What is a withdrawal and re-contribution strategy?

A re-contribution strategy involves withdrawing a lump sum from your super fund, paying any necessary tax on the withdrawal and re-contributing these funds back into super as a non-concessional (after-tax) contribution.

The revised superannuation balance will potentially consist of all, or more, tax-free component, which may ultimately reduce the tax payable when funds are withdrawn my a member or paid to beneficiaries upon death.

This opportunity may best arise between ages 60-65 when members can draw superannuation out without incurring tax, and still have the ability to meet the contribution rules.

To determine the validity of a re-contribution strategy, it is important to understand if your superannuation benefits are categorised as tax-free and/or taxable components.

  1. Tax-free components

The tax-free component of your super balance is generally the contributions on which you have already paid tax, so you don’t pay tax on them again when they are withdrawn. Tax-free components include your non-concessional (after-tax) contributions.

  1. Taxable components

The taxable components of your super balance are generally your concessional (pre-tax) contributions such as super guarantee (employer contributions) and salary sacrifice contributions.

Ultimately, you want your super balance to have a high tax-free component and a lower taxable components to reduce the potential tax payable when your super is paid out of your super fund upon a condition of release being met.

Disadvantages of a re-contribution strategy

  • This strategy may cause your assessable and taxable income to increase for a particular financial year. A higher assessable income and taxable income may lead you to pay more tax.
  • You also may be liable to pay tax on the lump sum withdrawal from superannuation if you are aged below 60.
  • When re-contributing, any amount that is in excess of the non-concessional cap will incur a penalty tax. The non-concessional (after-tax) contribution cap is $100,000 in 2020-21 or $300,000 if you are eligible to use a bring-forward arrangement.
  • Withdrawing a lump sum and re-contributing into your super account could affect both your total super balance (TSB) and transfer balance cap. As at 30 June 2021, your TSB needs to be under $1.6 million to make a non-concessional contribution.

Related blogs:

What happens if I make excess contributions to super?
How can you access your super?

Author: Jesper Lim
Email: jesper@faj.com.au

 

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Taxable Payments Annual Reporting – what needs to be done?

Taxable Payments Annual Reporting (TPAR) is where businesses report to the ATO the total payments they make to contractors for services in a financial year. The contractors can operate as any entity structure – sole trader, company, partnership or trusts. The TPAR does not result in additional payments or tax; it is simply reporting information to the ATO.

The ATO uses the information reported to data match what is declared on contractors taxable income and activity statements. The ATO will then know if contractors have failed to lodge a return or activity statement, failed to register or declare GST on their activity statements or haven’t declared their full revenue on a tax return.

Not all businesses need to prepare Taxable Payments Annual Reporting each year. It is only a requirement for industry specific businesses which include:

  • Building & construction services
  • Road freight & courier services
  • Cleaning services
  • IT Services
  • Security, investigation & surveillance services

Not all payments a business makes need to be reported on TPAR; it is only for payments to contractors for their labour. You do not need to report payments for materials, incidental labour, invoices unpaid at 30 June, payments within a consolidated group and contractors without an ABN.

For each contractor you need to report the following:

  • ABN
  • Address
  • Name (Business name/ Individual name)
  • Gross amount paid
  • GST paid (if applicable)

It is important to keep records of the above when payments are made to contractors to make completing the TPAR a lot faster, rather than having to chase information from contractors when the report is due.

TPAR needs to be lodged by the 28th of August after each financial year and penalties can apply if the reports are lodged late. The form can be lodged through a few different methods – paper form, lodging through an accounting software and lodging through the online business portal.

Other related blogs:

Employee or contractor – the risks of getting it wrong
When do I need to pay super for contractors?

Author: Rhys Frewin
Email: rhys@faj.com.au

 

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Tax consequences of buying a work vehicle

Understanding the tax consequences of buying a work vehicle can be complex and confusing.

The general concept is that if you buy a motor vehicle for work related travel, you are able to claim the work portion of the expenses incurred as a deduction, however under current temporary tax measures there are some circumstances where you can claim the cost of the vehicle.

How you claim a deduction for these expenses depends on many factors, such as if you are an employee or sole trader, what type of vehicle you purchase and if there is any private use of the vehicle. See below for a discussion on the factors which determine what method will be most tax effective for your situation.

Cents per kilometre vs logbook method

If you are an employee or a sole trader, you can either claim your car expenses using the cents per kilometre method or the log book method.

