Tax Advice Archives - Page 2 of 4 - Panicatax
 
Buying a motor vehicle to reduce your tax bill

Buying a motor vehicle to reduce your tax bill

Ok, so don’t literally go out and buy a new car without reading the article! I’ve been looking at a lot of family SUV’s lately and the Alfa Romeo Stelvio is a great looking car! This weeks tax planning tip is about bring forward the purchase of a new motor vehicle into this financial year to claim deductions now instead of waiting until next year.

 

What are we recommending?

If you are planning to purchase a new business related motor vehicle in the first quarter of next financial year (July 2018 to September 2018) consider whether you could bring that purchase forward a few months to claim some deductions this financial year.

 

What are the benefits?

 

Motor Vehicle Depreciation

By purchasing the motor vehicle in this financial year you can claim some depreciation in the 2017-18 financial year.

This strategy is particularly effective for small businesses (turnover less than $10,000,000) because the simplified depreciation concessions currently available  are very generous.

Under these rules, you can:

  • Immediately claim the full cost of the motor vehicle in this financial year if you spend less than $20,000.
  • Add any motor vehicles that cost more than $20,000 into a small business general pool and claim:
    • a 15% deduction in the first year;
    • a 30% deduction each year after the first year.

The great thing about the small business depreciation rules is that even if the asset is purchased on the 29th of June we can still claim a full year of depreciation, cha-ching!

 

Operating Costs & Interest

Motor Vehicle running costs (fuel, oil maintenance etc) paid during the year are deductible in the year you pay them. Make sure your accounting records are tracking all of these expenses ready for year end.

Interest paid on loans that are for business use can be claimed as a tax deduction. This means that some, or all, of the interest paid on the vehicle loan during the year is also deductible.

 

GST

Bringing the purchase forward also gives the business the ability to claim the GST earlier too. This assumes you are registered for GST and that you paid GST on the Motor Vehicle in the first place. If, for example, you purchase a vehicle privately for the business this will likely not have GST on the price.

 

What not to do

This is where the Profit First Professional takes over from the tax accountant. Don’t just buy a new car for the sake of having a new car. Remember, in business cash is king. It’s important that we plan for major asset purchases and spend based on ‘need’ rather than ‘want’. If you don’t need a new car don’t buy one. If you are going to buy a new car sometime next year but not in the first couple of months then hold off and buy it next year. There is a fine balance here. You’d like the deductions this year but you shouldn’t starve your business of cash through unnecessary spending.

 

A note on Logbooks

The general advice given in this article assumes that you will keep an appropriate logbook and that the business use percentage is close to 100%. If you’re planning to buy a vehicle but you believe most of it’s use will be private make sure you speak to your accountant about the appropriate tax treatment.

An article specifically focused on motor vehicle expenses and logbooks will feature later in this tax planning series.

Using Profit First to improve your relationship with the ATO

Using Profit First to improve your relationship with the ATO

In recent years there has been an escalation in the conflict between the Australian Taxation office (ATO) and small business owners. It’s been a hot topic in the media this week and was discussed at length on 4 Corners last night. The ATO have been accused of deliberately targeting small business owners, rather than big business or high net wealth individuals, because they lack the funds to fight back. They’ll just “pay up so the problem goes away”.

I honestly can’t say whether that is true or not. In my 10 years of dealing directly with the ATO on a daily basis I’ve experienced significant variation in the treatment my client’s have received for what I believe were exactly the same issues. Most of this I had  chalked up to the different phone operators I was dealing with. It’s an inside joke in the accounting industry that if the ATO doesn’t give you the answer you want just hang up, call back and hope to get someone in a better mood.

I will concede that many small business owners (and their advisors) have been guilty of not taking the ATO seriously. Ignoring requests for information, consistently paying late and generally not managing thee relationship very well.

Rather than bash the ATO, I wanted to cover off on a few things you can do to improve your relationship with them. That way you can try to avoid being on the receiving end of the powers they seem to be increasingly happy to use.

 

Use Professional advisors

I often hear comments along the lines of “I don’t need an accountant, I just lodge my own tax return online”. Is this a good idea? In my opinion, only taxpayers who meet the following requirements should consider taking a DIY approach to tax:

  1. They earn a Salary/wage with PAYG withheld from it (they are employed, not self employed);
  2. They claim very basic deductions – amounting to a couple hundred dollars at most; and
  3. Have no investments or other complex tax issues.

