Super “opt out” choice for high earners

If you're a high income-earner with multiple employers, you may be aware of potential traps with compulsory super contributions that can lead to some hefty and unfair penalty taxes. Fortunately, proposed new laws will give those high income-earners the opportunity to take proactive steps to overcome any penalties.

A person's concessional contributions (CCs) are capped at $25,000 per annum and include compulsory superannuation guarantee (SG) contributions; any additional salary-sacrifice amounts; and any personal contributions made by the member for which they claim a deduction.

However, an individual with multiple employers, such as a doctor working for a number of surgeries, can inadvertently breach their $25,000 CC cap because they receive compulsory contributions from each of these employers. While an employer is only required to make compulsory contributions of 9.5% on the worker's earnings up to $55,270 per quarter (or $221,080 per financial year), this applies on a per employer basis.

Excess CCs incur penalty tax at the individual's marginal tax rate less a 15% offset, plus additional interest charges.

Fortunately, under proposed new laws before Parliament, affected employees who may be at risk of breaching their CC cap will be able to "opt out" of receiving compulsory contributions from a particular employer (or multiple employers) by obtaining a certificate from the Commissioner of Taxation. (However, you must always have at least one employer to make SG contributions for you.)

The certificate will name the relevant employer and a particular quarter of the financial year, and will exempt that employer from having to make SG contributions. You'll need to apply for a certificate at least 60 days before the beginning of the relevant quarter.

The Commissioner will only be able to issue you a certificate if you're likely to have excess CCs if the certificate is not issued. To make this assessment, the Commissioner can rely on evidence such as past tax return data and employer payroll data. Once issued, the certificate cannot be varied or revoked. If you choose this opt-out, you'll be able to negotiate with the exempted employer(s) to receive more pay in lieu of the contributions (and you won't be required to show proof of this to the Commissioner).

The legislation to enable the opt-out is likely to pass this year, creating some opportunities for 2020 planning. If you're receiving SG contributions from multiple sources, contact us to begin your remuneration planning and to explore whether the opt-out may benefit you.

Until recently, a company that had experienced a significant change in ownership or control could only carry forward its earlier tax losses to a later income year if the company carried on the "same" business after the change. However, a new alternative test that applies retrospectively from 1 July 2015 means that now companies only need to carry on a "similar" business.

What exactly does "similar" mean? The legislation outlines several factors you must consider when assessing whether your business is "similar". This is a non-exhaustive list, and it requires a weighing-up of all relevant factors. The ATO unpacks the legislation as follows:

  • First, you must consider the following three things and compare them before and after the significant change in control of the company: the assets (including goodwill) used in the business, the activities and operations, and the "identity" of the business.
  • Then, where there have been some changes, you must identify to what extent these can be explained by natural development or commercialisation of the business that existed before the change in control. Natural development suggests a similar business is now carried on. But if those changes arose merely from a commercial decision, it's less likely the business is similar.

The ATO gives the example of a parcel courier company that expands its services to include food delivery. If this new activity commenced because the company undertook R&D to improve its bicycle design in order to improve efficiency, and as a result developed a new bicycle that it realised was suitable for transporting food, the service expansion results from development of the earlier business, so the similar business test is satisfied.

In contrast, if the company commenced this activity because it noticed a growing demand for food delivery services and purchased a new type of bicycle to embark on that opportunity, that would weigh against the current business being similar.

The ATO also emphasises that goodwill is an important asset to consider. For example, if a business adopts a new brand name and transforms from budget to "premium" products, it won't pass the similar business test as it hasn't used the goodwill of its former incarnation. This isn't the result of any natural development of the old business (but rather a commercial decision to present a new identity).

Planning a share sale or equity capital raising? Contact our office today for expert advice on getting the most out of your business' prior losses.

There's nothing as certain as death and taxes, but tax on death is not so clear. Generally, the law says there is no CGT liability for the deceased on the transmission of an asset, specifically a dwelling, to a beneficiary.

The beneficiary is considered to be the new owner of the inherited asset on the day the deceased person died and CGT does not apply to that asset. This applies to all assets, including a dwelling. The exception is where the beneficiary is a "tax advantaged entity" (TAE), such as a charity, foreign resident or complying superannuation entity.

If the beneficiary subsequently sells the asset, in this case a dwelling, this may create a CGT "event", depending on the status of the property, when it was purchased, when the deceased died and whether the sale qualifies for the CGT "main residence" exemption.

CGT liability on the sale will be determined by whether:

  • the deceased died before, on or after 20 September 1985 (when CGT was introduced); and
  • the dwelling was acquired before, on or after 20 September 1985; and if acquired post-CGT, whether the deceased died before or after 20 August 1996.

If the dwelling had been acquired by the deceased pre-CGT and the deceased died pre-CGT, then there is no CGT to pay (unless major improvements had been carried out post-CGT and the dwelling had produced assessable income).

