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 6My 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.

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. 

 

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.

‘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)

The Coalition’s election campaign centred on the parties’ tax plans, and Scott Morrison has stated that tax breaks for individuals are his main post-re-election priority. There are two main aspects of the tax plan: the Personal Income Tax Plan (PITP), implemented over seven years, and changes in income tax thresholds.

The first step of the PITP is immediate tax relief for low and middle-income earners (incomes of up to $125,333). The tax offset amounts to $255 for incomes up to $37,000, which increases incrementally for incomes between $37,000 and $48,000. Taxpayers with incomes between $48,000 and $90,000 will get the maximum relief amount of up to $1,080 for singles and up to $2,160 for dual income families. For those individuals earning over $90,000, the relief decreases incrementally until it reaches $0 at incomes of $125,333. The Coalition proposes to introduce further offsets in the 2022-23 and 2024-25 financial years, though those will be aimed at individuals with higher taxable incomes. The PITP operates alongside the existing Low Income Tax Offset, and they are both applied at the end of the tax return calculation, directly reducing an individual’s tax liability.

However, the delivery of the promised offset amounts is in danger of delay, as it is unlikely that Parliament can be convened on or before 30 June to pass the required legislation on time for the tax cuts to come into effect on 1 July. Instead, lower amounts that have already been legislated for (up to $530) are likely to be applied at the end of this financial year. The Government will likely turn to retrospective action to deliver on its promises, such a ‘supplementary’ offset, with the ATO applying the offset to this financial year even if the required legislation is passed after it ends. The Government is also likely to split up the full tax plan into smaller pieces, so as to be able to pass the immediate changes without too much resistance from the Opposition and crossbenchers in the Senate.

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

Our new HowNow system makes it easier for you to sign and send through your documents. You might need to use HowNow to exchange things like tax returns, Business Activity Statements and DFRs with us. Here’s what you need to know about using it.

  1. You will receive an email inviting you to activate your HowNow account. Click on the link in the email to set up your account. You will be directed to select a password of your choosing.
  2. When the account is set up, you can go back to your email. If there is an email from us with a document which needs to be signed, you will be able to use the link in the email to open that document in HowNow.
  3. The document will have highlighted sections where you need to sign or enter any information. Fill in any relevant fields, including ticking highlighted boxes.
  4. You will be able to sign the document by clicking the box on the document where the signature is supposed to go. This automatically brings up a digitally generated signature, which you can either use or replace with a digital signature that you draw yourself. Click “Apply” when you are happy with the signature.
  5. Finalise and send off the completed document by pressing the blue “Click to sign” icon. This will automatically send us a copy of the document, and give you the option of downloading a copy for your own records.

Many businesses continue to pay their staff cash wages for a variety of reasons – but what’s in it for you – the employer?

Advantages of paying your staff with cash wages

When reviewing wage expenses, and we identify cash wages, we hear all sorts of excuses – some potentially valid and some purely to minimise employer obligations:

  • “It’s easier to calculate an hourly rate, and not worry about tax and everything else” – a common issue is that employers are saddled with burdensome regulations: PAYG/W, Superannuation, Workers Compensation, cash flow on withholding tax etc. and so paying staff out of the till is seen as an easy alternative
  • Super is too much of a hassle” – like a lot of things in running a business, Superannuation can be a hassle – especially when each staff member had their own superannuation fund
  • I don’t believe in/want to pay super”  this one is quite common but is a legal employer obligation. Superannuation and PAYG/W are the 2 areas where all directors are jointly and personally liable, even in insolvency. Read that bit again, if you enjoy owning your home!
  • It’s how everyone in the industry gets paid” – while common a decade ago, young workers these days need to show regular income and payslips to be able to apply for credit cards, car loans and home loans. Not many industries use cash payments, and ATO compliance activities in those industries is shrinking the amount of cash wages.
  • “My staff want me to pay them cash” – we don’t know the situation of our staff’s personal lives. There could be various reasons staff would request cash: divorce/child care payments, claiming Centrelink or pension cards, underpaying tax. Do you want to be involved in that, and if you have knowledge – are you being complicit in the defrauding in Centrelink were to question it?
  • “Keeps my workers comp down”  while you can’t argue with that, what happens when that staff member is injured at work and makes a long-term claim?

