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Audit Insurance

 

Many accounting firms offer an audit insurance policy as an optional extra for their clients.  It is just about time for Jigsaw Tax’s policy to renew and we will no doubt get many questions from our clients about the need for this policy.  Given that we have been through a year with many self-assessed benefits being provided (particularly Jobkeeper), we are strongly recommending to our clients that they consider taking out a policy.  Here is a simple explanation about what audit insurance provides.

What does audit insurance cover?

First, you need to understand what the insurance covers.  The insurance is not in place to prevent you from being audited, it is in place to cover the costs of your accountant helping you through the audit process.  It does not cover the result of the audit either.  If the auditor finds a shortfall in the tax/superannuation/workers compensation you have paid requiring you to pay the shortfall, possibly with penalties and interest, you will still need to pay that.  Effectively it covers the cost of your accountant’s time, and other professionals they may ask to assist in your audit case.

Do not expect your accountant to act for free if you are audited.  This is additional time that your accountant will need to spend on your behalf and they will charge you for it.  If you have audit insurance it is likely this time will be covered by the policy.  If you don’t have audit insurance you should expect to pay for this service.

Audit insurance typically covers audits that arise from the ATO and other government agencies.  It covers audits for wage obligations, payroll tax and workers compensation.  Make sure you read your policy to understand what is, and what is not covered by the policy.

What if I don’t take out the policy?

The policy is completely optional, and like any insurance you run the risk that if you are not insured you will need to pay for the costs yourself.  We take out car insurance even though we hope we will not have a car accident.  Similarly, you can take out audit insurance in the hope that you will not need to draw on it.  If you do get audited, it is nice to know it is there.

If you don’t have audit insurance you can either handle any audit yourself, or you will need to pay for the services of a professional to help you.  Most audits take a number of hours (probably 3-4 at a minimum) so the cost is certain to exceed the insurance policy cost.

What are the benefits of having a professional help you with an audit?

From personal experience you will get a better result if you have a professional help you with the audit.  Your accountant understands what the auditor is looking for and can help to negotiate lower penalties.  They also know how to speak in the language of the auditor, and what not to say.  I have seen clients mention things to auditors that get them into more trouble.  We know what evidence is needed to argue for the view that was taken and we know when to concede that something was wrong and ask for leniency on your behalf.

Another major benefit is that it saves time and stress.  If someone else can pull the information together that saves you valuable hours which can be better spent running your business.

Do I need to be worried?

The Government have committed to over $500 billion in 2020 providing stimulus support to all areas of our economy.   This is money that Australia does not have and it will take years to recoup through an efficient tax system and increased wealth (Gross Domestic Product) in the Australian economy.

The ATO released statistics on the Tax Gap (if you want to find out more about the Tax Gap read my article https://www.tradiewags.com.au/wagtips/2020/11/1/what-is-the-tax-gap) indicating that in 2017-18 over a third of the tax gap came from small business.  This equates to $11.1 billion.  It is clear that with better use of information the Government will be targeting small business so they can close this tax gap.  Take this as a gentle warning – audit is going to be a big issue over the next few years.

We are concerned that people have applied for Jobkeeper without going through the myriad of tests that were required.  We know that businesses are struggling and sometimes that means bending the rules a little or missing compliance obligations.  We understand that compliance it difficult and that it is easy to make mistakes or forget to lodge something.  We are also seeing an increase of businesses being reported to the ATO for not doing the right thing, which typically results in an audit.

Insurance is a method of risk mitigation.  You cannot ‘insure’ that you will not be audited, but you can insure so that your audit will be handled in a professional way without cost constraints.  At Jigsaw Tax we will be recommending that our small business clients, particularly those who received Jobkeeper, take out audit insurance this year.

Jigsaw Tax & Advisory have staff who specialise in managing ATO audits.  This team is managed by ex-ATO auditors who understand how to communicate with the ATO in an effective way.   We do this not only for our own clients but also on behalf of other firms.  If you are interested in this service, please get in contact with Jigsaw Tax & Advisory and we can discuss your needs.

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Are you paying your staff correctly?

Employing staff certainly adds a layer of complexity to your business.  For many small businesses hiring staff is an essential way to meet growth goals and manage your client’s expectations.  Understanding how to pay staff is not something we naturally know, and we often see that staff are not being paid correctly.  It would seem that almost every week one major company is called out for not paying their staff correctly (and these include some of the biggest employers in Australia), so it understandable that the small business owner struggles to get it right.

There are so many rules around paying staff that your mind boggles.  The Government want small businesses to employ yet the red tape involved and the penalties for getting it wrong can be a deterrent for many.  We understand that rules are needed so as not to exploit our staff, but most employers are not trying to exploit anyone.  They unfortunately just haven’t kept up to date with the rules, or made assumptions about pay rates without doing the research.

The way we employ and pay staff in Australia is governed by the Fair Work Act 2009, and monitored by the Fair Work Ombudsmen.  The best source of information for any of this is the Fairwork website.

Let’s take a few minutes to review some basic elements about employing and paying staff.

 

National Employment Standards (NES)

Do you know what the NES are?  They are a set of 10 minimum standards of employment that apply to pretty much all employees in Australia.  The 10th rule is that you provide all new employees with a copy of the Fair Work Information Statement…does this mean you are breaking the rules already? Have you been giving all your staff this when they commence work?

To download a copy use the following link, and I suggest you take a read of this and make sure you are complying with these basic standards.

https://www.fairwork.gov.au/employee-entitlements/national-employment-standards/fair-work-information-statement 

Of note, the maximum work week is 38 hours per week.  Not 40 hours, 38 hours.

 

Find your Award

Speaking with a client a few weeks ago, I asked what award he paid his staff under.  The award he quoted doesn’t even exist anymore.  Most awards have now been replaced with Modern Awards and the best place to find your Modern Award is the Fairwork website. I know, reading awards can be incredibly boring, but please take the time to read the award that is applicable to your business.  Pay particular attention to the minimum rate and the casual loading that applies to the minimum rate (if you are employing casuals). Make sure you at least paying this minimum rate.

It is also important to read the Classifications that apply to each rate, and make sure your staff are correctly classified.

Use the calculators on the Fairwork Site

The Fairwork website has a pay calculator that steps you through the questions you need to answer to determine the correct rate of pay.  The link to this calculator is below.

https://calculate.fairwork.gov.au/findyouraward 

Take the time to work though this and keep a copy on record for each staff member.  If questioned, you can show Fair Work how you came up with the payrate for your staff. Remember that if a junior rate applies to a staff member, that rate is going to change when they have a birthday.  You should run this pay calculator at least one a year for all staff to ensure things have not changed. Maybe link that to their birthday as a way to remember to do this.

 

Stay aware

If you are member of an industry body you should get updates if awards change, but as a general rule, most award rates are updated on 1 July each year.  Put it in your diary or set a phone reminder to check this each year.  Include it as part of your year end process.  Be interested in media stories about employment so you can be alerted to wage rises.

Temporary changes are in place due to COVID-19, including the delay to some award rate increases this year.  If COVID-19 is impacting your ability to pay or retain staff, it may be worth reading the information on the Fair Work website. There are plenty of rules about what you can and cannot do due to COVID-19.

 

Pay your super

I feeling like a broken record, but just a reminder that superannuation is not an optional extra for staff.  It is mandatory.  It must be paid and it should be paid on time.