Everyone else should be using a professional.

You’re free to disagree with me. However, my opinion is shared by the majority of tax professionals in Australia. Everyday we hear examples of taxpayers having their businesses crushed by the ATO for having misinterpreted a section of tax legislation.

 

The ATO Website

The ATO website is a great resource but should be used in conjunction with professional advice. The general information they publish is intended to simplify what is otherwise quite complex tax legislation. Their aim is to present it in a way that the general public will understand. While this is a noble venture you must keep in mind:

  • The information is often over simplified;
  • It gives very limited guidance on how to apply it to your specific set of circumstances; and
  • None of it is binding on the tax office – if you inadvertently misuse the information you have no defence. Their response will be “you should have obtained professional advice on the matter”.

 

Implement Profit First

Using Profit First will dramatically improve your relationship with the tax office. That might seem like an odd statement to make but let me explain:

Benchmarking

Every year the ATO compares the information you report in your tax return with the data collected from everyone else in Australia that uses the same industry code as you. They calculate averages and standard deviations and use that information to look for tax payers who are reporting profits well below average for their industry. They want to audit these businesses to see if they are claiming tax deductions incorrectly.

By implementing Profit First you can ensure your business is above average from a profitability stand point and lower your risk of an audit.

Meeting tax obligations

For decades now small business owners have used withholding taxes, GST  and unpaid superannuation as a source of working capital. Personally, I believe the real reason the ATO seems to be targeting small business owners can found right here. As business owners we should be taking out business loans at market rates and managing our cashflow effectively. What’s happening in reality is that business owners using the ATO as a source of interest free capital. What we are seeing is the ATO’s attempt to ‘call in the debts’.

In recent years the ATO has:

  • Rolled out super stream so that superannuation funds can report late super payments to the ATO;
  • Started regularly rejecting payment plan applications where the debt is GST and PAYG. In the words of an ATO operator I was speaking to just last week “business owners shouldn’t need a payment plan for GST or PAYG. It was never their money to spend in the first place!”;
  • Referred debts to their internal Debt collection team just days after the first reminders have been issued to the taxpayers;
  • Launched single touch payroll (effective 1 July 2018). Now your own payroll system will report your withholding tax obligations directly to them.

Profit First helps fix this situation via the Tax Account. The whole purpose of the Tax Account is to accumulate the amounts you need to meet your various tax obligations. Taxpayers who regularly lodge on time and pay in full are far less likely to be audited.

My initial interest in Profit First as a service offering for my Accounting firm was specifically to help my clients break out of the tax debt cycle and get the ATO off their back!

 

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Tax Planning Tips – Donations

Tax Planning Tips – Donations

This tip can be controversial and was meant to feature a little later in the series. However, since I’ve had multiple questions about donations and tax deductions in recent weeks I’ve decided to bring it forward and make it Tip #1! As a topic for tax planning donations can be a little controversial. Why? Because people ‘give’ for so many reasons, most of which have nothing at all to do with tax. Even if the donations were not deductible they would still give and that’s great. However, i’m a tax accountant and this is a tax planning article so I have to address the issue from the perspective of tax management.

As my existing clients would know I’m not a fan of making donations as a tax planning measure. Nevertheless, lets run through the basics and I’ll explain my issue with it as we go along.

What can you claim

To encourage individuals and businesses to support charity organisations the ATO permits a tax deduction for donations so long as the donation meets certain criteria:

  • The donation must be made to a deductible gift recipient. We call entities that are entitled to receive tax deductible donations ‘deductible gift recipients’ (DGRs);
  • The donation must truly be a gift. A gift is the voluntary transfer of money or property where you receive no material benefit or advantage;
  • The donation must be money or property, which includes financial assets such as shares; and
  • The donation must comply with any relevant gift conditions. For some DGRs, the income tax law adds extra conditions affecting the types of deductible donations they can receive.

How much to claim

The amount you can claim depends on the type of donation made. For donations of money, it is the amount of the donation but it must be $2 or more. For donations of property, there are different rules, depending on the type of property and its value.

Typically the deduction for a donation is claimed in your tax return for the year in which the donation is made. However, you can elect to spread the tax deduction over five income years in certain circumstances. Why would you choose to spread the deduction rather than claiming it all this year? Because the overall tax outcome might be better, especially if you tax income varies significantly from year-to-year.