Under the cents per kilometre method, you can claim up to 5,000 kilometres of work related travel at a rate prescribed annually by the ATO. For 2021, this works out to a maximum deduction of $3,400. This method requires the least amount of administration as you do not require written receipts to substantiate your claim, but you do need reasonable evidence that you actually traveled the kilometres for work purposes.

The other method to claim car expenses is known as the logbook method. To claim under this method, you need to keep a logbook for 12 continuous weeks detailing all your work related travel to give you a log book percentage. If the logbook states your travel is 70% work related for example, then you can claim 70% of all your vehicle expenses, including depreciation of the vehicle and financing costs. The logbook is valid for 5 years, unless your circumstances change.

One key difference between these methods is that you cannot claim anything for the capital cost of your car under the cents per kilometre method. This is because the prescribed ATO rate already takes the car depreciation into account. On the other hand, the logbook method allows you to claim a depreciation deduction for the work-related portion of the cost of the vehicle.

Further, if you are a sole trader and use the small business concessions, you are currently eligible to claim the work-related portion of the full cost of the car in the year of purchase. The flip side to this is you will also need to declare the proceeds on the eventual sale of the vehicle as assessable income, which is taxed at your marginal tax rate in the year of sale.

Car vs Ute or Van

If your vehicle isn’t considered to be a car for tax purposes, you cannot claim using the cents per kilometre method. Rather, you must claim the portion of your vehicle expenses that relate to work use. A vehicle is not considered to be a car if it has carrying capacity of one tonne or more, or if it is able to carry nine passengers or more (for example, some utes and vans). The ATO states you do not need to keep a logbook to determine the work related use percentage for these vehicles, but it is recommended. It is important to note that not all utes and vans satisfy these conditions, so it is important to confirm the carrying capacity for your vehicle.

Car Cost Limit

If you are claiming car expenses under the logbook method, you can claim the work related portion of the cost of your vehicle up to the car cost limit. This is the maximum value you can use to calculate your depreciation claim. The car cost limit changes yearly – for 2021 it is $59,136 (GST inclusive). As an example, if you are a sole trader registered for GST and purchased a car in the 2021 year for $80,000, the most you can claim is 10/11ths of the car cost limit as a depreciation deduction, which is $53,760. You are also entitled to claim back $5,376 as a GST credit.

Related blogs:

Claiming vehicle expenses using a logbook
New guidelines for FBT exempt motor vehicles

 

Email: tessa@faj.com.au

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ATO reminder about deductibility of donations

“We make a living by what we get. We make a life by what we give.” Wise and inspirational words from Winston Churchill.

Around four million taxpayers each year make almost $4 billion of tax-deductible donations to various charities around the country. West Australians top the list for the average amount of donation per person. But not everyone understands the rules around the deductibility of donations.

Those that give may be rewarded through our tax system by receiving a tax deduction for donations given to certain organisations, known as Deductible Gift Recipients (DGRs). But like many components of our complicated tax system, the integrity of the rules is exposed to misunderstanding and misuse.

In the 2019 year, nearly two thirds of the charitable donation claims that were adjusted by the ATO were because the taxpayer could not prove they had made the donation. For this reason the ATO has put out a timely reminder, listing the four main reasons that donations may or may not be tax-deductible.

Firstly, the donation can only be deductible if it is made to an organisation that is endorsed as an Australian registered DGR. An organisation’s DGR status can be checked using the on-line ABN lookup tool at abr.business.gov.au. It’s important to understand that not all charities and not-for-profits are DGRs.

Crowd-funding is proving popular as a modern means of charity, but crowd-funding contributions will rarely be tax-deductible unless the funding organisation is a DGR. Foreign charities are also often not registered as an Australian DGR.

Secondly, donations are generally not tax-deductible where the taxpayer receives or expects to receive a monetary or personal benefit in return. Common examples include buying raffle tickets or chocolates for fundraising purposes, although receiving a token like a pin, wristband or sticker will not deny you of your deduction. Some crowd-funding models also provide reward in return for payments and would therefore not be deductible, regardless of DGR status.

The third reason is based on record-keeping. Most charities issue receipts for donations, but some don’t. Where you have third party evidence like a credit card statement that makes it clear you have donated to a DGR, the ATO will likely accept your claim. They’ll also accept a claim for bucket collections of $2 or more without receipts up to a maximum of $10 per year.

Lastly, the ATO says that some people incorrectly claim deductions for donations they intend to make in their will, or claim for workplace giving that has already reduced taxable income through the payroll system.