 

What if I have got it wrong?

Seek help from a professional.  You will need to rectify the situation and may need help to calculate the back pay or the missing entitlements.  Your accountant is a great starting point if you are having difficulties.  This is an issue you really cannot ignore so take time to add a HR check up to your to-do list today.

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Federal Budget 2020-21

Federal Budget 2020-21

The Budget is usually presented in May and as accountants, we get a nerdy excitement at the prospect of the tax planning that results.  Of course, this year is different.  Tax planning went out the window in April and was replaced with Stimulus planning.  The delay of the Budget until October seemed a lifetime away yet here we are, seven months into a global pandemic, sifting through a document full of unprecedented spending to kickstart our economy.

We knew the headline figure would be large, and the $213.7 billion deficit was not a big surprise.  In fact, there were few surprises in this budget as most of the measures had been announced prior to the budget being presented.  It has been clear that the Government sees the construction industry as a key driver to recovery.  As a business owner (particularly if you are in a Trade business) there is a lot in this for you, so let’s explore how this budget can help you to kickstart the Australian economy.

Personal tax cuts

The tax cuts that were expected in 2022-23 have been bought forward to this financial year.  The 19 percent tax bracket will increase from $37,000 to $45,000 and the 32.5 percent bracket will increase from $90,000 to $120,000.  The Low Income Tax Offset will increase from $445 to $700 and the LMITO (low and middle-income offset) of $1,080 will remain for an additional year, ending after 2020-21.  Ultimately this means more money in the pay packets of 11.6 million workers.  This money will be available almost immediately once the tax cuts are legislated.

I find it a little amusing that the tax cuts have been backdated to 1 July 2020.  I have no idea how the ATO would administer a mid-financial year tax cut so this a logical move in my opinion.

As a nation with one of the highest personal tax rates in the world, this is welcome news.  Bring on the Stage 3 tax cuts from 1 July 2024 which will flatten the tax rates resulting in 95% of taxpayers having a maximum rate of 30%.

Temporary Full Depreciation

We have become accustomed to budget changes to tax-deductible depreciation since 2012.  The government has been moving the deductible amount and the eligibility thresholds which has increased business investment in capital items by bringing forward the resulting tax deduction.  The latest measure is going to benefit almost every business who can invest in depreciable assets.

The temporary full depreciation measure takes away all the thresholds and eligibility (with the exception of those with turnovers exceeding $5 billion).  This means you can fully expense any ‘eligible’ assets purchased between 7.30 pm on 6 October 2020 that are installed and ready to use prior to 1 July 2022.  You can also fully expense the costs to improve existing eligible assets.

The key facts here, the asset must be an eligible asset which means it is a business asset subject to Division 40 depreciation.  Buildings and structure improvements to buildings are subject to a different type of depreciation (Division 43) which means the full depreciation is not going to apply to a property purchase or structure renovations.  You cannot use it for personal assets such as a new boat or investment purchases such as your rental property renovations.  The depreciation limit on luxury vehicles of $59,136 will apply, however many utes are not subject to this limit.  There are many assets that this will apply to and if you are intending to invest in capital in the next few years, this is your opportunity to maximise the tax deduction.

Temporary tax loss carry back

Our accountant minds are ticking away at how we can use this budget measure in combinations with the Full Depreciation to get you some of your previously paid tax back.  This measure applies to businesses with a turnover of less than $5 billion (so most businesses).  Without too many details available I imagine this is limited to those trading out of a company structure.

Essentially, if you have a tax loss in a business it will normally carry forward to future years to be offset against future profits.  However, it is expected that many businesses will have losses in 2020-21 and may not be able to use these for a few years.  As such the budget allows you to offset that loss against past taxes paid rather than carry the loss forward.

If you have tax losses in 2019-20, 2020-21 or 2021-22 you can offset these with tax paid in 2018-19 or later.  You will not be able to do this until the 2020-21 or 2021-22 tax return, so you don’t need to amend your 2020 return if you have already lodged this and it is applicable.

There are many questions that come out of this but no doubt it will be an excellent tax planning tool.  There was a loss carry back provision around 2012 -2014 so presumably, the rules will be similar.  We will be keenly waiting to find out how this will work.

It’s all about jobs

The government inspired catchphrases including the word “Job” just keep coming and the latest instalment is the JobMaker.  The JobMaker Plan involves $74 billion of spending to skill up our workforce.   If we are going to be creating new jobs, we need someone to do those jobs.  With high rates of unemployment, we need to find a way to direct people to areas that will need workers, at the same time creating sustainable careers.

Much of this money is directed at young people with the following key initiatives:

Boosting Apprenticeship Wage Subsidy.  The first lot of stimulus support for retaining apprentices was retrospective.  The apprentices needed to be in your employment before the key dates for you to be eligible for the wage subsidy.  This new initiative will help you to hire a new apprentice after 5thOctober 2020.  There are no restrictions on business size or employee numbers like the first and second round of apprentice wage subsidy.  The subsidy will be a quarterly payment of 50% of the apprentice’s wage up to $7000 per quarter until 30 September 2021.  This is expected to support up to 100,000 new apprentices and trainees.

JobMaker Hiring Credit.  Aimed directly at youth unemployment, payment will be made to businesses who create a job for an eligible employee from 7 October 2020.  An eligible employee is aged between 16-35 and is on Jobseeker, Youth Allowance (other) or Parenting Payment for at least one month of the 3 months prior to their hire.  The subsidy will be $200 per week for those aged 16-29 and $100 per week for those aged 30-35.  The program will be available for 12 months and subsidy is intended to run for the employee’s first year of employment.

JobTrainer Fund.  A fund of $1 billion will be established to support free or low fee training places, expected to benefit up to 340,700 people.  This money is meant to be directed to courses with areas of genuine skills needs, and presumably, some trades would be classified in this area.

Infrastructure spend

An effective way to create jobs is to initiate big infrastructure spending.  The budget added an additional $10 billion to project funding increasing the spending to $110 billion over the next 10 years.  The additional $10 billion announced in the budget is expected to be spent in the next 4 years, indicating an urgency to get these projects underway.

Much of this spend involves road, rail and water projects.  Money has been directed to State and Local governments for road upgrades, and presumably, some of these projects can be rolled out reasonably quickly.  Tradies, the demand for your services will be high over the next few years.

Housing Construction

For those not geared up for a large infrastructure project, the government has extended the First Home Loan Deposit Scheme by adding an additional 10,000 places. This allows first home buyers to enter the housing market to build or buy a newly constructed property with only a 5% deposit.

In conjunction with this, the Government is providing an addition $1 billion to enable the National Housing Finance and Investment Corporation to guarantee low-cost finance for eligible applicate to build affordable housing.

These initiatives are expected to generate $1.5 billion in additional economic activity.

Cutting red tape

The Government has relaxed a few things to make it easier for us to do business.  Of note are the following changes.

Insolvency Changes. The rules around trading while insolvent relaxed during COVID-19 but more permanent changes will be introduced from 1 January 2021.  The changes are aimed at small businesses allowing a lower cost process to restructure debts while they stay in control of their company.  There will also be a quicker, lower cost liquidation process available for those businesses that cannot survive.  These measures will be available to those companies that have liabilities of less than $1 million.

