If you have ever invested in the stock market, it is likely you have come across franking credits. Whether it be an amount on a dividend statement you notice doesn’t hit your bank account, or a refundable tax offset you see on your tax return. What does it actually mean and how does it affect you?

Why does the dividend imputation system exist?
A dividend imputation system is where some or all of the tax liability for a company is transferred to its shareholders in the form of a franking credit. The franking credit accompanies a dividend, which represents earnings by the company. The purpose of franking credits is to stop company profits from being taxed twice, so that whoever eventually receives the profits will be taxed at their own marginal tax rate.

How does it work?
Most companies pay tax on their profits at 30%. The company can choose to either reinvest their after tax profits back into the business or to pay some or all of these profits out to its shareholders as a dividend. The shareholder will initially receive the after tax amount (maximum of 70%), as 30% would have being paid by the company as tax. For the shareholder, the tax treatment is that the dividend is grossed up (imputed back to 100%) and then included as in the shareholder’s tax return and treated as ordinary income. The shareholder is assessed at their marginal tax rate and receives a credit for the franking credit. So if the shareholder’s marginal tax rate is less than 30% the shareholder is better off (from a tax perspective).

Why did I not get my franking credits refunded?
If you are in a higher tax bracket than the company, you will have to pay the additional tax on the dividend that the company hasn’t paid. For example, if you receive a dividend fully franked at 30% (that is the company has paid 30% tax on the earnings already), and you are a higher income earner in perhaps the 45% tax bracket, you will have to pay an extra 15% tax on the dividend.

Why do some dividends not have a franking credit?
If you receive an unfranked dividend, this means the company has not paid tax on the money you are receiving. You are more likely to receive an unfranked dividend when you invest in companies that do not necessarily pay much tax, as they have more deductions available to them. Companies can only distribute franked dividends if they have paid enough tax previously. There is also the possibility of receiving a partially franked dividend, which occurs when the company hasn’t paid enough tax to be able to pay a fully franked dividend.

I don’t need to lodge a tax return, am I entitled to a refund for franking credits?
If you are wanting to do this yourself, the easiest way is to go through your myGov account online. Alternatively, you can obtain an “Application for refund of franking credits for individuals” through the ATO website, before lodging this either by phone or post to the ATO. There is also an automated refund process that is being piloted by the ATO where a selection of taxpayers who applied for a refund in the previous year will be automatically issued a refund based on information reported to the ATO and the relevant share registries.

 

Author: Jake Solomon
Email: jake@faj.com.au

Bank feeds are automatically created lists of the transactions (spent and received) in your bank account which are electronically ‘fed’ through a third party provider to your accounting software. Bank feeds have been around for a while as part of desktop accounting software and have been integrated into online accounting software only in the past couple of years.

The great thing about bank feeds is that they heavily reduce the amount of data entry for business owners or their bookkeepers. The method of collecting these feeds differ between software providers and banks.

How does it work?
Bank feeds work by linking the data in your business’s bank, credit card and PayPal accounts to your accounting software.

Once the transaction has arrived in your software it needs to be coded to a general ledger account. This is where the magic begins – once a transaction has been coded the first time the software uses rules and artificial intelligence to learn how to automatically code future transactions. You can further assist by setting up  rules within your accounting software to auto-match all transactions and in this way minimize data entry.

For example, once you have allocated an account and tax code to a bank charge transaction all future bank charges with the same description will automatically be coded the same way. Of course if necessary the auto coding can be overridden.

Bank fed lines can also automatically match to any sales invoice or purchase invoice created in the software. If multiple invoices are paid at one time then matching to outstanding invoices can be completed with ease from the bank reconciliation screen.

The setup.
Generally setup requires signed bank forms which can be downloaded from within the accounting software. Sometimes direct links through online banking can be activated on the spot depending on the bank and type of account. This involves either:

• Accessing the bank account through online banking and activating to link with the accounting software selected (e.g. Xero, MYOB or Quickbooks) and the bank account created in the software

Or

• Accessing and printing bank forms from your accounting software, filling out the bank form information and getting the relevant people to sign forms (i.e. the signatories of the bank account). Then submit the forms to the relevant accounting software used. (Submission is usually via email to the accounting software provider)

Why are Bank Feeds So Important?
A large part of SME bookkeeping is coding bank statements into revenue and expense categories so a business can track its sales and costs. A user can set up rules to automatically match transactions from certain suppliers (e.g. a credit card transaction from an airline would be categorised as Travel). This coding occurs from within the bank reconciliation screen which is more efficient than older methods, and cuts out hours of manual data entry required to reconcile accounts.

Online accounting software collects bank feeds in two ways.

