Posts

Tax When You Buy Overseas Shares

Tax When You Buy Overseas Shares

/0 Comments/in /by

How to avoid additional tax when you buy overseas shares?

Tax When You Buy Overseas Shares

You can join a global trading platform and within seconds you own a share of Apple, Google or Tesla. But what are the tax implications?

If you get this wrong, you will end up with a lot more tax to pay, also called withholding tax leakage.

So let’s say that you buy $1m worth of Tesla shares – either as an individual, trust or company – and that they pay you a $100,000 dividend. Just dreaming.

So let’s start with you having bought the shares as an individual

Individual

You are entitled to $100,000 of dividends. This is your income.

But the dividends are subject to a withholding tax of 15%, so you receive $85,000 in your Australian bank account.

In your individual tax return you include income of $100,000. At the top marginal tax rate of 45% your tax liability is $45,000.

But you already paid $15,000 withholding tax. And so you receive an offset for this money. Meaning you don’t have to pay it again.

And so you pay $30,000 in Australian tax. With the withholding tax you paid this gives you an effective tax rate of 45%.

Trust

If you bought the shares through your family trust, the same applies. If the trust distributes the $85,000 to you, you recognise the $100,000 as income plus a foreign income tax offset (‘FITO’) of $15,000.

As before your tax liability at the top marginal tax rate is $45,000. Less the FITO you pay $30,000 in top up tax in Australia, giving you a 45% effective tax rate.

Company

As before, the $85,000 arrive in your company’s bank account. The company recognises income of $100,000 and so has a tax liability of $25,000 at a company tax rate of 25%.

But the company receives a FITO for the withholding tax, and so the company only pays $10,000 in top up tax and still has $75,000 in the bank

And so all is well. Until the company wants to distribute the $75,000 to you. Now you run into issues.

Because you only get a franking credit for the Australian tax your company paid, but not for the withholding tax.

And so the dividend of $75,000 only arrives with a franking credit of $10,000, not $25,000.

So you recognise income of $85,000. At a marginal tax rate of 45%, the tax liability is $38,250. But you have a $10,000 franking credit, so you only pay $28,250. So in total you paid $15,000 withholding tax plus $10,000 corporate tax plus $28,250 individual tax = $53,250, giving you an effective tax rate of 54.25%.

So when you buy overseas shares through a company, you pay almost 10% more tax on overseas dividends than if you had received those as an individual or through a family trust.

Does this make sense? Please give me a call if you get stuck.

 

MORE

Tax When You Expand Overseas

Car Tax Deduction

Paying Employee Accommodation

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Tax When You Expand Overseas

Tax When You Expand Overseas

/0 Comments/in /by

What happens to your tax when you expand overseas?

Tax When You Expand Overseas

There are two things you need to look out for around tax when you expand overseas. And these are GST and income tax. 

GST

When you sell things overseas, these sales are usually GST-free in Australia.

However, the other country might charge GST on your products. And they charge this GST in one of three ways:

1 – If you sell via a platform like Shopify or Amazon, the platform will charge the overseas GST.

2 – If your product exceeds a certain value, the other country will hold your shipment until your customer pays the overseas GST. 

3 – And if total sales in that country exceed a certain threshold, your Australian or overseas company – depending on who makes the sales – is required to register for GST, charge overseas GST and lodge overseas GST returns. 

So that’s GST in a nutshell. Of course, the devil is in the detail, but this is roughly how it works in most countries.

Income Tax

In Australia you are taxed on your worldwide income, assuming you are a tax resident of Australia. 

But to what extent any overseas profit is taxed in Australia or overseas, depends on what you are doing overseas. So you face one of four scenarios.

1 – You have no presence in the other country – no staff, no stock, no office, no warehouse, no company or other entity, nothing. And so you pay no income tax over there. Everything is taxed in Australia.

2 – You have an entity over there that will pay that country’s tax just like anybody else. When you now distribute these profits back to your Australian entity, there is no further tax. So your business only pays tax once on these profits. 

3 – You have no entity over there but a presence – be it staff, inventory, wharehouse, office or something else. And so you have a so-called permanent establishment. And this permanent establishment lodges tax returns and pays tax over there just like a real entity. Any profits sent back to Australia come with a credit for any tax paid overseas, so your business only pays tax once.

4 – You have an entity over there but are able to argue that this entity is an Australian tax resident and has no permanent establishment in the other country. It used to be that you only need central management and control in Australia for this to work. But now you also need your core operations in Australia. And that makes scenario 4 beyond the point now and infeasible.

Double Taxation

Why would you even be interested in scenario 4 if it was still feasible? Because scenario 2 and 3 have one big drawback if you operate through an Australian company – double taxation.

When you distribute the overseas profits to you as the sole shareholder, there is no franking credit attached to the extent the Australian company didn’t pay Australian income tax.