Relaxed credit rules.  If you have tried to borrow money from a financial institution in recent times you will understand that the processes are extremely restrictive.  The Government is relaxing the tight constraints that have been applied, hopefully allowing more people to access the funds required to spark investment.

While there has been a lot of criticism over this change in the regulatory framework of our credit laws, it will not be relaxed for the small loans and leases that are targeted at the more vulnerable (such as pay-day loans).  I personally think the relaxation of the laws will be a good thing.  The red tape we have to go through to get our clients even a basic loan has been incredibly restrictive and I cannot see how increased investment spending would be able to occur without this change.

Other spending and changes

Of course, there are plenty of other items in this budget, including investment in the Women’s Economic Security Statement 2020, changes to R&D concessions, spending on our security, the environment and health, but I have tried to highlight the items that are of interest to business owners.

One item that may be of interest to those who have young adult children is the increase of the age of dependents under private health policies from 24 to 31.  It was not highlighted in the speech, but I found it buried in the budget papers.

What next

Like all budgets, the bill will be debated and passed through parliament and then the various departments will work on how to enact the new rules.  The budget gives us a taste of what is to come, but the details are what we need so we can start to take advantage of these new initiatives.  As a business owner, it is time to consider how you will use these initiatives to your advantage.  It is your responsibility to take advantage of this unprecedented spending to create jobs, invest in capital and build your business.  That, along with a vaccine and the opening of borders, is the key to our nation’s recovery.

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Jobkeeper 2.0 – What you need to know

This week is the crucial week for action for those on Jobkeeper 1.0 and those intending to continue to claim support via Jobkeeper 2.0.  The long awaited alternative tests were released by the Commissioner of Taxation on 22 September giving us more clarity and some tools to assist our clients in determining their eligibility for Jobkeeper 2.0.  Once again our mind is swimming as we seek to get the best support for our clients in this crazy time.

If you are one of the businesses who were not impacted sufficiently by COVID-19 to be eligible for Jobkeeper you must be very bored by these conversations by now.  However, there are around 960,000 employers who have accessed Jobkeeper 1.0, and many are uncertain if they qualify for Jobkeeper 2.0. This make planning for the next 3 months very difficult if you are not sure of your eligibility.  This week will hopefully bring the clarity you are waiting for as to your continued eligibility.

The announcement of the Jobkeeper extension was made on 21 July.  Changes to the tests were quickly announced on 7 August as a result of the lockdown in Victoria.  The alternative tests were released on 22 September demonstrating that the government is taking a more measured approach than the rush to bring support to businesses in April.  Yet despite the delay in their release, the alternative tests are in line with the predictions of accountants trying to assess client eligibility.

Here is what you need to know:

 

The End of Jobkeeper 1.0

·       If your business is currently receiving Jobkeeper 1.0, this finished on 27th September.  You need to ensure that you have paid your staff at least the minimum of $1,500 for the fortnight 14th September – 27th September.

·       Report your turnover for September using the regular monthly business declaration  between 1 October – 14 October to receive the last of your payments for Jobkeeper 1.0 (being the payments for the two fortnights in September).

 

The start of Jobkeeper 2.0

·       Assess if you are eligible to receive Jobkeeper 2.0.  I will discuss how to assess this below.

·       If you are eligible you need to assess which Tier of payment your staff fall into.  This is determined by looking at the average number of hours the employee or business participant were actively engaged in the business in the four week period before either 1 March 2020 or 1 July 2020.  If the average hours are more than 20 hours per week the employee or business participant receives a Tier 1 payment.  If less than 20 hours, the employee receives a Tier 2 payment.

·       Advise via Singe Touch Payroll which Tier of payment is applicable for each employee.  If you don’t use Single Touch Payroll you will need to identify your employees when you make you submit your details on the Business Portal or MyGov.

·       Make sure you pay the employee the minimum amount for each fortnight based on their Tier.  The minimum amount is $1,200 per fortnight for Tier 1 and $750 per fortnight for Tier 2.  You have until 31 October to get this minimum payment made for the first 2 fortnights of Jobkeeper 2.0, allowing you time to properly assess your eligibility.

·       You will need to submit details of your businesses actual decline in turnover to the ATO between 1 – 31 October 2020.

·       In November you will need to continue with the monthly business declaration, not only declaring your turnover but which Tier your employees were paid for over the course of the month.

·       You will continue to be eligibly for Jobkeeper 2.0 until the next retest point at the end of December 2020.

 

Keep your employees informed

While there is no requirement to get new declarations from your employees for Jobkeeper 2.0, make sure you inform them of your eligibility, or not, so they can be aware of the circumstances.

Note, the eligibility tests for employees has not changed.  If you had assessed the employee eligible for Jobkeeper 1.0, the employee will continue to be eligible for Jobkeeper 2.0.  The start date of 1 July is the testing date for permanent employees and long term casuals and it is still the ”one in, all in” situation, meaning you cannot pick and choose which employees receive Jobkeeper.

 

The business eligibility test

When considering your eligibility for Jobkeeper 2.0, remember that this extension is really designed for the businesses who have been severely impacted by COVID-19.  In many cases businesses have returned to normal trading (although maybe slightly reduced) in recent times.  Jobkeeper 2.0 is largely designed to assist those in Victoria, and those in industries such as entertainment and tourism that simply cannot operate in a normal way at this stage.  Of course, there will be a wider net of businesses that will pass the eligibility test because it is not exactly business as usual right now, but this test will be a lot more difficult to pass than the Jobkeeper 1.0 test.

When it came to testing for Jobkeeper 1.0 we had a few options.  We could test on any month between March and August, or we could predict that the March- June quarter would show the required decline.  The ATO accepted those predictions so long as there was a reasonable basis for them.  We could choose between turnover on a Cash or on an Accrual basis.  With many businesses trading in a very different capacity in April and May, it was relatively easy for an effected business to pass the test.

There are no predications in Jobkeeper 2.0.  The test is based on actual figures and rather than looking at a month, it considers an entire quarter.  We need to look at the actual GST turnover from July- September for our comparatives.  The ATO prefer you to compare on the same basis as your Business Activity Statement (you either report on a cash or accrual basis) although they have said you can use the other basis this may be questioned by the ATO when your BAS comparisons don’t stack up.

The comparatives will be based on what your reported as your GST Turnover in your July- September 2020 BAS, and your July – September 2019 BAS.  To be eligible you need to show the 30% decline in turnover this year compared to last year, unless your business has a turnover of more than $1 billion per annum, in which case you need to show a 50% decline. The decline in turnover test for charities and not for profits is still 15%.

For most businesses it should be very simple to compare and determine eligibility.  If you qualify you will get Jobkeeper 2.0 from October – December.  You do not need to retest again until the end of December when a further extension is available at a further reduced rate until 28 March 2021.

Do not by surprised if you have dropped out for Jobkeeper 2.0.  If things go particularly bad in the October- December quarter the Government have left the door open for you to retest for the January- March quarter and jump back into the scheme.  Fingers crossed that will not be necessary.

 

The Alternative Tests

Aware that circumstances may prevent the traditional test to be appropriate for some businesses, the ATO has issued alternative tests that may be used.  These tests are very similar the initial alternative tests that were advised for Jobkeeper 1.0.  Remember, these are designed for businesses that have unusual circumstances and to be eligible to use an alternative test you must satisfy a condition to use the test, as well as pass the alternative test itself.