Donations made by the executor of a deceased estate are never tax-deductible, so if this is part of your estate planning strategy you should chat to your tax advisor to ensure you get the best outcome.

Related blog:

Is my donation tax deductible?

Author: Mark Douglas
Email: mark@faj.com.au

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Fuel tax credits – can my business claim them?

Fuel tax credits provide businesses with a credit for the tax included in the price of fuel used for certain activities. The tax credits are reported in an entities Business Activity Statements (BAS). Fuel tax credits apply to fuel used for:

  • Machinery
  • Plant
  • Equipment
  • Heavy vehicles (gross vehicle mass above 4.5 tonnes)
  • Light vehicles travelling off public roads or on private roads.

To calculate the fuel tax credit amount on each BAS, you multiply the litres of fuel purchased in the relevant period by the current ATO-specified rate. The rate is determined by several factors, including the type of fuel, when the fuel was acquired and what it is used for. Rates for calculating the credits are updated regularly, so it is advised that you check the rates every time you lodge a BAS.

Eligibility

To be eligible for the credits, you must:

  • Be registered for GST when you acquired the fuel
  • Be registered for fuel tax credits at the time you lodge the BAS.

In order to claim fuel tax credits, your business must purchase fuel to be able to produce income (this excludes general transport). Some examples of industries that claim fuel tax credits include:

  • Road transport businesses
  • Mining (machinery, generators)
  • Fishing
  • Agriculture
  • Construction
  • Non-fuel uses such as:
    • Fuel used to clean machinery
    • Diesel sprayed onto road as sealant
    • Fuel used as an ingredient for production (paints, ink)

Fuel tax credits are classified as assessable income, so it is important to declare them in your tax return.

If you are still unsure about whether your business is eligible to claim fuel tax credits, see the link below for further information:

https://www.ato.gov.au/Business/Fuel-schemes/Fuel-tax-credits—business/

Other related blogs:

Record keeping for small business

Author: Caleb Datson
Email: caleb@faj.com.au

 

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STP starts for closely held payees from 1 July 2021

Single Touch Payroll (STP) was introduced by the ATO to replace the PAYG Payment Summaries system, requiring employers to report their payroll information in real time. Most employers now report payroll data to the ATO each pay run using STP enabled software. The ATO has recently made STP changes which have taken effect from 1 July 2021.

What has changed for small employers – closely held payees

From 1 July 2021 small employers (with 19 or fewer employees) are now required to report payments made to ‘closely held’ payees through STP enabled software.

Small employers were exempt from reporting closely held payees through STP up until 30 June 2021. A closely held payee is an individual who is directly related to the entity, for example family members of a family business, directors or shareholders of a company, and beneficiaries of a trust.

When to report

There are 3 options to report your closely held payee data:

  1. Report actual payments on or before each pay run
  2. Report actual payments quarterly when the activity statement for that quarter is due
  3. Report a reasonable estimate quarterly

Reporting quarterly means that you only need to lodge an STP report in quarters where you have made a payment that you need to report. Each quarter you still need to include any PAYG withholding amounts on your activity statement, and be sure to make Superannuation Guarantee contributions for your closely held payees before the relevant due date.

If your circumstances change and your reported reasonable estimates in previous quarters are either too high or too low, you have until the due date of your next quarterly STP report to correct a closely held payee’s year to date information. It is important not to underestimate amounts reported for closely held payees as you may be liable for penalties and interest.

How to report

Your best option is to subscribe to a suitable software package. All the major players like Xero and MYOB have stand-alone payroll packages for four or less employees for $10 per month that automate the process.

The ATO maintains a product register to include all available STP software options. This may be through an update to your existing software, or an additional service. Specifically for small or micro employers is a list of no cost or low cost STP software solutions, that cost less than $10 per month.

Each software provider will provide a way to report quarterly closely held payee data in addition to reporting payroll for regular employees each pay day. However, it may be more efficient for you to report your closely held employees at the same time.

End of financial year finalisation declaration

You will need to make a finalisation declaration in your STP enabled software to let the ATO know your STP reporting is complete for an employee for a financial year. This means your employees’ information will be available via myGov rather than on a payment summary.

Small employers with only closely held payees must make a finalisation declaration by the due date of the individual’s tax return, and the due date for arm’s length employees remains 14 July. If you are using the reasonable estimate reporting method you must correct the actual year to date amount paid.