The foreign income tax paid doesn’t give you franking credits. And so you pay tax again on the overseas profit at your marginal tax rates. If …..

Ways To Avoid Double Taxation

If there is an overseas profit. And if you actually distribute those overseas profits to the individual shareholder.

The Australian entity can on-charge any expenses it incurred for the overseas entity (plus margin) in form of management fees. That might already reduce the overseas profit to nil or at least significantly reduce it. But make sure you can justify these charges. The overseas tax collection agency might look at your transfer pricing.

And you don’t have to distribute the overseas profits anyway. If you want to keep some profits in the Australian entity to fund further expansion, you keep the overseas profits and pay the Australian profits out and hence no double taxation either.

Permanent Establishment

Whether you have a permanent establishment (‘PE’) in the other country is not always easy to tell. There is a lot of grey. But here are a few clear indicators.

Using a 3PL service doesn’t create a PE, but using your own warehouse does.

Having independent contractors doesn’t create a PE, but having dependent contractors or staff does.

Using a shared office from time to time while you travel doesn’t create a PE, but having a permanent office does.

The rest depends on the double tax agreement between Australia and the other country and a few other things.

Summary

So when you want to expand overseas, look at GST and income tax. And give me a call if you get stuck.

 

MORE

Jobkeeper 2.1

How to Book a Company Car in Xero

Paying Employee Accommodation

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

How to Book a Company Car in Xero

/0 Comments/in /by

How to book a company car in Xero? Here is how you do it.

Book a company car in Xero

To book a company car in Xero is complex – there are a lot of moving parts. You have the split between principal and interest. Then depreciation or the instant asset write off. GST. The car limit. FBT. And last but not least a potential Div 7A issue. That is a lot. But let’s go through it step by step.

Acquisition

Let’s use an example. On 14 April 2020 you bought a car for $80,000 – a so-called ‘luxury car’ – and the dealer invoice says the following:

NetGSTGross
Vehicle Price69,698.476,969.84776,668.32
Transfer Fee34.00034.00
LCT (Luxury Car Tax)342.680342.68
Stamp Duty2,955.0002,955.00
73,030.156,969.8580,000.00
Less Deposit(2,000.00)
Less Finance Liability(78,000.00)
Due0.00

You book this purchase in Xero in 9 simple steps.

Step 1 – Raise a Bill 

You start with raising a bill if the car is financed. If you pay for the car, you have a choice – bill or money spent.

DR Fixed Asset 1GST on Expenses69,698.47
DR Fixed Asset 1GST Free Expenses34.00
DR Fixed Asset 1GST Free Expenses342.68
DR Fixed Asset 1GST Free Expenses2,955.00
DR GSTSystem generated6,969.85
CR Car Finance LiabilitySystem generated – BAS Excluded(80,000)

So the car shows up in your balance sheet with $73,030.15.

Step 2 – Reconcile Loan Repayments 

Every time there is a loan repayment, you need to split the payment between principal and interest as listed in the finance documents.

DR Car Finance LiabilityBAS Excluded1,000
DR Interest ExpenseBAS Excluded1,00
CR BankSystem Generated(1,100)

If you paid for the car outright, then you can skip this step. There is no liability to repay.

Step 3 – Determine Car Limit Excess

If the purchase price of your car is below the car limit in the year of purchase, you can skip this step. If it isn’t, you claimed too much GST in Step 1. So now you adjust this.

The car limits for 2019/20 and 2020/21 are as follows (for all cars, whether fuel efficient or not):

YearNetGSTGross
2019/2052,346.365,234.6457,581.00
2020/2153,760.005,376.0059,136.oo

This is the maximum GST and depreciation you can claim. No need to pro rata for having bought the car sometime during the year. 

Step 4 – Adjust GST

So now you adjust the GST to these amounts. Here is the booking.

DR Fixed Asset 1BAS Excluded19,087.32
CR Fixed Asset 1GST on Expenses(17,352.11)
CR GSTSystem generated(1,735.21)

The GST of $1,735.21 you no longer claim increases the cost of the car from $73,030.15 to $74,765.36.

Step 5 – Instant Asset Write Off 

Thanks to the instant asset write off ($150,000 threshold until 30 June 2021), you can claim the car in one go. But you only get a tax deduction up to the car limit.

DR Instant Asset Write Off ExpenseBAS Excluded52,346.36
DR Non Deductible ExpensesBAS Excluded22,419.00
CR Accumulated Depreciation Asset 1BAS Excluded(74,765.36)

You can book the GST adjustment through a manual journal – as done above – or through the depreciation worksheet in Xero.

Step 6 – Determine FBT Days

In the year of purchase (or sale) you don’t hold the car for the full 365 days. Open the ATO day calculator here and calculate the days from the date of purchase to 31 March. The FBT year goes from 1 April to 31 March.