Below is a table explaining the alternative tests.  Note, if your business qualified for the ATO Bushfire’s 2019-2020 lodgement and payment deferrals, or received Drought Help concessions, you can exclude the months that these concessions or deferrals covered from the calculations, unless they are the only months that the business operated.  If this is applicable to you, I suggest you read the legislation at this link for more details on how the bushfire or drought figures impacts your test.

https://www.legislation.gov.au/Details/F2020L01200

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I know this seems extremely complicated and if you think one of these tests may apply to you, I strongly suggest you seek the advice of a professional.

It is going to be a busy month ahead with all these things to consider, along with Business Activity Statements to be lodged and our first of our lodgement deadlines coming up on 31 October 2020 (typically for those with overdue returns).  Have patience with your accountant.  They are doing their very best to get you through this challenging time.

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Unpredictable

Every Monday I start my week with an early morning Reformer Pilates class.  It is a lesson in vulnerability and personal strength as I manipulate my body in challenging new positions that I thought I would never have been capable of.  This morning the only thing preventing a spectacular fall from the machine was a fluffy band and my will and strength not to embarrass myself. I saw this as a metaphor for life right now, particularly business life.  I don’t know if my body can do the exercise that I attempt because I have never done it before.  The outcome is unpredictable, but I try it anyway.  We are running our businesses in this strange time with a level of vulnerability we have not seen before.  To succeed we must trust in our own strength and instinct.

 

I am sure COVID-19 has taught us all many life lessons and it is going to teach as so many more as this pandemic lingers as a disruptive force to our life for many years to come.  One thing that it has taught me more than anything is that life is completely unpredictable and trying to learn to deal with this unpredictability is a critical new skill to learn.

I think we all find comfort in predictability, even those who like to think of themselves living an “unpredictable” life.  In business, predictable is a necessary thing.  We create budgets, make plans and decisions all based on the fact that what we know from the past will be recreated into the future.  Right now, it feels that some of that has gone out the window.  As a business owner this can cause stress and anxiety, particularly for those who are working in an industry that has been highly impacted by COVID-19.

 

One of my husband’s favourite sayings is “let’s just see what the tide does”.  While I love this reference to surf culture and a free lifestyle sitting on a beach somewhere, it is can also be rather infuriating for someone like me, an accountant.  While there are unpredictable elements of my job, overall we know that our workflow goes in cycles and we can set out targets based on these cycles.

We are fortunate in that at this stage our work has only become more intense as a result of Jobkeeper and the other stimulus measures.  Compared to so many businesses out there we have nothing to complain about, but even with a level of predictability we are having difficulty making business decisions.  We are not sure how many of our clients will survive.  We are not sure how many of our clients will be able to afford to pay our invoices.  We are not sure how long it will take for those invoices to be paid.  In the back of our minds we are also concerned about staff getting sick and the impact that will have on us meeting our client’s needs. There is definitely an element of “seeing what the tide does” in our business at the moment.

This, however, is no excuse not to plan.  If anything, it means planning is more important that ever.  Planning now needs to account for unpredictability as well as predictability.  Your “what if” analysis has a whole bunch of new factors to consider.  Now is the time to be savvy about your business, to tighten your procedures, to enhance the customer experience and introduce better technology to give you a competitive advantage.

 

As a starting point take 15 minutes to write down your concerns about your business in this unpredictable time.  This may include loss of customers, staff unable to work, your customers going into liquidation meaning higher bad debts, or the fact that you simply cannot work as the government has closed your business.  Then start to formulate a plan to tackle this if the worst does happen.  We are fortunate to have some government support at the moment but this is not going to last for ever.  We need to be making plans for a business life after the support drops off.  That business life may look different to what it has looked like in the past.

No one knows where this pandemic is going to take us and honestly, it is OK to be looking one day at a time right now.  I am sure no business plan written in 2019 factored in a global pandemic.  What is predictable is that we will survive this and one day life will return to normal, even if that normal looks different to what we have known in the past.  People will still need to eat, be entertained, be clothed and housed.  Trade businesses are still going to be in strong demand.  Taxes are still going to need to be paid and most business owners will need someone to help them prepare those taxes.  What that will all look like into the future we do not know, so we need to adapt as the new models for doing business emerge.  It will be survival of the fittest, so be the fittest.  This means you need to be nimble and have great systems so you can adapt.

 

Tomorrow is unpredictable, and so is the day after that, and the day after that.  Unpredictable is starting to be predictable itself.  Strong business owners will learn to live with this and find ways to make the most of it.

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A tax mum’s letter to first time taxpayers

It’s that time of year again, and I will no doubt be having the same conversation with many of my children’s friends who are new at lodging tax returns.  They will want my help to get as much tax back as possible and explain why their expectations do not necessarily match the reality of the tax refund.  So, to save time and reach a larger audience, I am writing this for you, the first time taxpayer.

Tax accountants wonder why the fundamentals of tax are not taught in school, but if you are like any other normal kid, I am sure a lesson on tax would have made little impact on your understanding of the Australian tax system.  Your mind would have been drifting off to something much more exciting because let’s face it, tax is boring.  That is until it becomes interesting to you when there might be something in it for you.  Yes, I bet you already have your anticipated tax refund spent.

How is that mystical refund calculated?  I am sure you have plenty of questions all of which are completely normal.  In fact, I am still explaining this to people who have been lodging tax returns for many years.  Tax can be complicated to understand. There are plenty of older people who are as confused by the tax system as you are.  Perhaps you should get your parents to read this as well.

Lodging your first tax return is a very grown up thing to do.  I see many parents taking a step back when it comes to organising your tax return.  It is one small act of responsibility that will set you on a good path as a tax paying citizen.  Lodging your tax return is one of those things you have to do each year.  It does not have to be scary, but if you leave it too long or ignore it altogether it can become an unpleasant experience (like going to the dentist).  Fortunately, in most cases your early tax returns will result in refunds encouraging you to attend to this life task each year.

Let’s break down some myths so you can feel a little educated when it comes time to do your tax.

 

Myth 1 – I hear that you get all your tax back the first time you lodge a tax return

Sometimes this is correct, but the ATO do not see you differently to any other taxpayer in Australia.  You don’t get a special exemption from paying tax just because it is your first time.  Tax is calculated on the total income you have earned for the year.  If you were fortunate enough to have earned income that takes you above the tax free threshold of $18,200, you will be contributing some of your income to the Australian Government in the form of tax.  Many first time tax payers have not earned a lot in their first year, so they may get all their tax back, but it is not a given.

The way your tax is calculated is quite simple in theory.  You calculate all of your income from various sources, including wages, interest, dividends and any work you do as a sole trader on an ABN.  You then take away any deductions that the government allows, and this gives your taxable income.  There is a formula applied to your taxable income to work out how much tax you need to pay.  This is compared to the tax that has already been taken out of your wages.  If you have had more tax taken out of your wages than needed, you get a refund.  If you have had less tax taken out of your wages than needed, you need to pay. This is the same for every taxpayer.

 

Myth 2 – If I buy some thing that I can use as tax deductions, I will get that money back

Not exactly.  A deduction reduces the amount of income that you have earned and this means the amount of tax you need to pay on that income is a little less.  The amount of tax you will get back on your deduction is based on your marginal tax rate (I will explain that later).  If your income is around $30,000 for the year, your marginal tax rate is 19%.  This means you will get back 19% of the expense.

