Tax on gifts and donations

Individuals can claim tax deductions when giving gifts or donations to organisations that have the status of deductible gift recipients (DGR).

To be eligible to claim a tax deduction for a gift, the ATO stipulates that it must meet the following four conditions:

• the gift must “truly be a gift”; that is, a voluntary transfer of money or property where the giver receives no material benefit or advantage.

• the gift must be made to a deductible gift recipient (DGR)

• the gift must be money or property

• the gift must comply with any relevant conditions. For some DGRs, the income tax law adds extra conditions affecting the types of deductible gifts they can receive.

What you can claim
The amount an individual can claim for a gift or donation depends on the type of gift given. For gifts of money, individuals can claim the total amount of the gift, as long as it is $2 or more. Different rules exist for gifts of property, and the amount of the tax deduction depends on the value and type of property.

Tax deductions for the majority of gifts can be claimed in the tax return for the income year when the gift is made. However, individuals can also spread the tax deduction over five income years under certain circumstances.

What you can’t claim
Individuals cannot claim a tax deduction for gifts or donation items that provide some personal benefit, such as:

• raffle tickets

• the cost of attending fundraising dinners (unless certain conditions are met – see your tax professional)

• membership fees

• payments to school building funds

• payments where there is an understanding with the giver and recipient that the payments will be used to provide a substantial benefit for the giver

Employment laws you may be breaking

Despite an employer’s best intentions, it can be surprisingly easy to accidently breach some of the laws and regulations that govern employment relationships in Australia.

However, disobeying the law can carry severe penalties. Violating Australia’s key employment legislation, the Fair Work Act 2009, can expose a business to penalties or up to $54,000 and up to $10,800 for individuals.

Here are three common practices that many businesses may be unwittingly carrying out that can land them in hot water:

Using unpaid interns to carry out productive work
Internships are an attractive option for students and jobseekers wanting to gain experience and get a ‘foot in the door’ to certain industries. However, if your business has hired an intern who is not part of a school program or tertiary degree but is performing productive work for your business, you may have unwittingly employed them.

If this is the case, unless the business pays and treats the intern like an employee, it is at risk of breaching the National Employment Standards in the Fair Work Act, on top of minimum award conditions.

Failing to consult employees about proposed changes to the workplace
Around 60 per cent of Australian workers have their minimum employment conditions underpinned by modern awards. Modern awards require employers to consult with the employees when major changes are going to be made that are likely to impact employees.

Failure to consult, or consult adequately, with employees of this change can be a breach of the relevant award.

Not providing allowances owing under an award
Along with minimum wages and overtime, many awards entitle employees to allowances. Some employers have been found to pay over the minimum award rate of pay and then rely on the greater payment to cover allowances.

However, the Fair Work Commission has stated that unless a written employment agreement specifies that an over-award payment will be made to cover those specific minimum entitlements, award entitlements will be payable on top of the higher rate of pay the employer gives to the employee.

When is the best time to register for GST?

The Australian GST system can appear to be quite complicated for some small businesses just starting out, due to the different types of GST goods and services, such as input taxed, GST-free and GST taxable.

Input taxed items are commonly financial services or products and rent from residential property.

GST-free items are goods and services provided as a part of education, medical and health services, and unprocessed food and produce.

Goods or services that are not classified as input taxed or GST-free are considered to be taxable. These products or services must have GST included in their selling price if the business selling them is registered for GST.

A determining factor of whether a business should register for GST is whether or not they can pass on the GST in the price they charge, or whether their industry’s market determines their product price, meaning GST cannot be added to the price.

Another factor businesses need to consider is whether they are able to increase their selling price to include GST. Businesses who cannot increase price effectively lose one-eleventh of the selling price (which must be paid to the ATO).

Businesses that turnover less than $75,000 a year are not required to register for GST. These businesses receive an Instalment Activity Statement, rather than a Business Activity Statement, from the ATO that advises them of their PAYG tax instalments. The IAS also must have completed the details of amounts paid to employees and how much has been deducted as PAYG withholding tax.