There is never a good reason to pay cash – as the disadvantages ALWAYS outweigh the advantages

Disadvantages of paying your staff with cash wages

These stories are based on experience working with clients and also as an auditor in the ATO.

  • No deduction available for cash wages: Employer paid staff cash for over 10 years, mostly non-residents (Backpackers as labourers); ATO audit deemed that no deduction was allowed as no paper work was provided, and non-residents had left country” – the individual sole trader was left with a $650,000 tax debt and an overall debt of over $900,000 after penalties and interest, as they could not satisfy record keeping requirements and therefore could not claim any deduction for wages (50% of his total costs). Period of review limitation of 2 or 4 years does not apply for cases of Fraud or Evasion – in this case as there was clearly an evasion of tax, ATO had unlimited period of review. Remember that for every $1 of cash wages you pay, you are the one losing deduction, not the employee.
  • PAYG Withholding grossed up: “Employer and employee agree to $700 cash per week; ATO audit deemed the $700 as a cash component of a gross wage and assessed the client on an additional $200 PAYG/W and 9% superannuation on $900/week” – the employer and employee were together in agreement that they would be satisified with $700 per week, to include their wage and superannuation. During a regular ATO review, the cash wages were identified (even though no tax deduction was claimed) and a subsequent audit ensued. The client was reviewed over 2 years with the advised outcome and was required to amend 8 x BAS with a 25% penalty and 8 x Quarterly Superannuation Guarantee Charge statements with penalties, interest and no deduction allowed.
  • Superannuation claimed twice by employee: Employer and employee agreed to pay the superannuation as cash bonus, rather than to Superannuation Fund; after 5 years of working together, employee was dismissed; employee ‘dobbed-in’ employer for non-payment of superannuation guarantee” – in this case, both the employer and employee were in agreement about the superannuation component; but after being dismissed, the aggrieved ex-employee called the ATO and advised that there was a non-payment of superannuation. As all employer obligation breaches MUST be reviewed by the ATO, eventually the ATO caught up with the employer some 2-3 years after the employee left and was required to lodge Superannuation Guarantee Charge Statements with interest, penalties and no deduction.

These stories aren’t particularly uncommon and with ATO deploying specialist teams into cash economy businesses (cafes, primary production, transport etc.), there is little upside for employers to pay wages in cash. All risk is borne by employers, while the employee potentially obtains benefits from Centrelink, overall tax debt, HECS repayment relief etc.

What can I do?

In some industries and personal employment agreements, cash remuneration is deeply entrenched such as tips, cash/meals for overtime, etc. to staff fully employed on cash wages. The first thing is to tell yourself as an employer – enough is enough and there will be no more cash wages. The risk of potential liability (remember, that as a director you’re personally liable for superannuation and PAYG/W of your staff, even if the company is liquidated, with no period of review time limit) should be enough for most. The advantage of obtaining additional deductions should help the financial situation.

The next steps will depend on your business but will involve:

  • Understanding the award for employees. While you may have the best intentions and paying staff over the minimum wages, various Modern Award require allowances and loading that are complex meaning you may be underpaying or overpaying your staff. E.g. Did you know the Modern Award “General Retail Industry Award MA000004” requires a $1.25 for every shift worked; but does not form part of your Superannuation Guarantee obligation?
  • Staff education. If staff are resistant and are willing to subvert federal tax laws, maybe they shouldn’t be handling your stock and cash?
  • Invest in a good accounting system. Most accounting software packages receive regular updates, including the latest PAYG/W tax tables, integrate into you online bank to allow you to process wages quickly and securely and streamline superannuation with only a few clicks. Apps and advanced integrations allow for modern award updates, self-service kiosks, rostering and timesheets, SMS staff about next shift, and the ability to plan and budget ahead.
  • Have a skilled book-keeper assist you with regular payroll processing
  • Talk with an employment relations expert, to create contracts, policies and ensure you’re FairWork compliant

As a business owner, you are responsible for all Employer Obligations – and with more data matching becoming available to the ATO, Centrelink, Dept of Immigration and Citizenship, Workers Compensation, banking institutions, superfund reporting – you can’t afford to be paying cash wages any more.

For more information, check out:

http://www.fairwork.gov.au/pay/paying-wages

https://www.ato.gov.au/Business/Your-workers/In-detail/Employer-obligati…

http://keypay.com.au/quickbooks/

https://www.xero.com/au/accounting-software/payroll/

https://tailoredaccounts.com.au/

http://employsure.com.au/

 

For decades, accountants and tax authorities have grappled with how to value, trade and eventually tax intangibles. Over time, we’ve come up with ways to effectively manage intangibles such as brand names, rights, trademarks, systems and even how much a business is valued by an owner, over and above the tangible assets – goodwill.