Proof that the donation was made

If you make a donation of $2 or more to a DGR they should provide you with a receipt for tax purposes. Many will ask you if you require this at the time you make the donation. For regular/recurring donations, which are usually direct debited from your bank account, you can use either your bank statement or the annual statement provided by the charity.

Bushfire and flood donations

One notable exemption to the evidence rule is bushfire and flood donations. If you made one or more donations of $2 or more to bucket collections conducted by an approved organisation for bushfire and flood victims, you can claim a tax deduction equal to your contribution without a receipt provided the contribution does not exceed $10.

What you can’t claim

You cannot claim a deduction where you received some sort of personal benefit in exchange for the payment. Examples of personal benefits you may receive are:
• raffle or art union tickets, for example Yourtown and Endeavour Foundation;
• items such as chocolates and pens;
• dinner – even if the payment exceeds the value of the dinner;
• memberships;
• payments to school building funds made, for example, as an alternative to an increase in school fees;
• Any other payments where you have an understanding with the recipient that the payments will be used to provide a benefit for you.

Why don’t I like donations as a tax planning tool?

Before you say it…No! it’s not because I’m stingy accountant who watches every dollar!

For me it’s all about your ‘why’ when donating. If you genuinely believe in the charity you are supporting and want to help, then by all means make a donation and claim the deduction. Panic Atax gives a portion of annual revenue to Beyond Blue because I genuinely believe one of the biggest issues facing long term entrepreneurs is mental health. I can only do so much to help them directly. I’m just one guy and my skills are restricted to financial management. Organisations like Beyond Blue do what I can’t!

However, if your only motivation for making the donation is to reduce your tax bill then this is a poor use of money. Assuming you pay tax at an average rate of 20% making a donation of $100 reduces your tax bill by $20. So, you just spent $100 to save $20. Don’t do it! Pay the $20 in tax and keep the extra $80 in your pocket.

How to make your church tithing deductible

Based on the rules we discussed earlier money given to your church does not qualify for a deduction as a donation. Why? Because your church is likely not a Deductible Gift Receipient which means they cannot receive tax deductible donations.

However, your church is likely to be exempt from income tax which potentially allows your accountant to make your tithing deductible through effective business structuring and tax efficient distribution of profits.

I won’t over complicate this article but drilling down into the specifics of how we achieve that outcome but flag this as a topic to discuss with your accountant as part of tax planning!

Going…Going Concern!: GST on the Sale of a Business.

Going…Going Concern!: GST on the Sale of a Business.

A common exit strategy for business owners who wish to do something different (or even retire!) is to seek a buyer. The sale of a business allows the seller to unlock the value they have built over the years of operation. For the buyer its an opportunity to bypass the usual start-up struggle. They can purchase an established brand, existing clients and all the equipment they need to hit the ground running. In addition, if the sale covers the entire business and the business carries on after the sale the whole transaction could be GST Free…Winning all around!

A “going concern” is an Australian Tax Office (ATO) invention that allows the sale of a business to be a GST-free transaction. But, its not as simple as it sounds. We cannot just assume the sale is GST Free because the item being sold is a business. The parties need to clearly discuss GST during the negotiation process. They both need to take the necessary steps to ensure the going concern exemption is available in the first place.

 

Essential elements of a going concern sale

  • Both seller and buyer must be registered for GST;
  • The sale of the business must be for consideration (something needs to be ‘paid’ for the business);
  • Your sale contract must expressly record that the sale is a going concern (in writing);
  • The seller must sell everything that is necessary for the continued operation of the business. This includes any necessary premises as well as a contractual agreements signed by key members of staff. Any exclusion can mean that it is not a going concern;
  • The business must continue to trade until the date of sale. Any business closure in the lead up to the sale will nullify the going concern status – so beware if you plan to close for renovations before the final handover.
  • The business must continue to trade in the ‘normal’ manner after the sale has been finalised.

If you are able to meet all of the above requirements, your sale should be a going concern and there will be no GST payable. However, in the situation where the seller has different entities owning different parts of the business this could create an issue – the seller should investigate their ownership structure with their accountant when preparing for sale;

 

Some handy rules to remember when selling a going concern

1. Always negotiate the price in GST exclusive figures so that neither party is confused, or disappointed, by the result. You never want the contract to be silent in regard to GST. If the contract makes no mention of GST the price is assumed to be inclusive. This can result in the seller receiving far less for the business than they originally anticipated.

