Quarterly GST reporting

Businesses with a GST turnover of less than $20 million who have not been asked by the ATO to report their GST on a monthly basis can report and pay their GST quarterly. Businesses who report and pay their GST quarterly have three reporting options:

1. Calculate and report GST quarterly
This option allows businesses to calculate, report and pay their actual GST amounts quarterly. Businesses can use either the accounts method or the calculation worksheet method to work out their GST outlay. Business owners must report amounts at the following labels on their activity statement:

• total sales (G1)

• export sales (G2)

• other GST-free sales (G3)

• capital purchases (G10)

• non-capital purchases (G11)

• GST on sales (1A)

• GST on purchases (1B)

Those who have a WET or LCT liability or entitlement must also report these amounts each quarter (labels 1C, 1D, 1E and 1F).

2. Calculate GST quarterly and report annually
This option allows businesses to report less information on their quarterly BAS, but still calculate and pay their actual GST amounts quarterly. Owners can use either the accounts method or the calculation worksheet method to work out their GST amounts. Business owners must report amounts at the following labels on their quarterly activity statement:

• total sales (G1)

• GST on sales (1A)

• GST on purchases (1B)

Those who have WET or LCT obligations must also report these amounts each quarter (labels 1C, 1D, 1E or 1F).

Business owners must also complete an Annual GST information report to report annual amounts at the following labels:

• export sales (G2)

• other GST-free sales (G3)

• capital purchases (G10)

• non-capital purchases (G11)

3. Pay GST instalments quarterly and report annually
This option is available to all businesses with a turnover of $2 million or less. Those who choose this option will pay a quarterly GST instalment that the ATO determines and will report their actual GST information annually on an Annual GST return. Business owners must report amounts at the following labels on their Annual GST return:

• total sales (G1)

• export sales (G2)

• other GST-free sales (G3)

• capital purchases (G10)

• non-capital purchases (G11)

• GST on sales (1A)

• GST on purchases (1B)

Those who have WET or LCT obligations must also report these amounts on their Annual GST return (labels 1C, 1D, 1E or 1F).

Preparing for the FBT year-end

With the end of the fringe benefits tax (FBT) year fast approaching, business owners need to be aware of the FBT and gross up rates when preparing for their FBT return.

The FBT rate increased from 47 per cent to 49 per cent from 1 April 2015. The rate increase was due to the introduction of the Temporary Budget Repair Levy imposed on individuals for a two year period (1 April 2015 to 31 March 2017).

Consequently, the gross up rates were increased from 1 April 2015 to 2.1463 for Type 1 benefits (GST-creditable benefits), and 1.9608 for Type 2 benefits (no entitlements to a GST credit).

The FBT rate will return to 47 per cent from 1 April 2017, as a result of the discontinuation of the Temporary Budget Repair Levy. The gross up rates from 1 April 2017 will be 2.0802 for Type 1 benefits and 1.8868 for Type 2 benefits.

Whether the benefits provided to the employee are type 1 or type 2, only the lower gross-up rate is used for reporting on employees’ payment summaries.

Avoiding CGT in your SMSF

It may be beneficial for trustees who buy and sell assets through their self-managed super fund to start a transition to retirement pension to escape the burden of capital gains tax.

Capital gains are profits that an SMSF makes on the sale of an asset. Capital gains tax (CGT) is a tax on the profits that a fund, or an individual, makes on the sale of an asset. According to the ATO, CGT refers to the income tax an SMSF pays on any net capital gain it makes e.g. when the fund sells an asset as part of a CGT event, the fund becomes subject to CGT.

While CGT is payable in Australia’s superannuation environment, different rates apply to different situations.

Before a pension is established within an SMSF, any assets the fund has held for less than 12 months will be taxed at 15 per cent, and assets the fund has held for more than 12 months will receive a 33 per cent discount. Therefore, the CGT rate will be 10 per cent.

Once an SMSF trustee is in pension mode, there will be no CGT payable on any transactions. This also goes for all account-based pensions and all transition to retirement pensions, making it one of the main reasons why putting money into superannuation as the lower tax rate will guarantee better returns.

For the reason outlined above, it may also be in a trustee’s best interest to start a transition to retirement pension as soon as they turn their preservation age, which is currently 56 years old.

No tax penalty when restructuring your business

Federal Parliament recently passed legislation that will allow small businesses to change the legal structure of their enterprise without incurring a capital gains tax (CGT) liability. Instead, the CGT liability can be deferred until eventual disposal.

The legislation, ‘Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016′, will apply from July 2016. It provides an optional rollover for small business owners who change the legal structure of their business when transferring assets from one entity to another.

