Posts Categorized: Tax
Entertaining and providing gifts at Christmas time to staff, customers and suppliers is a cost of doing business. However, there are some important FBT, GST and income tax considerations and outcomes.
As an employer, you need to be careful at what you provide at Christmas. The rules are complex and the costs of getting it wrong can prove very expensive.
We will outline some of the more common scenarios and what to be careful of.
Under-pinning the implications are the following key points:-
Christmas parties, entertainment and gifts are all treated under entertainment tax rules.
FBT applies to benefits given to employees.
There are no FBT implications on entertainment and gifts given to customers, clients and suppliers.
There are three methods under which an employer can quantify the taxable components of any entertainment expenditure – in fact there are 38 permutations depending on who is entertained where, how and with whom. We will largely address the actual method which is the one used by most small businesses (as it usually results in the best outcome). It is beyond the scope of this briefing to address the 12 week log method and we will only touch upon the 50/50 method where relevant.
Christmas comes but once a year and to the best of my knowledge and experience does so on 25th December. Nevertheless, the ATO treats Christmas parties and gifts as being what are called minor, infrequent and irregular benefits.
Such minor benefits are FBT exempt where they cost less than $300 (including GST) provided the actual method is used to quantify entertainment.
The Christmas party
Where entertainment is calculated under the actual expenditure method (which is the most common method for small businesses):-
If a Christmas party is held on-site on a work day, the whole cost for each employee will be an exempt fringe benefit. So too will the spouse’s cost provided the cost per spouse is less than $300. No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend. Taxi travel to or from the workplace (not both ways) will be exempt from FBT and not tax deductible.
If a Christmas party is held off the work premises, then the whole cost will be exempt from FBT provided the party costs less than $300 per person (employees and their spouses). No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend.
If an external Christmas party costs more than $300 or more per person then the total cost is subject to FBT.
The cost of any entertainment provided during the party (whether that be at the work premises or outside) will be exempt if it costs less than $300 per head – for example a DJ, musician, clown and comedian.
The cost of entertaining clients, customers and suppliers is not subject to FBT and is not tax deductible.
If any exemption is exceeded then FBT is payable. Consequently, an FBT Tax Return must be lodged and FBT paid (the FBT tax rate being the same as the top marginal tax rate). Please keep this in mind when completing the 2018/19 FBT Questionnaire in early April 2019.
All other entertainment during the year will be subject to FBT on a case by case basis.
Where entertainment is calculated under the 50/50 method:-
50% of the cost will be subject to FBT and this portion will be tax deductible. The other 50% will not be subject to FBT and will not be tax deductible. An FBT Tax Return must be lodged and FBT paid.
Only taxi travel from home to the venue will be FBT exempt and not deductible for tax.
50% of all other entertainment during the year will be subject to FBT.
The following gifts are exempt from FBT and are tax deductible:-
- Hampers, bottles of wine, gift vouchers, a pen set costing less than $300 (inclusive of GST).
The following gifts are subject to FBT and are not tax deductible:-
- Tickets to a sporting event or theatre, holiday, accommodation, etc.
The GST treatment of gifts is:-
- The GST component of any tax deductible portion can be claimed back.
- The GST component that relates to the non tax deductible portion can’t be claimed.
Please do not hesitate to call us should you have any queries.
The Family Tax Benefit is designed to support low and middle income with the cost of raising a family. It is not only a generous payment, it is non-taxable – meaning you get to keep the lot.
So generous that they must be taken into account when undertaking any tax planning.
There are two Family Tax Benefit components:-
Part A is based of combined family income.
Part B is based of the secondary earner’s income (but the main income earner’s income must be below $100,000).
Part A is paid in graduated levels:-
The full amount per child is paid where the combined family income is under $55,626.
For every dollar of income over $55,626, the Part A entitlement is reduced by 20 cents until it reaches what is called a base rate.
Families are paid the base rate until combined income exceeds $98,988. Every extra dollar of income then reduces the benefit by 30 cents in the dollar until any entitlement is exhausted.
The maximum payment rates are $4,929pa for each child under 13, $6,410pa for children aged between 13 and 15 and the same rate for children aged between 16 and 19 who meet study requirements.
The base rate is $1,583pa.
Part B is paid in respect of one child only:-
Is paid at $4,190pa where the youngest child is under 5.
Is paid at $2,927pa where the youngest child is aged 5 to 18.
After the first $5,767 of annual income of the secondary income earner, the rate of payment is reduced by 20 cents for extra dollar of income.
This means that no entitlement is paid where the youngest child is under 5 and the secondary income earner’s income exceeds $28,671; $22,388 for youngest child being 5 and over.
Payments can be received either fortnightly or after lodgement of your Tax Return for that year. But a Tax Return must be lodged by the following 30th June otherwise all entitlements are denied.
The amounts payable can be substantial. They can mean that a two child family can effectively be paying no income tax on incomes of $60,000.
A lack of proper planning by your accountant could see a loss of not just of tax of 39% but may be 30% of a Part A entitlement and even all of the Part B entitlement. As they say, proper planning prevents poor performance!
