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Employers beware: increase in super guarantee

With the advent of a new financial year, there is an important change from 1 July 2021 that employers should be aware of. The rate of super guarantee you're required to pay your employees has increased from 9.5% to 10%. This is the minimum percentage now required by law but you may pay super at a higher rate under an award or agreement. Depending on how your employment contracts are structured (ie a package or base pay plus superannuation), the extra 0.5% may either come from the employee's existing gross pay or be extra on top of their salary. Most payroll and accounting systems will have incorporated the increase in their super rate, but it's always good to check. If you're still using a manual process to pay your employees, you'll need to work out how much super to pay your employees under the new rate. The process is fairly simple, you'll just need to multiply your employee's ordinary time earnings based on salary and wages paid in the quarter by 10% (or a higher rate under an award or agreement). Remember, the rate you use to calculate super contributions depends on the quarter that you're paying your employees in, it does not matter if the work is performed in a different quarter. The 10% super guarantee applies to all super payments made after 1 July 2021. Example Trevor is an employee of Ian and is paid fortnightly. For the pay period ending 27 June 2021, Trevor's ordinary time earnings for the fortnight are $2,000. Ian pays Trevor on 1 July 2021. The minimum super contribution for Trevor for the pay period ending 27 June 2021 is $200 (ie $2,000 x 10%). However, if Ian made a payment on 27 June 2021, the minimum super contribution would be $190 ($2,000 x 9.5%). Now imagine Trevor's fortnightly pay period spans from 21 June 2021 to 5 July 2021, and Ian makes a payroll payment on 9 July 2021. Because the payment is made after 1 July 2021, the minimum super contribution Ian has to make on behalf of Trevor is still $200 (ie $2,000 x 10%), it does not matter that some of the work was performed in a different quarter. This increase to 10% is by no means the last time super guarantee will change over the next few years. From 1 July 2022 to 30 June 2023 (ie next financial year), the rate will increase to 10.5%, followed by another 0.5% point increase to 11% in the 2023-24 financial year. So, employers will need to be on their toes to make sure the right amount of super guarantee is paid for the next few years.
Following on from the revelation that the bulk of tax collected by the ATO comes from individual taxpayers, it comes as no surprise that the ATO is continuing to target this sector to squeeze out every last tax dollar. This time, it has announced another new data-matching program on novated leases, this is in addition to the plethora of data-matching programs already announced this year on an eclectic range of areas including rental properties, motor vehicles, residency, contractor payments, and cryptocurrency. By way of background, novated leases is an agreement where an employee enters into a lease with a finance company to obtain a vehicle and the employer enters into a deed of novation with the employee and the finance company. This essentially means that some of the lease obligations of the employee is transferred to the employer, and the employer is considered to be leasing the car, allowing the car to be treated like a company car. Where the employee salary packages a novated lease, they are able to salary sacrifice a portion of their pre-tax salary to pay for lease on the car, leading to tax savings. Usually, the finance company sets an amount to cover the car's expenses for the life of the lease including financing, fuel, servicing and repairs, registration, insurance etc, with regular deductions made to the employee's pre-tax and post-tax salary to cover the expenses and to reduce the FBT that the employer has to pay. At the end of the lease, the employee can either choose to novate a new car, refinance the existing car for another term or pay out the residual value of the vehicle. Under this data-matching program, the ATO will collect information on novated leases from McMillan Shakespeare Group, Smartgroup Corporation, SG Fleet Group, Eclipx Group, LeasePlan, Toyota Fleet Management, LeasePLUS and Orix Australia for the 2018-19 to 2022-23 financial years. Employee identification details obtained include name, address, date of birth, contact phone numbers, and email addresses. It is estimated by the ATO that records relating to approximately 260,000 individuals will be obtained each financial year under the program. Lease transaction details obtained under the program include the following: Lease start date, end date, expected end date, and termination date; number plate of vehicle; type of vehicle (ie new or used); category of vehicle (ie sedan, wagon, utility etc); lease per month including GST; items and expenses packaged with vehicle lease (ie fuel, servicing etc); bank account BSB, number, and name for the employee. According to the ATO, the information will be used to educate individuals in relation to novated lease arrangements, and also to identify relevant cases for administrative action and/or compliance activity. Remember, if you as an employee enter into a novated lease arrangement, you cannot deduct the work-related portion of any expenses incurred in running the car in your tax return, this is because your employer is considered to be leasing the car and not you.

