Is it a business or a hobby?

Determining whether you are running a business or a hobby can be difficult. Generally, a hobby is an activity performed in your spare time with the single purpose of enjoyment.  If, however, the hobby earns income and begins to make a profit, should it be considered a business?

Whether a taxpayer carries on or business is not defined by law, but is a question of fact and degree. Unfortunately, there is no single factor when making this determination, but the following points need to be considered:

  1. Do you intend to be in business?
  2. Have you decided to operate in a business-like manner? This may include an application for a business name or ABN, writing a business plan or opening a bank account.
  3. Do you intend or genuinely believe you will make a profit from your activities?
  4. Is the activity repeated and continuous?
  5. Have you obtained relevant licences and/or permits?
  6. Are you advertising your goods and services to the public?
  7. Do you have a business premises?

If the answer is yes to many of the above, then the likelihood is that you are considered a business for income tax purposes, which of course comes with certain obligations.

There are different types of business entities to choose from, and deciding which best suits your situation will determine what you need to report and how you lodge a tax return. There may also be restrictions on your ability to utilise any losses made, or offset these against other personal income.

As a business you are required to record all items of income and expenditure and regardless of whether a profit has been made, report this to the Australian Taxation Office by lodging an income tax return.

Businesses can be registered as Sole traders, Partnerships, Companies or through Trusts.

Your accountant will be happy to discuss your requirements with you, and together determine which entity best suits you and guide you through all ATO and business requirements.

Further references:

https://business.gov.au/planning/new-businesses/difference-between-a-business-and-a-hobby
https://www.ato.gov.au/businesses-and-organisations/starting-registering-or-closing-a-business/starting-your-own-business/are-you-in-business

Other related blogs:

Content creators – Income and GST considerations
What is a non commercial loss?

Author: Jessica Jones
Email: [email protected]

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What to expect from a tax audit

Australia boasts a tough taxation system designed to ensure compliance and fairness. The Australian Tax Office (ATO) plays a pivotal role in maintaining the integrity of this system by conducting tax audits when necessary.

Understanding Tax Audits:

Our tax system is primarily one of self assessment and disclosure. A tax audit is a formal examination of a taxpayer’s financial information to verify the accuracy of their lodged tax returns and compliance with tax laws. The ATO conducts audits to identify discrepancies, errors, or instances of tax evasion. It’s essential to note that being selected for an audit doesn’t necessarily imply wrongdoing; it’s part of the ATO’s routine efforts to maintain the integrity of the tax system.

Initiating an Audit:

A tax audit can be triggered by various factors, including red flags in a taxpayer’s financial data, industry-specific benchmarks, or random selection. Additionally, the ATO may target specific industries or taxpayers based on its risk assessment processes.

Notification and Documentation:

If you or your business is selected for an audit, the ATO will issue a formal notification. This notification outlines the scope of the audit, the information required, and the timeframe for response. It is recommended to respond promptly and cooperate fully with the ATO throughout the process.  Sometimes rather seemingly benign questions are really loaded questions that may initiate further investigation.  While not essential it can be beneficial to have your tax agent assist and guide you through the audit.  It is worth checking if you have separate tax audit insurance or even coverage under your general business insurance policy.  Gathering and organizing all relevant documents, such as financial statements, receipts, and invoices, will be essential.

Resolution Options:

Following the audit, the ATO will provide the findings and propose adjustments if necessary. Taxpayers have several options at this stage, including accepting the ATO’s findings, negotiating an agreement, or disputing the audit results through formal objection and appeal processes.

Penalties and Consequences:

Non-compliance with tax laws can result in penalties and legal consequences. Understanding your rights and responsibilities during the audit process is essential to mitigate these risks. It is advisable to seek professional advice to navigate the complexities of tax laws and regulations.

Other related blogs:

ATO penalties for failing to withhold PAYGW for employees – What are the risks?
What can I claim in my tax return without receipts?
What company debts can directors be personally liable for?