In this example you bought the car on 14 April 2020. So you calculate the FBT days from 14 April 2020 to 31 March 2021, which are 352 days.

Step 7 – Calculate FBT

Any company car takes you into FBT territory. FBT stands for Fringe Benefit Tax.

Providing you or any employee with a car constitutes a car benefit covered by Division 2 FBT Assessment Act, giving rise to FBT. 

To work out your FBT position, you choose between the statutory formula method and the operating cost method. The later requires a log book.

Which one is better depends on how much you REALLY use the car for business. If less than 80%, use the statutory formula method which works like this (base value excludes registration or stamp duty):

Taxable Value = Base Value (cost + delivery + GST) x 20% x Available Days/365 – Employee Contribution

Not relevant in the year of purchase or the subsequent 3 years, but once you owned the car for at least 4 years on 1 April, you can reduce the base value by 1/3 (33.33%).

NetGSTGross
Vehicle Price69,698.476,969.84776,668.32
Transfer Fee34.00034.00
TOTAL Base Value69,732.476,969.8576,702.32
x 20%15,340.46
x 352/365 days14,792.81

So you take 20% of the base value and then pro rata the amount. That is the employee contribution to reduce your FBT to nil.

Step 8 – Book Employee Contribution

You have a choice. You can lodge an FBT return and then pay the FBT. Or you recognise an employee contribution for the amount and voila: No FBT to pay and no FBT return to lodge. Most sole sharesholders do the later.

The employee contribution is subject to GST. In the example it would look like this.

DRShareholder LoanBAS Excluded14,792.81
CROther IncomeGST on Income(13,448.00)
CRGSTSystem Generated(1,344.81)

If you set amounts to ‘GST inclusive’ in Xero, you don’t need to calculate the GST. The software does it for you.

Step 9 – Div 7A

You just have one last potential problem to deal with if you booked the employee contribution in Step 8. And that is Div 7A. If the company has a receivable to the shareholder at year end, you have a Div 7A problem.

So create a Div 7A agreement or reduce the distributable suplus to nil.

Summary

And that’s it. This is how you book a company car in Xero. In future years, you still have to deal with loan repayments and FBT employee contributions, but the rest is done and dusted.

Does this make sense? Please give me a call if you get stuck.

MORE

Jobkeeper 2.1

Help is Coming

COVID-19 Help for Business

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Car Tax Deduction

/0 Comments/in /by

Your business needs a car, so it got one. The big question is tax. How do you claim your car tax deduction?

Car Tax Deduction

Working out your car tax deduction can be confusing. Here are 10 steps to get the highest tax deduction possible.

1 – Put Travel Aside

Everything that follows here is about car expenses (motor vehicle expenses to be precise), but not travel. The distinction between car and travel is important, because different rules apply. 

Motor vehicle expenses are fuel, oil, repairs, servicing, car wash, insurance, registration, interest and depreciation (or lease payments) and so on.

Travel expenses are road tolls, parking, car ferry or paying somebody for getting a lift and so on. If you incur these for a business trip, you get the full tax deduction.

So put travel expenses aside for now and focus on car expenses.

2 – Ownership

Whoever owns the car, gets the car tax deduction. 

If your employee owns the car, you get no tax deduction for the car itself. But you get a tax deduction for any car allowance you pay. Treat the allowance like any other wage payment. After that you are done. 

If you own the car, you get the tax deduction.

3 – Methods

Now it gets confusing. You need to choose a method to work things out. The problem is that there are four methods. Four!

Cents-per-km Method: You claim 72 cents for each business km – up to 5,000 km. That is your tax deduction.

Logbook Method: You log every trip over 12 weeks and work out your business percentage, which you then apply to your actual cost. That is your tax deduction. Your logbook is valid for 5 years.

Statutory Formula Method: You apply 20% to your car’s base value, possibly pro rata. That is your FBT taxable value.

Operating Cost Method: You keep a log book for 12 weeks and work out your private percentage, which you then apply to your actual cost. That is your FBT taxable value.

But not all of these four methods apply to you at once. 

4 – Tax Deduction

Which tax deduction is available to you depends on your business structure and type of motor vehicle.

Business Structure

If you are a sole trader or partnership, you can choose between the cents-per-km and the logbook method to determine your tax deduction.

If you are a company or trust, you get a full deduction for all motor vehicle expenses. Whatever you pay, you get to tax deduct. But….then FBT picks up any private portion of those costs. 

And to calculate this FBT value, you either use the statutory formula method or the operating cost method.

Type of Motor Vehicle

Everything we talk about here only applies to cars. Cars is anything designed to carry a load of less than one tonne and less than nine passengers.

Anything larger than this usually gets a full tax deduction and no FBT.

5 – Best Method

How do you work out which one will give you the highest tax deduction? The answer depends on your actual costs and private use.