ATO turns its attention to crypto

The meteoric rise of cryptocurrency (crypto) and NFTs (non-fungible tokens) has raised many eyebrows and has now also caught the attention of the ATO. Whether you're trading crypto or NFTs as an individual or business, capital gains tax (CGT) applies to any gains you make regardless of whether the gain is in foreign currency or Australian dollars. Most people are now familiar with cryptocurrency, which is a type of digital money created from code and usually takes the form of tokens or coins. The most well-known of which include Bitcoin, Ethereum, and Dogecoin. Non-fungible tokens are a comparatively more recent development which basically consists of a unit of data stored on a ledger to certify that a digital asset is unique. This has mostly been applied to artwork but can also include photos, videos and other types of digital files. Based on its data holdings, the ATO will be writing to around 100,000 taxpayers with crypto assets explaining their tax obligations and urging them to review their previously lodged returns. It will also prompt another 300,000 taxpayers as they lodge their 2021 tax return to report their crypto capital gains or losses. Individuals or businesses that dispose of crypto must work out if they made a capital gain or loss and report the resulting gain or loss in their tax return. Disposal of crypto can include exchange of one cryptocurrency for another cryptocurrency, trading, selling or gifting cryptocurrency, converting cryptocurrency to a government issued currency (ie Australian dollars). Transfers of cryptocurrency from one wallet to another while maintaining ownership is not considered to be a disposal, however, if your crypto holding reduces during this transfer to cover a transaction fee, this fee is a disposal and has CGT consequences. In addition, if you acquire a small amount of crypto and use it within a short time to make personal purchases, the crypto may be considered to be a personal use asset and not subject to CGT. In conjunction with contacting taxpayers, the ATO is also conducting a data-matching program which will consist of account identification and transaction data from cryptocurrency designated services providers from the 2021-2023 financial years. These details include the usual client identification information such as name, address, date or birth, phone number and email, but interestingly, now also includes social media account details. Transaction details will also be obtained which includes bank account details, wallet addresses, transaction dates/time/type, deposits, withdrawals, transaction quantities, and coin type. It is estimated that records relating to approximately 400,000 to 600,000 individuals will be obtained each financial year under the program. According to the ATO, while crypto appears to operate in an anonymous digital world, it closely tracks where crypto interacts with the real world through data from banks, financial institutions as well as online cryptocurrency exchanges to trace the money back to taxpayers.

Get ready for tax time 2021

While the ATO annual statistics releases are usually quite dry and technical, it does give a nice insight into why the ATO does what they do. For example, just in the first half of 2021 the ATO has been targeting individual taxpayers with various data matching programs on rental properties, motor vehicles, residency and contractor payments to name just a few. With the release of the latest taxation statistics showing that individual tax collections account for more than half of all taxes collected in Australia, the intensity and frequency of these data-matching programs now make more sense. It should also come as no surprise that with tax time 2021 fast approaching, the ATO is keeping a close eye on the individuals sector with warnings to not overclaim on deductions this year. Specifically, the ATO will be focusing on work-related expenses such as car and travel expenses which it reasons will decrease due to restrictions on travel and a large proportion of the population working from home as a result of COVID-19. According to the ATO, around 8.5m individuals claimed around $19.4bn in work-related expenses in their 2020 tax returns. The value of car and travel expenses claimed in 2020 decreased by 5.5% compared to 2019, however, there was an understandable increase of 2.6% in clothing expenses due to claims for hand sanitiser and face masks. The ATO notes that it will be using data analytics to single out unusually high claims this tax time, particularly if an individual's deductions are much higher than others with a similar job and income. It will also be on the lookout for individuals claiming significant working from home expenses while at the same time maintaining or increasing their claims for car, travel or clothing deductions. Individuals with legitimate increases in car, travel or clothing expenses along with significant work from home expenses can still deduct these expenses provided that they have evidence or contemporaneous records supporting their claims. The ATO also notes that it will be "sympathetic to legitimate mistakes where good faith efforts have been made". As a reminder, the ATO notes that the temporary shortcut method of 80c per hour (all-inclusive rate) for working from home expenses has been extended to apply for the full 2020-21 financial year. Although a timesheet, roster or diary entry indicating the number of hours worked needs to be kept as evidence. In addition, those individuals predominately working from home and only undertaking occasional travel to their places of work are unable to claim the cost of travel from home to work as it is still considered to be private or domestic.