Finding new customers

If you’re new to business, marketing can seem overwhelming and frustrating. There is no one activity that brings a wealth of customers to your door. Marketing must be an ongoing activity with a number of complementary approaches.

What typically happens when you first start your business, you pay a lot of attention to marketing, but once you reach a satisfactory level of sales or a sufficient client list, you slowly let marketing slide. That’s a recipe for long-term decline. There’s always a certain amount of natural attrition in your customer base, as well as new competitors attracting some customers away. You have to keep marketing just to retain a constant level of income.

But before you go out and spend your money, sit down and plot out at least a mini-marketing plan. Make sure your marketing activities are a good fit for your type of business. Come up with a budget. As importantly, remember you need repeat exposure to potential customers to get results. So, don’t blow your entire marketing budget on one direct mailing

Here’s are five tried-and-true marketing activities for small businesses:

Advertising
Advertising often brings quick results, especially if you’re announcing a special sale. But advertising works best when you maintain an ongoing advertising program because ads keep your name in front of customers.

Direct mail
Direct mail can be expensive and must be repeated at least quarterly to be effective, but it definitely works.

Cold calls
Want fast results? Pick up the phone, knock on the door, visit the prospect’s business.

Website
Having a website won’t generate sales, certainly not immediately. But it helps support your other sales efforts and gives your business credibility.

Referrals
Everyone wants “word-of-mouth” advertising, but this takes time. The best way to generate referrals is by ongoing networking, but you can also institute a reward program to encourage current customers to recommend you to their friends.

Have you considered seasonal packaging?

Even though special seasonal packaging has become an important part of the holiday season for many brands, is it always a worthwhile endeavour for smaller businesses?

Getting seasonal packaging right can be difficult and may take a few years of practice which involves making mistakes and then learning from them. Even though it might be an easy way to engage with, and attract new customers to your business, there are still quite a few things that can go wrong.

Getting your business’s numbers right in terms of both demand and distribution is very important for a special holiday packaging initiative. Overestimating customer demand or expectation can end up in a business discounting their leftover products, which can severely eat into a company’s profit margins.

Seasonal packaging is a fun way for businesses to mix up their traditional brand identities, but going too far may lose customers, not gain them. Straying too far from your original or traditional identity may confuse and even annoy customers who may not be able to find your product because it looks so different.

Large businesses can often afford to make mistakes with seasonal packaging. Sadly, many small businesses often do not have this kind of luxury and are usually the ones who have the most to lose from taking this kind of marketing approach.

Clever seasonal packaging can play the deciding factor for a new customer choosing between your product and a cheaper, more generic option. So if your small business is ready to take the risk, all it comes down to is if you’re going to do it, make sure you do it right!

Meeting the 10% income test

While the 10 per cent income test rule may come across as sounding fairly complicated, for those who are employed or self-employed, it is simply a process of working out whether or not you’re eligible to claim a tax deduction for super contributions.

Individuals who are substantially unemployed (receive part of their income as an employee) and can satisfy the 10 per cent income test rule are eligible to claim a tax deduction for their super contributions.

Those who are substantially self-employed or substantially not employed (but are an employee) can also claim a tax deduction for super contributions when their employment income is less than 10 per cent of their total income.

To satisfy the 10 per cent rule, an individual’s employment income must be less than 10% of their total income. Total income is an individual’s assessable income (gross income before tax deductions) plus any salary sacrifice contributions and reportable fringe benefits.

Employment income includes reportable employer super contributions, such as salary sacrifice contributions, but doesn’t include Superannuation Guarantee.

Assessable income is an individual’s gross income before any deductions are allowed. It includes:

• salary and wages

• dividends

• interest distributions from partnerships or trusts

• business income

• rent

• foreign source income

• net capital gains

Reportable employer super contributions (such as salary sacrifice contributions) are also added back to assessable income when determining whether an individual satisfies the 10 per cent test.

