In this issue:
- Bad news for business
- Allowance for travel (and some common mistakes)
- Rewarding staff with FBT free benefits at Christmas
BAD NEWS FOR BUSINESS
The increased thresholds for the small business instant asset write-off and the loss carry-back offset for companies have now been repealed. These law changes may require you to urgently amend your business’s tax return in order to avoid interest charges.
On 2 September 2014, legislation to repeal the Mining Tax was passed into law. Also repealed were a number of income tax measures that the Mining Tax was designed to fund including:
- The increased thresholds for the small business instant asset write-off
- The accelerated depreciation rules for small business motor vehicles, and
- The loss carry-back offset for companies.
We now examine the new rules going forward and any action you may be required to take in light of these changes.
Reduction in Small Business Instant Asset Write Off
The repeal legislation reduces the threshold for the small business instant asset write-off.
Under the new rules, small business entities (SBEs) can now only claim an immediate deduction for the entire value of a depreciating asset (i.e. write it off) if it costs less than $1 000 (down from $6 500). Assets costing more than $1 000 will now be depreciated at 15% in the year of purchase, and 30% of the remaining value per year in subsequent years. Consequently, the balance of a general small business pool will only be fully deductible where it is less than $1 000 at the end of an income year (instead of $6 500).
This reduced threshold of $1 000 applies to depreciating assets that are first used or installed ready for use on or after 1 January 2014. On the other hand, the higher $6 500 threshold applies to assets that are first used or installed ready for use prior to this date.
Already Lodged Your Return?
If your small business has already lodged its 2013/2014 return before the 2 September repeal date, the Tax Office allowed you to self-assess under the law that applied at the time (i.e. claim the higher $6 500 threshold). If you completed your return on that basis, the Tax Office is now advising that you amend your return to apply the new law (for assets first used or installed ready for use between 1 January 2014 and 30 June 2014). No shortfall penalty will apply and if you amend your return within a reasonable time, the Tax Office has declared that they will also remit the shortfall interest charge (SIC) to nil. However, if an amendment is not sought within a reasonable time, SIC may be imposed from 2 September onwards. As it stands, the Tax Office has not offered any guidance on what it considers a “reasonable time” for the purposes of amending your return, however we recommend that you do so as soon as possible if required.
Yet to Lodge Your Return?
If your business has not yet lodged its 2013/2014 tax return, when doing so you must prepare your return in accordance with the law as it now stands (i.e. using the reduced $1 000 threshold). In practice this means you will be required to apply two sets of rules on your return:
- Old Rules – Claim an immediate write-off for assets costing less than $6 500 where the asset was first used or installed ready for use in the business between 1 July 2013 and 31 December 2013.
- New Rules –Claim an immediate write-off for assets costing less than $1 000 where the asset was first used or installed ready for use in the business between 1 January 2014 and 30 June 2014.
Abolition of Accelerated Depreciation for Motor Vehicles
The $5 000 motor vehicle write-off which allowed small businesses to claim a bonus $5 000 write-off in the year a business vehicle was purchased, has now been abolished altogether from 1 January 2014. Vehicles will therefore now be depreciated as per the standard rules (i.e. 15% in the year of purchase, and 30% of the remaining value per year in subsequent years). The Tax Office advises that they will apply the same administrative treatment to the preparation and amendment of 2013/2014 tax returns as the instant asset write-off as detailed above.
This means that:
- If your business has already lodged its return and self-assessed under the old rules (claiming the $5 000 accelerated depreciation for vehicles acquired on or after 1 January 2014) you will need to amend the return within a reasonable time, otherwise interest may be imposed. In practice this means reversing your $5 000 accelerated depreciation claim for vehicles first used or installed ready for use between 1 January 2014 and 30 June 2014.
- If you are yet to complete your 2013/2014 return, then you must do so on the basis of the current law (i.e. only claiming the $5 000 accelerated depreciation on vehicles first used or installed ready for use between 1 July 2013 and 31 December 2013).
ALLOWANCE FOR TRAVEL (AND SOME COMMON MISTAKES)
The idea of making allowances to cover the cost of necessary travel by employees is not a new area of tax, but it is becoming increasingly significant, especially with today’s fast-moving and ever more global economy. Businesses are increasingly moving staff around to achieve expansion and build greater ties across greater distances.
It can however be an area of tax law that is still misunderstood by many. First because of recent legislative changes to the LAFHA (living away from home allowance) and secondly because so many employees rely heavily on these types of allowances. As travelling for work purposes can affect employees both financially and emotionally, there is plenty of interest in ensuring that employers get it right.
The Purpose of both types of allowances is to compensate employees for the additional costs they incur due to being required to travel and/or live away from home as a part of their employment duties. However the fact that there are two types of allowances is a legitimate situation as there are relevant issues, for both employer and employee, that will determine which allowance better suits an employee. Having more than one option means tax outcomes can be tailored to match circumstances, as opposed to a “blanket” policy or allowance to cover all travelling employees.
