In this issue:
- A tax deduction for your commercial website
- Dun & Bradstreet’s tips to ensure prompt payments
- ATO targeting work-related deduction claims
- Employee v’s contractor – main issues and consequences of getting it wrong
A tax deduction for your commercial website
There is no denying that the internet pervades our everyday living in multiple and various ways these days. The commercial world is not only similarly tied-in with all things “cyber”, but in fact many businesses rely to such an extent on being “online” that they couldn’t survive without it.
Of course the internet is not a “one-size-fits-all” tool for commercial activities, as the purpose behind having an online presence varies greatly depending on the business involved.
A particular website could be just for promotions and marketing, or it could provide essential contact details or information about services offered. Another business will require e-commerce capabilities, or other interactive services such as online quotes, or be capable of taking customer feedback.
Depending on whether a complex or a “plain-vanilla” web presence is needed by a business, the costs involved in creating, running and maintaining a website can vary greatly. Therefore estimating the financial demands of website development and maintenance – and the resulting tax consequences – can be far from straightforward.
From a tax treatment point of view, the sticking point with website expenditure can be determining whether such costs are essentially of a “capital” nature, or operational outgoings.
The software that allows the website to operate may be deemed by the Tax Office to be “in-house software” if it is used to perform the functions for which it is developed. The software in these circumstances is an intangible asset.
However, where an intangible asset is determined to be in-house software, as in this case, it would be classified for tax purposes as a depreciating asset that can be written over time. Of course uncontrovertibly the hardware (such as a computer server) if used in-house would likely be considered “plant and equipment” and can be depreciated, with the effective life for such assets generally being four years.
Business owners should be mindful however that costs dedicated to maintaining their website, and expenses associated with uploading content, such as price lists or changing details of goods or services on offer, and replacing text or pictures, can generally be seen as operating costs in the ordinary course of business.
This would mean that these type of costs may therefore be deductible in the same year that they are incurred. An example of these types of costs may be the hosting of a website, as this is part of the regular ongoing cost of operations.
In very broad terms, the following are the tax treatments available for website expenses.
Depreciable assets (written off over the life of the asset)
- Dedicated hardware (server, CPU and other physical assets)
- “In-house software”, which is depreciated at 25% prime cost if it is not allocated to a pool.*
- Interactive functions
- E-commerce tools
- Membership or “sign-in” requirement
- Wages or contractor fees to the extent that they are in respect of the items above.
* If allocated to pool, 0% in first year, 40% in each following two years, then 20% in remaining year.
- Cost of third-party hosting
- Upload of simple text content, company information, price lists (replaced periodically)
- Operation costs in the ordinary course of business.
But the Tax Office’s view of a website being “in-house software” or not – and therefore treated as depreciable capital expenditure – can also be coloured by the simplicity and/or complexity of a website. It all comes down to what the tax office refers to as “a question of fact and degree”.
A very general assertion can be made that the simpler a website is (that is, if it is merely a few documents converted to code) the more likely it is that the business can argue that costs – for example, the periodic uploading of content – are of a revenue nature carried out in the normal course of business. Expenses incurred in creating and uploading content for the bare-bones website are likely to be fully deductible in the year such costs are incurred.
But in cases where more sophisticated website elements come into play, such as adding a shopping cart, the Tax Office will likely take the view that an in-house software asset has been created and deployed, and the business involved may be denied an upfront deduction in the year the costs are incurred, with these costs instead required to be allocated to a capital account and depreciated over a number of years.
Salary, wage and/or contracting costs could also be included, apportioned appropriately to website expenses.
Rulings and decisions
The Tax Office has already provided an “interpretive decision” regarding the allocation of such costs between deductible expenses and non-deductible capital expenditure. The decision concluded that salary and wage costs could be on capital account if:
- The duties of the employees were mostly involved with major upgrades of assets on an ongoing basis
- The relevant assets formed a significant part of the taxpayer’s business structure, and
- The employees were “engaged in a systematic manner and as part of their normal duties, in the construction and upgrading of the taxpayer’s depreciating assets”.