If your accountant hasn’t spoken to you about the Family Tax Benefit then you could be missing out on many thousands of dollars. We welcome the opportunity to discuss your situation.
As I said in parts 1 & 2, in all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.
And now with no upper threshold, that interest may grow.
In this the third and final part, we set out our last set of 7 tips.
Before jumping in and buying an asset , please consider these additional considerations:-
15/. You can only claim the business portion on an asset that is used both for business and privately – such as a car or lap-top. That said, one can deduct the whole cost of cars provided the Fringe Benefit Statutory Formula method.
16/. If your business has current or carried forward losses in excess of your intended asset purchase(s), then your business will not gain any tax saving in this financial year.
17/. Please refer to our separate blog about using this concession to claim back company tax paid in respect of the 2019 and 2020 tax years. The results can be amazing!
18/. Small businesses can also use this concession to deduct written down value of the depreciable (general pool) assets. As it was, a small business could write-off the carried forward written down value of assets at 1st July 2020 when less than $30,000.
19/. As the write-offs can be large, we are now running two depreciation schedules for our business clients – one at normal rates and one with accelerated tax rates The reason for doing so is that the financial won’t show an artificially low profit which may deny a financial application or even review of existing arrangements.
20/. It applies to tangible assets – ones you can touch. This write-off threshold does not apply to intangible assets such as web pages.
21/. Beware of glitzy app based products as their rates tend to start above credit card rates. We can put you in contact with financiers who have access to the best deals.
With these 7 and the previous 14 common consideration, please don’t jump in and commit to an expensive asset without being absolutely assured of all of its consequences. We therefore welcome any question you have about the instant asset write-off.
Click here to read the first two sets of tips:-
As I said in part 1 last week, in all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.
And now the instant asset write-off has become even more attractive!
What was to be until December a $150,000 limit for small businesses has now become a complete write of all equipment purchases for any business with turnover under $5billion.
In such difficult times as this, it can deliver even greater outcomes when combined with the carry back of company losses.
But before doing so, please ensure you have factored in the following considerations (see part 1 last for the first 7 tips):-
8/. Your small business must own the asset. Your business either needs to pay for it or finance it by a loan, hire purchase or by way of a chattel mortgage contract.
9/. Assets that your business leases from others do not qualify for the write-off (as one does not own the asset until the final payment is made or the lease contract is paid out early).
10/. The incentive also doesn’t apply to assets that are leased by your business to others.
11/. It’s not about when you buy the asset. Your entitlement to claim is based on when you held the asset first ready for use. So for assets you need to have installed, it is not when you buy it; it is when you can first use it.
12/. Make sure you when buy an asset to have the installation date agreed upon.
13/. Installation and delivery costs comprise part of the cost of the asset.
14/. If you trade-in an asset, it is the cost of the new asset that qualifies. So if your business buys a car for $50,000 and trades in an old car for $8,000, then the deductible write-off is $50,000.
Please come back to this web page next week for a further 7 tips and traps.
You can read our first 7 tips here.
We welcome any question you may have in the meantime.
In all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.
And now it has become even more attractive!
And what was to be until December a $150,000 limit for small businesses has now become a complete write of all equipment purchases for any business with turnover under $5 billion.
In such difficult times as this, it can deliver even greater outcomes when combined with the carry back of company losses.
But before doing so, please ensure you have factored in the following 20 key considerations:-
This concession originally only applied to the purchase of new assets. However businesses with group turnover under $50 million can now deduct the cost of second hand assets.
It does not apply to building or capital works nor software development pools or primary production assets.
If your business sells expensive assets, this expanded concession should prove to be a major buying incentive for your customers; even more so if you offer funding solutions. Ask us if you would like a worked example to use with your customers
Only buy an asset if you need it. So, if a company registered for GST buys and asset for $11,000, it will get back $1,000 of GST and will have a tax deduction of $10,000. It will pay $2,600 less company income tax. It will still be $7,400 out of pocket. As tempting as this limit is, don’t get too carried away and buy assets that your cash flow cannot support.
A tax deduction in the 2020/21 tax year will have a flow on effect as it will reduce the PAYG Instalments for 2021/22 and part way into 2022/23.
An asset purchased in 2020/21 will also have a flow on effect for those small businesses paying GST under the instalment method. It will reduce the GST Instalments for 2021/22 and part way into 2022/23.
Writing of large assets may be great for tax but can make your financials look ordinary, possibly disastrous to a current or future financier. For this reason, we now run two sets of depreciation schedules; one for tax and one for accounting / financial statements purposes. Effectively the tax rates are a nonsense and they should not make your financials misleading.
Please come back to this web page for a further 14 tips and traps.
We welcome any question you may have in the meantime.
If one incentive had clients jumping the last couple of years it was the instant asset write-off. Particularly last year when the limit was increased to $25,000 and then to $30,000.
As part of the stimulus measures, it has now been increased to $150,000 to 30th June 2020. And the small business threshold has been removed. A business with turnover of less than $500,000,000 can now use this concession!