ATO compliance: economic stimulus measures

The ATO has announced that it will be conducting compliance activity on various economic stimulus measures introduced to help businesses recover from the effects of COVID-19. These stimulus measures include loss carry-back, temporary full expensing and accelerated depreciation. While the ATO said it will continue to support most businesses doing the right thing, it is looking at behaviour or development of schemes designed to deliberately exploit various stimulus measures. By way of background, the loss carry-back measure allows eligible corporate entities to claim a refundable tax offset in their 2020-21 and 2021-22 company tax returns. In essence companies get to "carry-back" losses to earlier years in which there were income tax liabilities which may result in a cash refund or a reduced tax liability. The temporary full expensing measure allows eligible businesses to immediately deduct the business portion of the cost of eligible new depreciating assets or improvements held and ready for use between 6 October 2020 and 30 June 2022. Eligible businesses also have access to the accelerated depreciation measure for the 2019-20 and 2020-21 income years, in which the cost of new depreciating assets can be deducted at an accelerated rate. Specifically, in relation to loss carry-back, the ATO will looking for businesses that are deliberately inflating deductions or omitting income to generate losses. It will also look for signs of businesses entering into contrived schemes to obtain a benefit of the loss carry-back tax offset such as shifting or creating losses through non-arm's length dealings or shifting franking credits to a corporate entity (either directly or indirectly). In relation to temporary full expensing and/or accelerated depreciation, the ATO notes the following behaviours which will attract its attention: entering into contrived schemes to obtain a benefit of a temporary full expensing deduction, including schemes involving:manipulation of aggregated turnover; non-commercial transactions involving the transfer of an asset between related entities; artificially inflating the cost of assets (including inappropriate valuations) through non-arm's length dealings; claiming deductions for assets acquired solely for a non-business purpose or failing to take into account any portion of non-business use; deliberately misclassifying or reclassifying excluded assets (eg reclassifying capital works and buildings as eligible assets under temporary full expensing or Div 43 capital works and buildings as eligible assets under accelerated depreciation); deliberately inflating the amount of accelerated depreciation deduction by applying the incorrect adjustable value or effective life; failing to take into account the car limit when calculating the deduction; and lacking evidence to substantiate the claim (including the cost of assets) such as invoices, contracts, supplier agreements or independent valuations. The ATO notes that it will review claims for loss-carry back, temporary full expensing and accelerated depreciation as part of its tax time compliance activities as well as actively identifying tax schemes and arrangements seeking to exploit those schemes. Where cases of concerning or fraudulent behaviours are identified, it will actively pursue the claims including imposing financial penalties, prosecution and imprisonment for the most serious of cases.