Other situations are less straightforward. If the asset is a post-CGT asset, it's still possible there will be no CGT on the sale of the inherited dwelling but it depends on certain conditions being met. For example, if the asset has been used since the date of death as the main residence (and not to produce income) of the beneficiary, the deceased's spouse or someone with a right to occupy the dwelling, no CGT will apply on the sale.

In some limited cases where the dwelling has not been used as a main residence, CGT also won't apply if the sale occurs within two years of death – but the qualifying rules are tricky, so seek advice about any dwelling you've recently inherited.

If CGT applies to the sale of the inherited dwelling, then the relevant cost base needs to be identified, eg whether it's the cost base or the market value of the dwelling at the date of death. 

If you have inherited a dwelling and are in the dark about the CGT impact of hanging onto it or selling it, we can guide you through the minefield and minimise any tax consequences.

ATO Clamping Down on Clothing Deductions

Taxpayers who claim deductions for work-related clothing and laundry expenses may find themselves under the ATO's microscope this tax time. Even if your claim is relatively small, penalties can apply for incorrect claims. Find out what categories are allowed and what records you need to keep.

If your work-related clothing falls into one of the following three categories, you can claim the purchase cost and the costs of laundering that clothing:

  1. Uniforms. To qualify, your uniform must be both unique (designed only for your employer) and distinctive (including your employer's logo and not available to the public). This means you can't make claims for non-branded uniforms. And if your uniform is compulsory, you may also be able to claim shoes, socks and stockings provided they're an essential part of the uniform. Non-compulsory uniforms have much tighter rules.
  2. Occupation-specific clothing. This is clothing that is unique to your occupation, is not "everyday" in nature and allows the public to identify your occupation, such as a chef's checked trousers or a barrister's robes. In contrast, a bartender's black trousers or a swimming instructor's swimwear wouldn't be allowable.
  3. Protective clothing. To be eligible, the clothing must offer a sufficient level of protection against injury or illness in your work setting. Typical examples include high-visibility clothing, steel-capped boots, non-slip shoes, smocks/aprons and fire-resistant clothing.

The ATO is particularly concerned that many taxpayers incorrectly claim for ordinary clothing, like suits or black work trousers, or formal clothes to wear to work functions.

For total clothing and laundry claims of up to $150, you aren't required to keep detailed records. However, the ATO stresses that taxpayers aren't "automatically" entitled to a $150 deduction – you must have actually incurred the expenses you claim. The ATO can still ask you to substantiate your claim, and can contact your employer to verify its clothing requirements.

If your total claim is under $150, you can calculate your laundry claim using a $1 per load rate where all the clothing is work-related, and 50 cents per load where other clothes are in the load.

If your total claim for clothing and laundry exceeds $150 (and your total claim for work-related expenses exceeds $300), you'll need to keep receipts. To prove your laundry costs, you'll need to keep a diary for a representative one-month period.

Talk to us for expert assistance with all of your work-related expense claims. We'll help you claim everything you're entitled to, while keeping the ATO happy.

Is your Farm a Hobby or a Business?

As you sip a drop from the latest vintage you've crushed with the toes of your family and friends, is it possible that turning these vines into wine has ventured into primary production, and this happy hobby has become a business?

How can you tell? Defining "primary production" and "business" is no problem. Figuring out if a business of primary production is being carried on in your particular case is not so easy.

First, let's look at the definitions. "Business" is clearly defined to include any profession, trade, employment, vocation or calling (other than an occupation as an employee), and "primary production" broadly refers to plant or animal cultivation (or both); fishing or pearling (or both); or tree farming or felling (or both).

Determining whether a business of primary production is being carried on requires both these definitions to be satisfied, but neither provides a simple test for when the nature and extent of your activities amounts to the carrying on of a business.

Fortunately, there are a number of indicators, courtesy of case law, that give some direction, but the ATO emphasises that no one indicator will nail it.

It's a matter of weighing up all the relevant indicators in each individual case. The indicators include things like the intention of the taxpayer (do they intend to engage in business and to make a profit?), the size and scale of activities, whether there is repetition and regularity, and many other factors.

But why does it matter? Defining whether you are carrying on a hobby or a primary production business matters because there are tax considerations for both activities, such as the following.

If it's a hobby you can enjoy the activity without any reporting obligations. You don't need to declare any profit from the activity, but you can't claim any losses. Also, without an ABN, to supply another business requires the completion of some paperwork, otherwise tax will be withheld at the highest rate.

If your hobby becomes a primary production business, you need to declare your income to the ATO, get an ABN and keep tax records. You can also take advantage of tax concessions (like the $30,000 instant asset write-off) and claim general business deductions for your expenses (unless you're offsetting a loss against other income, in which case you need to satisfy the ATO's "non-commercial loss" tests or defer your loss until you make a profit).