 

Author: Georgia Burgess
Email: [email protected]

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Content Creators – Income & GST considerations

Considering the modernity of digital content creation as an income-producing activity, it’s not unusual to encounter uncertainty among content creators regarding their tax obligations. In addition to its unprecedented nature, confusion arises due to the fact content creation is a rather unique source of income, as portrayed by the many ways a creator can generate profits.

In addition to the standard, monetary method of producing income (etc. payments from social media platforms, advertisements, and appearances), creators are also required to report non-monetary income received during the financial year, including but not limited to gifts of assets and/or experiences such as…

  • Cosmetics, accessories, gaming consoles
  • Vacations i.e., flights, accommodation
  • Admission fees to events
  • Cryptocurrency and shares

As income tax returns are numerical in nature, the Australian Taxation Office (ATO) expects content creators to appraise all non-monetary gifts at their market value when preparing their returns. For instance, products received free of charge by a content creator, are expected to be reported as income in the creator’s tax return at their retail price. Alternatively, products may be offered to content creators at a discounted rate, in which case the creator will only be obligated to pay tax on the benefit received from the discount.

Therefore, it’s prudent for content creators to exercise caution when accepting gifts of high market value, as the resulting tax liability may be harsh and without adequate cashflow to cover the liability creators may find themselves in a difficult situation…

Another important tax obligation for content creators to consider is goods and services tax (GST). GST is an additional tax of 10% charged on certain goods and services consumed or sold in Australia. Taxpayers in business are obligated to pay and report GST if their annual GST turnover exceeds $75,000. The annual GST turnover is calculated by totalling a taxpayer’s income (monetary and non-monetary) over a 12-month period and subtracting any corresponding GST on applicable income. It should be noted that non-monetary income is subject to GST and should be calculated based on the accepted market value. For example, if a gifted product’s retail value was $320, the creator should report GST on sales of $29.09 to the ATO.

Due to the global nature of the internet, content creators often source income from foreign advocates and supporters. Therefore, as the creator’s goods and services are not ‘consumed’ in Australia, its unlikely the income will be subject to GST. If a content creator cannot distinguish between foreign or Australian income, the income is taken to be taxable and subject to GST as per the ATO’s ruling.

Although foreign income is exempt from GST, it’ll still contribute to the $75,000 threshold when calculating the annual GST turnover. Content creators exceeding the $75,000 annual GST turnover threshold should register for GST immediately, and depending on their expected turnover, will be required to report their GST liabilities to the ATO either annually, quarterly, or monthly through Business Activity Statements (BAS).

We urge any content creators who are unsure of their tax obligations to please contact our office to gain assistance and peace of mind from any one of our friendly tax accountants!

Other related blogs:

 

Author: Amy Murphy
Email: [email protected]

 

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Negative gearing and the benefits

What are the benefits of negative gearing?

Negative gearing refers to an investment where the investment has cost more money to hold than the income it produces before the consideration of any capital growth.  Currently an income tax benefit may be gained from negative gearing which is attractive to many when considering their investment options however it is important to understand what this concept means and the risks involved.

You may wish to make such an investment if the expected capital growth of the investment is expected to outweigh the after tax yearly cost of holding it.

What is negative gearing?

When it comes to investing, the term ‘gearing’ refers to the borrowing to purchase an asset. Negative gearing occurs when the annual costs of owning the investment outweigh the annual income it generates each year. Negative gearing results in a tax loss, which can potentially be offset against other taxable income to provide current year income tax savings.

Benefits

  • An income tax loss generated from negative gearing can be deducted against other taxable income such as salary and wages, reducing the overall taxable income for the year.  This can result in a refund or a reduced income tax payable in the annual ATO assessment.
  • It allows investors to use leverage to purchase more expensive assets than they could normally afford
  • If the investment appreciates in value in time, this could lead to a higher rate of return however it is important to note that should the investment decrease in value then the extent of the losses is also magnified.
  • Over time, it can be a way to build wealth and create an income stream under the assumption that the asset value will rise and become positively geared.
  • The income tax benefit of the loss is received each year but be aware of the potential capital gains tax which is deferred until the property is sold.  The delayed taxing point on the increase in value of the property can have a significant impact on compounding returns over time.