If your income is $18,000 for the year, your marginal tax rate is 0%.  You guessed it you will get back $0 for your tax deduction.  You should never buy anything just for the tax deduction.  There should always be some other reason you are spending your money.  The tax deduction may be an advantage but should not be the only reason you make a purchase.

Your refund will be based on the amount of tax your employer has taken out of your income.  The ATO do not mystically give refunds just because you purchased something.  If your employer did not take any tax out, there is nothing to refund.  The best you can do is get back the tax that has been taken out of your pay.  You will not get any more tax back than that.

 

Myth 3 – My friend got heaps of tax back this year, I should get the same shouldn’t I?

Although tax is calculated using a formula, everyone’s circumstances are different.  Your income and deductions are not going to be the same as your friends, they are unique to you.

It is also possible that your tax is calculated with a slightly different formula to that of your friends.  If you have a Study Assist debt (eg HECS) and you go above a certain income level you will start to pay some of the debt back.  Private health insurance, Medicare Levy and Medicare Surcharge may effect the overall tax calculation.

 

Myth 4 – I think I have earned enough to move into a higher tax bracket. This means I am going to be higher tax on all of my earnings

This is a very common misconception that I discuss with taxpayers all the time.  Tax is calculated on a scale that increases the amount of tax you pay as your income gets higher. However, you only pay the higher tax rate on the income that is earned at the higher rate.

Let’s say your taxable income is calculated at $50,000 for the year.  On the first $18,200 you pay no tax at all.  This is the same regardless of how much you earn.  Between $18,201 – $37,000 you will pay 19 cents in the dollar and then you will pay 32.5 cents in the dollar between $37,001 – $50,000. On top of this you will pay 2% in Medicare levy.   The total of all of this is $7,796 + $1000 (Medicare Levy) = $8,786.   This is very different to thinking you will pay 32.5 cents on all of your income which would mean you would be paying $17,250 in tax.  That would be really bad.

So yes, you will be paying tax at a higher rate, but only on the income that relates to that higher tax bracket.  It is always better to earn more money than less.  There is no reason to reject a higher income because you will be paying a higher rate of tax.

The tax bracket your income falls into is known as your “marginal rate”.  In the case of a $50,000 salary your marginal rate is 34.5 cents (32.5 + 2 cents for Medicare Levy).  This means that any tax deductions will give you back 34.5 cents in the dollar.

 

Myth 5 – I have private health insurance so I should not have to pay Medicare

Medicare is levied on all taxpayers unless your income is very low, or you are exempt for a special reason.  Private health insurances prevents you from having to pay Medicare Surcharge, not the Medicare Levy.

Medicare Surcharge is extra tax that you pay if you don’t have private health insurance and your income is at a higher level.

 

Myth 6 – My employer is paying my Study Assist Loan (eg HECS) as a deductions from my pay so why is it on my tax return?

Your employer does not know how much you owe on your Study Assist loan, only that you have one (because you have told them hopefully).  They are taking extra tax out each pay to cover this, but the calculation of how much needs to be paid off your loan only happens when your tax return is done.

If you have not told your employer that you have a Study Assist Loan and you earn enough to start paying it back, you will probably end up with a tax bill.  Make sure you tell them so they can take some extra tax out.  It may take a few years to earn enough to start to pay your loan back but the debt will not go away.  It can be a nasty surprise if you have not informed your employer about it and not enough tax has been taken out.

 

Hopefully this has helped your understanding a little but I am sure you will have many questions.  Sometimes it is good to get a little help with your first tax return or take some time to read up on what you can and cannot claim based on the work you do.

The ATO has some excellent guides to help you based on your occupation.  Find the one relevant to you using the link below.

https://www.ato.gov.au/Individuals/Income-and-deductions/Occupation-and-industry-specific-guides/

Finally, remember to be honest in what you tell the ATO and keep records of your receipts or calculations. Get into some good habits and lodging your tax return will be a breeze for years to come.

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Jobkeeper – the Good, the Bad and the Ugly

Over the last few days, we’ve been busy researching all the new information that has been released, and what that means for tax professionals and their clients. We’re still receiving updates and clarification from the ATO as late as Friday night on the intricate details on how the Jobkeeper Scheme will apply from Monday. I recommend that you read our summary guide on the Jobkeeper Scheme.

This article is simply a  summary of interesting topics we’ve been asked or noticed in our research. It has been prepared to the best of our current knowledge, but the advice is general in nature and should not be relied upon.

The Good – clarity and assistance for businesses

GST Turnover – cash or accrual: This important question has been clarified by a concession from the ATO – “Modification to Projected and Current GST Turnover”. In the original drafting of the legislation, the unintended consequence was that the turnover test would be based on accrual (i.e. when an invoice is raised). The issue arose where a small business had raised invoices in March or April for work completed, but due to the virus had little possibility of collecting payment from their customer: they would be disadvantaged as they would not qualify for the Jobkeeper Scheme due to ongoing invoicing.
The ATO has made the concession that where a business reports its BAS on cash basis, it can elect either cash or accruals turnover as the method for determining the required drop in turnover. Note that the same method needs to be used for both test periods.

Simple calculation: Once the technical aspects of the turnover test are determined (e.g. cash/accrual, add-backs, which period to test etc.), the actual test is generally quite simple. Calculate your actual turnover or projected turnover for March/April/May/June/July/August/September 2020; or the June or September Quarter 2020 and compare it to the to the same chosen period in 2019. If you satisfy the test in either March or April, either under cash or accruals, you are now eligible for the Jobkeeper Scheme. You can apply at any time between now and September, subject to other conditions but to claim the full benefit, you need to register before 30 April. Many clients are starting to forecast their income and will potentially notice a drop in June/July.

What if my income goes up the following month, after I’ve passed the test: The ATO and Treasury are clear on this – once you pass the test, then you remain eligible for the duration of the scheme, until 30 September. While monthly turnover reporting will be used to monitor the economy, it can be assumed that compliance activity may arise from those that did not have a bone-fide drop in income for the test period (e.g. holding off invoicing until the following month). It is very important that you prepare detailed evidence of your claim at the time of determining eligibility, and not down the track. Most accounting software packages provides audit trails, so don’t change invoice dates to qualify.

Business Boost does not impact Jobkeeper: Receiving the Business Boost does not impact eligibility or requirements for employers. The Business Boost can be used to assist funding ongoing wages, provide cash flow assistance to pay the first mandatory Jobkeeper payments, or assistance in meeting any other business expenses.

Stimulus payments will be exempt from turnover test: The ATO has confirmed that Jobkeeper Scheme payments will not be included in your turnover test. A situation could arise, where a company has only marginally qualified for the Jobkeeper Scheme for May based on projected turnover, but due to the payment of the Jobkeeper Stimulus in late May for Fortnight 3, it would not satisfy the required reduction in turnover. We have seen that Jobkeeper payments may be over 60% of total prior year revenue. Also noting that previous releases have stated that Business Boost ATO credits will be considered Non-Assessable Non-Exempt income, and by that definition would not count under the GST Turnover test. While no office advice has been issued as to whether the Apprentice 50% wage subsidy or support state-based stimulus grants will also be exempt from turnover, we are assuming similar treatment to Business Boost stimulus payments.