Actual Costs

The cents-per-km and statutory formula methods don’t take your actual running costs into account. But the logbook and operating cost methods do.

So if your running costs are particularly high – high kms, fuel inefficiencies, a lot of repairs, expensive maintenance etc – then go for the logbook /operating cost method. If they are low, go for the cents per km / statutory formula.

The purchase price only matters if your car is below the car limit.

Private Use

The statutory formula method is the only method that ignores your actual private use and just assumes a fixed percentage. So if your private use is high – rule-of-thumb over 20% – go for the statutory formula method in a company or trust. If your private use is low, go for the other methods.

6 – Receipts

For the cents-per-km method you don’t need receipts. Just a reasonable explanation how you calculated your number of business kms.

For the logbook method you don’t need receipts for fuel and oil if you can show how you estimated those costs, but you need receipts for all other costs.

As a company or trust you need receipts for all motor vehicle expenses.

7 – Instant Asset Write Off

The instant asset write off rules give you a full tax deduction in the year of purchase (adjusted to your business % if a sole trader or parternship), as long as the purchase price is below the threshold.

This threshold is currently $150k until 30 June 2021. 

8 – Car Limit

You can only claim a car tax deduction and GST up to the car limit. The car limit for 2020/21 is $59,136 including GST, so $53,760 plus GST of $5,376.

For the cents-per-km method the car limit doesn’t affect you.

In all other cases it does. You can only claim depreciation (or the instant asset write-off) and GST up to the car limit, reduced by any private % for sole traders and partners. 

9 – Employee Contributions

This one only applies to companies and trusts. If the employee reimburses the company or trust for the taxable value they received, then the FBT is nil. If they don’t, then the company or trust has to lodge an FBT return and pay the FBT.

So most sole directors and shareholders of family companies pay the company the taxable value to avoid having to lodge an FBT return. There is usually no cash payment, but just a debit against shareholder loan.

10 – Div 7A

Booking the employee contribution against shareholder loan in Step 9 (as a company or trust) might give you a Div 7A problem, if you owe the company or trust at the end of the financial year.

If you (or anybody associated with you) owes the company or trust at year end, Div 7A wants to treat that debt as an unfranked dividend unless you have a Div 7A agreement.

So get a Div 7A agreement or reduce the distributable surplus to nil and voila: Your Div 7A problem is sorted. But for this one ask an accountant to help you.

Summary

So these are 10 steps to claim a deduction for your car. Just go through these step by step. And give me a call if you get stuck.

 

MORE

Super Death Tax

Paying Employee Accommodation

Accounting Tips for Your Business

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

 

Jobkeeper Payment Cycles

Jobkeeper Payment Cycles

/0 Comments/in /by

Jobkeeper runs over 26 fortnights from 30 March 2020 to 28 March 2021. That is 26 Jobkeeper payment cycles. Here are the relevant dates.

Jobkeeper Payment Cycles

The first round of Jobkeeper covers two quarters: June and September 2020. Its modified extension covers two more quarters: December 2020 and March 2021.

Jobkeeper 1.0

Jobkeeper 1.0 started on 30 March 2020 and ran over 13 fortnightly payment cycles to 27 September 2020, paying $1,500 per fortnight per eligible employee.

1 – 30 March to 12 April 2020

2 – 13 April to 26 April 2020

3 – 27 April to 10 May 2020

4 – 11 May to 24 May 2020

5 – 25 May to 7 June 2020

6 – 8 June to 21 June 2020

7 – 22 June to 5 July 2020

8 – 6 July to 19 July 2020

9 – 20 July to 2 August 2020

10 – 3 August to 16 August 2020

11 – 17 August to 30 August 2020

12 – 31 August to 13 September 2020

13 – 14 September to 27 September 2020

So all up you should have received 13 payments of $1,500 per employee, so all up $19,500 per eligible employee.

Jobkeeper 2.0

Jobkeeper 2.0 started on 28 September 2020 and runs until 28 March 2021, but rates change. To be eligible as an employer from 28 September onwards you must have had an actual turnover drop of at least 30% in the relevant quarter. So no more projected turnovers. It is all based on actual turnovers now.

December Quarter

From 28 September 2020 to 3 January 2021 Jobkeeper has dropped to $1,200 per fortnight per eligible full-time employee and $750 per part-time employee.

14 – 28 September 2020 to 11 October 2020

15 – 12 October 2020 to 25 October 2020

16 – 26 October 2020 to 8 November 2020

17 – 9 November 2020 to 22 November 2020

18 – 23 November 2020 to 6 December 2020

19 – 7 December 2020 to 20 December 2020

20 – 21 December 2020 to 3 January 2021

March Quarter

From 4 January to 28 March 2021 Jobkeeper drops down to $1,000 and $650 per full-time and part-time employee respectively.