SMSFs and minimum pension requirements

As the trustee of an SMSF, if one of the beneficiaries of the fund retires and commences an account-based pension, it is the responsibility of the trustee to ensure that the pension meets the minimum pension payment requirements. Generally, once a pension or an annuity is commenced, there is a minimum amount that must be paid each year depending on the age at which the pension is commenced. For example, the minimum percentage withdrawal for those under 65 is 4% and those between 65 and 74 is 5%. Although specifically for the 2020-21 and 2021-22 income years the percentage was reduced by 50% due to COVID-19 (ie the minimum percentage withdrawal for under 65s is 2% and 65-74 was 2.5%). In instances where the trustee of an SMSF fails to meet the minimum pension payment requirements for an income year, the super income stream will be taken to have ceased at the start of the income year for income tax purposes. Any payments made during the year will be considered to be super lump sums for both income tax and super purposes and taxed accordingly. This is the case even if the member is entitled to receive a payment from the fund for the pension. However, there may be circumstances under which the ATO will allow an income stream to continue even through the minimum pension standards have not been met. This may be the case if: the trustee failed to pay the minimum pension amount in an income year due to an honest mistake by the trustee and the underpayment was small, or if there were matters outside the control of the trustee; the income stream was in the retirement phase, the entitlement to the exempt current pension income (ECPI) exemption would have continued but for the trustee failing to pay the minimum payment amount; when the trustee became aware that the minimum payment amount was not met, a catch-up payment was made as soon as practicable in the current income year, or in lieu of a catch-up payment has elected to treat a payment made in the current year as being made in the prior year; had the catch-up payment been made in the prior year, the minimum pension standards would have been met; the trustee treats the catch-up payment for all other purposes as if it were made in the prior income year. When all the above conditions are met, the trustee can consider the income stream as having continued rather than commencing a new pension. It can also continue to claim an income tax exemption for earnings on assets supporting that pension if the income stream was in retirement phase, and the payments are treated as super income stream benefit payments rather than super lump sums. The above conditions may also apply in transition to retirement income streams (TRIS) in some instances.
As a part of a suite of measures introduced by the government to combat phoenixing activities, the ATO now has the power to retain an income tax refund where a taxpayer (including both businesses and individuals) has outstanding notifications. The discretion to retain refunds previously only applied in relation to notifications under the business activity statement (BAS) or petroleum resources rent tax (PRRT) but has now been expanded. This new extension of powers applies to all notifications that are required to be given to the Commissioner under taxation law, for example, an income tax return, but does not include any outstanding single touch payroll or in instances where the Commissioner requires verification of information contained in a notification. The ATO notes that these new powers to retain refunds will not be taken lightly and will only be exercised where the taxpayer(s) have been identified as engaged in "high-risk" behaviour and/or phoenixing activities. According to the ATO, examples of high-risk behaviours include (but are not limited to): poor past and/or current compliance with tax and super obligations (ie registration, lodgment, reporting, record keeping and on-time payments); poor behaviours and governance in managing tax and super risks; the number of, and the circumstances around, any bankruptcies or insolvencies; tax-related penalties and sanctions imposed including director penalty notices; connection with advisers who are subject to disciplinary actions or sanctions relating to tax and super laws; past information provided which reasonably indicated fraud or evasion, intentional disregard or recklessness; and the likelihood of participation in or promotion of aggressive tax planning arrangements, tax avoidance schemes, fraud or evasion or criminal activity. Indicators of phoenix behaviour by the taxpayer, and its associates or controllers, include (but are not limited to): cyclically establishing, abandoning or deregistering companies to avoid paying taxes, creditors or employee entitlements; assets being dissipated, stripped, transferred and/or other actions with the intention to defeat creditors ahead of abandonment, winding-up or deregistration; a director associated with prior liquidations and/or deregistrations or prior instances of insolvency; transfer of employees to a new company under the same effective control as the previous company to defeat tax obligations and employee entitlements; backdating of the resignation of a director, appointment of "straw" directors, or abandonment of a company without a resident director; the concealment of the role of a shadow or de facto director; and the concealment or destruction of company records. The totality of the circumstances will be considered by the ATO when exercising the discretion to retain a refund. It will also weigh the seriousness of the behaviour identified against any potential adverse consequences for the taxpayer. Once the ATO decides to use its discretion to retain a refund, it will be retained until either the taxpayer has given the outstanding notification or an assessment of the amount is made, whichever event happens first. There are also circumstances where the taxpayer can apply to have the retained amount refunded and/or apply to have the decision reviewed.