Individuals cannot claim a deduction if they obtain 10 per cent or more of the following as an employee:

• Assessable income

• Reportable fringe benefits

• total superannuation contributions

ATO targeting private school parents

In the latest crackdown on tax evasion, the ATO is targeting parents suspected of paying their children’s private school fees from secret offshore bank accounts.

Following concerns that overseas accounts are being used to hide away secret funds, the tax office will be contacting more than 100 parents with private school fees of up to $100,000 per year paid from offshore accounts this week.

While there is nothing wrong with Australians having an offshore account, those individuals are still required to pay tax on the account’s interest or earnings. Suspected parents will be asked to provide documents and attend interviews to answer questions about their arrangements.

Government introduces significant tax changes in innovation statement

Significant tax breaks and incentives for Australian investors were unveiled on Monday when the Turnbull government released their National Innovation and Science Agenda.

The tax changes are designed to help support start-ups to develop their ideas in Australia.

Investors will now be able to access a 20 per cent tax offset instead of deductions or a (CGT) exemption in start-up companies that are less than three years old, are unlisted, and received less than $20,000 in income in the previous year.

The reason for changing to the offset model over a deduction is because it will benefit people more evenly across the differing income groups. The cost of the offset is estimated to be $106 million over four years, with most funding beginning after 2017.

This means that if someone was to invest $20,000 and claim the offset, they would be able to reduce their income tax by $4,000. If the investor then sold their shares three years later, their initial $20,000 will also be exempt from CGT. For start-ups, this will bring forward the point at which they can receive a tax break.

Setting out terms and conditions

Entrepreneurs embarking on new business ventures often enter new customer and business arrangements.  

Setting out the terms and conditions of these arrangements might not be of highest priority to those new business owners with never-ending to-do lists; however, neglecting this aspect of business may create future financial burdens.

To avoid monetary disputes and the risk of late payments, the terms and conditions should be established from the beginning of the business deal. The terms and conditions should be in writing and cover the responsibilities, duties, rights and roles of each party.

The terms and conditions need to be specific and clearly state:

• What products and services will be provided

• When payment is to be made

• What happens if a product or service is faulty – is there any guarantees or warranties offered

• A refund policy

• If a guarantor is needed

When drafting up your business’s terms and conditions make sure they comply with the Australian Consumer Law and other relevant legislation. If you are unsure, seek professional advice.

Turning complaints into compliments

Employees frequently concentrate on the positive side of their conversations with customers, and often fear management disapproval if a complaint comes to light. This can often hinder what otherwise might have been healthy and useful criticism.

Complaints can show a business what needs to be changed, so owners should work hard at generating honest feedback from their customers, be it positive or negative.

One way to solicit feedback is by simply asking customers to provide it. An example would be sending a personal letter to customers that includes a questionnaire, or invites them to call if they have any complaints or problems.

If a customer complaint concerns a specific employee, it is often best to speak directly to him or her about the problem, and try to determine what can be done to rectify it.

Generally, complaints are best handled by the people that can do the most about them, which is usually the person in charge of the particular area. A complaint about the business’s telephone system should go to the business administrator while the personnel manager would handle a complaint about a secretary’s rudeness. However, customers can complain to any member of staff, so handling them should be everyone’s responsibility.

If a business decides upon this approach, adequate employee training is critical. Employees must be made to feel that they play an important part in customer service, and it is the responsibility of management to encourage this company ethos.

Business should present customer service training to employees in a way that puts them at their ease. Let them know that it is healthy criticism, which should not be taken too seriously. Do not blame or praise, because this could lead to resentment or low morale. Feedback should always be presented in the context of, ‘How could we do this differently?’

Businesses may start to see improvement in a very short time, but this process can take as long as a year. Training your staff to look at customers more closely is an easy and effective way to measure customer satisfaction on a daily basis.