21 – 4 January to 17 January 2021

22 – 18 January to 31 January 2021

23 – 1 February to 14 February 2021

24 – 15 February to 28 February 2021

25 – 1 March to 14 March 2021

26 – 15 March to 28 March 2021

So these are the 26 Jobkeeper payment cycles.

 

MORE

Jobkeeper 2.1

Take Cash Out Of Company

COVID-19 Help for Business

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

How To Take Cash Out of Your Company

Take Cash Out Of Your Company

/0 Comments/in /by

How to take cash out of your company without getting hit with a massive tax bill?

How To Take Cash Out of Your Company

Being a sole trader or partnership, one thing is really simple: taking cash out. No strings attached. Your business bank account is all yours. As a company, it it isn’t. 

Sole Trader and Partnership

As a sole trader or partnership, your business and you are one. Your business is not a separate legal entity, but part of you. So your business cash is your cash. 

How much you take doesn’t affect your tax position. You already paid tax on the business profits at your marginal tax rate.

Company

But all this changes in a company. Now you and your business are no longer one, but two. You are a legal entity. And your company is another. The company’s cash is no longer your cash.

So how do you take money out of your company? There are 5 ways and just those 5 – there is no other way.

1 – Wages

The company pays you a wage. Any PAYG withholding you receive back as a tax offset when you do your individual tax return.

Wages are included in your assessable income. So you pay tax on any wages you receive.

2 – Dividends

The company declares and pays you a dividend, hopefully with franking credits attached. Franking credits give you a refundable tax offset and hence are like cash. They are a refund of the tax the company already paid.

Dividends are included in your assessable income. So you pay tax on any dividends you receive, but with a tax offset for any franking credits.

3 – Shareholder Loan

You just take money out of the company and book it against shareholder or director loan. Or you pay private expenses from your company’s bank account. Nobody says that you can’t do that. You can.

But the crux is that unless you pay this back by the time your tax return is due, this loan will be treated as a dividend. So it gets included in your taxable income and you pay tax on it. Unless….you make it a Div 7A loan.

4 – Div 7A Loan

This is a common way to take money out of a company – for up to 7 or 15 years – without it hitting your individual tax return as income. You need a formal loan agreement and minimum yearly repayments of interest and principal.

But a Div 7A loan is only a temporary solution. In the end you have to pay it all back. And then your money is back in the company – looking for a new way out.

5 – Capital Distribution

Amounts sitting in your capital profits reserve, for example pre-CGT capital gains, are distributed as capital upon liquidation of your company.

Capital distributions receive generous tax concessions (50% CGT discount, small business CGT concessions), so you pay a lot less tax than if you had received this money as wages or dividends.

So that’s all you have. Those 5 ways. Does all this make sense? Just give me a call, if you get stuck.

 

MORE

Jobkeeper 2.1

Help is Coming

COVID-19 Help for Business

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Instalment Activity Statement

Instalment Activity Statement

/0 Comments/in /by

IAS stands for Instalment Activity Statement. Think of it as a gap filler when you don’t have to lodge a BAS for a certain period.

Instalment Activity Statement

The Instalment Activity Statement (IAS) covers PAYG instalments, PAYG withholding and ABN withholding. These three – nothing else. So no GST.

Your IAS comes in, when a particular period is not covered by your BAS. For example, when you report PAYG W on a monthly basis but your GST on a quarterly basis.

PAYG Instalments

The ATO will tell you whether, when and how much you need to pay in PAYG instalments on your so-called instalment income.

Your instalment income includes dividends, interest, profits you made as a sole trader or through a partnership and other income that is not subject to any other withholding, but excluding capital gains. 

PAYG Withholding

For PAYG withholding you are either a small, medium or large withholder depending on your PAYG withholding. 

As a small withholder (less than $25,000 of PAYG W) you report and pay quarterly – through your BAS if you report GST quarterly, otherwise your IAS.

As a medium withholder ($25k to $1m of PAYG W) you report and pay monthly – whether through your BAS or IAS depends on what you do for GST.

Large withholders (more tha $1m) are complicated, so let’s put those aside.

ABN Withholding

If a supplier does not provide an ABN to you for goods and services of more than $75 (excluding GST), you need to withhold the top rate of tax from the payment and report this through your IAS or BAS.

IAS v BAS

If you are not registered for GST, you don’t have any Business Activity Statements (BAS) to worry about. All your reporting is done through an IAS – either monthly, quarterly or annually.

But if you are registered for GST, then it gets more complicated, especially if your GST and PAYG instalments or withholding are on different reporting cycles.

You might do your BAS quarterly but might be a medium withholder for PAYG Withholding and hence need to report PAYG W on a monthly basis. In that case you do both. You lodge your BAS quarterly, but then lodge an IAS for the months in between.

Does this make sense so far? Just call me if you get stuck. My number is 0407 909 779. I am Heide.