As a rough guide, the Tax Office issued a tax ruling that set out some “indicators” regarding the tax treatment of a business’s website. These are:
- It allows interaction with users, such as them “signing in”, or some system of membership,
- It had to undergo a testing process to iron out bugs and fix errors,
- It is specifically designed to meet certain criteria spelled out by the business, and
- Supportive documentation is required to assist in the various phases of the lifestyle of the website.
For now however, as the above ruling has been withdrawn and no replacement has been issued, the Tax Office seems determined to take a very “case-by-case” approach to deciding on which costs it will allow a business to claim upfront or as part of a depreciating asset. Having said this, if a business’s website seems to cover one or more of these tax treatment indicators as spelled out by the Tax Office, it is more than likely that the tax treatment will require having related expenses apportioned on a “revenue” (deductible) or “capital” (depreciable) basis. Good advice will be essential in this area. Where the case is unclear a private binding ruling from the Tax Office may need to be obtained.
Dun & Bradstreet’s tips to ensure prompt payments
Credit reporting and receivables management company Dun and Bradstreet (D&B) said that while business owners often find themselves focused on the job at hand, the job isn’t really over until it has been paid for. D&B said that it is essential for a business’s health and cash flow to have a timely turnaround on all accounts. Accordingly, here are D&B’s top five tips on collecting payments (and limiting the possibility of acquiring bad debt).
Record customer details
D&B said it is important to have all the relevant customer details you need before you deliver a service or product. Not all late payments are due to bad debt, so it’s a good idea to maintain the details of your customers to investigate the payment as it becomes overdue. “Additionally, customer details are also perfect for initiating a marketing strategy or activity, so it’s a good idea to keep them on file.
Clearly state trading terms
As D&B said, not all late payments will be a result of bad debt. Sometime customers will forget to pay due to poorly devised invoices. “In order to help guarantee your payments it’s essential you outline your company’s credit policy, the due date and total amount owing on the invoice”. By providing all these details, D&B said you equip your customers with the information they need to make a prompt payment.
Offer early discounts
Sometimes customers will need an incentive to make early or even on-time payment, and D&B said it is common for debtors to ignore your invoice if they don’t see it as a priority. One way to confirm the importance of your invoice is by offering a discount for early payments. “Customers will always try to make savings wherever possible, so even a minor discount of 5%is enough to confirm a prompt payment.”
Keep in telephone contact
It can be too easy for customers to ignore a letter or email that outlines the payment they owe. D&B said that telephone follow ups have a higher chance of success, largely because it is a lot more difficult to ignore a phone call. Another major benefit of a telephone follow up is that you are guaranteed direct communication with your debtor if they answer, which is never the case with an email or letter.
Refer to a collection agency
Debt collection agencies are designed to collect payment for delinquent accounts. D&B’s advice, if you find yourself spending too much time or resources and still not getting anywhere, is that it may be worthwhile outsourcing your debt collection. “Agencies deal with debt collection every day, so it’s only natural that they are better positioned to reclaim money.
ATO targeting work-related deduction claims
This year, the ATO is continuing to pay close attention to the $19.5 billion in work-related expenses individuals claim each year as deductions when they lodge their tax returns. Rather than focusing on particular occupations as it has done in the past, this year the ATO is focusing on particular types of work-related expense claims relating to:
- Overnight travel;
- Transporting bulky tools and equipment; and
- The work-related proportion of use for computers, phones or other electronic devices.
If you usually claim these types of deductions, or are planning to in your 2014 return, you should bear in mind that the ATO will be closely scrutinising these claims.
The ATO will also continue to review incorrect or excessive claims for all other work-related expenses.
Employee V’s Contractor – Main Issues & Consequences of Getting it Wrong
The issue of whether a worker is properly classified as an employee or an independent contractor has taxation, legal and potential insolvency implications.
The ATO’s 2012 compliance program has a section aimed at “promoting a level playing field for Australian Business”, specifically targeting businesses that use sham contracting from gaining an unfair competitive advantage over businesses that put people (employees) on the payroll.