Pro Tip:  You need to consider whose name you purchase the asset under.  If the property is expected to generate a large negatively geared loss then it would be tempted to purchase the asset in the name of the higher income earning spouse but you also need to consider the potential capital gains tax liability when that asset is sold.

Related blogs:

Pros and Cons of negative gearing

Author: Tayla Walkinshaw
Email: [email protected]

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Deductibility of electric vehicle used for work

You have just purchased yourself a shiny new Tesla in the hopes of never again having to spend over $2 per litre of fuel. Now what? What deductions are you entitled to for this electric vehicle?

If you are an employee or a sole trader, you can either make your claim using the cents per kilometre method or the logbook method.

Cents per Kilometre Method

The cents per kilometre method is the easiest to calculate. You just claim the work distance travelled (in km) for the year up to a maximum of 5000km and multiply it by the ATO set rate for the relevant year. For example, in the 2023 financial year the ATO have given a set rate of 78 cents per km meaning you can claim a maximum deduction of $3,900 for the operating expenses of your electric vehicle for the year. When it comes to keeping records, written receipts are not required however you should still have reasonable evidence to prove how you have calculated distance claimed.

Logbook Method

The logbook method allows you to claim a deduction for your actual vehicle costs. Under this method you are required to keep a record of all vehicle expenses incurred, the total is then apportioned by your logbook percentage to calculate your deduction.

To claim under this method, you first need to keep a valid logbook.

Step one is to record your opening odometer right before starting your logbook.

Step two is to record all your work-related travel. This must include, travel date, details of travel, starting odometer, closing odometer and a total KMs travelled. You will need to do this for 12 continuous weeks.

Step three: Work out your logbook percentage.  To calculate the percentage, you will need to take a final reading of your odometer at the end of the 12-week period. We should now have 3 values. The odometer at the start and end of the 12-week period and the total work-related distance travelled. From this we can calculate the work-related percentage by dividing the work-related distance by the total distance travelled during the 12-week period.

Now you have a logbook you can claim the work related percentage of vehicle costs such as;

  • Fuel Costs (see below for Electric Vehicle rules)
  • Annual Servicing Fees
  • Any extra repairs and maintenance
  • Registration
  • Insurance
  • Interest on the vehicle’s loan
  • Depreciation (see below)

The biggest difference between traditional vehicles and electrical vehicles is that EV’s don’t require traditional fuels so how do you work out the charging costs

Electric Vehicle Recharge Costs

When it comes to claiming the costs to recharge.  If you recharge your EV from a commercial charging station, then you just keep the receipts and apply the logbook % to the total for the year identical to if you were to have fuel receipts.

However, if you charge from home, you will find that it is very difficult to calculate portion of your electricity bill is from charging your EV at home since the costs are lumped in with your household electricity costs. Because of this the ATO have provided a shortcut method to easily calculate the running costs of the vehicle. Like the cents per kilometre method the ATO provides a rate of 4.2 cents per kilometre travelled. To calculate this, you would grab your odometer reading at the start of the financial and year and another at the end of the financial year. Calculate the distance travelled and multiply by 4.2 cents. The final thing is to apply the logbook percentage to get your final figure.

When opting to use this ATO shortcut method you need to be certain that your vehicle is eligible. The shortcut method can be used for zero emission vehicles, this means that hybrid vehicles with an internal combustion engine that uses liquid fuel are not eligible for the method.

Car Cost Limit and Depreciation

If you are claiming your motor vehicle expenses using the logbook method, you can claim the work-related portion of the vehicle up to the car cost limit for that year. From July 2022 to June 2023 the limit is $64,741. For example, the vehicle you purchased was $75,000. When calculating the decline in value for the vehicle you would first have to reduce the cost of the vehicle to $64,741.