What has changed for micro employers

Until 30 June 2021 a quarterly STP reporting option applied to micro employers (1 to 4 employees). From 1 July 2021 micro employers will need to report their payroll data in real time, or they can continue to report quarterly through a registered tax or BAS agent if they meet the following eligibility requirements:

  • Lodge activity statements electronically through a registered tax agent
  • Have a non-computerised payroll i.e. manually on a paper or a spreadsheet
  • No overdue amounts owing to the ATO or lodgement obligations
  • Meet the ATO’s exceptional circumstances determined on a case by case basis

Exceptional circumstances may include natural disasters, impeded access to records, serious illness or death of a family member, internet issues such as the inability to connect to the internet or an unreliable or slow internet connection, or having seasonal or intermittent workers.

Next phase of STP

From 1 January 2022 extra information will need to be included in your STP reporting for each employee, including their employment basis, itemised payment types that make up the gross amount (e.g. allowances, overtime, salary sacrifice), how they are taxed and details of why their employment has ceased.

Other related blogs:

Single Touch Payroll

Author: Danielle Pomersbach
Email: danielle@faj.com.au

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ATO penalties for failing to withhold PAYGW for employees – what are the risks?

What is PAYGW?

For those of us who are not so savvy with ATO acronyms, PAYGW stands for Pay As You Go Withholding.

This is a system of taxation that requires employers to withhold a portion of employees’ wages and then pay it to the ATO to offset expected year-end tax liabilities.

The system is usually more convenient for taxpayers, avoiding the accrual of large unexpected tax liabilities and also allows a more even flow of tax revenue for the Government.

What are the risks for failing to withhold?

There can be risks for business owners who are unaware of the PAYGW regime and who may pay cash to employees or pay wages through the Single Touch Payroll system, but who do not withhold the correct amount of PAYGW.

The consequence for failing to withhold tax on an employee’s wages is that an amount equal to the amount of tax not withheld must be paid to the ATO as a penalty.

Where an employer fails to withhold tax from their employee’s wages over a period of years, the penalties in the case of an ATO audit can be substantial and potentially crippling to a small business.

Additional risks for businesses who pay contractors

There can be additional risks for businesses who pay contractors. In some circumstances, despite having a contracting arrangement with an individual, the ATO would regard this person as an employee. Some factors that may indicate that a contractor should really be classified as an employee are:

  1. The employer pays the contractor on an hourly basis for their labour rather than on a ‘results’ basis
  2. The employer supplies any tools/equipment required for the work
  3. The employer is responsible for any warranty or faulty work
  4. The employer holds the workers compensation insurance
  5. The contractor does not have the right to delegate the work to someone else
  6. The business has the right to direct the way in which the worker does the work.

Businesses who use contractors should assess each one to check if they should actually be employed as employees and therefore have PAYGW deducted from their wages.

In the event that the ATO audits the business and classifies any contractors as employees, the ATO could apply the failure to withhold penalties along with interest on amounts from earlier periods. These amounts can be substantial in some cases.

Furthermore, employees who have been wrongly classified as contractors, may have rights to leave and super entitlements from the Employer, adding further costs to the employer’s business.

What do I need to do?

If you are an employer, have a look at the ATO page ‘PAYG withholding’  and register for PAYG withholding if required.

If you are a business that employs contractors, have a go at the ATO’s ‘Employee or contractor decision tool’ for each contractor.

If you need more help, speak to your Accountant or Bookkeeper or contact FAJ on (08) 9335 5211.

Other related blogs:

Employee or contractor – the risks of getting it wrong

Author: Heather Cox
Email: heather@faj.com.au

 

 

 

 

 

 

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Carry forward concessional contributions – what are the rules?

Concessional super contributions are payments put into your super fund from your pre-tax income. Concessional super contributions are tax deductible to the contributor and are taxed at 15% when they are received by your super fund. They include:

  • Employer super guarantee contributions (including contributions made under a salary sacrifice arrangement)
  • Personal contributions claimed as a tax deduction.

The tax advantages that concessional contributions provide is limited subject to an annual cap. From 1 July 2017, the general concessional contributions cap is $25,000 for all individuals regardless of age, and has since increased to $27,500 from 1 July 2021.

From 1 July 2018, members can make ‘carry-forward’ concessional super contributions. The carry forward rule allows individuals to make additional concessional contributions in a financial year by utilising unused concessional contribution cap amounts from up to five previous financial years, providing their total superannuation balance just before the start of that financial year was less than $500,000. Effectively, this means an individual can make up to $150,000 of concessional contributions in a single financial year by utilising unapplied and unused concessional contribution caps from the previous five financial years.

