Welcome to Tax Time!
Make tax time easy this year by having me complete your tax return.
4 simple steps to complete your tax return:
1. Confirm/Let me know you would like me to complete your tax return
2. Send me through your tax information & documents
3. I start completing your tax return
4. I will communicate with you with a range of questions to maximise your tax deduction
My top 5 goals when completing your tax return:
1. Make tax time easy & provide you with peace of mind
2. Maximise your refund
o Maximise your tax deductions
o Minimise the amount of tax you pay
3. Save you time so you can do the things you enjoy
4. Provide you with recommendations to improve your tax & financial future
5. Reduce your risk of audit
Please refer me to family & friends who also would like me to assist them with their tax & accounting.
Daniel
Car expenses on the ATO radar
With almost 4 million Australians making work-related car expense claims, the Australian Tax Office has the practice in its headlights.
Not only are they on the lookout for people wrongly claiming, but they are also armed with enhanced technology to check these claims.
As a result, you need to make sure that if you claim your car expenses, or if your employees use a company car for private use, that you are sticking to the rules, not double dipping and not misrepresenting actual usage.
ATO driven to act
In 2016-17, the ATO says more than 3.75 million people made a work- related car expense claim totalling some $8.8 billion. Indeed, 40 per cent of all claims are for car-related expenses so it’s not surprising that they have decided to crack down.
The ATO acknowledges that the rules around deductions for vehicles can be complex and mistakes easy to make. Whether by accident or design, it believes many employees are making errors.
The key problem areas are:
-
- Private trips
-
- Trips that never occurred
- Car expenses paid for by employee and reimbursed.
The ATO says there are three golden rules when employees claim car related expenses:
-
- You must have spent the money yourself
-
- Your claim must be directly related to earning your income
- You need a record to prove it.
The ATO cites a case where someone claimed $3800 saying he needed to transport bulky tools to and from work as there was no secure storage area at his workplace. When the tax office consulted his employer they discovered that not only was he provided with a company car at all times but that he was given all his tools so had no need to transport them. As a result, the claim was disallowed and the employee had to pay a penalty.i
Penalties can be up to 200 per cent of the tax avoided although generally they are 25 per cent to 75 per cent of the shortfall between the correct liability and the amount the taxpayer paid. If it is seen as a genuine oversight, then penalties are usually avoided.
Novated leases can also present issues. If you have a novated lease, then it is your employer who owns the car and incurs the running costs of the car, not you. So, if you try and claim you would be viewed as double dipping.
Logbooks must also be accurate. If you create a logbook and the ATO discovers it was filled out, say, a year after the event, then they can deem the claim invalid unless you can prove that you actually undertook that mileage.
FBT and employers
For employers, Fringe Benefits Tax is an issue. The tax is payable when a company owns or leases a car and makes it available for employees’ private travel such as travel between home and work.
Some vehicles are exempt from FBT. For instance, a single cab ute (two seats) qualifies for full exemption while a dual cab (four/five seats) is only exempt for work-related use.
There are two ways to calculate a deduction for car expenses: you can use either the cents per kilometre method or the ATO logbook. The choice will depend on how much you travel. If you travel less than 5000km a year then cents per kilometre is preferable; if more, then consider using the logbook.
If you use the former, then you can claim 68c for each kilometre. While you do not need a logbook to substantiate the cents per kilometre method, you do need to have actually driven that distance. As the tax office says: the cents per kilometre method is there to simplify record keeping not to provide a free ride.
With the logbook you monitor your usage over a 12-week period and then determine the percentage of business use. You can claim running costs, insurance, repairs, depreciation and registration of the vehicle for that percentage.
If you want to make sure you stay on the right side of the ATO, call us to discuss the tax treatment of your vehicle.
Smart ways to invest your tax refund
Most taxpayers aim to make the most of their available tax deductions, but how many of us give much thought to maximising our tax refund when it arrives? The average tax refund in 2016 was $2300i, enough to make a real difference if used wisely.
And it seems many of us do just that. An ASIC poll found 29 per cent of people used the money to pay bills, 21 per cent saved it, 13 per cent paid down their credit card or a personal loan and nine per cent put it on their mortgage. But there were also a few party animals who used it to celebrate.i
Here are some suggestions to help you make the most of your tax refund.
1. Pay off debt
Credit card debt attracts high rates of interest, so it makes good sense to reduce it whenever possible. The issue, however, is that many credit card users lack the self-discipline to stay out of the red for any length of time. So if you do put, say, $2000 on your credit card, consider also lowering your credit limit by $2000.
If you’re free of pressing credit card debt, the next best financial return on your tax return is often to reduce your mortgage. That $2000 put into your mortgage account now can end up saving you ten times as much over the life of your home loan.
2. Monetise your underemployed assets
Thanks to the wonders of the digital age, it’s never been easier to go into business. Paying someone to clean out and repaint the spare room can mean you’re able to rent it for upwards of $100 a night on Airbnb. Upgrading your car may allow you to rent it out when you aren’t using it, on one of several car sharing platforms. And that hobby, be it making jams and pickles or assembling model aeroplanes, can now be turned into cash if you pay someone to set up a website for you.
3. Expand your skill set
In a fast changing world, people who are willing to adapt and learn new skills will thrive. There are thousands of courses – covering everything from social media marketing to foreign languages to business law – available online or at bricks and mortar colleges. These can teach you a valuable new skill and possibly launch you on a whole new career.
4. Improve your health
Few things will impact your earning capacity and quality of life like a serious illness. Spending money on a gym membership, yoga classes, seeing a nutritionist or taking a much-needed holiday should improve both your health and happiness levels. Incidentally, a pack-a-day smoker spends around $6500 a year on their habitii. So investing a few hundred dollars on programs and products to quit offers a massive return on investment, especially as the price of cigarettes could soon double.
5. Save for a rainy day
Granted, you won’t currently get much return by depositing your refund in a savings account. Nonetheless, it’s hard to put a price on the sense of security that comes with knowing you’ve got a rainy day fund to fall back on should you get sick, lose your job or need urgent repairs to your roof. Or you could keep your emergency cash in your mortgage offset or redraw account and reduce your interest payments at the same time.
6. Boost your super
Despite the post-Budget headlines, superannuation remains the most tax-effective retirement savings vehicle in the land. So if you have not already reached your lifetime non-concessional contributions limit of $500,000 consider putting your refund to work for your retirement.
If you’re not sure you’ll be able to delay gratification once your tax refund arrives, you can always compromise and indulge your present self while assisting your future self. How? Invest most of your refund for the longer term and use the balance to buy that set of golf clubs or designer label dress you’ve been lusting over.
i Moneysmart, https://www.etax.com.au/average-tax-refund-sept-12/
ii http://www.quit.org.au/reasons-to-quit/cost-of-smoking
How to avoid unwanted ATO attention
Nobody wants to attract unwanted scrutiny from the ATO. Tax audits can be stressful and potentially costly. They are also increasingly well targeted, now that the ATO’s data matching capabilities are making it easier to pick up discrepancies. The best way to avoid an audit is to know how to stay out of trouble in the first place.
Whether it’s not declaring foreign or business income, claiming too much for work-related deductions, or not paying your employees’ superannuation, some activities are likely to attract the tax man’s interest.
Here are some simple steps you can take to reduce the likelihood of the ATO taking a closer look at your personal or small business return.
Declare all your income
For individuals, it’s important that you include all your taxable income in your return. Ultimately, the responsibility for including all your income rests with you, so ensure you report everything as the Tax Office will use a wide variety of information sources to cross check.
Common mistakes are not including capital gains you received when selling shares or property or forgetting income from overseas sources such as a business, rental property or shares.
When it comes to tax deductions, the ATO is particularly interested in your work-related expenses. If your deduction claims are unusually high compared to other people in similar industries, the ATO will want to know more. A good tip is to check out the ATO’s guides to deductions for specific industries.i
Take care with property investments
Tax deductions claimed on your rental property are another red flag for the ATO, so it’s important to follow the rules.
Ensure you understand the difference between claims for depreciation and capital works, and only claim expenses for periods when the property is rented, or genuinely available to tenants. And don’t forget you can no longer claim travel expenses for inspecting your property or undertaking maintenance.
The ATO is also interested in any noncommercial rental income received from a holiday home, so if you let your property at a discounted rate to relatives or friends, you need to limit the amount of deductions you claim to avoid problems.ii
If you have a loan for an investment property and are claiming for the cost of interest on the loan, you need to split your deduction into private and business purposes.
Watch your business reporting
When it comes to small business, the ATO looks for enterprises that incorrectly or under report their sales (both cash and electronic payments) or fail to register, so ensure you keep good business records and lodge accurate business activity statements.
Another warning signal for the ATO is businesses that report outside the normal small business benchmarks for their industry.iii These benchmarks are helpful for comparing your business’s financial performance against similar businesses, but they also provide the ATO with a useful tool for comparing tax payments and deductions claimed by businesses across the industry.
As more customers pay electronically, the ATO is also increasingly interested in cash-only businesses which it views as more likely to be avoiding tax. If your business operates and advertises as being ‘cash-only’, or does not accept electronic payments, you will need to keep detailed records of your takings and payments, as the ATO will be extremely interested in your tax returns.
Pay your staff correctly
If your business employs staff, ensure you are deducting Pay As You Go (PAYG) withholding from their wages and regularly forwarding it to the ATO. Making regular Superannuation Guarantee (SG) contributions to your employees’ super funds is also important if you want to avoid ATO scrutiny.
Not paying the correct amount of Fringe Benefits Tax or incorrectly accessing FBT concessions are also red flags, so ensure you are complying with the rules.iv
If you are registered for Goods and Services Tax (GST), ensure you are actively carrying on a business or you may find yourself talking to an ATO auditor.v
The key to ensuring your tax return is correct is to get professional help. We can help you to maximise your tax return, while ensuring that it is correct and compliant.
i https://www.ato.gov.au/Individuals/Income-and-deductions/Occupation-and-industry-specific-guides/
iii https://www.ato.gov.au/business/small-business-benchmarks/
iv https://www.ato.gov.au/law/view/document
Tax offset v tax deduction: What’s the difference?
This year’s Federal Budget was full of talk about one-off support for households in the form of tax offsets, but most people are a bit hazy on the difference between a tax offset and a tax deduction.
Both can help reduce the amount of tax you pay each year, but a tax offset generally results in a bigger dollar tax saving than a tax deduction of the same amount. The key difference is the point at which they are applied to your income when calculating the final amount of tax payable.
What is a tax deduction?
A tax deduction is one of the first things applied to your income when calculating your tax bill. It reduces your taxable income and hence the amount of tax you pay, potentially moving you into a lower tax bracket. Deductions are intended to ensure you only pay tax on income exceeding the costs associated with earning that income.
For a small business, deductions ensure it doesn’t pay tax if its running costs exceed its revenue. Common deductions include operating expenses such as stationery, and capital expenses such as equipment.
There are also temporary deductions, such as the additional 20 per cent deduction for costs related to digital adoption (like portable payment services and cyber security) and employee training expenditure announced in the 2022 Federal Budget.
Employees can claim deductions in a similar way. Personal deductions include work-related expenses like the cost of a computer if you have a home office, or supplies purchased for classroom use by a teacher. Other deductions include the cost of managing your tax affairs, donations and income protection insurance.
Offsets are similar but different
Tax offsets on the other hand, are deducted at the end of the calculation process and directly reduce the tax you pay.
Offsets are used by the government to encourage specific outcomes, such as uptake of health insurance through the Private Health Offset, or adding money to your spouse’s super through a contribution offset. They are also used to provide tax relief or financial support to certain groups in the community.
Calculating tax using offsets and deductions
The easiest way to understand the difference between an offset and a deduction is to walk through an example.
In the table below, we have two taxpayers. One person has an income of $30,000 a year paying tax of 19c on every dollar above the tax-free threshold of $18,200. This results in tax of $2,242 before any deductions or offsets. The other earns $130,000 a year, paying the top marginal tax rate of 37c in every dollar above $120,000, resulting in tax of $33,167.
As you can see in the table below, the impact of a $1,000 tax deduction provides a bigger tax saving of $370 for the higher income earner, compared with $190 for the lower income earner.
However, not only does a $1,000 tax offset provide both taxpayers with a bigger tax saving of $1,000 each, but it’s worth relatively more to the lower income earner at 3.3 per cent of $30,000 compared with less than one per cent of $130,000.
Impact of a $1,000 tax deduction and tax offset on tax owed
| Assessable income | Tax owed | $1,000 tax deduction | $1,000 tax offset | ||
| Tax owed | Tax saved | Tax owed | Tax saved | ||
| $130,000 | $33,167 | $32,797 | $370 | $32,167 | $1,000 |
| $30,000 | $2,242 | $2,052 | $190 | $1,242 | $1,000 |
Source (with updated figures for 2021-22 financial year): ANU Tax and Transfer Policy Institute Tax Fact #6
How tax offsets affect the tax you pay
Unlike tax deductions, the ATO automatically applies most offsets to your tax payable when you lodge your tax return.
In general, tax offsets can reduce your tax payable to zero, but they can’t be used to generate a tax refund if you don’t pay tax. If your taxable income is $18,200 or less, an offset won’t reduce the tax you pay as your tax payable is already zero. If you have paid any tax on this amount, you receive the tax back as a refund, but no offset is applied.
Also, most tax offsets don’t reduce the Medicare Levy and Medicare Levy Surcharge (if any) you are required to pay.
The amount of tax offset you receive also depends on the particular offset and your taxable income. For example, with the Low and Middle Income Tax Offset (LMITO) for 2021-22, if your taxable income is $37,0000 or less, you will receive a $675 offset on your tax payable when you lodge your tax return. If your income is $48,001 to $90,000, however, the offset is worth $1,500.
Liability limited by a scheme approved under Professional Standards Legislation. This advice may not be suitable to you because contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.