“Cirrus was seeking knowledgeable and mature financial support. A full time resource would have been too expensive for a business of our size. SME was an ideal solution. They understood our business quickly and continue to offer high quality advice.”
Dr Eric Heyde
Cirrus Communications Pty Ltd
Cirrus is a broadband internet provider focused on providing high quality telecommunications services to business and domestic customers in regional Australia.
“I am proud to say that Stuart Boyers from SME Business Accountants is my accountant. Attention to detail, expert advice and his always striving attitude to get the best results for my business, are just some of the reasons why I rave about SME Business Accountants. I have referred many people to Stuart and I will continue to do so because the feedback I receive from people who have met with Stuart is always very positive and thankful that I recommended them to him.”
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If you carry out work at home, you may be able to claim a deduction for some of the expenses relating to the area that you use for business purposes. In all cases the taxpayer needs to:
This article clarifies the various options available and highlights a potential capital gains pitfall.
The level of deductibility depends on the nature of activities being carried out.
Where a study or spare room is set aside primarily or exclusively for business activities.
Possible deductions:
Cannot claim:
Portion of rent, mortgage interest, insurance or council rates.
You run your business from home and an area is set aside exclusively for business activities.
Possible deductions:
The most common basis used to apportion occupation costs is floor area. Other methods can be used, provided the basis is reasonable.
Do you have to pay capital gains tax when you sell your house?
If you answer yes to all of the following questions, then you have a potential capital gain exposure on the sale of your property:
You are entitled to an interest deduction where:
Examples:
You still have a capital gains tax exposure on the sale of your home if you were entitled to claim a deduction for interest and didn’t actually claim the deduction!
The fact that you chose not to claim a deduction for interest on your mortgage does not exempt you from paying capital gains tax on a portion of the profit that you make on the eventual sale of your home!
With Christmas almost upon us, many employers will be shopping for Christmas gifts for their employees, clients and other special people.
At this point it is important to consider the new rules relating to the minor fringe benefit exemption which can save employers $000’s. These rules now allow an employer to provide an “infrequent” benefit to an employee – up to $300 – without having to pay any Fringe Benefits Tax. These benefits are termed minor exempt fringe benefits.
The new rules get even better by applying each benefit separately, for example where a gift is provided to both an employer and their spouse, the gifts are applied separately for the $300 threshold. In other words under the new approach the ATO accepts that different benefits are not added together when applying the <$300 threshold.
These generally include, for example:
Briefly the general FBT, tax, and GST consequences of these gifts are as follows:
These generally include for example:
Briefly the general FBT, tax, and GST consequences of these gifts are as follows:
These concessions recognize that if an employee is required to live away from their usual place of residence, they will incur additional expenses which are fundamentally private or domestic in nature. The law permits employers to pay a tax free benefit, known as Living Away From Home Allowance (LAFHA), to cover these additional expenses. A LAFHA is usually made up of a reasonable accommodation component and a reasonable food component. Other expenses, such as schooling costs, can also be packaged.
A living away from home allowance can be paid where the employee has moved and taken up temporary residence away from his or her usual place of residence so as to be able to carry out employment duties for a time at the new (but temporary) workplace.
In order for the allowance to be tax free, the employee must have a usual place of residence to begin with. Although “usual place of residence” is not defined, the legislation defines “place of residence” to mean:
The Australian Tax Office has stated that “the question whether an employee is living away from his or her usual place of residence normally involves a choice between two places of residence, i.e. the place where the employee is living at the time or some other place. A person is regarded as living away from a usual place of residence if, but for having to change residence in order to work temporarily for their employer at another locality, the employee would have continued to live at the former place.”
A relevant factor in determining this is whether there is an intention or expectation of the employee returning to live at the former place of residence on cessation of work at the temporary job locality.
The legislation provides for NO maximum time for a LAFHA to be paid. In 1995 the Government proposed to amend the law to impose the following time limits:
These limits were NOT enacted. As such, a LAFHA can be paid for as long as the basic conditions for its existence are in place.
However, if it becomes clear that there is no real intention to return to the previous location, the facts could point to a conclusion that the employee has now changed their usual place of residence.
Changing jobs does not necessarily mean that LAFHA benefits stop. As long as the job is not open ended, a LAFHA can still be paid. Proof of this may be that one’s visa requires one to return home.
The exempt accommodation component is that part of the LAFHA which is in the nature of compensation for additional expenses that might reasonably be incurred by the employee in respect of the lease of a unit of accommodation for eligible family members. This amount is only exempt if the employee gives the employer a declaration in the approved form which sets out:
The term “in respect of accommodation” does not include the reimbursement or payment by the employer of mortgage expenses in respect of a house purchased by the employee and used as a dwelling by the employee and family members while temporarily residing in Australia.