If it's all enough to turn you to drink, come and see us for some expert advice and guidance on the most tax-effective way forward for your farm!

Hiring independent contractors can be a flexible staffing solution for many businesses, but did you know that some workers who are genuinely independent contractors are still entitled to compulsory superannuation contributions? Find out what test the ATO applies and check whether your business has its super obligations covered. If a worker is not an employee in the general sense but is hired under "a contract that is wholly or principally for the labour of the person", the worker is deemed an employee for superannuation purposes, even if they have an Australian Business Number. This means the hirer must make superannuation guarantee (SG) contributions of 9.5% (in relation to the part of the contract that is for labour). Hirers can't meet this obligation simply by paying the worker an additional 9.5% – they must actually make contributions to the worker's super fund. So what sort of contracts are captured? The ATO's view is that a contract is "wholly or principally for labour" when three key requirements are all met. First, the person must be paid "mainly" for their labour (if not entirely), and the ATO interprets this as "more than half the dollar value" of the contract being for labour. Labour includes not only physical work, but also mental and artistic effort. The second requirement is that the person is paid for their labour, not to achieve a result. Being paid by the hour suggests the person is paid for their labour. Third, the person must personally perform the work and must not be able to delegate to someone else. All kinds of workers can be captured. Typical examples might include freelancers such as programmers, editors, graphic designers or administrative support workers who are paid by the hour (not for a specific result) and can't delegate the work to someone else. Similarly, labourers and other contractors performing physical work could be captured. The rule can also extend to individuals in sophisticated business structuring arrangements. In a recent decision, the Federal Court found that a dentist who had sold his dental practice to a third party and continued to work as a dentist for that practice was an independent contractor, but had been working under a contract "wholly or principally for labour". The new owners were therefore required to make minimum SG contributions for him. Don't wait for the ATO to come knocking. Contact us today for assistance in reviewing your contractor arrangements and ensure your business is protected.

Unsure about the instant asset write-off?

You may have heard about the "instant asset write-off", but do you understand exactly how it can benefit your business? Read our case study for insight into how the write-off works, and what you need to do by 30 June 2020 to take advantage of this limited-time incentive.

The write-off allows small and medium businesses (with turnover up to $50 million) to claim a full deduction for any depreciating asset costing up to $30,000 in the year they first use it, rather than having to deduct the cost over several years under the usual depreciation rules. It's a temporary measure and unless there are further government announcements, the threshold will return to $1,000 from 1 July 2020.

Case study

David runs a distribution business with annual turnover of $1.4 million. He has been thinking about purchasing a computer upgrade (costing $8,000), an extra forklift ($24,000) and a new van ($35,000), which David would use 20% of the time for personal use.

The $30,000 threshold is a per asset threshold, so the business could claim both the $8,000 computer upgrade and $24,000 forklift under the write-off, even though these total $32,000. The $35,000 vehicle won't qualify. Even though businesses may only claim the write-off for the business use proportion of an asset (in this case 80% or $28,000), the full cost of the asset must still be below the $30,000 threshold. The vehicle would be subject to the usual depreciation rules.

To qualify, David must do two things if he wishes to utilise the $30,000 write-off. First, he must purchase the asset by 30 June 2020. For small businesses like David's (with turnover under $10 million), the purchase can go as far back as 13 May 2015 (subject to the "first use/installation" rule discussed below).

If David's business turnover was between $10 million and $50 million, the purchase would need to have been made after 2 April 2019 (when the measure became available to medium businesses).

Second, the asset must be first used, or installed ready for use, on or before 30 June 2020. This means David wouldn't qualify if he buys the asset, but it's not delivered until after 30 June 2020. If a small business purchased and also first used or installed an asset on or before 2 April 2019, a lower threshold will apply. Talk to your adviser about the tax treatment of that purchase.

If you've purchased new equipment for your business, contact us today to explore whether the write-off can work for you. 

Small Business CGT Concessions

The small business capital gains tax (CGT) concessions can save businesses some serious tax – and help business owners significantly boost their superannuation – but it's essential that you keep the right records, particularly for when the time comes to sell. Find out what your business should be doing now to keep the ATO at bay in the future.

Your tax adviser can help you consider whether your business will qualify for this small business relief. If so, you could potentially access one or more of the following concessions:

  • Where the asset is owned for at least 15 years and sold in connection with your retirement: you can potentially disregard the entire capital gain. You can also contribute proceeds of up to $1,515,000 into superannuation under your lifetime "CGT cap".
  • Alternatively, you can disregard up to $500,000 of the capital gain provided you make a superannuation contribution equal to that amount if you're aged under 55.
  • You may also have the choice to apply a 50% reduction to your capital gain (on top of the regular discount for assets held for at least 12 months), and/or defer the gain until later.