ATO target rental property owners

Rental property owners beware, the ATO has commenced 2 data-matching programs designed to obtain a myriad of information to ensure that various income tax reporting obligations have been met. Specifically, the ATO will run a new data-matching program to collect property management data for the 2018-19 to 2022-23 financial years, and extend the existing rental bond data-matching program through to 30 June 2023. The justification used by the ATO for targeting rental property owners is that each year it conducts a review of a random sample of tax returns to calculate the difference between the tax collected and tax that should've been collected (ie the tax gap), for the 2017-18 year, it estimated a net tax gap of 5.6% or $8.3bn for individuals with rentals making up 18% of this net tax gap. As a comparison, the net tax gap for high wealth groups is 7.4%, for medium businesses it is 6.2% and for medium businesses it is 11.5%. The information obtained under the 2 programs will include property owner identification details, including unique ID, individual/non-individual names, addresses (residential and postal), email addresses, contact numbers, BSB number, bank account number, bank account name, and business contact names and ABN if applicable. Rental property details obtained under the 2 programs will include address, date property first available for rent, period of lease, commencement and expiration of lease, amount of rental bond held, number of weeks the rental bond is for, amount of rent payable for each period, period of rental payments (ie weekly, fortnightly, or monthly), type of dwelling, number of bedrooms, rental income category, rental income amount, rental expense category, rental expense amount, and net rent amount. In addition to the above, the programs will also obtain details of the property managers involved, including business name, managing agent full name, business addresses (including internet addresses), email, contact numbers, ABN and licence number. As can be seen, the amount of information to be collected by the ATO is voluminous and detailed which will enable it to perform detailed analytics for its compliance programs. The rental bond data will be acquired from State and Territory rental bond regulators on a bi-annual basis, and the property management data will be acquired from property management software providers. It is expected that records relating to around 1.6m individuals will be obtained each financial year in relation to the property management program and records of an estimated 350,000 individuals will be obtained under the rental bond program. Although, due to the nature of the data collected, there will be some overlap in the number of individuals captured. The ATO will be using the vast amount of data collected to ensure that taxpayers that own income producing property are meeting their obligations to report the correct amount of income in their tax returns. It will also be used to identify taxpayers disposing of income producing properties which will trigger a CGT event, the ATO notes that it will use historical rental bond data to support CGT cost base calculations if necessary.

Budget 2021: what’s in it for me?