Business Participation: Sole traders, one partner of a partnership (if an individual), one director, one individual shareholder, or one individual beneficiary are now eligible for Jobkeeper payments. A modification is that the payment is paid to the business and does not need to be paid to the business participant. This can be used assist in cash flow to support other business activities. In situations where there is a registered working director, on PAYG/W and/or STP, and a spouse is a co-director or shareholder or beneficiary who had not drawn a wage – the working director is eligible for Jobkeeper as an employee and the spouse may be eligible as a business participant.

Payment of Jobkeeper: ATO has indicate it will start processing payments by mid-May. The ATO is required to pay claims within 14 days of receiving a claim. The first day for lodgement of a claim is 4th of May, meaning that payments will need to occur by 18th of May. The ATO has advised it will try to pay this amount before Fortnight 3 is required to be paid. This payment will be for Jobkeeper Fortnight 1 and Fortnight 2. From then on, employers will need to apply for eligible employees and receive reimbursement 14 days after lodging the Jobkeeper payment notice.

The Bad – items of concern, but can be managed

Policy on the fly: While we appreciate the hard work that has been put into the legislation and the rules, it does seem over complicated and open to interpretation. Thankfully, the ATO is listening and is regularly adding updates on their websites and making administrative changes to the law to provide a fairer outcome (e.g. the cash vs accrual test). We know further information is coming regarding business participation mentioned above.

Tight timelines: For businesses wishing to apply for the Jobkeeper from 31 March, there is minimal time to obtain advice, plan cash flow, and make necessary payments (see the Ugly below). For new businesses or businesses with lumpy income, this is exacerbated with the ATO still not providing guidance on the Commissioner’s Discretion. Businesses are having to rely on merely 2 policy examples from the EM.

Fairwork Act experts: Many of the terms surrounding the application of the Jobkeeper Scheme to casuals are contained within the Fairwork Act. The Tax Agent Board is currently considering allowing tax agents to assist clients in determining when a casual is a long-term casual and eligible for Jobkeeper. Most tax agents do not have insurance or limited liability scheme coverage on non-tax advice. Please understand that we may refer you to Fairwork or an employment solicitor for specific advice. If you have an Employsure subscription, now is the time to start talking to them and asking questions. They host regular Q&A webinars.

One-In/All-In: If you are an eligible Jobkeeper Scheme employer, you must allow all your eligible employees to enrol in the scheme. With the ambiguity mentioned above, regarding some long-term casuals, it can be stressful determining which casuals are eligible. There are also cases where some employers don’t feel it is appropriate for a casual working 3-5 hours a week to receive the full Jobkeeper, but the scheme requires ALL eligible employees to be included.

Interaction with other income support: Employees need to be mindful that if they decide to participate in the scheme, other income support may be affected. Employees on Disability Support Pensions may lose their entitlements due to reporting too much income. This will cause flow on effects such as having to be reassessed for DSP (even those with lifetime assessments) and loss of their Pensioner or Health card until the DSP is reinstated. Other issues we are seeing is reduction in Family Tax Benefit, loss of rental assistance, and effects on the aged pension for those that may work to supplement their income. As an employer you are required to offer ALL eligible employees the opportunity to enrol, but we recommend that where you think the issues above may apply, that you advise that employer to seek professional advice, speak with Centrelink or Department of Veteran Affairs, or their carer. It could be recommended that they withhold providing the nomination form until after receiving advice; and their eligibility may commence in May rather than April.

Employee entitlements: The interaction between service periods, leave entitlements, superannuation has created a headache for many employers. This is especially confusing whether it is a full stand-down, partial stand-down, a reasonable adjustment to increase hours to $1500/fortnight, or Jobkeeper acts as a supplement for employees over $1500/fortnight – and each situation affects leave accruals differently. There are complex rules when and how employees can access their annual leave entitlements under each situation. It is best to see supporting information provided by the software provider.

Workers Compensation: it is unknown whether Workers Compensation premiums will be affected by the potential increase in overall wage expenses. At time of publishing, NSW Government has not provided advice on this. It is hoped that Workers Compensation will use similar rules to Superannuation Guarantee on Jobseeker top-ups – i.e. only actual hours worked will be counted.

The Ugly – material impacts on businesses

No backpay allowed: This is a shocker and to most clients, this has been the biggest hurdle to pass. Due to the One-In/All-In rule, all eligible employees must be fully paid up by 30 April. For mum/dad style businesses, that will be fine – as a round-robin cash injection, and wage payment will suffice.

But take a café with 15 eligible casuals, some working as few as 3 hours a week, and a team of 4 fulltime staff (real example). To be eligible for the April Jobkeeper for the fulltime staff, the business must also pay the 15 eligible casuals for Fortnights 1 and 2 = $3000/employee. The small business needs to find 19 x $3000 = $57,000 and pay that through to all eligible employees by April 30th. Monthly wages were usually only $20,000-$25,000. The business owners will now have to redraw against their home equity or attempt to obtain a line of credit in under a week to make the required payments.

The inflexibility is frustrating and not reflective of the commitments made by the Government, as many small businesses cannot afford to bank roll such a large amount for nearly 6 weeks. Some lee-way would have allowed businesses to access the Business Boost, make back payments, and then be required to make the necessary payments going forward on time.

Non-long term casuals are excluded: We have had many examples where casuals have missed out by a matter of days or have had extended holidays during the last 12 months and do not meet the long-term casual requirements. Other issues are certain professional industries are casualised or hired on contracts. Examples include physiotherapists, who tend to work on casual contracts for multiple centres, and are remunerated on commission / patient number basis. The industry norm is that these employees may move every 6-12 months as work is available but usually retain their customer base. These employees have worked in the industry for many years, but those employees are excluded. Treasury has been hesitant to open up the scheme to casuals.

Business Participation through interposed entities: While the business participation test is a welcome addition, issues such as businesses operated as partnership or unit trust of disparate non-individual entities (e.g. a business operated in a unit trust held by family trusts) means that those individuals are now excluded from Jobkeeper eligibility.

Administration entities cannot pass test: A common structure feature of many businesses is an administration company which employs employees – and charges for those costs to the business/invoicing entities. Usually, the invoice between the administration company and the business entity is equal to the wages and minor costs and is primarily used for asset protection purposes. In this case, unless 30% of wages are reduced (e.g. under a stand-down) and no pre-Jobkeeper payments are made, the administration entity will not pass and employees employed in that company will not be eligible for Jobkeeper. In many cases, the main business entity may be suffering a decline in turnover, but in order to maintain wages, the invoice from the administration company to the invoicing company cannot be reduced by 30%;  alternatively moving to a loan rather than invoice may be seen as a scheme by the ATO to artificially obtain Jobkeeper eligibility. Eliminating intra-group invoices would provide a better picture of the economic reality for a business. For entities above $1b turnover, the more appropriate “aggregated turnover” test is used, which does look at the economic group as a whole, eliminating internal transactions.

Employees refusing to work: We are now hearing anecdotal examples of Jobkeeper eligible employees stating they are concerned about COVID19 and refusing to work. The Fairwork Act 2009 has been modified, to allow an employer to make reasonable adjustments to staff work patterns during COVID19. The advice I have heard is that OH&S overrides all reasonable adjustments and an employer can refuse to attend work on OH&S grounds – and cannot be dismissed so therefore is eligible for the Jobkeeper payment. On the other hand, an employer is required to make the workplace as safe as reasonably possible and an employee cannot refuse. What is reasonable is different in every industry and different employees have different requirements. We advise obtaining advice from Fairwork or an employment solicitor.