Income year Maximum* CC cap with carry forward rule
2019–20 $25,000 to $50,000
2020–21 $25,000 to $75,000
2021–22 $25,000 to $100,000
2022–23 $25,000 to $125,000
from 2023–24 $25,000 to $150,000

Prior to these amendments, if an individual did not fully utilise their annual CC cap in a financial year, they could not carry forward the unused cap to a later year. This rule constitutes an exception to the usual rule when it comes to concessional contributions: ‘Use it or lose it’.

Related blog:

What happens if I make excess contributions to super?

Author: Jesper Lim
Email: jesper@faj.com.au

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What happens if I die without a will?

In Western Australia if you die without leaving a valid will your estate will be distributed according to legislation, this being the Administration Act 1903. This means that the law decides who your beneficiaries are and how your estate is divided with minimal flexibility.

Intestacy is the term given when a person dies without leaving a valid will.

Any person over the age of 18 who is entitled to a share of the estate can apply to be the administrator of the estate. The administrator of the estate is in charge of paying individual debts and allocating the deceased estates assets to beneficiaries.

The estate first pays off any debts owed by the deceased individual before death, this occurs regardless if a will is in place or not. After the debts are paid, the assets are divided between the spouse and children as per below:

  • If the deceased estate assets are valued at less than $50,000 the spouse receives it all.
  • If the deceased estate assets are valued at more than $50,000, the spouse receives the first $50,000 and 1/3rd of the remaining. The remaining 2/3rd is split between all children.

If the deceased has no children at the time of death the distribution of assets changes:

  • Spouse receives all household chattels, the first $75,000 of assets and 1/2 of the remaining assets. The other 1/2 is split as follows:
  • Parents receive the next $6,000 of assets and 1/2 of the remaining balance.
  • Siblings receive the remaining balance.

The asset allocation splitting as seen above does not give much flexibility to the administrator of the estate. Especially in the case where an individual with family disputes and multiple families might want to look after specific beneficiaries and not want particular family members receiving any assets. Therefore, it is very important for individuals to make sure they have a valid will to ensure they are happy with their estate asset allocation.

Individuals should not only have a will but also update their will when family circumstances change, like a divorce or having children.

Other related blogs:

Due you need a binding death benefit nomination?
What is an enduring power of attorney?

Author: Rhys Frewin
Email: rhys@faj.com.au

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$150,000 instant asset write off – do I have to use it?

Eligibility for the Instant Asset Write Off (IAWO) has changed over time and in recent changes has been extended to 30 June 2021. IAWO is available for eligible entities with an aggregated turnover threshold of up to $500 million. It allows businesses an immediate tax deduction for capital assets acquired.

IAWO has been further extended with another measure known as Temporary Full Expensing which allows a deduction for the cost of the business portion of eligible depreciable assets. A tax deduction is available for new business assets provided aggregated turnover is under $5 billion, and for second hand assets provided turnover is under $50 million. This measure originally ran until 2022 but was extended in the recent budget to run from 6 October 2020 until 30 June 2023.

However utilising IAWO may not always give the best outcome from a tax planning perspective. Claiming an immediate deduction for expensive capital assets could result in a business or business owner dropping into a lower tax bracket or creating or increasing a tax loss. In this case the business won’t get the full benefit of the deduction. In some situations it may be better to apply the usual depreciation rules and spread the deduction over the number of years.

Some other issues to consider before investing in new assets for the business:

  • Not all assets are eligible. IAWO does not apply to capital works such as extensions, alterations and structural improvements to a building.
  • The car limit still applies to passenger vehicles designed to carry fewer than nine passengers or a load of less than one tonne. This limits car deductions to $59,136 (for 2021).
  • From a cash flow perspective it may be better to lease an asset rather than commit to purchasing it outright
  • To use IAWO, small businesses must elect to use SBE simplified depreciation rules which does not provide flexibility as everything needs to be written off

Small business currently can choose to use what is known as the Simplified Depreciation rules. These rules include a number of concessions, including IAWO. A small business can opt-out of these concessions and therefore opt out of IOWA, but as a result they lose access to all of the Simplified Depreciation rules.

More ATO information on IAWO

Related Blogs

Company carry back losses – what are the rules?

Author: Elena Grishina
Email: elena@faj.com.au

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