What amount might reasonably be incurred on accommodation costs? – this is a question of fact to be determined based on the circumstances. It is likely that the amount which is reasonable would be an amount that approximates the amount which is actually incurred for the accommodation in fact used by the employee.
The exempt food component is that part of the LAFHA which is in the nature of compensation to the employee for additional expenses that might reasonably be incurred in respect of food for the employee and family while living away from home.
Once again, this amount is only exempt if the employee gives the employer a declaration in the approved form.
The exempt food component for expatriate employees working in Australia can be determined by guidelines issued by the Australian Tax Office from time to time. The reasonable food components for expatriate employees for the 2008/09 Fringe Benefits Tax year which ends in March 2009 are as follows:
| Number of persons | Per week ($) |
| One adult | 211 |
| Two adults | 338 |
| Three adults | 379 |
| Two adults and one or two children | 379 |
| Two adults and three children | 442 |
Tax planning is the process of organizing the affairs of a taxpayer so that, as far as legally or commercially possible, the liability of the taxpayer to income and other taxes is minimised. – (definition from the Australian Master Tax Guide)
Some common strategies of reducing ones tax liability are:
The implementation of these strategies differs from taxpayer to taxpayer depending on many variables. Tax planning should address each strategy and identify whether they are appropriate to each taxpayer undergoing the planning process.
Some examples of permanent tax savings recommended to our clients
We identified that our client’s tax position allowed her to take full advantage of the co-contribution rules and advised her to make an undeducted contribution of $1,000 into her superannuation fund before the end of the financial year. The government then made a contribution of $1,500 into the fund on her behalf.
A return well in excess of 100%!
By our review of a client’s profit and loss for the 9 months we were able to project that the tax bill was going to be big. We then identified expenses which could be incurred during this year rather than in the following year. The effect of this strategy was to realise a permanent tax saving due to the fact that tax rates would be less in the next year.
Our client is the owner of a business services company. He had made some good profits during the year. The strategy which was appropriate for him was for his company to make an extra contribution on his behalf into his superannuation fund. This reduced the company’s taxable income to NIL and the superfund was taxed on the contribution at 15%. A permanent saving of 15% was achieved in this case.
The Fringe Benefits Tax Assessment Act 1986 (“FBTAA”) provides for substantial concessions where an employer pays for various costs associated with relocating an employee. These expenses can be met directly by the employer or passed on to the employee as part of a salary sacrifice arrangement. These concessions are available only if an employee relocates solely to perform employment duties i.e. if it weren’t for the employment duties, the employee would have continued to live in his or her previous place of residence.
From the employer’s point of view:
From the employee’s point of view:
Taxpayer has been asked to relocate in order to take up a new position with a new employer. He estimates that the costs associated with the relocation to be $60,000. His employer has indicated that they are willing to package the relocation costs as part of his salary. They offer:
If the Taxpayer takes the allowance:
The full amount of $60,000 will be taxable and the taxpayer will not be entitled to any deductions for the costs associated with relocation as these will be fundamentally private, capital or domestic in nature.
If the taxpayer chooses to be reimbursed for expenses up to $60,000:
The employer will be able to fully deduct the amount of the reimbursement.
No tax will be payable by the taxpayer and no Fringe Benefit Tax will be payable in relation to this amount.
Relocation benefits which the taxpayer’s employer can offer are as follows:
One of the benefits of a negatively geared property investment is the ability to deduct the losses incurred against other income. For this reason many investors register property investments in their individual names. Although this achieves their tax objective it does not provide tax flexibility nor asset protection objectives, which are available in a trust structure. It’s worth gaining a good understanding of the pros and cons of a trust structure before making the decision.
If a trust is the best structure for your situation then we recommend that you set one up sooner rather than later. To transfer a property into a trust at a later date can attract unnecessary costs. The longer you leave it the higher the growth, which results in more stamp duty and capital gains tax when transferring the property.
If a trust is the best structure, the next question will be – what type of trust? The type you choose will depend on your personal situation.
Income from a trust can be distributed in a tax efficient way. The trustee of the trust has the discretion to distribute income to any of the trust beneficiaries. Ideally income would be distributed to family members with the lowest taxable income and hence the lower tax bracket. This can be varied annually depending on family circumstances.
Trust income can also be distributed to children under 18, but only up to $1,325 per child for the 2008 year, after which income is taxed at the highest marginal rate.
Note that if the property is negatively geared (i.e. costs exceed income) then the tax losses would be carried forward in the trust and utilised in future years when profits are made. Under a negatively geared situation unit trusts or hybrid trusts may be more appropriate, where the losses can be regularly utilised.