In today’s environment, using this incentive may not be possible for many.
From 1st July 2020, the instant asset write-off is set to reduce to only $1,000.
So as tough as things are, consideration should be given to buying needed business assets now to bring forward tax deductions. Not only will this save on income tax, it will have a flow on effect with reduced PAYG Instalments payable through 2020/21. We are not saying buy assets willy-nilly; we are simply saying seriously analyse the impact rather than dismiss it as a knee jerk reaction.
You might also find that you get good deals over the next few months.
Who else should consider this?
Those selling major assets to larger businesses. They might well have the cash flow to acquire assets others can’t. Make sure you tell them about this incentive. With much noise and unprecedented rapid, change, they may not be aware. You might be doing them a favour by telling them.
Over the last couple of years, all one has heard is that the ATO keeps reducing its workforce; at the same time it has spent a fortune on IT and data matching. As a result, the ATO’s audit focus has totally changed.
In recent years, the ATO has escalated the number of warning letters. They have done so in the knowledge that it generally results in reduced claims – many people are fearful and don’t want to claim what is genuinely claimable.
Of late, the ATO’s audit focus has changed. They are announcing visits to certain suburbs and towns; such as Bathurst just before the car race. Moreover, they are stating that they are intending to visit 100’s of businesses at a time. Unless they have done something like doubling their workforce or re-deploying people, I can’t see how this can be done. How many staff do they need to visit the 800 business stated for visits in Croydon and Frankston even if the visit itself is only 30 minutes as they say? And these visits must be undertaken over a short time frame as such visits are now being announced every month.
Businesses to be visited in Croydon will include common targets of takeaway food places, hairdressers, cleaning businesses and somewhat surprisingly management consultants and financial advisers.
Businesses to be visited in Frankston will include the common targets of again take away food places and restaurants but also real estate agents and accountants. Would could deduce that they are trying to scare accountants and get them to put their wind up their clients.
Of particular interest is that the ATO has stated that they are not just relying on the old gold mine of tips offs but also from government regulators such as Fair Work Australia. Under the table payments and under award payments are the very clear focus of this campaign. Discussion topics also include payment facilities, lodgements and super obligations.
Check their identity
The ATO will notify their visit. I strongly recommend cross checking the validity of a request to ensure it is genuine. I say that as when the ATO were undertaking GST reviews in 2000/01, we found that one such client review was in fact a competitor trying to bluff their way in to get inside knowledge.
You can read more at the following link including details on information sessions.
Late last week, a highly contentious bill passed which levies a Capital Gains Tax (CGT) hit on those who sell their home whilst living overseas.
It doesn’t matter how long you lived in your former Australian home. If you sell it whilst loving overseas, you pay tax on the whole gain. There is neither a reduction for:-
- The time it was your home, nor
- The 50% general CGT tax discount which non-residents are not entitled to since 2012.
We will set out more later.
In the meantime, if this affects you, family or friends, keep the following two tips front of mind:-
- It doesn’t apply to house owned since May 2017 which are sold before July 2020.
- Normal CGT treatment applies if the house is sold when you again become a tax resident of Australia.
In the meantime we welcome any question you may have.
We have addressed in previous blogs and our newsletter that former Australian residents selling their former family home will pay tax on the whole gain if the property is sold after 30th June 2020 whilst they are still living overseas. There is no reduction for the period it was their family home. There is however an exemption to some non-residents selling their former Australian home after June 2020; but hopefully those circumstance don’t eventuate.
Former Australian tax residents who have lived overseas for less than 6 years can claim an exemption for what are referred to as life events.
Life events include such things as:-
Being diagnosed with a terminal medical condition by the individual or a family member.
The death of certain family members.
A marriage or de facto relationship breakdown.
We should add that it doesn’t matter whether one still holds an Australian passport. Residency for tax purposes is a separate concept. Whilst there are numerous considerations, the basic position is that one ceases to be a resident of Australia for tax purposes once one has lived overseas for two years or more.
If a former home is sold by an Australian now living overseas and there is no life event exemption, then:-
The whole gain will be taxable – there is no reduction for the period in which it was the family home.
The capital gains tax general discount of 50% is not available to non-residents. In other words the whole gain is taxable.
Tax is payable from the first dollar at 32.5% as non-residents do not receive the tax free threshold nor the 19% marginal tax rate.
Under the new non-resident property withholding tax, 12.5% of the proceeds must be remitted to the ATO – meaning only $1,750,000 from the sale of a $2,000,000 property will be received at settlement; the balance will offset against the capital gain within the Tax Return.
Please refer to previous blogs for strategies to not paying this rather hefty and unfair tax. Or better yet, calls us to discuss your situation.
An often over looked way to reduce the tax paid on the sale of a former home is to use the six year absence rule.
The net rent you receive is assessable (or deductible if negatively geared) but the gain itself can be disregarded.
However, you must take care when choosing to use this method when you live in another home. One is only entitled to one principal residence (family home) exemption so choose carefully
We would welcome the opportunity to discuss what is best for you. We welcome your call.