There are also State based payroll tax obligations to consider, plus the sham contracting provisions in the Fair Work Act 2009 and the various State/Territory workers compensation authorities.
The problem for businesses is that there are no clear cut definitions to distinguish employees and independent contractors. Instead, there are a number of different indicators that have been identified by the Courts which need assessment according to the individual circumstances of each case. What is clear, is that the intention of the parties is not the only thing taken into account, and the Courts (and government agencies) will look behind any intentions, whether documented or not, to look at the relevant circumstances of the arrangement. This creates uncertainty for businesses that potentially face insolvency if they get it wrong.
This article summarises the main issues and consequences of getting it wrong.
Perceived advantages of hiring a genuine contractor
- avoid unfair dismissal claims;
- avoid employment on-costs, including PAYG and superannuation guarantee contribution (SGC);
- avoid other employer obligations and employee rights under the Fair Work Act (FWA) and other legislation, including paid leave entitlements, Award conditions, overtime and the like;
- avoid workers’ compensation claims and increases to premiums; and
- avoid payroll tax.
Main indicators of employment
- the employer has substantial control over the worker, including the right to suspend or dismiss the worker;
- the substance of the work contract is not to achieve a specified result and the work is ongoing;
- the worker is required to provide the services personally and cannot delegate/sub contract to third parties
- the worker/service provider is an individual and not a company;
- the worker wholly or mostly does work only for the employer (as opposed to providing services to a number of businesses);
- the worker does not conduct his/her own business;
- the worker’s hours are set by the employer;
- the employer provides the equipment/tools;
- the employer pays for the employees work-related expenses;
- the worker bears little or no risk of the costs arising out of injury or defects in carrying out the work;.
- the employer is responsible for insurances including workers compensation and professional indemnity;
- the employer is responsible for paid leave/benefits; and
- the employee is paid based on the amount of time worked (as opposed to being paid to achieve a specified result – eg: a lump sum contract).
How things can go wrong
1. FWA and employee rights
- Labelling a worker a “contractor” and paying on receipt of a tax invoice, does not prevent a worker from making an unfair dismissal claim or suing for other employee entitlements/benefits, particularly if the relationship is terminated and the worker’s engagement is terminated;
- Starting an unfair dismissal claim is cheap and quick, although the threshold issue of determining whether the worker is a contractor or employee needs to be determined at an early stage;
- Likewise, workers can also start unlawful termination claims under the FWA (for example for discrimination) relatively quickly and cheaply and the onus is then on the business to disprove the allegation;
- Workers can claim for unpaid benefits/entitlements – a 2011 Federal Court case decided that five insurance agents engaged as independent contractors who were paid on a commission basis, had limited rights to employ others and who were not prevented from performing work for third parties, were found to be in fact employees entitled to accrued annual leave and long service leave. Key findings were that the insurer gave the agents sales leads and training and encouraged them to behave as part of the insurer’s business and that the agents were not conducting their own business but were clearly part of the insurer’s business. The contracts included indemnities by the agents in favour of the insurer which covered the cost of paid leave. The indemnities were held unenforceable as against public policy;
- Orders under the FWA for back pay and leave entitlements as employees, may impact on other legal liabilities, such as payroll tax, SGC and workers comp, which likewise need to be adjusted/paid as a result;
- The FWA prohibits sham contracting arrangements, which cover dismissing/threatening to dismiss an employee in order to re-engage them as a contractor and making false statements to an employee to persuade him/her to become a contractor. Penalties include fines of up to $51,000 for a company and $10,200 for individuals involved in the breach. There have been a number of successful prosecutions by the FWO including one against the sole director of a company employer and its human resources manager; and
- Even if the relationship is properly an independent contracting arrangement, contractors can still take advantage of the Independent Contractors Act. This permits the courts to review contracts on the grounds the contract is unfair or harsh and to make orders to fix any established unfairness. That includes compensation.