1. The Direct Feed
Larger software companies pay the biggest banks to receive bank feeds for shared customers’ accounts. The bank’s IT department prepares its systems to export a daily feed of transactions from its banking system to the software company’s databases that run the online accounting program (eg. Xero, MYOB).

Direct feeds are commonly used for everyday business and personal bank accounts, some loan accounts but not term deposits. It does depend on the banks setup of the banking accounts whether they can be fed or not.

2. The Indirect Feed
An online accounting program can also use a data aggregation service which collects bank feeds from thousands of banks.

The data aggregator used by most software companies is a US headquartered company called Yodlee. Yodlee sidesteps the cost of paying for fees by copying the list of transactions on the screen of users’ online banking portals.

Yodlee cleans up the list, removes duplicates and sends it to the user’s online accounting software as a bank feed.

This process is called “screen scraping” and initially created some controversy for two reasons.

1. The technology is not perfect and the occasional transaction is duplicated or omitted. Online accounting programs that use Yodlee recommend checking reconciled accounts against the balances in your online banking portal.
2. Yodlee is most commonly used for credit card feeds, although recently the ANZ Business One credit card has commenced feeding through using the direct method feed.

Pro Tips:

• Credit cards can be particularly helpful when using bank feeds as they contain more descriptive information than regular bank transactions. This description improves the effectiveness of rules and artificial intelligence.
• Contact FAJ Bookkeeping if you’d like advice or assistance with integrating your bank feeds into your accounting software.

Author: Jasmina Nesic
Email: jasmina@faj.com.au

How much tax you pay depends on how much income you earn net of deductible expenses. Simply speaking, tax is paid to the Australian Taxation Office (ATO) based on your taxable income. When we prepare your tax return, our focus is to report the correct taxable income.

The basic formula for calculating your taxable income is: total income minus total deductions. Income can come from a range of sources, such as: wages, business earnings, interest earned, dividends received, Centrelink payments etc. We will work out all your allowable deductions, whether they relate to your work, your business or your investments. We do this to reduce your taxable income, hence reduce the amount of tax the ATO will ask from you.

Once your taxable income has been established, the ATO have set rates on how much tax is due on that particular amount of taxable income. This figure can also depend on your personal circumstances. A few examples include; the types of income earned, whether you are single or member of a family, whether you have a HELP debt or your age at year end. We then compare the tax figure calculated by the ATO at year end to any tax that you have already paid during the year.

The most common form of prepaid tax comes from an employer withholding tax from their employees. If you are a wage earner, each time you get paid, your employer is withholding some tax and paying it to the ATO on your behalf. If you have sources of income that are generally untaxed during the year (for example business profits, interest earned or investment earnings etc.), the ATO can also ask you to prepay some tax during the year. These are known as PAYG instalments and are usually due on a quarterly basis.

Once we complete your tax return (to include all income, deductions and tax paid) we can then let you know if you have paid too much, or not enough. If your prepaid tax is greater than what the ATO are asking for, you will receive a tax refund. If your prepaid tax is less than what the ATO are asking for, you will have to pay further tax.

Author: Allan Edmunds
Email: allan@faj.com.au

Client gifts are becoming a common part of business practice these days and can help you win new clients, increase referrals and generate new revenue.
Like other business expenses you want them to be tax deductible so they can be claimed at tax time. Most of these gifts are tax deductible provided they meet certain criteria. Tax Determination 2016/14 states that provided the gift is characterised as “being made for the purpose of producing future assessable income”, it is tax deductible. This however doesn’t mean that any gift given to a client is deductible as shown in the examples below.

Deductible
• Bottled Spirits
• Bottles or Cartons of Wine, Beer
• TV Sets
• DVD’s
• Computers
• Gift Vouchers to generic organisations (eg. Myer, David Jones, Westfield)
• Crockery
• Swimming pools
• Gardening equipment
• Perfume
• Pen sets
• Groceries
• Games

Not Deductible
• Glasses of Champagne
• Hot Meals
• Theatre Tickets
• Holiday Accommodation
• Cruises
• Hired Entertainers
• Hired Sporting Equipment

So why is there a difference between the deductible and not deductible expenses if they are all purchased as gifts for clients?
The answer to this is whether or not the client gift constitutes entertainment or not.
Entertainment is specifically excluded from being deductible in the Income Tax Assessment Act and is defined as entertainment by way of food, drink or recreation; or accommodation or travel to do with providing entertainment by way of food or drink or recreation.
In practice, the provision of entertainment can be determined by reference to the characteristics of timeliness and direct connection.
Essentially you need to ask your self one main question in relation to client gifts.
1. Is the benefit used up immediately after consumption or is it delayed and can be drawn out?
The more the benefit can be delayed, drawn out or used again the less likely it is to be considered entertainment.

Author: Adrian Wardlaw
Email: adrian@faj.com.au