Related blogs:

Tax consequences of buying a work vehicle

Author: Matthew Prawirohardjo
Email: [email protected] 

 

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Quick Guide to the Training and Technology Boosts

Training and technology are often at the heart of a business’s success and may give them an edge to help them thrive in a competitive market. The Australian Government has recognised the importance of both of these concepts through the introduction of two initiatives to support small business, the Skills and Training Boost and the Technology Investment Boost.

Both initiatives allow business entities with an aggregated turnover of less than $50 million to access a further 20% deduction for eligible training and technology expenditure, and can apply to sole traders, partnerships, companies and trusts.

The Skills and Training Boost

The Skills and Training Boost applies to eligible expenses incurred from 7:30 pm AEDT on 29 March 2022 until 30 June 2024.

This further 20% deduction is only available for expenditure on external training courses that are provided by registered training providers to employees. You can check whether a training provider is registered by searching for them on training.gov.au.

The expenditure must meet the below criteria to qualify:

  • The training can be provided to employees either in-person or online
  • The training must be provided by a registered training organisation (RTO) that is not your associate or your own business
  • The expenditure must already be an eligible deduction under Australian Taxation Law
  • The expenditure must be incurred within the abovementioned dates

If your business is registered for GST, the bonus 20% deduction is calculated based on the GST exclusive amount.

You cannot claim expenses for training of non-employee business owners such as sole traders, partners in a partnership, or independent contractors. The fee must also have been charged directly from the RTO and not by an intermediary inclusive of additional commissions or fees.

There is no cap on the bonus deduction that can be claimed under the Skills and Training Boost.

The Technology Investment Boost

The Technology Investment Boost applies to eligible expenses incurred from 7:30 pm AEDT on 29 March 2022 until 30 June 2023.

There is a cap on the bonus 20% deduction that can be claimed under this initiative. It applies to total eligible expenditure of up to $100,000 per income year, meaning the maximum additional deduction available is $20,000 per annum for eligible entities.

The expenditure must meet the following criteria to qualify:

  • The expenditure must already be an eligible deduction under Australian Taxation Law
  • If the expense is incurred on a depreciating asset, it must be installed ready to use or first used by 30 June 2023. There may be exceptions for in-house software that is allocated to a software development pool.
  • The expenditure must be incurred wholly or substantially for the purpose of digitising the operations of the entity or assisting the digital operations of the entity.
  • It must be for business use. If it is a mix of private and business use, the expense must be apportioned.

If your business is registered for GST, the bonus 20% deduction is calculated based on the GST exclusive amount.

Items that may be able to be claimed should fit into the four categories below:

  1. Digital enabling items including computer hardware and equipment, telecommunications hardware and equipment, software, internet costs and systems and services that form and facilitate the use of computer networks.
  2. Digital media and marketing such as audio and visual content, web page design, web page updates, SEO fees, pay-per-click advertising, email marketing fees, photo stock commissions and music royalty fees.
  3. E-Commerce costs including goods and services supporting digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services and advice on digital operations or digitising operations.
  4. Cyber security expenses such as cyber security systems, backup management, monitoring services and upgrade services.

Subject to the criteria above, some of the more common eligible costs incurred by small business will be hardware costs, accounting software, app subscriptions, internet, web hosting and VOIP charges, IT support costs, and any social media or web based marketing.

Your accountant will be able to determine whether your entity, and the expenditure, is eligible for either of the above boosts and assist you in claiming the bonus deductions in your income tax return.

 

Author: Joanne Humphreys
Email: [email protected]

 

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Tax when an individual passes away

It is an unfortunate part of life that at some point, someone close to you will pass away. It is therefore important to be aware of the tax consequences that come along with this. When an individual passes away, a legal personal representative (LPR) (AKA administrator or executor) will be appointed to manage the tax affairs of the deceased.

The LPR should notify the ATO of their appointment and of the death of the deceased, using the Notification of a Deceased Person form online. The LPR will be required to go to a post office to provide official documents for viewing, including the death certificate and either the letter of administration or evidence of probate. Probate is the process of proving and registering the last will of a deceased person, this will need to be done prior to managing their tax affairs. Once this has been done the LPR will have full authority to lodge any outstanding or future tax returns on behalf of the deceased.