Many businesses have changed work practices (e.g. rostering teams together to minimise contact points, additional distancing measures with physical barriers / Perspex barriers, additional cleaning, PPE, etc.). If the employee is still not satisfied and refuses to attend work, then the business owner may only have 2 choices if the employee is not satisfied with the amended work practices:
1) stand-down that employee (and risk other employees requesting stand-down) and continue paying $750/week, or
2) terminate employment and cease any stimulus support.

We advise seeking professional advice as each case is different. Franchises may be able to reach out to the Franchise support team. We also ask that you consider reputation risk, especially in small communities.

Harsh penalties: Businesses and tax agents have been warned that harsh penalties will apply if contrived schemes or non-compliance is identified. The ATO has been given extraordinary powers, to be able to review claims for up to 5 years (rather than the standard 2 year period of review). Agents advising on stimulus remain exposed to rapid changes in legislation, policies and rules. The additional time to review the rules for our clients is affecting other areas of a tax agent’s business. Similar extensions have been granted to Fairwork and the various State departments if claiming state stimulus grants.

The ATO is issuing and updating guides nearly every day. Advisers are expected to apply the rules correctly with no prior warning. As yet, we have not received any advice on Commissioner’s Discretion for new or lumpy income businesses, but many employees of these businesses are expecting coverage under the Jobkeeper Scheme. The difficulty for advisers is that most of these decisions need to be finalised and implemented by 30th of April. We ask for your continued patience and support, to understand that the industry is under a lot of pressure to complete reviews, advise employers and employees, and lodge the necessary documentation with the ATO. Please review the previous article and follow the procedure if you wish assistance. 

 

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A matter of Trust

Explaining how a Trust structure works to a client who does not have a legal or accounting background is difficult.  In fact, explaining a trust to someone who does have an accounting background can sometimes be difficult as well.  Trusts are complex beasts.  I spent a semester of my Masters degree intensely studying the topic of Trusts.  I have read many books and been to conferences specifically about Trusts, yet I definitely would consider myself an expert.  It is completely OK to think that Trusts are complicated because they are.

I want to share with you the way I explain Trusts to my clients.  This is an intentionally simple explanation.  I am aware that there is so much more to know, but I also feel that understanding the basic concept is a critical stepping stone in your journey to become the proud owner of a Trust.

Let’s go back to Ye Olde England

Trusts started back in 12th Century and relate to the King of England and The Crusaders, but I prefer to explain trusts as they would have been used in Jane Austin times.  I may be taking some creative liberty with this story, but I think it helps get the message across.

Back in those days, women were not able to own property in their own names.  This caused a dilemma for the wealthy landowner who only had daughters.  What would happen when he passed away?  How could he leave his property to his wife and daughters when they were not legally able to hold the title to the property?

Enter “Old Mate” down the road, the landowner’s trusted friend.  What if he left the property to “Old Mate” who could be the legal owner of the property, with an agreement (based on the landowner’s trust of the moral fortitude of “Old Mate”) that he would do the right thing by the women family members?  They could live in the property and benefit from any income the property would derive without any legal entitlement to do so. There is a distinct reason that the word “trust” is used!

Essentially a Trust is just a relationship.  The relationship between the Trustee (Old Mate) and the Beneficiaries (the wife and daughters).  The relationship between the legal owner and those who should reap the benefits of the assets of the trust.

In current time

Return from the times of Pride & Prejudice and think about your own trust structure and how it works.  The Trustee is likely to be a company (a Corporate Trustee) or it may be some individuals.  The rules that define the relationship between the Trustee and the Beneficiary are formalised in a document called the Trust Deed.  The Trust Deed names the beneficiaries of the Trust, explains the powers of the Trustee, and outlines the operating rules for the Trust.   If you do have a Trust, take half an hour to read your Trust Deed.  It will be riveting reading (I know), but it is a very important document.

Our court system has come a long way since the days of the Crusaders and now it is the legal obligation of the Trustee of a Trust to act in the best interests of the beneficiaries.  This is known as a fiduciary duty, the requirement to put another person’s interests in front of your own.

The Settlor

There are a few more concepts and roles that you need to be aware of so I will try to explain them as simply as I can.  A trust must be settled over a piece of property and the person who provides that property is known as the Settlor.

In our Ye Olde England example, the Settlor would have been the landowner who was giving the property to Old Mate to create the Trust.  I appreciate that may have been part of a will, but let’s just set that aside for this example and assume he created the trust prior to his death.

In today’s typical Trust set up the Settlor is often a lawyer, accountant or friend who is generous enough to give the trust a sum of money (usually $100 – $500) to start the trust.  Once this act of generosity has been performed, the Settlor has no further role in the Trust.  Most Trust Deeds specifically say this – so please don’t think your lawyer or accountant has somehow wormed their way into your family business or investments by being the Settlor.  In some states (eg NSW), stamp duty is payable on the trust property when the trust is settled, and that is why you keep the trust property amount low.  You don’t want to inadvertently settle a Trust on a large value and end up with a high stamp duty charge.

The Appointor (or Principal)

In your Trust Deed you will find reference to the Appointor or Principal of the Trust.  This is the person who has the power to replace the Trustee of the Trust.  Typically this role does nothing, but it does have the ultimate power.  If the Appointor is not happy with the Trustee – they can be replaced.

Vesting Date

Unlike a company that has an unlimited life (until you choose to wind up a company), a Trust has a limited life.  The termination of a Trust agreement is called the Vesting Date and this will typically be 80 years after the start of the Trust.  On that date the Trust should be “vesting” the assets to at least one of its beneficiaries.

What is a Discretionary Trust?

There are many variations on Trusts but I will discuss the two most common forms of Trust – the fixed Trust (Unit Trust) and the Discretionary Family Trust.

A Family Trust is considered “discretionary” because the distribution of the income of the Trust, or the assets of the Trust is as the “discretion” of the Trustee.

A Family Trust Deed will list some named beneficiaries, and then the family relationship to those named beneficiaries that will allow us to find potential beneficiaries.  Allowing additional beneficiaries based on a family relationship stops you from having to change the deed as the family dynamics change.  Potential beneficiaries can include parents, grandparents, children, grandchildren, siblings, aunts, uncles, nieces and nephews.  There is a large net that can be cast to find the potential beneficiaries.  You do not need to name your children in the deed as they will automatically be potential beneficiaries.

To some people this sounds scary.  What about that crazy cousin who may want to get their hands on your money?  The key to all of this is that although they can be beneficiaries to your trust, there is no entitlement to anything without the Trustee exercising their discretion to distribute to that beneficiary.  Your investments are safe from that crazy cousin.

If you have distributed income to someone and the money has not been paid to them, they do have a legal right to that money.  This is called an unpaid present entitlement.  The entitlement is limited to the amount you have distributed to a beneficiary.

The Fixed Trust

As a business owner you may want to use a Trust structure but you have a business partner who is not related to you.  You can’t use a Family Trust as you are not part of the same family.  You will also want some assurance of your share of the assets of the Trust.  In this instance you would have a Unit Trust.