2. There should always be a clause in your contract stating that if the tax office deems your sale was not a going concern, that the buyer must pay the GST amount.

3. The seller will be liable for both penalties and interest on the amount of tax avoided in the event the ATO disagrees on the going concern treatment. You may wish to extend the clause mentioned in point 2 to cover these amounts;

4. The buyer should also seek professional advice around the going concern. Often the appeal of the exemption for buyers is that it allows them to buy a business they couldn’t otherwise afford. By applying the going concern exemption the total purchase price drops 10%. They simply cannot secure sufficient funding to carry them over until the next Business Activity Statement is lodged to claim the GST back. If you are in this situation a surprise GST bill could be crippling, so seek advice!

 

Can the going concern exemption apply to shares

The going concern exemption will not apply where the shares of a company operating the business are sold. In this case the supplier (shareholder) is not the same entity as the one carrying on the business (the company).

However, this does not mean that GST will be payable where a buyer purchases the shares in the company. The sale of a business by shares is a financial supply. This is because the shares themselves are considered to be financial supplies under GST law. Financial supplies are input taxed rather than GST Free. What does that mean to people who don’t spend all day reading the GST laws? Basically, no GST will be charge on the sale price of the shares but no GST credits can be claimed by the seller for GST paid on expenses relating to the sale (legal or accounting advice, for example).

Cryptocurrency: Bitcoin and the ATO

Cryptocurrency: Bitcoin and the ATO

Cryptocurrency is all the rage right now. Bitcoin, in particular, has been getting plenty of coverage. If you’re a member of any investment focused Facebook groups you will have seen the polar opposite opinions out there. While some feel it’s the next stage in the evolution of commerce others consider it nothing more than a dressed-up gambling product.

Despite the coverage on the topic very little is being done to ensure that individuals fully understand the tax implications of ‘investing’ in Cryptocurrency. Even if Bitcoin is the future of currency, for the time being at least, our normal tax principles still apply.

What are the tax consequences if you choose to jump on board the cryptocurrency train? Well, that depends on whether you are running a business or acquiring a personal investment.

What is a Cryptocurrency?

Cryptocurrencies, like Bitcoin, are a form of digital currency. Information relating to these currencies is entered on a networked ledger called ‘the blockchain’. Balances are created and kept using both public and private keys – essentially long strings of numbers and letters. The public key serves as an address to which others can send cryptocurrencies, similar to your traditional bank account number. The private key (your PIN) is used to authorise transmissions from your account.

Cryptocurrency and Business

Businesses that buy and sell Bitcoin

So, you’ve decided to go all in and set up a business that buys and sells Cryptocurrency? According to the ATO, the proceeds you receive when you sell Bitcoin (or other crypocurrencies) should be included in your assessable income for the year. You can, of course, claim a deduction for the expenses you incurs just like any other business. Your Bitcoin is treated as stock and should be accounted for as such.
Bitcoin is classified as ‘input taxed’ from a GST perspective. As such, you are not required to register for GST. However, you may choose to register anyway after considering other circumstances specific to your business.
Note: these same rules apply to businesses engaged in mining Cryptocurrencies.

Capital Gains Tax Consequences

Where you carry on a business and dispose of bitcoin as a part of that business, there may be capital gains tax consequences. However, the capital gain may be reduced by the amount that has already been included as income. The ATO requires records to be kept for such transactions, including:
• the date of the transaction,
• the amount in Australian dollars (marked to a reputable exchange,
• the purpose of the transaction, and
• details of the other party or parties involved in the transaction.

Businesses that use Bitcoin in transactions rather than AUD

When you use cryptocurrency for business transactions, for example – providing your goods or services in return for bitcoin, you need to record the value in Australian Dollars (AUD) as a part of your income. The amount to include should be verifiable from a reputable, third-party exchange.
If you are registered for GST (or required to register) you will need to remit GST on the transaction – 1/11th of the value received in AUD. The total of these amounts will be reported on your Business Activity Statement in AUD.
When you make business purchases using cryptocurrency you may be entitled to a deduction and GST credits for these expenses. You will need to determine the fair, arm’s length value of the item(s) acquired. Normally this won’t be an issue, but care should be taken if the payments are made to a related party.