The first step to finalising the tax obligations of the deceased is to ensure that all previous year’s tax returns have been lodged, and if returns were not necessary, then ‘Non-Lodgement Advice forms have been lodged.

Secondly, if in the year that the deceased passed away, they had any of the following, then a date of death tax return will be required:

  • Tax withheld from income.
  • Income above the tax-free threshold.
  • Franking credits that they wish to claim.

A date of death tax return covers the period from the beginning of the financial year in which the deceased passed, being the 1st of July, up until the date of death. The deceased’s marginal rate of tax will apply, including the entitlement to the tax-free threshold.

Finally, a trust tax return covers the period from the date of death up until the end of the financial year, being 30th June. A trust tax return will be required if any of the following have occurred in the name of the deceased:

  • Earns any amount of income above the tax-free threshold.
  • Received dividends and wants to claim franking credits.
  • Has carried on a business.

To lodge a trust tax return on behalf of the deceased, the LPR will be required to apply for a new TFN for the deceased estate.

A trust tax return will need to be lodged every year until the deceased estate is fully wound up and not earning any income. The tax rate that will apply will be the deceased’s marginal tax rate for the first three years, but if further returns are required beyond this, then higher, progressive tax rates will apply to encourage the LPR to make a genuine effort to wind up the deceased tax affairs.

Related blogs:

What happens if I die without a will?

Author: Molly Ingham
Email: [email protected]    

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When Does a Non-resident Need to Lodge a Tax Return

Before we delve into the question of whether a non-resident is required to lodge an Australian income tax return, a prudent first step would be to determine whether the individual in question is a non-resident for taxation purposes. The Australian Taxation Office (ATO) has in place four residency tests to assist individuals in determining their tax residency. The four tests are as follows:

  1. The Resides Test – do you reside in Australia?
  2. The Domicile Test – is your permanent home in Australia?
  3. The 183-Day Test – were you physically present in Australia for more than half of the financial year?
  4. The Commonwealth Superannuation Test – are you or your spouse an Australian Government employee working at an overseas Australian post under either the CSS or PSS scheme?

The individual is a non-resident if all four tests cannot be satisfied for the financial year in question.

Once you have established the individual is a non-resident, the next step is to determine whether a tax return is required. According to the ATO, a non-resident is required to lodge an Australian income tax return if they have sourced any of the following categories of Australian income in the relevant financial year:

  • Employment income; from activities specifically carried out in Australia.
  • Rental income; from an Australian property.
  • Interest income; only assessable if the income was not subject to the 10% non-resident withholding tax deducted by the bank.
  • Unfranked dividends from Australian companies; companies do not withhold tax on ‘unfranked’ dividends, only on franked dividends.
  • Capital gains; from the sale of Australian assets.
  • Pensions or annuities from Australian superannuation funds; unless you are eligible for an exemption under a tax treaty.

From the above criteria, you may have noticed a pattern or general rule of thumb; if the Australian sourced income was subject to withholding tax (e.g., interest, franked dividends, and royalties), the income does not need to be declared by the non-resident, subsequently eliminating the need to lodge an Australian tax return.

If you are still unsure whether you are personally required to lodge an Australian income tax return, please make use of the ATO’s ‘do I need to lodge a tax return’ tool.

Further references:

https://www.ato.gov.au/Individuals/Coming-to-Australia-or-going-overseas/Your-tax-residency/Foreign-and-temporary-residents/

https://www.ato.gov.au/Individuals/Coming-to-Australia-or-going-overseas/Your-tax-residency/

https://www.expattaxes.com.au/do-i-need-to-lodge-a-tax-return/

Other related blogs:

Main residence exemption changes for foreign residents

Author: Amy Murphy
Email: [email protected]

 

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Section 100A – The Latest Guidelines

Trusts have been a recent target of the ATO after they released new guidelines on what’s known as Section 100A. The law is not new, but recent changes to the guidelines and the ATO’s application of the law are looming over accountants and their clients and may impact the way trusts distribute income moving forward.