 

MORE

Super Death Tax

Cloud Accounting Software

Accounting Tips for Your Business

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Small Business CGT Concessions

/0 Comments/in /by

This overview of small business CGT concessions will give you a rough road map of the most generous concession for small business in Australia. 

Small Business CGT Concessions

Imagine the small business CGT concessions didn’t exist. Let’s say you have a small business. And your business is your life. Started from scratch 30 years ago. Risked the family home during the GFC for it. Risked everything. Gave dozens of people good steady jobs. Was part of the engine that drives Australia.

Now you get an offer to sell with a $1m capital gain. How much do you get to keep? 53% – the ATO will take the other 47%, assuming that you have other income and the capital gain fully hits the top marginal tax rate.

Doesn’t feel right. So can you see why we need the small business CGT concessions? To make sure your life’s work doesn’t evaporate in tax. If you qualify, you will pay little or no tax. It can change your life.

Do You Qualify In Principle?

The small business CGT concessions are very generous. But to qualify you have to pass three hurdles. 

Hurdle # 1   Basic Conditions

The basic conditions are your first hurdle. To pass these basic conditions, you need to meet one of 4 conditions – A, B, C or D. It is an either-or proposition. If you fail one, you can still get through with another.

A – Turnover 

You need to carry on a business and have a turnover of less than $2m. This is called the small business turnover test. If you don’t pass it, just keep going. Maybe you pass the net asset value test.

B – Net Asset Value 

You pass the maximum net asset value test, if you have net assets of $6m or less. Your net assets include your interest in the business you sell as well as certain assets of your affiliates and connected entities. But your net assets don’t include your main residence, personal use assets and superannuation for this test.

C – Partnership

If the asset you sell is a partnership asset, then the partnership as a whole must carry on a business and meet the turnover test. If that fails, then the your proportionate share of the partnership will go into your net asset value test under B.

D – Passively Held

If the asset is passively held and used by an associate or connected entity in a small business entity, you pass.

You only need to pass one of these four. Take a capital intensive business like a farm as an example. It might hold land worth more than $6m, but have a turnover of less than $2m, and hence qualify.

Hurdle # 2     Active Asset Test

The active asset test is your second hurdle. You need to always pass this test. This means that the asset must have been part of your business. ‘Used or held ready for use’ is the term they use.

Hurdle # 3      Shares or Units

And the third hurdle only applies if shares or units are involved. If they are not, skip this one. You are done.

If your set up includes shares or units, then this turns into a different ball game. It will get a lot more complicated. How this all works is a long story that we will cover later.  So for now let’s just assume that no shares or units are involved. That you are a sole trader selling your business. 

Do You Qualify For a Specific Exemption?

So you qualified in principle. But what do you actually get? It depends which specific concession you qualify for.

 There are 4 small business CGT concessions. Each of these four is unique with its own set of rules and requirements. Would be boring otherwise. And how you combine these four is important as well and might result in different tax outcomes.

Subdiv 152-B    15-Year Exemption

The first and most generous exemption is the 15-year exemption. It is unique in that it exempts the entire capital gain without any cap. Think about that. The entire capital gain: Tax-free.

This exemption takes priority over the other three exemptions. And it applies before any capital loss offset. So you can keep your capital losses and still get the entire capital gain tax-free.

But to pass you must have owned the asset for at least 15 years and be at least 55 years old. 

And the CGT event must happen in connection with your retirement or permanent incapacitation. What is or isn’t “in connection with your retirement” is often a point of contention though.

If you qualify for the 15-year exemption, you can stop reading here. Anything that comes after this won’t affect you anymore since your entire capital gain is disregarded. This exemption has priority. If you qualify, it applies whether you like it or not. But we have never met a living soul who doesn’t like this one.

Subdiv 152-C   50% Reduction 

This one is easy. The moment you pass the basic conditions, you have this one in your pocket. You don’t have to apply it but you can.

The 50% reduction allows you to reduce a capital gain by a further 50%. Why further? Because you probably already got the 50% CGT discount if you held the asset for at least 12 months.

So now in addition you get the 50% small business reduction when you pass the basic condition. And after that you can still apply the other two exemption, hopefully reducing your capital gain to zero.

Subdiv 152-D    Retirement Exemption

This one is also easy even though it comes with slightly more fineprint. You can claim a capital gain of up to $500,00 as exempt. But not more – ever. That is the lifetime cap.

And there is one more catch. If you are under 55, you have to pay the exempted amount into super. Some people don’t like that. And so they skip this one or park it. The secret word is J5. Sounds confusing – I know.

Here is an example how this works out in conjunction with the 50% reduction.  Let’s say the capital gain is $4m. The 50% CGT discount brings it down to $2m. The 50% reduction brings it down to $1m. And then you and your spouse claim $500,000 retirement exemption each. And voila. You walk away with $4m tax-free in your pocket. Not bad.