Although they are both referred to as “allowances”, they are dealt with by different taxation regimes. LAFHA is dealt with under the fringe benefits tax (FBT) regime and travel allowances are dealt with under the income tax regime. As we have covered LAFHA recently, we will focus on the travel allowance options available (although ask this office if you require more information on the LAFHA).
Travel allowances are paid to employees who are travelling on business but are not considered to be living away from their home. As a general rule of thumb, the Tax Office considers being on the road for 21 days or less to be travelling. Also there is no change of employment location, and generally an employee travelling for business is not accompanied by spouse and children. A travel allowance provided by an employer is not taxed under the FBT regime but may be taxed under the PAYG withholding regime as a supplement to salary and wages.
The Tax Office publishes guidelines each year on what it considers to be reasonable amounts for a travelling employee. These guidelines give a reasonable daily travel allowance amount and take the following factors into consideration:
- destination of travel (broken down into metropolitan cities, country centres within Australia and international countries)
- other incidentals
- employees annual salary (in ranges), and
- specific rates for truck drivers.
Countries other than Australia are slit into “cost groups”, with each determining the reasonable amount of the daily allowance. These are determined based on the cost of living in that country and then numbered between cost groups one to six. Cost group one has the lowest daily allowance and cost group six the highest.
The reasonable amounts are intended to apply to each full day of travel covered by the travel allowance, with no apportionment required for the first and last day of travel (ask this office if you are interested in what the reasonable amounts are for 2014-15).
Where the employer has paid the employee less than the Tax Office reasonable amount, then the employer is not obligated to withhold from the allowance nor does the employer have to include the allowance on the employee’s PAYG payment summary for that relevant taxation period.
Where a travel or overtime meal allowance is not shown on the employee’s PAYG payment summary, it does not exceed the reasonable amounts, and has been fully expended on deductible expenses, neither the allowance nor the expenses should be included in the employee’s income tax return. If the employee has not expended the entire travel allowance amount, then both the allowance amount and the deductible expenses should be included in their income tax return.
The employee can claim in their personal income tax return the costs of meals, accommodation and other incidentals they incurred as part of their business travel. Expenses claimed however must have been incurred and must be an allowable deduction. The mere fact that they received a travel allowance does not in itself allow a deduction to be claimed.
Where the employee is claiming no more than the reasonable amounts as per Tax Office guidelines, substantiation of the claim with written evidence is not required. If however, the employee claims more than the reasonable amounts, then substantiation is required for the entire amount of the claim and not just the excess above the reasonable amounts.
Main areas of confusion
Some taxpayers get confused by the interaction between the LAFHA and travel allowances, and in some cases people have tried to claim against the LAFHA where no deduction is available. In fact, if an employee tries to make a claim for travel expenses where a LAFHA has been provided by the employer, they are essentially taking “two bites of the cherry” as they would not have had income tax withheld from the amount, nor have they included the allowance received in their income tax return as assessable income. This is because the employer would have dealt with any tax (FBT) liability on the LAFHA, if there was any FBT payable after available concessions.
Another incorrect assumption is that the substantiation exemption means having no records at all. In addition, where there has been reliance on the substantiation exemption for travel claims, there may still be a requirement in appropriate cases that an employee should be able to produce the following:
- how they worked out their claim
- that the expense was actually incurred
- an entitlement to a deduction (that is, that work related travel was undertaken)
- a bona fide travel allowance was paid; and
- if accommodation is claimed, that commercial accommodation was used.
It is also crucial that an employer is aware of the differences between the two forms of travel allowance, and which one suits the circumstances at hand. Other important factors an employer should consider when determining the correct allowance to give to their employees include:
- the enterprise bargaining agreement (EBA) or employment contract
- the policies and governance for the business
- any industry awards
- the industry standard practices
- the experience and level of the employee
- the employee’s personal situation (that is, with family, house etc)
- any exceptions to the general rules (for example, fly in – fly out employees).
Not only is it essential to ensure the correct classification, but employers and the tax professionals helping them also need to apply the appropriate tax treatment for each allowance. Ask this office for guidance.
REWARDING STAFF WITH FBT FREE BENEFITS AT CHRISTMAS
The application of fringe benefits tax (FBT) means that it’s more tax effective to provide staff (including working directors) with non-entertainment gifts (see below) at Christmas rather than hosting a party. This is because such gifts are both tax deductible and FBT free.
This article examines in detail some of the most common benefits provided at Christmas and outlines the various income tax, GST and FBT implications for employers who do not elect to use the 50-50 split method or the 12 week register method.
If an employer, alternatively, elects to use either the 50–50 split method or the 12 week register method for calculating the taxable value of meal entertainment expenditure, the employer would not obtain the benefit of the relevant exemptions outlined in this article (e.g. the $300 minor benefits and business premises exemptions do not apply).
Christmas parties constitute “entertainment benefits” and as such are subject to FBT to the extent the expenditure relates to employees attending a Christmas event unless the benefit is exempt, e.g. the “minor benefits” exemption applies. A minor benefit is one that is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, is not a reward for services, and the cost is less than $300 “per benefit” inclusive of GST.
