What record-keeping requirements does the ATO have in place?

Record-keeping, if done well, can help running a business much easier. It gives you an overview of the business’ financial progress so that owners can assess their strengths and weaknesses and make decisions accordingly. Record keeping also enables owners to meet their tax and superannuation obligations easily – all the data and information required is readily available. Finally, record-keeping provides owners with a profile, of sorts, which demonstrates the financial position of the business to banks or other lenders.

Record-keeping requirements related to tax and superannuation need to be met. The specifics will depend on the unique tax and superannuation and obligations your business may have and the structure of your business (sole trader, partnership, company or trust).

The Australian Taxation Office (ATO), requires the following from all businesses:

• The records cannot be changed and further, the information should be kept so that it cannot be changed or damaged.
• The records must be kept for 5 years from the date they were prepared, obtained or a transaction was completed – or the latest act they relate to. The records might need to be kept for longer periods in certain circumstances.
• The business must be able to show the ATO their records if requested.
• The records must be in English or easily translated into English.

The ATO will accept paper and electronic records.

• There has been an inclination towards electronic record-keeping for both tax and super requirements as this makes certain tasks easier and reduces workload after initial set up. There may be some laws which require paper records in addition to electronic ones.
• Businesses may also keep paper records electronically i.e. scan paper documents and store them on an electronic medium (and dispose of papers).
• If records are stored electronically, then they should be on a device which owners have all access to, has been backed up, and allows the owner to have control over the information that is processed, entered or sent from the device.

Transition to retirement

The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

• Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer’s compulsory contributions as well as any voluntary contributions you may be making.
• Government benefits and TTR: The benefits you or your partner receive might be impacted if you choose to opt for this strategy. How and what exactly will change might become clearer upon discussing this with a Financial Information Service (FIS) officer.
• Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

Tax contributions on your super

How much tax you pay on your super contributions and withdrawals depends on a variety of factors. The process takes into account your total super amount, your age, and the type of contribution or withdrawal you make.

How are super contributions taxed?

The money that you contribute to your super account through your employer is taxed at 15%, and this is the same with salary sacrificed contributions. But there are exceptions to this:

• If you earn $37,000 or less, then the tax will be paid back to the super account due to the low-income super tax offset (LISTO)
• If your income and super contributions add up to more than $250,000, then you are also required to pay an additional 15% Division 293 tax.

Any after-tax super contributions (non-concessional contributions) are not taxed further.

How are super withdrawals taxed?

How much tax you pay on withdrawals depends on whether you withdraw as a super income stream or a lump sum. Since this can be a convoluted process, it may be beneficial to approach an advisor and clarify any questions you may have before you withdraw money.

What about beneficiaries?

If someone dies, then their super money will go to their beneficiary. This is known as a super death benefit. As a beneficiary, the tax you pay on the death benefit is dependent upon:

• The tax-free and taxable components of the super
• Whether you’re a dependant for tax purposes
• Whether you take the benefit as an income stream or a lump sum.

Superfund categories and what they mean

There are four different categories of super funds. These have different primary features and are more applicable to certain people than they are to others.

Retail super funds

Anyone can join retail funds. They are mostly run by banks and investment companies:

• Allow for a wide range of investment options.
• Financial advisors may recommend this type of fund as they receive commissions or might get paid fees for them.
• Although they usually range from medium to high cost, there may be low-cost alternatives.
• The companies that own these funds will aim to keep some of the profit they yield

Industry super funds

Anyone can join bigger industry funds, but smaller ones may only be open to people in certain industries i.e. health.

• Most are accumulation funds but some older ones may have defined benefit members
• Range from low to medium cost
• Not-for-profit, so all profits are put back into the fund

Public sector super funds

Only available for government employees

• Employers contribute more than the 9.5% minimum
• Modest range of investment choices
• Newer members are usually in an accumulation fund, but many of the long-term members have defined benefits
• Low fees
• Profits are put back into the fund

Corporate super funds

Arranged by employers for employees. Large companies may operate corporate funds under the board of trustees. Some corporate funds are operated by retail or industry funds, but availability is restricted to employees

• If managed by bigger fund, wide range of investment options
• Older funds have defined benefits, but most are accumulation funds
• Low to medium costs for large employers, could be high cost for small employers

Self-managed super funds

Private super fund you manage yourself. Many more nuances to this type of fund. Most prominent feature is the autonomy over investment.

Small business CGT concessions

Businesses receive four different types of concessions on top of CGT exemptions and rollovers which are available to everyone. These allow businesses to disregard or defer some or all of the capital gains from an active asset which is used in the business.

The four additional concessions include:

• 15-year exemption: If the business has owned an asset for 15 consecutive years and you are 55 years or over and are retiring or permanently incapacitated, then the capital gain won’t be assessable when you sell the asset.
• 50% active asset reduction: Being a small business, ATO permits reduction of the capital gain on an active asset by 50%. This is in addition to the 50% CGT discount if ownership of the asset extends over a year.
• Retirement exemption: Capital gains incurred from the sale of active assets are exempt up to a lifetime limit of $500,000. However, you must pay the exempt amount into an appropriate super fund or retirement savings account if you are under 55 years of age.
• Rollover: You may defer all or part of a capital gain for two years upon selling an active asset. Your deferral period can be longer than two years if you acquire a replacement asset or incur expenditure on making capital improvements to an existing asset.

Note that these concessions are only available upon disposal of an active asset and either of the following:

• Small business with an aggregated annual turnover of less than $2 million
• Asset used in closely connected small business
• Net assets have a value of no more than $6 million (this excludes personal assets e.g home, as long as these have not been used to produce income)

There are also other criteria and conditions that the business will need to meet but you can apply to as many concessions that are applicable to you. Importantly, you can only apply to these in a certain order so be wary of this.