Subdiv 152-E  Rollover 

This one will buy you time. Your capital gain is not disregarded just yet, but you defer paying tax on it.

This rollover relief allows you to defer the capital gain for at least two years or beyond two years if you acquire a replacement active asset or incur capital expenditure on active assets. You can choose to rollover the entire capital gain or just a portion after the 50% reduction and retirement exemption. The decision is yours.

If you don’t acquire a replacement asset withing the 2 years, you trigger CGT event J5. But guess what? That might be exactly what you had inteded.

By now you might be 55 and no longer have to put the retirement exemption into super. So now you apply the retirement exemption and walk away with the cash tax-free. 

So that was a quick small business CGT concession overview to give you a rough idea. To show you what is possible.

But don’t give up if this sounds too confusing. Just ask your accountant or ask us. My number is 0407 909 779 – just call me. I am Heide Robson.

 

MORE

NSW Payroll Tax

Accounting Tips for Your Business

Instalment Activity Statement

 

Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

How Super Rules Change with Age

NSW Payroll Tax

/0 Comments/in /by

Payroll tax is a blind spot for many. 

Do I Have To Pay NSW Payroll Tax?

The business is growing. You hire more staff and contractors. And suddenly payroll tax is an issue – a huge issue – an issue you didn’t see coming.

Rough Estimate

To assess whether payroll tax is an issue for you or not, start with a rough estimate. Add up everything you pay for workers – anything you pay for work to get done – wages, paid leave, super, contractor payments, other benefits everything. Does the total in that bucket exceed $1m?

If you are well below $1m, then don’t worry about payroll tax. If you might be getting close, have a closer look

Two Baskets

To work out whether you need to pay payroll tax or not, you need to separate your workers into two groups.  To make this easier imagine two baskets.

Put all your individual workers into the first basket. Individual workers are those who receive a wage from you. And they are those who gave you an ABN in their own name, so no partnership, trust or company involved.

And then you put everybody else into the second basket. Everybody working for you through a partnership, trust or company.

FIRST Basket – Individual Workers

Now you start looking more closely at the individuals sitting in your first basket. Those receiving a wage or working as sole traders.

You look at the totality of relationship. That is the key phrase – totality of relationship. You look at each individual and assess the totality of your relationship with them or their relationship with you – whichever way you look at it.

Totality of relationship means that you don’t just consider one factor, but the total – all six factors together. You look at the total relationship.

A worker is your contractor if they are:

1   –  Able to delegate – they arrive in a team
2  –  Paid for a result, not time – they fix problems at their own cost
3  –  Provide their own tools to complete the work
4  –  Bear the commercial risk – they can make a loss
5  –  Have control over their work – when and how
6  –  Independent of you – you don’t tell them what to do

If considering these six factors somebody looks like a contractor, move them to the second basket. Otherwise leave them in the first basket.

Moving into the second basket is good. You want that. It means you get a second chance. Because everybody left in the first basket is subject to payroll tax.

SECOND Basket – Contractors

Now you look at the second basket. Your contractors – those who work for you through a partnership, trust or company as well as those who came from the 1st basket.

Your aim is to get everybody out of this 2nd basket. But you can only take them out, if one of the 7 exemption applies.

These exemptions are about all or nothing. An exemption either applies to a contract or it doesn’t apply. There is no pro-rata thing going. One day over – gone.

So you go through these 7 exemptions for each contractor. If an exemption applies, great – you can take them out. If none applies, you leave them in there.

# 1  Services Ancillary to the Provision of Goods

It is all about the goods. The labour provided under the contract is ancillary to the supply or use of goods.  

Think of the glazier who delivers and installs the new state-of-the-art glass panels. It is all about the panels. The glazier installing them is just the side show.

# 2  Services Not Ordinarily Required

Your business doesn’t ordinarily require these services. And the contractor supplies the same type of services to the general public in that year.

Think of a plumber who comes to the site once-off to repair a broken pipe. You usually don’t have a broken pipe. And the plumber has plenty of other customers on other sites.

# 3  Services Required For Less Than 180 Days 

The business ordinarily only uses these services for 179 days a year or less. So this is about the service itself. Not the worker. Think of a ski-resort that only needs road clearing for 179 days a year. 

# 4  Services Provided For Less Than 90 Days

This is now about the worker, not the service itself. The worker works for less than 90 days in a financial year. Think of a virtual CFO who only comes  for a day each month.

# 5  Services Generally Supplied To the Public

This exemption only applies if the Chief Commissioner says so. So you need to specifically apply for this one.

This exemption applies when satisfied – based on evidence provided – that the contractor actually provided that type of service to the general public during the financial year. 

# 6  Services Performed by Two or More People

The contractor doesn’t arrive alone but brings at least one other person to help them. Think of the arborist who needs another person to hold his safety lines.