The underlying objective of Section 100A is to deter scenarios where a trust allocates income to a beneficiary at a favourable tax rate but the funds associated with the income are enjoyed by some one else. 

The most common example of this is where the trustees of a trust allocate income to an adult child beneficiary (or even a niece, nephew, uncle or aunt), therefore  making them entitled to the income. However, instead of paying the income across to this beneficiary, the parents draw the money out of the trust and use it for personal purposes, and may have no intention of ever paying the debt to the beneficiary. This is the type of tax avoidance scenario the new guidelines are bringing into question.

If it is found a trust has not met the requirements of Section 100A, the trustee is taxed on the income at the top marginal tax rate (47%), instead of the beneficiaries’ marginal tax rates.

There’s many other scenarios that could trigger Section 100A in the new guidelines, which are unfortunately very grey in various areas, but in principal, if a trustee has a genuine intention to pay a trust entitlement to a beneficiary, the risk of Section 100A applying is much reduced.

As a first step we recommend that trustees keep evidence of how adult child beneficiaries might receive an economic benefit from their income entitlement from the trust. Did you pay for your child’s tax payments or help out with their first car or house deposit? Keep record of these payments (or even better, pay them from the trust) as they will help support your case if the distribution is questioned by the ATO.

Apart from evidencing expenditure and being clear on your intentions, there is no clear cut change to make moving forward as every trust scenario may be different to the next. Included in the guidelines are a number of scenarios which are considered lower to higher risk. When determining who the income of the trust should be allocated to, discuss with your accountant to see where you might fall in the risk categories and the expectations associated with allocating income to a beneficiary.

 

Other related blogs  

ATO guidance for distribution of professional firm profits
Why use a family trust?

Author: Allan Edmunds
Email: [email protected]    

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Real time super

In the recent federal budget the Government has committed to real time super in a bid to curb the billions of dollars lost in unpaid employee super.

When businesses underpay workers in any form it’s labelled as wage theft. It could be a deliberate deed, an unintended error, or a consequence of the complexity of our HR laws, but it’s all wage theft in the eyes of the public.

It’s rife in this country, but only the big ones make the news. Usually we’re talking mere millions like in the cases of David Jones and Wesfarmers but none were as big as Woolworths who have admitted to around $750 million in underpayments. Beyond the headliners there’s a stack of small employers getting caught – cases this year include 13 Perth security businesses, seven Optus Stadium cleaning companies and a local Hans Café outlet.

The theft often involves an underpayment of award rates, particularly penalty rates for overtime and weekends.

Another less acknowledged form of wage theft is unpaid or late paid employee superannuation. The ATO estimates that employees missed out on around $3.4 billion of their super entitlements in the 2019/20 year alone.

Employers currently provide for employee super each and every payday and immediately disclose the super on their employees’ pay slips. But that doesn’t mean it’s been paid because businesses are not required to remit the super until after the end of each quarter.

With limited scrutiny, it can be tempting for a struggling business to forego its super commitments to cope with pressing cashflow issues. By the time the ATO catches up with late payers they’re sometimes insolvent making it difficult to recover unpaid super (which can include voluntary employee contributions). Historically the ATO recovers only 14% of unpaid super from directors of insolvent companies.

Even if businesses always pay the super on-time, employees are foregoing earnings on that super for months at a time, and the compounding effect of this is significant. It’s not the business’ fault – it’s the law.

In this digital and automated age, it’s sensible policy that from July 2026 employers will be required to pay real time super – i.e. at exactly the same time as they pay employee wages. Superannuation clearly forms part of an employee’s remuneration package and they should not have to wait months to receive the benefit of it.

It will also provide a better mechanism for the ATO to crack down on rogue employers quickly and the budget has allocated some further resources to this.

The Government has recently accepted a Senate enquiry recommendation to criminalise wage theft and it’s likely that this will apply to all forms of remuneration including super.

Related blogs:

Other related blogs

Get attached to your super
Penalties for late payment of super guarantee

Author: Mark Douglas
Email: [email protected]

 

 

 

 

 

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