Cryptocurrencies have create another shift in the world of financial, tradeable and intangible assets. Banks, regulators, market participants are all starting to adapt to the emergence of various cryptocurrencies.
Thankfully, the Australian Taxation Office, never wanting to miss an untaxed profit, has provided some initial guidelines (note that this has not been tested in court, and the final outcome may be different to the ATO’s view).

Here’s a summary of the most common scenarios:
– If you purchase and operate a cryptocurrency business (Am I in business?) then all gains and losses will be taxable under normal income rules. This would be similar to a day trader who has a volume of transactions
– If you pay for goods using Bitcoin, any gain or loss will be disregarded if you total investment is under $10,000.
– If your holdings are over $10,000, then you will need to declare the gain/loss under the Capital Gains Tax regime. If you’ve held the cryptocurrency for over 12 months, you may be entitled to the 50% CGT concession or apply against capital losses.
– In some circumstances, an SMSF may invest in cryptocurrency as a medium/long term asset, but additional regulations apply. The current rule of thumb is that cryptocurrency should not be more than 3-5% of the SMSF’s total investment portfolio – a financial planner will need to be consulted to review and amend your investment strategy.

Each situation must be treated on its own merits and some may require clarification from the ATO:
– does the $10,000 limit count towards a specific currency (Bitcoin, Etherium, etc.) or across the whole portfolio;
– what if I buy lots from Kogan using BTC, do I need to pay tax on the gain?
– what if I purchase a currency in my testamentary trust?
We hope that ATO will continue to work with accountants to answer some of these questions – but it is clear that the ATO will be taxing some of the large 2017/18 profits.

Compliance
One question is how will the ATO know, if cryptocurrencies are anonymous – remember there is always a paper trail when you convert to AUD via your bank/Austrac for international transfer. The simple answer is, that the ATO can find you – which is especially concerning since the ATO advised 2 weeks ago of a specialist audit team:
http://www.afr.com/news/policy/tax/ato-creates-specialist-task-force-to-…

One of the ATO and Commonwealth’s key focuses in recent times has been the cash and hidden economy.

Particularly, the ATO is concerned about businesses who advertise ‘cash-only’ or deal mainly in cash. We can see that the ATO and the Commonwealth are both pushing for more transactions to be electronic – by regulating merchant fees to be capped; RBA’s Fast Settlement Service to clear funds between institutions nearly instantly; Single Touch Payroll for all wages and a framework supporting businesses migrating to electronic commerce. The private sector is also joining the rush to assist businesses in transacting online for quicker, safer and easier to manage sales.

The ATO is working collaboratively with business operators, business chambers and industry associations to highlight the following key messages:
• the benefits of electronic payment and record keeping facilities
• community expectations of paying by card
• making sure businesses are registered correctly
• ensuring all businesses pay the correct amount of tax and super by declaring all their income and knowing what expenses they can claim
• lodging their tax returns and activity statements
• meeting their obligations and if they are struggling, taking into account specific circumstances, and helping them get back on track
• any other help they may need.

The ATO regularly undertakes data matching to identify businesses that don’t take electronic payments from customers. These businesses will be contacted by the ATO via email or letter highlighting the benefits of investing in an electronic payment facility. Some of the benefits of electronic payment options are as follows:
• easy to set up including EFTPOS, smartphone and tablet card processing
• consumers are going cashless and expect to have a choice
• fewer mistakes – so less contact from the ATO
• quicker reconciling at the end of the day – less time in queue at the bank
• less chance of being presented counterfeit notes
• reduces the risk of theft or break-ins.

EFTPOS/Paywave machines are now evolving:

CBA’s Albert integrating into many POS  like Kounta to eliminate staff fraud.

ANZ’s BladePay can integrate with Kitchen docket printers…

 

and phone intregated solutions like Square for Tradies on the go.

Most solutions integrate reliably with Xero or Intuit QuickBooks

If your business operates mainly in cash or is not currently using electronic payment systems, we can assist you in sourcing, implementing and maintaining the appropriate electronic payment and record keeping systems to keep the ATO at bay.