These six exemptions apply across Australia (apart from WA). That is why they are called the ‘six general provisions’.  But there is one more. One specific exemption that only applies to NSW.

# 7  Services Provided by an Owner-Driver

The contract is solely for the conveyance of goods in a vehicle provided by the contractor. The contractor must own or lease the vehicle and must not be an employee. Think of the truck driver who delivers cement for you in their own truck. 

Numbers’ Game

The rest is now just a numbers’ game. You add up everything you pay for the individuals left in the 1st basket and the contractors in the 2nd basket.

And if the total exceeds $1m*, you pay payroll tax. That is why you try to get everybody out of the 1st basket into the 2nd basket and then everybody out of the 2nd basket. That is why you try. 

As part of the NSW COVID-19 Stimulus Package there is no payroll tax during the corona virus crisis until 30 June 2020.

* The threshold for payroll tax is $1m from 1 July 2020 onwards. Lower thresholds apply to the years before that.

 

MORE

Accounting Set Up

Tax Deduct a Business Lunch

Share Certificate

 

Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

 

 

minor benefit rule

Tax Deduct a Business Lunch

/0 Comments/in /by

How to tax deduct a business lunch. Or breakfast meeting. Or morning and afternoon tea. Or dinner.

Tax Deduct a Business Lunch

Most accountants will tell you that you can’t tax deduct a business lunch, nor a breakfast meeting, nor morning or afternoon tea, nor a business dinner. It is all entertainment. And hence not deductible.

And they are right. BUT…..

There are 5 back doors – FIVE – wide open – that allow you to claim a tax deduction nevertheless.

Backdoor #1   The 4W Test

This is the biggest door of all. Think garage door. And this door exist thanks to TR 1997/17. You have probably never heard of this tax ruling and will never again. But it is your best chance to claim a tax deduction for a meal.

TR 1997/17 allows you to tax deduct a meal if the expense passes the Why, What, Where and When test. So let’s call it ‘The 4W Test’.

If the Why, What, Where and When indicate that the dominant purpose of the meal was business, then it doesn’t count as entertainment.

The Why and What carry the most weight. You must get those right. And then you need at least one more – the Where or the When – or even better both.

WHY did you have it? Taking a client out to lunch means business. Taking out a friend doesn’t.

WHAT did you have? Something purely functional like sandwiches and coffee means business. A three-course meal doesn’t. 

WHERE did you have it? Business premises means business. Off site weakens your argument, but doesn’t kill it if the When supports your argument

WHEN did you do it?  During business hours means business. At night doesn’t.

So if your meal ticks at least 3 boxes, it is a business expense and hence not entertainment. And so it is tax deductible.

Backdoor #2    Sustenance

If you have a simple meal on business premises without alcohol, the ATO will count it as sustenance as long as it is finger food. Think of  a working lunch in the board room with sandwiches and tea, a morning tea in the staff room with muffins and coffee or an all-nighter at your desk with pizza and coke.

Sustenance doesn’t count as entertainment, but is a business expense, hence tax deductible.

Backdoor #3    FBT

If you pay FBT for an expense – any expense – then you can tax deduct that expense even if it is entertainment.

So whenever you pay FBT for a meal, you can tax deduct that portion of the expense that was subject to FBT.

Backdoor # 4    Sudiv 32-B

And then there is another door but a really tiny one. Certain entertainment expenses are tax deductible thanks to exceptions listed in Subdiv 32-B..

This subdivision is long and confusing with tricky details and a long list of exceptions. So we run a real risk of boring you with this one.

So below we have just listed a few to give you an idea, but please email or call if you want to try and fit through this tiny door.

You can tax deduct a meal if it falls under certain employer, seminar, promotion and advertising or other expenses. There is also a specific exception for businesses in the entertainment industry. 

If you provide a lunch in an in-house dining facility, that expense might be tax deductible per s32-30.  The same might apply to food or drink that would be subject to FBT but is not due to certain exemptions in the FBT Act. If you provide a business lunch at a seminar that lasts 4 hours or more, you can deduct these entertainment expenses per s32-35.  If you provide a lunch to promote or advertise your goods or services – a product lunch for example – you may be able to claim a deduction per s32-45, but only if ordinary members of the public have an equal chance to attend your event.

Back Door # 5    Travel

And then there is travel. All bets are off when it comes to travel. When you travel, you can have as lavish a meal as you like and it still counts as a business expense. Just stay off the booze. Alcohol and business don’t mix in the eyes of the ATO.

GST

If your lunch is tax deductible for income tax purposes, then you can also claim the input tax credit in your BAS. But if it isn’t, then you can’t

GST just follows what you do for income tax. Whatever is tax deductible as a business expense, gives you an input tax credit (as long as it is a taxable supply).

 

MORE

Cloud Accounting Software

NSW Payroll Tax

Share Certificate

 

Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.