What is an annuity?

An annuity provides guaranteed income for a number of years, or for the rest of your life. It is also known as a lifetime or fixed-term pension.

You can buy an annuity from a super fund or life insurance company. You are able to choose whether you want the payments to last for a fixed number of years, your life expectancy, or the rest of your life.

In order to buy an annuity through your super fund, you must be in the ‘preservation age’ which is between 55 and 60. Additionally. You are required to meet a condition of release e.g. permanently retiring.

You are also able to buy an annuity in joint names using savings. Through this method, you can split income for tax purposes. If either you or your partner dies, then the survivor has ownership and access to the funds. On the other hand, buying an annuity using a super lump sum can only be in the name of the owner.

When you buy the annuity, you decide the payment amount you will receive. This can increase each year by a fixed percentage or indexed with inflation. Further, you can also choose if you are paid monthly, quarterly, half-yearly or yearly. There are some conditions the ATO has about minimum annual payments if your annuity is bought with super money e.g. must pay a certain percentage of the balance based on your age.

You decide what happens with your annuity if you pass away. You can either nominate a reversionary beneficiary or choose a guaranteed period option. A reversionary beneficiary will receive your income payments for the rest of their life, usually at a reduced level. The guaranteed period option will allow your beneficiary to receive their payments as a lump sum or an income stream.

An annuity will impact your eligibility for the Age Pension as it is accounted for in the income and assets tests which are conducted. You should discuss exactly how the annuity will impact Age Pension entitlement with a Financial Information Service (FIS) officer.

Claiming your tax deductions

There are different types of deductions which individuals can claim to reduce their taxable income.

Work-related expenses

In order to claim work-related tax deductions, the expenses must have to meet three criteria. Firstly, all the expenses have to be paid by the individual, without being reimbursed by the employer. Secondly, they must be directly related to earning your income. Finally, there must be a record of the expenses (i.e. a receipt).

There are various different expenses which can fall under this category.

• Vehicle and travel expenses: Commuting between different locations but not usual travel between home and work
• Clothing, laundry and dry-cleaning expenses: Cost of work uniform which is distinct and unique (i.e. has a specific logo)
• Self-education expenses: Any courses or study associated with employees current role, such as textbooks
• Tools and other equipment: If you purchase tools or equipment, then a deduction for some or all the cost could be claimed

Investment expenses

The cost of earning interest, dividends or other investment income can also be claimed. This can include:

• Interest charged on money borrowed to invest
• Investment property ex[enses
• Investing magazines and subscriptions
• Money you paid for investment advice

Home office expenses

A portion of the costs associated with installing your home office can be deducted. The process is now much easier due to COVID-19. It allows people to claim 80 cents per hour for all running expenses. Additionally, people living in the same house can claim this individually, there is no need for a dedicated office.

Other deductions

There are also other deductions available. These include:

• Union fees
• The cost of managing your tax affairs
• Income protection insurance (If not through super)
• Personal super contributions
• Gifts and donations to organisations that are endorsed by the ATO as deductible gift recipients

Super scams: What to look out for

The market for super funds is extremely competitive.Scammers take advantage of this by promising unrealistic benefits to acquire personal or account details. They are able to use this information to steal your identity or transfer your super to an account they can access.

Scammers can approach you in various ways. You could receive a phone call, email or be contacted online.

This is what you should be weary of:

• Advertisements promoting early access to super
• Offers to ‘take control’ of your super
• Offers to invest your super in property
• Offers of quick and easy ways to access or ‘unlock’ super

The best way to spot a scam is to know what the rules about your super fund are. Knowing when you can legally access your super will protect you from false promises. Additionally, the ASIC website lets you check if someone is licensed, if they are not licensed, more likely than not, they should not be trusted.

If you believe that you’re being targeted by a scam, then rather than simply ignoring approaches and not engaging, you should report the scam. You can do this by calling the ATO or completing the online complaint form on the ASIC website.

How are investments taxed?

Investment income needs to be included when conducting tax returns. This includes any income acquired through interest, dividends, rent, managed funds distributions and capital gains. The income yielded from investments is taxed at a marginal tax rate.

Individuals are able to claim deductions for the cost of buying, managing and selling an investment. However, the Australian Tax Office (ATO) provides rules about what an or cannot be claimed as a tax deduction.

The MoneySmart website has a simple and easy-to-use tax calculator that may give an indication as to what the annual tax will be. However, it is recommended that if an individual has a diverse portfolio that yields income from multiple sources, then should consult an accountant or advisor that can lead them through the process as it can become quite complex.

In order to minimise taxation on investment income, individuals should consider tax-effective investments which provide concessional taxation. These include superannuation and insurance bonds.

PAYG instalments for business and investment income

Pay as you go (PAYG) instalments are payments you can make throughout the year to avoid accumulating a large tax bill to pay at the end of the year. Making these payments is a great way to budget for income tax and keep a healthy cash flow.

To qualify for PAYG instalments, you must earn over a threshold amount from your business or investment income (also known as instalment income).

The amount that you pay in PAYG instalments throughout the year will be offset against any owed tax for the entire year. But it is important to lodge your activity statements and pay all PAYG instalments before lodgment of tax returns if you want these to be included in your tax assessment.

There are two options for calculating and paying PAYG instalments:

• Instalment Amount: Simplest option which involves paying instalment amounts the ATO calculates based on relevant information.
• Instalment Rate: You calculate the instalment amount using instalment rate provided by the ATO and your instalment income. Therefore, dependent on income as you earn it and not predetermined.