or want to write off bad debts. Again, there are strict anti-avoidance rules in place. The FTE allows the trust to pass the “pattern of distribution test” and the “control test”. This means the trust can use the losses.
- The election can allow the trust to satisfy the “income injecting” rules. These rules are intended to stop losses in a trust being soaked up by “injecting” income into the trust. For example, one trust distributing income to another trust simply to benefit from that second trust’s losses. But if the two trusts both make an election, then the distribution may be permitted – allowing the tax losses to be absorbed.
- Reporting requirements may be less onerous (the trust may avoid the trustee beneficiary reporting – or “TBR” – rules).
FTE Summary
The table below highlights key differences between rules for the different types of trust and therefore when an election might make sense.
| Type of trust | Tests required to claim tax revenue losses and bad debts | Pass on franking credits | Income injection test |
| Fixed Trust | 50% stake test | Yes | Yes |
| Non-Fixed Trust (i.e. Discretionary Trust) | Pattern of Distribution Test and Control Test | No | Yes |
| Family Trust | No test required | Yes | Yes |
How to make a family trust election
The family trust election nominates a specific person – known as the test individual. The election is made in writing, using a form published by the ATO. It’s an important choice to get right, because the decision will have significant long-term implications.
Essentially, once a FTE is made the trust can only distribute income to members of the family group, without a significant tax penalty being applied. The family group refers to the family members centered around the test individual. It includes:
- The test individual and their spouse.
- Any parent, grandparent, brother or sister of the test individual (or the test individual’s spouse).
- Any nephew, niece or child of the test individual, or their spouse, and any lineal descendent of these individuals.
- The spouse of anyone mentioned above.
Relationship between test individual and the family group
The family group can also include companies, partnerships and trusts that are wholly owned by any of the above or that have made an “Interposed Entity Election” (or “IEE”). Take, for example, a trust that has a company as the beneficiary. The company could form part of the family group if wholly owned by a family group member or has made an IEE.
The family trust must also satisfy the family control test. That’s a set of specific rules that require the trust to be controlled by family members or individuals connected to the family (such as an adviser).
Are there any traps to watch out for?
After the election the trust can only distribute to the test individual’s family group. That means only members of the “family” can receive distributions. Any distribution outside the family is subject to Family Trust Distribution Tax, charged at the top personal marginal rate (with the Medicare levy also applied) – so, currently 47%.
Family trusts can seem like an easy answer to a range of different tax problems. But be careful. They can be a complex area of tax law, especially when dealing with how the various the tests apply, or when dealing with losses or franking credits from dividends.
What is Fringe Benefit Tax (FBT)? Research shows that employee benefits can be a great way to attract, motivate and retain employees. Whether its free massage services, laundry pick-up or discounted gym membership, the use of non-cash benefits is increasing. But employers in Australia planning to offer staff perks first need to think about the effects of FBT.
What is Fringe Benefits Tax?
Fringe Benefits Tax (abbreviated to FBT) is a tax paid by employers on any non-cash benefits provided to employees.
The concept seems straightforward. However, there are some complex rules for calculating the tax. There are also several different exemptions. Together, these rules make FBT a topic which often catches employers out.
When does Fringe Benefit Tax apply?
The starting point is to know what counts as a fringe benefit. According to the ATO, it includes any payment to an employee, other than in the form of salary. It also includes benefits provided to an employee’s family or associates.
FBT can even apply when the benefit is provided by a third party when arranged by the employer.
What are examples of taxable fringe benefits?
Another way to understand FBT better is to consider different benefits commonly provided by employers:
- A motor vehicle for private use.
- Car parking space.
- Low and zero interest loans.
- Payment of private expenses.
- Certain types of entertainment, such as meals or concert or event tickets.
- Gym and health club memberships.
Essentially anything you provide to an employee that is non-cash can be a fringe benefit. Hence the list could be very long!
What are the exemptions from Fringe Benefits Tax?
The FBT rules specify several items which are a fringe benefit – but which are exempt from the tax. Here are some common examples:
- Work-related items (such as a mobile, laptop or other device, software, protective clothing, tools or a briefcase).
- Child care (in certain circumstances).
- Minor and infrequent benefits (for example, a Christmas party costing less than $300 per person).
Each exemption has its own criteria. These will need to be satisfied before the exemption can be claimed. Finally, adding to the complexity, more generous rules can apply for small businesses.
You can see how providing fringe benefits can start to get complicated.
How do I calculate Fringe Benefits Tax?
FBT is currently applied at a rate of 47%, calculated using the value of the benefit being provided. The value of the fringe benefit provided can be tricky to calculate. In most instances it is the cost of the good or service. Give a top employee a holiday, it’s the cost of the holiday. However, there are numerous areas where the calculation of cost isn’t that simple. Contact us if you have any questions.
When calculating FBT, you’ll need to know that fringe benefits are split into two types:
- Benefits for which you claim a GST credit (“type 1 benefits”) – for example, providing a company car.
- Benefits for which you don’t claim a GST credit, because they were GST-free or input taxed (“type 2 benefits”) – for example, an employee share plan.
During the calculation, you will also have to “gross up” the value of benefits you provide. This means calculating the equivalent gross amount an employee would have to earn (at the highest marginal tax rate) if they wanted to pay for the benefit themself.
FBT calculation
Seven steps to calculating FBT
- Calculate
Calculate the taxable value of all fringe benefits you provide to employees. In most cases this is simply how much the benefit costs. Watch out for specific rules that cover specific fringe benefit types – for example, where a car is provided.
Split the amounts into those that you can claim a GST credit for and those that you can’t. - Add up
Add up the total taxable value of benefits for which you can claim a GST credit (type 1 benefits). - Multiply
Work out the grossed-up taxable value of these Type 1 benefits – multiply the total taxable value by the type 1 gross up rate (currently 2.0802). - Add up
Add up the total taxable value of benefits for which you cannot claim a GST credit (Type 2 benefits). - Multiply
Work out the grossed-up taxable value of these Type 2 benefits – multiply the total taxable value by the type 2 gross up rate (currently 1.8868). - Add totals in 3 and 5 together
Add the grossed-up amounts (from steps three and five). This is the total fringe benefits taxable amount. - Calculate FBT payable
Multiply the total Fringe Benefits Taxable amount (from step six) by the FBT rate (currently 47 percent). This is the total FBT amount you are liable to pay.
Watch out – the FBT gross up rates change every few years. Check the ATO’s website to make sure you’re using the right figure.
Fringe Benefit Tax Example
Assume you pay a staff member an annual salary of $100,000. You also provide a car – a benefit with a taxable value of $10,000 during the 2019/20 FBT year.
The $100,000 salary is taxed at the applicable PAYG withholding rate. You withhold the tax and pay it to the ATO. However, you also need to calculate how much FBT is payable on the car.
The $10,000 car benefit is taxed as follows:
| Taxable Value | $10,000 |
| Multiplied by Gross-up rate | x 2.0802 |
| Grossed-up taxable value | $20,802 |
| FBT Rate | 47% |
| FBT Payable | $9,777 |
FBT example
So, in this example, the total cost to the business to provide the car is the taxable value ($10,000) plus the FBT amount ($9,777). That’s a total of $19,777.
How do I lodge a FBT return?
If you provide a benefit, you’ll need to lodge an annual FBT return. The FBT year runs from 1 April to 31 March.
Check – does the pre-gross up taxable value of the fringe benefits provided to your employee exceed $2,000 within the FBT year?
If so, the grossed-up taxable value of those benefits must be included on the employee’s Payment Summary for the corresponding payroll financial year (1 July to 30 June). However, note some fringe benefits don’t need to be reported on payment summaries.
Remember too that employers can also claim an income tax deduction – for both the cost of providing the fringe benefit and for the FBT paid. This allows you to claim a tax deduction for items that might not usually be claimable. For example, if a car is provided for 100% private or domestic usage, you would not usually claim a tax deduction for that amount. However, paying FBT on it means the company can now claim a tax deduction.
Planning is the key
While you’re busy running your business, it’s easy to see how Fringe Benefit Tax can catch you out. If you need help understanding the impact of FBT on your business, contact us today.
JD Scott + Co is one of Sydney’s leading Chartered Accounting firms, we aim to help build your business and wealth, empowering you to reach your goals.