The effect of the rollover is the tax cost of the transferred asset/s is rolled over from the transferor to the transferee, providing greater flexibility for the small business.

The rollover will apply to any gains and losses which occur from the transfer of active assets that are:

• CGT assets

• Depreciating assets

• Trading stock

• Revenue assets

Businesses that qualify for the rollover are ongoing businesses who transfer asset(s) as part of a genuine restructure.

Whether a restructure is “genuine” is determined by the facts and circumstances of the restructure, such as:

• Whether a bona fide commercial arrangement is undertaken for the purpose of enhancing business efficiency

• Whether the transferred assets will continue to be used in the business

• Whether or not it is a preliminary step to facilitate the economic realisation of assets

To be eligible for the rollover, each party to the transfer must be either:

• a “small business entity” with $2 million or more in turnover for the income year during which the transfer occurred;

• an entity that has an “affiliate” that is a small business entity for that income year;

• “connected” with an entity that is a small business entity for that income year; or

• a partner in a partnership that is a small business entity for that income year.

Since the new rules are rather technical in nature, obtaining professional advice may be in a small business’s best interest to ensure they can take advantage of the restructure rollover.

Renting out a room can incur CGT

A large number of Australians who rent out a room in their home, whether it be via Airbnb or another avenue, are unaware that the practice can incur capital gains tax (CGT).

Many assume CGT is not on the cards because profit made from the family home (or ‘primary residence’) is usually tax-free. However, those who earn an income from a portion of the family home may inadvertently create a capital gain for the ATO to grab.

Even though CGT is affected by events throughout a vendor’s ownership period, it is often calculated many years down the track, and unfortunately, many may not remember or be able to locate records for a relatively short time in which they were renting part of the house out.

Some people are aware that renting out a portion of their home may trigger a capital gain event, but still fail to calculate the percentage of the property the calculated gain should be attributed to.

Vendors need to work out the portion of the property that was used for ‘investment’ or ‘income producing’ purposes based on the floor area rented out as a percentage of the total property. This needs to then be apportioned to the period that space was made available to rent throughout the duration of ownership.

For example, a couple who bought their property for $1.5 million back in 2006, sell it for $3 million in 2016. During their ownership, they rented out a bedroom and bathroom for four years and worked out that the rented space is equivalent to 15 per cent of the property.

15 per cent of their capital gain ($1.5 million) is subject to CGT, which comes to $225,000. Their next step is to calculate the proportion of time the part of the property was rented out. Since the area of the property was rented out during four of the ten years of ownership, they need to work out four-tenths of $225,000, which is $90,000.

Since they owned the property for more than a year, the CGT discount of 50 per cent applies, making the assessable net gain $45,000.

How much the actual tax works out to be depends on whose name the property is taxed in. For CGT purposes, and if the property is positively geared from an income tax perspective, it is better to put the property in the lower income earner’s name.

If the property was negatively geared, the couple would need to consider the tax benefit they would sacrifice. Negatively geared properties result in a larger tax deduction if claimed in a higher income earner’s name.

New tax policy set to hit Australia’s wealthy

Wealthier individuals in Australia may have to pay higher taxes on their superannuation in the near future, with the government hinting that superannuation tax concessions will be reorganised to target those who are most at risk of relying on the age pension in retirement.

Industry groups are expected to be advised of the proposed changes this coming week.

Some industry observers believe that the government will tax super contributions at people’s marginal rates minus a discount to ensure everyone receives the same tax benefit on super contributions, regardless of their level of income.

At present, super contributions are taxed at 15 per cent. The presumed discount approach would reduce benefits for the country’s highest-income earners and provide larger tax breaks for low-income workers.

While setting the discount at 15 per cent would save the Australian government $5.8 billion a year, 9.5 million Australians would have to pay more in contributions tax than they do presently.

One alternative to the suspected tax changes would be to reduce the amount of money and individual can save in super. This practice would immediately decrease costs and lower the cost of tax breaks over earnings in the future because the amount of money covered when people retire would be lower.

Under current superannuation rules, people under the age of 50 can contribute up to $30,000 a year into their super accounts.

How do franking credits work?

Franking credits are a kind of tax credit that allows Australian companies to pass on the tax paid at company level to shareholders.

Franking credits can reduce the income tax paid on dividends or potentially be received as a tax refund.

Where a company distributes fully franked dividends (and those dividends are included in the taxable income of the taxpayer) the taxpayer can claim a credit against their taxable income for the tax that has already been paid by the company from which the dividend was paid.