However, business owners taking advantage of these generous concessions should understand they may receive a "please explain" follow-up from the ATO. It's therefore essential to record all relevant information about your business assets so that you can later substantiate your CGT claim. This includes purchase information (date of purchase, the price you paid, any stamp duty and legal fees you paid) and ongoing costs (repairs, insurance, installation costs and improvement costs).

Usually, you need to keep all records until at least five years after the CGT event (generally, when you sell), so for an asset you purchased in 2002 and sold in 2019, you'd need to keep all the purchase records until 2024! Alternatively, keeping a CGT "asset register" can make record-keeping simpler. This is a register where you keep relevant information for all your CGT assets, and a major advantage is that once an entry is certified by a tax agent, you only need to keep the original records for five years from that date.

Want to simplify your record-keeping or need help reconstructing records that aren't up-to-date? Don't jeopardise your future tax planning – talk to us today for expert assistance in ensuring your business will be ready to take advantage of the CGT concessions.

The way we approach tax matters can sometimes end up making a big difference to our bottom line and stress levels. Here are three tips to help individual taxpayers achieve a better outcome when lodging and dealing with the ATO this tax time. 

Tip one: Get help with debts early: If you're experiencing financial difficulties, there are a number of ways the ATO can assist. If you can't pay your tax bill, the ATO encourages you to contact them early to discuss your options. For tax bills under $100,000 you can set up a payment plan online through myGov, or through your tax agent. For bigger debts, contact the ATO to discuss a plan. The ATO has power to provide debt relief from an individual's tax bill (in part or in full) if payment would leave them unable to afford food, clothing, accommodation, medical treatment, education or other necessities. In 2017–2018, the ATO granted 2,174 full or partial releases. A good tip for anyone having trouble paying their tax bill is to stay on top of their lodgment obligations. This shows the ATO you're aware of your obligations and you'll avoid penalties for non-lodgment. 

Tip two: Stay off the ATO's radar: No one wants to be audited, so it pays to know the following "red flags" the ATO looks for when analysing its vast data sources, and it may help you identify when to seek professional advice: unusually high work-related expense claims; rental expenses, especially those inconsistent with rental income or other ATO data; undeclared capital gains and income; and taxpayers who don't lodge returns on time! 

Tip three: Manage disputes efficiently: There are many options for resolving tax disputes, ranging from lodging an objection, seeking external review, alternative dispute resolution and litigation. However, the ATO wants to resolve tax disputes quickly and fairly. The ATO's "in-house" facilitation service gives individuals (and small businesses) free access to an impartial ATO mediator who will take the taxpayer and ATO case officers through the issues in dispute and attempt to reach a resolution. It's a voluntary process and can be undertaken at any time from the early audit stage up to and including the litigation stage. 

In all of your dealings with the ATO, we're here to support you. Whether it's a tax debt, a disputed assessment or a complicated deduction you're not sure about claiming, our experts will guide you every step of the way and help you achieve the best outcome

Have you run a small business that has ceased or paused operations? Or perhaps you've been hired as an ABN contractor? The ATO is cleaning up the Australian Business Register and is on the lookout for people who may not be entitled to hold an ABN.

This year, the ATO has been focused on improving the integrity of the Australian Business Register (ABR). You may have even heard that the ATO has been "bulk cancelling" a large number of ABNs. Only entities that "carry on an enterprise" are entitled to hold an ABN. An enterprise includes running a business, as well as other activities like leasing property or being the trustee of an SMSF. It does not include working as an employee.

The ATO is focused on identifying the following types of ABN holders who are not entitled to hold their ABN: businesses that are no longer active; businesses that hold multiple ABNs; and workers who are incorrectly classified as contractors rather than employees (discussed below).

The ATO is also concerned that some businesses are incorrectly classifying their workers as "independent contractors" when in fact they are likely to be "employees". In such cases, the employer may ask the worker to obtain an ABN and call the arrangement "contracting". Unfortunately, this illegal practice is sometimes done to avoid paying entitlements like award wages and superannuation contributions.

If you hold an ABN, you must update the register within 28 days of becoming aware of a relevant change. This includes things like your contact details (including your business address) and your main business activity and business category.

You should cancel your ABN if your business has been sold or is no longer operating. Before cancelling your ABN you should make sure you've complied with all of your lodgement and reporting obligations. You may also need to cancel your ABN if you're changing your business structure (eg from a sole trader to a company) and then apply for a new ABN. Of course, you should get professional advice before changing your business structure to make sure you understand the associated tax consequences.

Don't stress over business administration – get help from the professionals. Whether you're thinking of starting a new business or need help sorting out a registration issue, we can handle all of your ABN registration needs, as well as related registrations like GST, PAYG and business names.

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