As is tradition, the second Tuesday in May saw the Treasurer, Josh Frydenberg handed down the 2021-22 Federal Budget, his third. Overall, he noted that while the Australian economy has recovered from COVID-19 impacts in record time, the Budget deficit will still reach $161bn in 2020-21, and is projected to slowly decrease to $106.6bn in 2021-22 and $57bn in 2024-25. So, with the government continuing its spending spree in order to keep the economic engine going, individuals are set to benefit with the following, albeit delayed changes. LMITO and low income tax offsets The government will retain the low and middle income tax offset (LMITO) for the 2021-22 income year. It was previously legislated to only apply to the end of the 2020-21 income year which would've seen low-to-middle income earners lose between $255 to $1,080 in tax refunds. The amount of the LMITO remains the same as the 2020-21 income year, that is $255 for taxpayers with a taxable income of $37,000 or less. Those earning between $37,000 and $48,000, the value of LMITO increases at a rate of 7.5 cents per dollar to the maximum amount of $1,080. Taxpayers with taxable incomes from $48,000 to $90,000 are eligible for the maximum LMITO of $1,080. From $90,001 to $126,000, LMITO phases out at a rate of 3 cents per dollar. The low income tax offset (LITO) will also continue to apply in conjunction with the LMITO. The LITO was originally intended to replace the LMITO from 2022-23 but was subsequently brought forward in the 2020 Budget. The maximum amount of LITO is $700 for those earning up to $37,500. Those earning between $37,501 and $45,000 will have LITO withdrawn at a rate of 5 cents per dollar. Taxpayers earning between $45,001 and $66,667 will have LITO withdrawn at a rate of 1.5 cents per dollar. Those earning above $66.668 are not eligible for the LITO. $250 threshold to be removed for self-education expenses It was announced that the government will remove the exclusion of the first $250 of deductions for prescribed courses of education. Currently, if a taxpayer incurs self-education expenses in relation to a course provided by a university, college etc, for the purpose of gaining qualifications for use in carrying on of a profession, business or trade or in the course of any employment, the first $250 of the cost is not deductible. This measure is not expected to start until the first income year after the date of Assent of enabling legislation, meaning that unless legislation is introduced, passed and receives Assent before 30 June 2021, the measure will not start until 2023. Tax residency changes The government will replace the existing tests for tax residency with a primary test under which if a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Those that do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria. As with the self-education expenses, the government has committed to any firm dates for the legislation to come into effect. Other measures: childcare; personal tax rates As previously announced by the government, the Budget confirmed that it will make an additional $1.7bn investment in childcare, although changes will not commence until 1 July 2022 (the next financial year!). The Budget also confirmed that there will not be any changes to personal tax rates for the 2021-22 income year, which means the rates remain the same as the 2020-21 income year.

Budget 2021: what’s in it for my business?

The 2021 Federal Budget has been handed down with many sweeteners for businesses to help drive unemployment rates down and power the economic engine of Australia. It has been forecast that the unemployment rate will fall below 5%, reaching 4.75% by June 2023 quarter. While real GDP is predicted to grow by 1.25% in 2020-21, rising to 4.25% in 2021-22 and 2.5% in 2022-23. The suite of business measures include the following. Temporary full expensing extended until 30 June 2023 The current temporary full expensing to allow eligible businesses to deduct the full cost of eligible depreciating assets will be extended until 30 June 2023. The measure was due to end on 30 June 2022 before the announcement of the extension. Other than the extended date, all other elements of the temporary full expensing remain unchanged. This means that a business will qualify if it is a small business (annual aggregated turnover under $10m) or has an annual aggregated turnover under $5bn. Loss carry-back also extended by one year The government will also seek to extend the loss-carry back provisions by one year. Under the original measure, eligible companies (with aggregated annual turnover of up to $5bn) could carry back a tax loss for the 2019-20, 2020-21 or 2021-22 income years to offset tax paid in the 2018-19 or later income years. Eligible tax loss years will now include the 2022-23 income year. Tax refunds resulting from loss carry back will be available to companies when they lodge their 2020-21, 2021-22 and now 2022-23 tax returns. The government notes that this measure will help increase cash flow for businesses in future years and support companies that were profitable and paying tax but find themselves in a loss position as a result of the COVID-19 pandemic. Small businesses will be able to pause disputed ATO debt recovery Legislation will be introduced to allow small businesses to pause or modify ATO debt recovery action where the debt is being disputed in the AAT. Specifically, the changes will allow the Small Business Taxation Division of the AAT to pause or modify any ATO debt recovery actions, such as garnishee notices and the recovery of GIC or related penalties until the underlying dispute is resolved. Small business entities (including individuals that carry on a business) with an aggregated turnover of less than $10m per year will be eligible to use the option. Other measures: disaster recovery grants tax exemption; self-assess effective life The government will provide an income tax exemption for qualifying grants made to primary producers and small businesses affected by the storms and floods in Australia ((including certain recovery grants). The Budget also confirmed that taxpayers will be able to self-assess the effective life of certain intangible assets (eg intellectual property and in-house software) rather than being required to use the effective life currently prescribed. Self-assessment of effective lives will apply to eligible assets acquired following the completion of the temporary full expensing measure.

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