For example, an individual who owns shares in a company receives a fully franked dividend of $700 from the company. The dividend statement says that there is a franking credit of $300 (the tax the company has already paid). This means the dividend would have been $1,000 ($700 + $300) before company tax was deducted.

At the end of the financial year, the individual must declare $1,000 (the $700 dividend + the $300 franking credit) in their taxable income.

If the individual’s marginal tax rate was 15 per cent, they would have to pay $150 tax on the dividend. But because the company has already paid $300 in tax, the individual receives a refund of the difference, which is $150.

If the individual was in a higher tax bracket, they may not have been entitled to a refund of any of the franking credit, and may even have had to pay additional tax. However, if they are a low-income earner, it is possible to be refunded the full amount of the franking credit.

Tax office uncovering Australia’s wealthy

The ATO is currently working with insurance providers in a bid to identify wealthy Australians with policies that cover an expanded range of asset classes.

Last month, the office launched a data-matching program, which involves contacting insurers to distinguish policy owners of various classes of insured assets that are often associated with wealth.

Insurance policies that cover damages or losses related to marine, aviation, enthusiast motor vehicles, fine art and thoroughbred horses will all be coming under the tax office’s radar.

The ATO will use the information gained through the data-matching process to create a more accurate estimate of individual taxpayer’s actual wealth, so the office can provide tailored services to ensure that everyone meets their tax obligations.

The ATO anticipates that it will receive 100,000 records where the different asset classes meet certain threshold amounts.

Types of fringe benefits

FBT law includes different categories of fringe benefits and specific valuation rules for each category. FBT is a tax employers pay on benefits they provide to their employees, including their employees’ family or other associates. The benefit may be in addition to, or part of, an employee’s salary or wages.

Employers who provide fringe benefits must pay FBT, even if the benefit provided is to an associate of their employee or by a third party under an arrangement with the employer. The type of fringe benefits employers must pay FBT on include:

Car fringe benefits
If an employer makes a car they own or lease available for the private use of an employee, they may have to provide a car fringe benefit.

Car parking fringe benefits
A car parking fringe benefit may arise if an employer provides car parking to an employee and meets several conditions (which can be found on the ATO’s website).

Entertainment and fringe benefits
The provision of entertainment includes providing food, drink or recreation and accommodation or travel in connection with, such entertainment.

Expense payment fringe benefits
Employers may provide an expense payment benefit if an employee incurs expenses and the employer reimburses them for the expense or pays a third party for the expenses.

Loan fringe benefits
Employers may have to provide a loan fringe benefit if they give their employee a loan and charge no interest or a low rate of interest.

Debt waiver fringe benefits
Employers may have to provide a debt waiver fringe benefit if they do not require an employee to repay a debt.

Housing fringe benefits
A housing fringe benefit may arise when an employer provides accommodation to their employee rent-free or at a reduced rent where that accommodation is their usual place of residence.

Board fringe benefits
A board fringe benefit may arise if an employer provides an employee with accommodation and an entitlement to at least two meals a day.

Living away from home allowance (LAFHA) fringe benefits
A LAFHA fringe benefit may arise if an employer pays an allowance to an employee to cover additional expenses incurred, because they are temporarily required to live away from their normal place of residence to perform their employment duties.

ATO crackdown on rental property tax claims

The ATO is currently targeting taxpayers who rent out their holiday homes for only a few weeks during the year but claim a full year’s worth of deductions on their tax returns

The tax office is will be paying close attention to rental property owners, especially those who own a holiday home who incorrectly claim deductions for initial repairs to recently acquired rental properties.

Last year, the ATO sent out letters across Australia reminding people to only claim deductions that they are entitled to for the periods that the rental property was rented out or genuinely available for rent.

While the majority of taxpayers who received those letters reduced their claims, the key concern that remains is over people who make claims for expenses during a time when the property was not genuinely available for rent.

With the ATO taking a more broad approach in monitoring rental deductions, now may be the perfect opportunity for holiday home investors to review the rules surrounding holiday home tax deductions to ensure that they can address any risks or issues in a timely manner.

Homeowners should be aware that it is not just holiday homes that are under focus by the ATO. The office will also commence addressing rental property owners who incorrectly claim deductions as well.

A common mistake that has risen among rental property owners is claiming for deductions for initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing the property.

Taxpayers should be aware and understand that they are not entitled to claim a deduction for any repairs made to their rental property for issues that existed when they purchased it, even if the repairs were carried out to make the property suitable for rent. Instead, the cost of these repairs is used to work out any profit or capital gain, when the property is sold.