Crypocurrency and Payroll

You may even decide to pay your team members using Crypocurrency (subject to their approval). to pay employees’ salary and wages. The payments are treated like normal payroll amounts and the business has all the typical PAYG Withholding, Superannuation and Workcover obligations.

Cryptocurrency held personally

Because cryptocurrencies like Bitcoin can be used to making purchases instead of traditional ‘money’ its highly probably that some taxpayers will buy cryptocurrency to facilitate a transaction.

If you decide to acquire Bitcoin, or any other Cryptocurrency, to hold and use personally (other than as part of a business operation) you will not report sale proceeds in your tax return. You will also not be entitled to a deduction for any expenses related to your cryptocurrency. In addition, there will be no GST consequences for you because these transactions are not related to a business operation.

However, whether or not you are carrying on a business depends on a number of subjective factors. It is normally best practice best to speak with your accountant to determine if you are running a business.

Using bitcoin for purchases – Capital gains tax

Where you have Bitcoin and you use it to purchase goods or services for personal use, capital gains or losses from the disposal of bitcoin will be disregarded provided the cost of the bitcoin is $10,000 or less.
Where the cost of Bitcoin used is $10,000 or more, there may be CGT consequences. Again, the ATO requires records to be kept for such transactions, including:
• the date of the transaction,
• the amount in Australian dollars (marked to a reputable exchange,
• the purpose of the transaction, and
• details of the other party or parties involved in the transaction.

Further Information

You may also wish to read the following information directly from the ATO.

New Rental Property Deduction Changes

New Rental Property Deduction Changes

Negatively geared rental properties are an incredibly popular investment option in Australia. For taxpayers who have a combined household income well above average the benefits of negative gearing can be significant. Especially during periods which see the rental property itself increasing in value at a significant rate.

As we approach the end of the 2017-18 financial year property investors should be aware of a couple of key changes to the deductions available for this year’s tax return. These changes could reduce the tax benefits offered by the investment depending on when the property was purchased.

 

Depreciation – Rental Property Equipment

Deductions for Depreciation of Fixtures and Equipment in residential rental properties are now limited to outlays actually incurred by the investor.

 

What were investors doing prior to this change?

Before 1 July 2017 investors who purchased a residential rental property would engage the services of a Quantity Surveyor. The result of this service was a ‘Depreciation Report’ that detailed all the existing Fixtures and Equipment in the property (Oven, Blinds, Carpet etc). A portion of the cost price of these assets could be claimed as a tax deduction each financial year. The depreciation amount would help to increase the total loss made on the investment for the year. This, in turn, would increase the tax benefit available.

 

How will the change impact investors?

Depreciation deductions for previously used fixtures and equipment in residential rental properties will no longer be available if:

* The item was purchased on or after 9 May 2017 – based on contract date;

* The item was acquired before 1 July 2017 but were not used to earn income in either the current or previous year.

Investors who purchase new fixtures and equipment will still be able to claim a deduction for depreciation in the normal manner.

Supporting Information

 

Deductions for Travel Expenses

From 1 July 2017, travel expenses that relate to inspecting, maintaining, or collecting rent for a residential rental property can no longer be claimed as a tax deduction. The change applies to all properties regardless of when they were purchased.

 

What were investors doing prior to this change?

Traditionally, investors who travelled to their rental property to inspect the dwelling, undertake repairs or to collect rent would claim the costs associated with these activities. These costs typically related to transportation (motor vehicle costs, air fares) and accommodation.

 

How will the change impact investors?

Investors who own residential rental properties can no longer claim a deduction for travel costs relating to these investments. The change applies to every residential rental property.

The travel expenses should not be recognised in the cost base of the property either.

Supporting Information

 

Are you exempt from these changes?

The changes to rental property deductions will not apply to the following taxpayers:

* Individuals or entities that incur these costs in the course of carrying on a business;
* Corporate tax entities;
* Superannuation plans other than self-managed superannuation funds;
* Public unit trusts;
* Managed investment trusts, and
* Unit trusts or partnerships whose members are the above listed entities.

 

Conclusion

The combined impact of these new rules will not result in a mass exit from the property market. Investors buy property, or seek to do so, because they love that investment option. However, if you were looking at purchasing a property and claiming expensive travel costs to ‘inspect’ your investment you may want to reconsider.