As the name implies, the beneficiaries are issued Units and the number of units indicates the unit holder’s share of the assets and income of the Trust.  It is very similar to a company, except the income must be distributed to the unit holders each year.

Distribution of Income

The Trustee of a discretionery Trust does not have to distribute the income of the Trust, but any undistributed income is taxed at the highest marginal tax rate.  As such, it is usually in the best interests of the beneficiaries that the income is distributed to at least one beneficiary.

The distribution of taxable trust income will be taxed in the beneficiary’s tax return at whatever their marginal tax rate is.  Be cautious about distributing to children under the age of 18.  Tax rates on minors are much higher than the tax rates of a grown up to discourage parents from putting investments into their children’s names.

If a trust is running at a loss you cannot distribute the loss.  It will stay in the trust to be offset against future gains.

ABN’s and Trading Names

My final point in this simple explanation (which probably doesn’t seem so simple now that I have written it) is about the logistics of trading through a Trust.

The legal name of the Trust is the Trustee’s name, as Trustee for (which is abbreviated to ATF), the Trust name.  As an example, my trust is Jigsaw Accounting & Taxation Services Pty Ltd ATF Jigsaw Family Trust. Yes, it can be a tongue twister and it is not something you want to write 100 times a day.

While you will open your bank account with this name, you are entitled to use the Trustee name as your business name or trading name.   In my example, I trade under Jigsaw Accounting & Taxation Services Pty Ltd.

Your Trust will have its own Australian Business Number (ABN) if it is running a business, and its own Tax File Number.  When your supplier looks up your ABN it will refer to the Trust name, not the Trustee name.  Trusts are common structures and you are not trying to hide anything or do anything dodgy by using a Trust as your business entity.

Hopefully this has shed some light on something that is very complicated.  As I mentioned, there is a whole lot more information available and I could talk about Trusts for hours, but a simple understand is better than no understanding at all.  If you have questions, please speak to your accountant or lawyer.

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Tax Evasion: What It is and What It’s Not

‘Tax evasion’ is a broad term and it is not quite as simple as it might seem at first. In this article, I will unpack the meaning of the term and outline how the ATO decides which acts constitute tax evasion and which do not.

What we call ‘tax evasion’ are actually two separate but related Commonwealth offences under the Criminal Code Act.

The first is obtaining a financial advantage by deception, under Section 134.2(1) of the Act. This applies when someone obtains a financial advantage for themselves or another person, or induces a third party to do so. The deception that leads to the financial advantage must be reckless or deliberate, rather than due to a genuine mistake. A genuine mistake is when the taxpayer omits income or incorrectly claims a deduction by accident, but not in a manner that is reckless; meaning that they’ve considered the question of whether they have paid the correct amount of tax to the best of their knowledge.

The second offence is conspiracy to defraud, under Section 135.4 of the Act. This applies when two or more people work together to defraud the ATO.

You might be charged under the above sections if you knowingly and deceitfully misrepresent your tax obligations to the ATO, leading you to pay less tax than you are legally required to, or if you help someone else do so. The kinds of actions that might fall under the scope of tax evasion include, for example, hiding income through specific structures or offshore entities, and/or providing advice on how to understate income. This is different to merely accidentally overstating a deduction or forgetting to advise the ATO of interest. The threshold for fraud or evasion is quite high under the Criminal Code Act.

In cases of the deception being due to a genuine mistake, the ATO will impose a penalty amounting to 25% of the tax shortfall on the taxpayer rather than prosecuting them. Most cases fall into the category of genuine mistake. In fact, in my time as an ATO auditor, only one case was ever referred onto to the AFP for prosecution. This is because prosecution is expensive and it is not in the spirit of the ATO to prosecute all cases that break the rules.

Tax evasion is distinguished from tax planning and tax avoidance.

Tax planning is the normal preparation you would do with your accountant to figure out how to pay the correct amount of tax, all through entirely legal and appropriate means. Through tax planning, you ensure that you do not overpay and/or seek to minimise the amount of tax you pay through, for example, reductions or planning, but do so honestly and as intended by the law.

Tax avoidance differs from tax evasion in that it is not a criminal offence, but it is nevertheless frowned upon by the ATO. Tax avoidance generally amounts to exploitation of the tax system to minimise the amount of tax you pay – while it may all be within the limits of the law, it may not be in the spirit of that law. For example, one might find loopholes in the relevant laws that have not been corrected. The ATO is more likely to conduct audits of businesses and individuals that engage in such practices, and scrutinise them to ensure that their actions do not breach the thin line into tax evasion. Businesses and individuals that engage in tax avoidance are much less likely to pass ATO audits than those that do not attempt exploit the tax system.

One way of thinking about the difference between tax evasion and tax avoidance is that it is ultimately up to the ATO to decide whether an act is within or outside the law. It is a Schrödinger’s cat of sorts: you have simultaneously both broken the law (and are in trouble) and not broken the law (though you might still be in trouble if your actions lead to an audit, which is not a very pleasant experience), a paradox which resolves itself only when the ATO decides which one it is. It is thus no wonder that the terms ‘tax evasion’ and ‘tax avoidance’ are often used interchangeably, despite them technically being two distinct concepts.

To determine whether the law has been broken or not, the ATO might apply the ‘reasonable person’ test, which has two main components. Firstly, it will look at what a hypothetical reasonable person in the same circumstances as the taxpayer would have done if they were acting reasonably and honestly. Secondly, if the taxpayer’s actions differed from those of this reasonable person, the ATO will look at any reasons that they have provided for acting as they have. It will ask whether, in light of these reasons, the taxpayer’s wrongful acts or omissions should still be considered blameworthy. If its answer to this yes, the ATO may proceed to audit or prosecute the taxpayer.

Once the ATO decides to audit you, you are unlikely to be able to effectively hide evidence of any wrongdoing. The ATO is great at easily figuring out if your income is greater than what you are declaring, through comparing your businesses’ income to those of similar businesses, audits, and data matching. As technology develops, all of this is made easier for them, and, for those that are caught, there are some strict and severe penalties that they might face, from a 5% administrative penalty on the shortfall to up to 10 years’ imprisonment. So, the benefits of tax evasion are probably not worth the risk of getting caught and punished, and it is best to minimise the tax you pay in lawful ways through working with an accountant, rather than through fraud.

Michael Konarzewski CPA
Partner
Ex-ATO auditor in the High Wealth Individual Taskforce ($2m-$200m)

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Common mistakes for GST

Here are common GST mistakes we see:

  • Government fees
    ASIC, business name registration, vehicle registration (remember CTP may have GST)
  • Food
    Fresh fruit, vegetables and milk for the office
  • Banking
    Bank fees are GST free; merchant/eftpos fees are subject to GST. Interest doesn’t attract GST either
  • Insurance
    No GST on the stamp duty and fire levy component; also insurers pay the GST directly to the ATO for successful claims that involve a payout
  • Small Businesses
    Remember some small suppliers or contractors may not be registered for GST
  • Entertainment
    Where a business has elected the 50/50 split method for FBT, only 50% of credits can be claimed. Remember – travel is not entertainment, and all credits can be claimed
  • Travel
    International airfares do not attract GST, as they are regarded as an export service
  • Private expenses (sole traders and partnerships)
    When apportioning private and business use expenses, only claim GST on the business proportion
  • Government grants and awards
    Most grants and awards are GST, but worth making sure
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