(i) On-site Christmas party
Holding the Christmas party on the business premises on a working day is usually the most tax effective. Expenses such as food and drink (including alcohol), are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. However, where employees’ families (i.e. associates) also attend and the cost attributable to each associate is $300 or more inclusive of GST, there is FBT on the associate’s portion of food and drink, and a tax deduction and GST credit can be claimed on that portion. The cost of clients attending the party are not subject to FBT, but no income tax deduction or GST credit can be claimed on their portion of the cost.
Where the Christmas party is held on the business premises on a working day with only employees and clients attending, and only finger food or a light meal and no alcohol is provided, then the entire cost is tax deductible. There is no FBT and a GST credit can be claimed on the entire cost.
(ii) Off-site Christmas party
Christmas parties held off the business premises are exempt from FBT where the cost for the employee and their associate is each less than $300 inclusive of GST but no tax deduction or GST credit can be claimed. The cost of clients attending the party is not subject to FBT, and no tax deduction or GST credit can be claimed on their portion of the cost.
Certain benefits provided to employees at the Christmas function are considered separately when applying the $300 minor benefits exemption. For example, a Christmas party is held at a restaurant costing $220 per head, and at the same time employees are provided with a Christmas hamper (considered a non-entertainment gift), costing $150. Although the total cost per head is more than $300, the provision of both benefits will usually be exempt from FBT under the minor benefits exemption.
For the Christmas party expenses, the business will not be entitled to claim either a tax deduction or a GST credit. However, a tax deduction and GST credit claim should be available on the cost of the hamper as this is not considered to be providing “entertainment”.
Bringing the family along
Employees can make the Christmas party a family affair. Not only will it be a more inclusive experience, the ATO says the $300 minor benefits threshold applies per-attendee, not per-employee, which potentially means more FBT-free benefits.
Taxi travel to and from the party
Where the employer pays for an employee’s taxi travel home from the Christmas party, and the party is held on the business premises, no FBT will apply as the entertainment occurred on business premises. The cost of the taxi fare will be tax-deductible as a minor benefit.
Where the party is held off-site, taxi travel to or from the Christmas function is part of the meal entertainment benefit. In such circumstances the taxi travel cannot be viewed separately, and must be added to the cost per employee of the Christmas function to determine whether the $300 taxable value has been exceeded under the minor benefits exemption for the employee or a relative.
(i) Non-entertainment gifts
As noted above, non-entertainment gifts provided to employees are usually exempt from FBT where the total value is less than $300 inclusive of GST. A tax deduction and GST credit can also be claimed. These include skincare & beauty products, flowers, wine, perfumes, gift vouchers and hampers.
Given that the cost of hosting a Christmas party is not tax deductible (where the $300.00 minor benefit exemption applies) and that occasional gifts under $300 per head are tax deductible and FBT free, for a given dollar spend per employee, it would be more tax-effective for the business to choose tax deductible gifts less than $300 that are not subject to FBT rather to spend the money on a Christmas party costing less than $300 per head which is not tax deductible.
There is an interesting twist with providing staff occasional gifts of, say, beer or wine which is not consumed at the workplace or at a work social gathering. In this situation, if the employee consumes the alcohol at home, the cost is tax deductible and exempt up to the $300.00 limit.
Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules as they are not provided to employees. Generally a tax deduction and GST credit can be claimed for these gifts provided they are not excessive or overly valuable.
(ii) Entertainment gifts
The provision of entertainment gifts has different tax implications (examples include theatre tickets, passes to attend a musical, live play, movie, tickets to a sporting event or providing a holiday). Where the cost for the employee and their associate is each less than $300 GST inclusive, FBT is not payable, and no tax deduction or GST credit can be claimed.
However, if the cost for the employee and their associate of an entertainment gift is each $300.00 or more GST inclusive, a tax deduction and GST credit can be claimed, but FBT is payable. The cost of any entertainment gifts provided to clients is not subject to FBT, and no tax deduction or GST credit can be claimed.
It is important that businesses maintain separate accounts in the general ledger for recording the above transactions to ensure that the correct income tax, GST and FBT treatment is applied.
Reporting Benefits on Employees PAYG Payment Summaries
Where the taxable value of certain fringe benefits provided to employees or their associates exceeds $2,000 in an FBT year (1 April to 31 March), employers must record the grossed-up taxable value of those benefits on employees PAYG payment summaries.
Note that entertainment in the form of food and drink, including benefits associated with that entertainment, such as travel and accommodation is exempt from this reporting requirement even if the minor benefits exemption does not apply (e.g. the cost of a Christmas party held off the business premises is $300.00 or more per employee).
Benefits that are exempt from fringe benefits tax are not regarded as taxable wages for payroll tax, superannuation guarantee, and workers compensation purposes which results in a saving of these employee on-costs.
Disclaimer: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.