When the property is eventually sold the trustee can choose which beneficiary will receive the capital gain. This could save large amounts of tax by allocating these gains to the beneficiary with the lowest tax rate. Investment properties that are held for more than a year will be eligible for a 50% discount on the taxable capital gain.
If you purchase a property in a trust then in theory it would be protected if you were sued. In many instances insurance covers the costs of unforeseen events – but there are many situations where insurance does not pay out.
A trust also offers an extra protection – if you lend money to a trust then the loan is at risk, therefore, it is preferable to make a gift of money to the trust from an asset protection point of view. Your creditors can then only gain access to trust income that has been formally distributed to you i.e. income that you are entitled to receive.
If the property is negatively geared and you intend to keep it that way for some time then a discretionary trust may not be for you. Any losses incurred get stuck in the trust. Under these circumstances you may consider a unit trust or hybrid trust, where you can get the benefit of the losses on an ongoing basis. With these trusts you would borrow from the bank in your own name and purchase units in the trust. With the loan in your name you can set the interest costs off against your other personal income, provided that the trust deed provides for distribution of all the income from the property to yourself.
There will be upfront costs relating to the set up of the trust. In most cases we would recommend that the trustee of the trust be a company, which will add to the upfront costs.
Ongoing costs include accounting fees and ASIC fees if a corporate trustee is chosen.
In many states land tax will be at higher rates in a trust than in an individual’s name.
If you own or intend to own an investment property, we recommend that you seek advice from your accountant or lawyer about the best structure for your situation. We recommend asking them the following questions in respect of trusts:
As every situation is different, the information contained in this newsletter is for informative purposes only and should not be used as advice in structuring your investment properties.
We are happy to assist investors or potential investors with setting up an efficient structure for their purposes.
Section 262A of the Income Tax Assessment Act 1936 states that a person carrying on a business must keep records that record and explain all transactions and acts engaged in by the business that are relevant to the Australian income tax legislation.
Earlier this year the ATO issued taxation ruling TR 2005/9 to explain their view on electronic record keeping systems. A tax ruling is not legislation, however, it does explain the ATO’s opinion on certain tax laws and the ATO will follow this opinion when determining whether or not a business is complying with the tax laws.
The Tax Office considers that electronic record keeping systems operate essentially in the same manner as paper based systems, and the records kept in them are, in principle, the same as those kept under manual / paper based record keeping systems. The Tax Office requires that the records, whether kept on paper or electronically, must be kept accurately so as to enable the business’s tax liability to be readily ascertained.
There are many risks involved in keeping electronic records instead of paper records and the ATO expects taxpayers to minimise these risks by implementing the following controls into their electronic records:
These controls enable businesses to protect the security and integrity of their electronic records and are described in more detail below.
Taxpayers should retain electronic records for the same length of time that it retains paper records. For tax purposes this is generally for a period of 5 years. If a taxpayer routinely destroys records it is advised that this occurs in accordance with a regular schedule which is part of the document record retention procedures. A routine procedure may provide the ATO with an explanation as to why documents were destroyed.
A taxpayer should be able to demonstrate that their electronic records system is secure from both unauthorised access and data alterations. This usually involves developing and documenting a security program which achieves the following:
The entire electronic records system should be documented, including physical and logical descriptions of the system’s structure and programs, including inputs and outputs. System documents should be retained to explain aspects of that system so ATO officers can ascertain the system is doing what it is claimed to do. Any related numeric, textual or graphic information should also be documented for easy retrieval.
Generally it is not necessary to retain a hard copy of the information contained in an electronic record unless a particular law or regulation requires the taxpayer to retain the paper copies. However, electronic records must be in a form which ATO staff can access and understand.
Electronic records should be readily accessible. Under Section 263 of the Income Tax Assessment Act, the Commissioner of Taxation or any authorised officer has full and free rights to access all buildings, places and documents including electronically stored records that are required for the purposes of the Tax Act. Furthermore the occupier of a building or place is required to provide the officer with ‘reasonable facilities and assistance’, this includes login codes, encryption keys, passwords, access to hard copies, and computer and software manuals. If the ATO’s system is not compatible with the taxpayer’s system then the information will need to be produced in a hard copy.
The ATO expects businesses to adopt sensible practices that reduce the likelihood of loss of decryption keys and passwords i.e. keeping a copy written down, or on other storage, such as a floppy disk, or by the use of a trusted third party.
The ATO issued this tax ruling to explain to businesses what is expected of them and to advise them how they can meet these expectations. If the ATO audits a business, they will not accept the excuse that the businesses electronic data has become corrupt or been lost.
This initiative allows eligible taxpayers to get an education tax refund for some of their expenditure on education costs.
Key Points:
