Welcome to our May newsletter
Happy Mothers Day to all the wonderful mums!
TAX TIME
Tax time is fast approaching & now is the perfect time to book a tax planning strategy session with us. Contact us today to learn how you can implement a tax planning strategy to reduce the amount of tax you pay.
FRINGE BENEFITS TAX
Have you provided any of the below to an employee, director or beneficiary? Then you may need to complete a FBT return.
– entertainment i.e. meals, drinks, free tickets to events, etc
– use a work car for private purposes
– a discounted loan
– gym or other personal membership
– reimbursed an expense incurred by an employee, such as school fees
– benefits under a salary sacrifice arrangement with an employee.
FBT returns are due to be lodged on 21 May 2022. Contact us to complete for you & provide strategies to avoid or reduce FBT.
ECONOMY
While the weather is cooling the economic and political landscape is heating up. Interest rates have risen ahead of the federal election on 18 May 2022.
The economic event that overshadowed all others in April was the release of the March quarter Consumer Price Index (CPI), which showed inflation up 2.1% in the quarter and 5.1% on an annual basis. This was the biggest lift in prices since 2001 and well above the Reserve Bank’s target of 2-3%. The biggest increases were for fuel, housing construction, and food as the war in Ukraine pushes up global oil prices and the cost of transporting food and other goods. Most economists now agree that the Reserve will lift official interest rates on Tuesday from their current historic low of 0.1%. The question now is by how much. Any rate rise will be passed through to variable mortgage rates, putting more pressure on household budgets during an election campaign where cost of living is a major theme.
On a positive note, unemployment fell below 4% in March, its lowest since 1974 as the economy continues to recover from COVID-related disruptions. As a result, businesses are more confident, with the NAB business confidence index lifting to a five-month high of 15.8 points in March, well above its long-term average of 5.4 points. Consumers are less confident, with the Westpac-Melbourne Institute consumer sentiment rating down 0.9% in April to a 19-month low of 95.8 points.
The Aussie dollar fell from US75c to around US71c over the month, adding to cost pressures on imported goods. Oil prices eased slightly, with Brent crude down 6% in April but up 48% on the year.
Salary sacrifice to cut tax and boost your super
This time of year, people’s thoughts start turning to their tax return, but it can also be a good time to set things up so you don’t pay more tax than required next financial year.
Simply talking to your employer about setting up an arrangement to “sacrifice” some of your pre-tax salary could potentially lower your tax bill – and boost your retirement nest-egg.
Reducing your tax bill
A salary sacrifice arrangement simply involves coming to an agreement with your employer to pay for everyday items or services you would normally pay for out of your after-tax salary directly from your before-tax salary. This might include things like childcare, health insurance or super. The benefit is that this reduces the level of income the ATO uses to calculate your tax bill.
If you set up a salary sacrifice arrangement with your employer, it’s important to understand that while your taxable income is lower, the benefits are still listed on your annual payment summary. For some people, this reduces the tax offsets, child support payments or other government benefits they receive, limiting the value of salary sacrifice.
Salary sacrificing options
The items or services you can pay for using salary sacrifice depends on your employer.
Some employers let their employees salary sacrifice for expenses such as cars, health insurance, school fees and home phones. Others are not prepared to do this, as they may end up paying Fringe Benefits Tax (FBT) on the benefits you receive.
Employers are usually more willing to allow you to package FBT-exempt work-related items such as portable electronic devices, computer software, protective clothing or tools of trade, as these generally don’t result in FBT bills.
Boost your super account
One of the most popular forms of salary sacrifice is redirecting some of your pre-tax salary into your super fund. Most companies are willing to provide this option as it not only helps you build retirement savings, but it can also earn them a tax deduction.
When you salary sacrifice into your super, your contributions are taxed at 15 per cent when your super fund receives the money. For most people this is a lower tax rate than if they received the money as normal income.
A further bonus with salary sacrificing into super is you only pay 15 per cent on any investment earnings you receive inside super, instead of your marginal tax rate for investments held outside super.
Find out what’s on offer
If you’re interested in a salary sacrifice arrangement, it’s a good idea to discuss the subject with your employer or HR team to find out the company’s policy.
It’s also a good idea to talk to us, as the value of these arrangements needs to be weighed up carefully against your reduced take-home pay and the potential loss of government benefits.
These arrangements should be put in writing before you earn the income you are sacrificing, so you need to talk to your employer prior to the start of the new financial year if your salary will change from 1 July.
Tips for employers
Allowing your employees to salary sacrifice can help them reduce their tax bill and it boosts engagement with your business. Another overlooked benefit is if your employee salary sacrifices into their super, you can claim a tax deduction for their contributions, as they are considered employer contributions.
To do this, you need to ensure you create an ‘effective’ salary sacrifice arrangement meeting the ATO’s guidelines. Otherwise the benefits your employee receives are considered part of their taxable income.
Effective arrangements require a clear agreement stating the terms and conditions and they must be documented in writing to avoid any uncertainty or future disputes.
Sacrifice arrangements can only apply to wage and salary payments for work yet to be performed, not past earnings. Salary and wages, leave entitlements, bonuses or commissions accrued prior to the arrangement cannot be used.
A simple way to avoid problems is to document your employees’ salary sacrifice arrangements before the start of a new financial year – or whenever there is a change to their salary – so it covers future earnings.
You need to keep detailed records of these arrangements for five years and list all sacrifice amounts on the employee’s annual payment summary.
If you would like help working out if a salary sacrifice arrangement makes sense for you, call our office today.
In family we trust
Family trusts have come under close scrutiny from government and the Tax Office over the years, but they are still a popular wealth management tool for Australian families. While trusts are set up for a range of reasons, it’s important to understand what they are and what benefits they can provide before making the move.
A family trust is an agreement where a person, group of people or company acts as trustee and agrees to hold assets for the benefit of others, known as the beneficiaries. The trustees control the assets in the trust – which might include property, shares or a business – according to the terms of the ‘trust deed’.
Setting up a family trust is relatively straightforward but there are strict rules governing who can benefit and how any income is to be distributed.
A fairly typical scenario is one where the trustees are Mum and Dad or a company one or both of them owns and controls. Their children or other dependents are the likely beneficiaries.
Any income earned by the assets in the trust can only be distributed to people who qualify as beneficiaries under the terms of the trust deed. In addition to children, beneficiaries can be a spouse or ex-spouse, parents, grandparents, siblings, nephews and nieces. Beneficiaries can also be related companies or charities.i
The trust must also file its own annual income tax returns.
Income distribution
The income distributed by your family trust could come from dividends from shares, rent from property or capital gains. Any income not distributed is taxed in the hands of the trustee at the top marginal tax rate, so there is a big incentive to distribute every year.
One of the many appeals of family trusts is that the trustee has full discretion over which beneficiaries will receive income and in what proportion. This offers a high degree of flexibility but it can also lead to disputes over favouritism.
As income is taxed in the hands of beneficiaries, one popular strategy is to direct income to those on the lowest personal marginal tax rates. For example, if parents want to support a child through university this can be a tax-effective
way to do it.
The tax-effective nature of family trusts has also put them on the radar of the Tax Office. In recent years it has made changes to wind back some of the earlier tax benefits such as the tax-free threshold to minors.
Asset protection
Tax benefits are far from the only advantage of a family trust. They can also put the trust’s assets at arm’s length from creditors and potential claimants.
Legally speaking, the trustee might be the legal owner of assets inside the trust but they are not the beneficial owner.ii What’s more, beneficiaries don’t own or have an interest in the property held in the trust.
Say a beneficiary owns a café that is forced to close down owing money. Creditors would struggle to make a claim on any assets held by the family trust.
Some families use trusts to protect an adult child’s inheritance from ‘gold-diggers’ or a relationship breakdown. That’s because the assets within a family trust would generally not be counted in a property settlement.iii
Protecting kids from themselves
In other cases, parents may worry that one or more of their children are spendthrifts or not up to the task of managing a substantial inheritance. Holding assets in a family trust where they can’t be sold off can help alleviate some of those concerns.
Whether or not a family trust is the best place to accumulate and hold assets will depend on the assets involved, whether you are acting as an individual or a company, the ages and relationships of your beneficiaries and your willingness to take responsibility for maintaining and operating the trust appropriately.
If you would like to discuss the potential benefits of a family trust, please give us a call.
Avoiding emotional bias in financial decision making
Our emotions colour every aspect of our lives including our financial lives. Recognising how emotions can influence your financial decision making puts your rational side back in the driver’s seat and can help you to achieve positive outcomes in business and your personal finances.
So where do our feelings about our finances come from? We are the products of our upbringing, learning from and either emulating or rejecting our parents’ attitudes to money – but we are also products of our environment. Money equates success in our society and your financial position strongly influences how people treat you, as well as how you perceive yourself, so it’s no wonder that financial matters tend to stir up strong emotions.
While we experience plenty of powerful positive emotions around money – think about how exuberant you feel when you receive an unexpected windfall or win a lucrative contract – it’s the negative emotions we feel about financial matters that really have the potential to impact our decision making.
Let’s look at the most prevalent and powerful feelings associated with money and how to ensure that they don’t adversely impact your financial position.
Fight the fear
One of the most common negative emotions around money is fear. While it’s prudent to be conscious of risk in your approach to financial matters, fear can take the form of avoidance and cause you to miss opportunities. The most successful businesspeople and investors know how to take calculated risks and as we know, risk and reward tend to go hand in hand. The key is to be mindful of your fears but not let them unduly influence your decision making.
The flip side of fear is hope and that’s a powerful motivator that can be channelled into building a successful business or saving for retirement.
Greed is not always good
Greed is another common emotion that can sabotage prudent financial planning. Greed fuels get-rich-quick thinking, making you vulnerable to those that exploit the unwary. Greed can also make it harder to maintain a disciplined, long-term investment plan and makes you prone to risk taking or knee-jerk reactions when the market is volatile.
Greed is not always bad either. It can drive you to chase ambitious goals, but the trick is in knowing when you’ve got enough or reached that goal. Greed makes us raise those goal posts. That’s where having defined plans and measurable benchmarks comes in.
Guilty as charged
Even more dangerous than fear and greed is guilt. While fear and greed are largely fuelled by external factors like the performance of the stock market or your SMSF or super fund, guilt is your internal conscience speaking to you and it can be insidious. People feel financial guilt about nearly everything. Spending too much… or too little, not earning enough or saving enough, or even having more than others – if it has a dollar value, we feel guilty about it. Feeling guilty can be a key factor holding you back from achieving (and enjoying!) business or personal success.
The best way to combat money guilt is to know your triggers, foster a good understanding of where you stand financially and ensure that your fiscal management reflects your values.
Overcoming envy
It’s hard not to compare your financial situation with others. There is an innate tendency to maintain a ‘keeping up with the Joneses’ kind of awareness of the holidays your friends are having or the cars they are buying.
In business you must keep a regular eye on your competitors. It can be disheartening to see that someone is doing much better than you. However, there is always going to be someone more successful. By all means aspire to more, but it’s important not to let envy drive your decisions.
Emotions aren’t intrinsically bad; it’s how we channel and manage them that either has a positive or negative affect on our finances. Developing an awareness of what emotions drive you and what holds you back will help you achieve your version of a prosperous and successful life.
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.
Tax and your website: What can you claim?
Most small businesses and independent contractors have a website these days. If you are planning to launch a new website or refreshing an existing one, it’s important to understand the tax implications. As with all things tax, it’s not always easy.
The complexity of the technology and associated services that go with running a website can make it tough to determine what you can claim upfront as a tax deduction and what you need to depreciate over time.
Capital or revenue cost?
To work out what you can and can’t claim as an immediate deduction, it’s important to understand which of your website expenses are capital or revenue costs.
A simple way to think about it is this. If the expense relates to the initial development or acquisition of the website, the ATO considers the expense capital in nature, so it can’t be claimed immediately as a deduction.
The same goes for any changes to your website that improve the business’s ability to make a profit. These expenses are also considered capital expenses and not immediately deductible.
Other examples of capital expenses include the costs incurred when migrating content from an old to a new website, or the cost of securing the right to use a domain name.
It’s important to check with us when it comes to any software you have developed in-house. For this to be immediately deductible, it must be complex and seen as significantly improving your website.
Claim revenue costs now
On the other hand, costs related to the running and usage of your website – such as operating and routine maintenance costs – are considered by the tax man to be revenue in nature.
These include periodic domain name registration fees, your monthly hosting fees and upgrading website software to appear correctly on new mobile devices, browsers and operating systems. These costs are all immediately deductible in full.
Updating your website content with new articles, graphics or advertising is also considered a maintenance expense and is immediately deductible. However, if you develop a microsite that links back to your main business website, the costs relating to this are not immediately deductible.
For a gripping read, you can always check out the details in the ATO’s Taxation Ruling TR 2016/3.i This lengthy document provides lots of examples of different types of website expenses and whether the tax man considers them capital or revenue in nature.
Reprieve for small business
But before you start combing through all your website expenses to try and work out whether you can claim them upfront, it’s worth noting there is a reprieve for smaller operations.
If your business qualifies as a Small Business Entity, you may not need to work out whether your website expenses are capital or revenue in nature. Under the government’s popular $20,000 instant asset write-off concession, the business portion of website capital expenses can be written off immediately, rather than depreciated over five years, if they are less than this amount.ii
To qualify to use the simplified depreciation rules and claim an immediate deduction, your turnover must be under $10 million and the capital expense for your website must have been first used or installed ready for use during the income year you are claiming the expense.
This means if you are a small business and do not have large website costs, you can avoid the problem of working out what is and is not deductible.
It’s worth noting, however, that the $20,000 immediate write-off concession currently expires on 30 June 2019, although it may be extended again in the next Federal Budget.
If it is not extended, the concession drops to $1,000 and all your website expenses over this amount will need to be classified as capital or running costs. You will then need to depreciate capital expenses over time.
Call us today to find out more about how to correctly claim expenses relating to your business website or the instant asset write-off concession.
i https://www.ato.gov.au/law/view/document?DocID=TXR/TR20163/NAT/ATO/00001&PiT=99991231235958
ii https://www.ato.gov.au/Newsroom/smallbusiness/Lodging-and-paying/$20,000-instant-asset-write-off/
Transport business for sale
Transport business for sale in Brisbane.
Motivated sale for the savvy investor/business operator to buy at a very good value.
Instructed to present all offers to vendors.
- Reliable vehicles
- Technical Support
- Well-Trained Staff
- Part time owner and potential to run under management
For more information contact:
Sanjay Agarwal at Xcllusive Business Sales
0416 737 593
sanjay@xclusive.com.au
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.