2. PAYG withholding
- Employers must withhold tax from salaries, wages, commissions, allowances and bonuses paid to employees, and remit that to the ATO. See Tax Ruling 2005/16;
- Failure to withhold and remit can result in the ATO charging a minimum penalty of 100% of the shortfall;
- If PAYG is unreported and unpaid for more than three months, then under the 2012 changes to the tax laws, the ATO can issue a Director’s Penalty Notice (DPN) and hold directors of a company employer personally liable. It is no longer a “defence” to place the company into liquidation or administration. The ATO has already started cracking down on directors, including a case where a company started being wound up before the DPN was issued. Failure to account for this potential personal liability can completely negate any restructuring of a business, even where a business is sold at valuation price or where a Deed of Company Arrangement (DOCA) has been proposed and approved by creditors; and
- The ATO can conduct audits of the past five financial years.
3. Super guarantee (SGC)
- Employers are required to make compulsory super contributions based on an employee’s ordinary time earnings. Ordinary time earnings is a wide definition and picks up salary, wages, bonuses, commissions, leave pay and the like;
- SGC is payable at least quarterly, by 28 days after the end of each quarter;
- Like PAYG, if SGC is unreported and unpaid for more than 3 months, then the ATO can also issue a DPN and hold directors of a company employer personally liable;
- In addition, under the Super laws, SGC is also payable to persons who are generally found to be independent contractors, if certain conditions are met, including if the person works under a contract that is wholly or principally for his/her labour; certain artists, musicians and sports persons and persons who are paid to do work which is wholly or principally of a domestic or private nature for more than 30 hours/week. See Super Ruling SGR 2005/1;
- Note however that SGC is not payable where the contractor is a company and has its own ABN; and
- Failure to pay SGC results in late payments not being tax-deductible and imposition of a superannuation guarantee charge which includes an admin fee and interest. Late lodgement of your super guarantee charge statement can make you liable for penalties up to 200% of the amount of the charge payable.
4. Workers compensation
- Workers compensation laws vary from State to State. They are all however aimed at covering an employer’s liability arising out of injuries to workers in the course of employment;
- Like SGC, the workers compensation regimes have extended concepts of what constitutes a “worker” and captures some contractors, in certain situations, for example where the work is under a contract or at peace work rates, for labour;
- Failure to include a relevant worker under your workers compensation policy can result in significant penalties, which may include the amount of damages paid out to an injured worker; and.
- Workers compensation authorities also have significant investigation and auditing powers.
5. Payroll tax
- Payroll tax is a State/Territory based tax imposed on employers in respect of “wages”.
- In NSW, if your total wages, calculated over a business and any associated entities (the legislation is very wide in terms of what other entities are captured in a “payroll group”), is above the annual payroll tax threshold (currently $750,000.00 in NSW), then payroll tax is charged at 5.45% of the amount above the threshold.
- Like SGC and workers compensation, the payroll tax regimes have extended concepts of what constitutes an “employee” and in some situations captures some workers who are properly classified as independent contractors: and.
- Payroll tax is paid on a self- assessment basis and there are significant penalties for non-disclosure. The penalties are reduced if voluntary disclosure is made.
Tips to minimise risk/liability
- If you are thinking about engaging workers on an independent contractor basis, get professional advice before you do so, in particular in preparing your contractor agreements;
- Keep a clear paper chain of evidence/records in relation to the considerations taken into account in looking at the relevant indicators;
- If you are going to engage a worker as an independent contractor, then make sure you engage them through a company, ensure that the company has a valid ABN, and that the company has appropriate workers compensation, public liability and professional indemnity insurances;
- Include a “set off” clause in the contract so that any amounts paid over and above minimum Award entitlements (if the worker had been an employee), are set off as against any subsequent claim or loss suffered in connection with claims that the relationship is that of employer/employee (although such a clause may be struck down for public policy reasons, similar to the indemnity above);
- Get professional help to conduct a risk analysis of your business if you already engage contractors; and
- Remember, that if you have a problem in one area, it will likely cause a problem in each of the other areas. Shortfalls in PAYG, SGC and workers compensation premiums can bring significant financial penalties. You may also become exposed to significant historical financial exposure, through backdated penalties which could put substantial financial pressure on your business.