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Itax Solutions ® Directory GST Basics
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| See also Year End Tax Planning Checklist |
If you use a car for work, how do you intend to claim a deduction for it ? -If so what records have you kept ?
Actual expenses If you seek to claim part or all of expenses incurred, you will need a log book and tax receipts. Have you kept a log book in prescribed format for 12 weeks ? (each car every 5 years)
Arbitrary Methods -Did you travel more than 5000 km for work related purposes ?
If yes you can claim 12 % of the cost of the car or 1/3 of the expenses.
If no, you can claim cents per KM, the exact rate depending on the engine capacity.
Employer Provided Cars
Employer owned cars may incur fringe benefits tax unless the employee reimburses for the otherwise taxable benefit. Generally no amount is claimable by the employee, but there may be exceptions. (refer section 51AH)
Taxable benefits greater than $ 1000 (increased to $ 2,000 from 10 May 2006) may need to be reported on the group certificate and affect liability to medicare surcharge, superannuation surcharge and Centrelink entitlements.
Claiming GST Credits
Full input tax credits became available for vehicles acquired on or after 23 May 2001. Before rushing to buy a new business vehicle, you need to review the impact on lease versus hire purchase or other means of funding. Note that you will probably have a GST liability (1/11) on sale or trade in of an existing vehicle.
Effective finance for businesses involves consideration of the cash flow position after allowing for the timing of GST credits and income tax savings. What suits a business registered for GST accruals will not necessarily suit an entity registered for GST receipts basis of accounting. Call our office for advice re tax effective financing.
This is an area complicated by changes since introduction on 19 September 1985; and recently in the May 2006 Federal Budget some basic but important warnings :
 | Capital gains emerges on disposal of certain assets; in the case of property this is on exchange of contracts, not settlement. |
| The settlement date may trigger a CGT liability for a deceased estate where the home is sold more than 24 months after death. |
| Share Traders are not subject to capital gains tax on "stock", but they must include in income at 30 June a value for "stock of shares on hand." Tax may be saved in determining this value per the legal options. |
| Assets held for at least 12 months - 50 % discount is available for individuals, partners and possibly trusts, but not companies. Avoid holding appreciating assets in companies without professional advice. |
| The tax rate for net taxable capital gains will be that applicable to the entity deriving the gain; for an individual this will be their personal "marginal tax rate"; for a company this will be the tax rate for the year in which it is derived. |
| Indexation was available until 30 September 1999, but you may need to compare the two different methods to minimise your capital gain, if the asset was acquired prior to that date. |
| Capital losses may only be offset against capital gains; otherwise they are carried forward. |
| Business Active Assets - if a small business is involved, a further 50 % discount may apply to the gain on active assets."There a conditions for eligibility including a maximum $ 5 million small business asset test. Federal Budget Change : increase to $ 6 million from 1 July 2006. Eligibility requirements eased by replacing "controlling individual test" with a "significant individual" test. Seek advice from our Firm or a Tax Lawyer ! |
| Retirement concessions may be available re capital gains on disposals. |
| Deferrals - there may be roll-over relief in certain situations, including where a replacement asset is acquired within a certain period. |
| Contracts for sale should be drawn up having regard to all imposts including stamp duty, GST and CGT. |
Before disposing of an asset, especially if a business is involved, please call for advice.
Depreciation (or decline in asset value) is a deduction which relates to the deterioration or obsolescence of plant and equipment, computer software or motor vehicles. The rules for calculation of the depreciation deduction have changed over the years but are complicated for the period on or after 21 September 1999.
STS Depreciation
Small businesses who have adopted the "Simplified Tax System"( STS) are in the minority, mainly due to the complexity of adjusting from accruals to receipts basis. One of the benefits for adopting STS is the ability to write off equipment costing less than $ 1000 instead of depreciating; another is the application of a rate of 30 % reduced balance to equipment including cars. A flat 15 % deduction is allowed on the GST exclusive cost of additions during the year.
Non-STS Depreciation
If not eligible for STS, the rate of depreciation for cars is only 18.75 % due to the increase in effective life per the Tables.
Generally, for Non-STS taxpayers, decline in asset value or depreciation is based upon the effective life of the item. However, if an item costs less than $ 1000 "pooling"is available which attracts a deduction of 18.75 % in the first year, then 37.5 % thereafter. This is attractive for landlords who otherwise may only be entitled to claim 10 to 15 % per annum, depending on the effective life of the item.
The Taxation Office have released new useful life tables for rental properties which provide guidance as to their classification of items subject to Division 43 depreciation or Division 40 building write offs. The Tables apply as from 1 July 2004.
NOTE Budget 9 May 2006 CHANGES : From 10 May 2006, non-sts depreciation will increase. The loading for diminishing value method will increase from that date from 150 % to 200 % .
Archive of Tax Treatment of Depreciation in prior Tax Years :
| Entity Type | Tax Year ended 30 June | ||
| 2000 | 2001 | 2002 | |
| Small Businesses (annual turnover less than $ 1 mill) no STS elections | |||
| Immediate w/off for assets less than $ 300 ? | Yes | Yes | No |
| Immediate w/off for assets less than $ 1000 | No | No | No |
| Accelerated Rates IT 2685 til 31 Dec 2000 then TR 2000/18 to 1 Jan 2001 | Yes | Yes but based upon effective life | No , unless acquired pre 21 Sept 99 |
| Entity Type | Tax Year ended 30 June | ||
| 2000 | 2001 | 2002 | |
| Small Businesses
(annual turnover less than $ 1 mill) Simplified Tax System election |
|||
| Immediate w/off assets less than $ 1000 | No-see above re $ 300 | No | Yes |
| Pooling of assets greater than $ 1,000, deprec rate 30 % per year if life is < 25 yrs otherwise 5 % | No | No | Yes- 15 % first year regardless of days held |
| Accelerated Rates IT 2685 til 31 Dec 2000 then TR 2000/18 to 1 Jan 2001 | Yes | Yes but based upon effective life | No , unless acquired pre 21 Sept 99 |
| Entity Type | Tax Year ended 30 June | ||
| 2000 | 2001 | 2002 | |
| Large Businesses (annual turnover $ 1 mill or more) | |||
| Immediate w/off for assets less than $ 300 ? | Yes | No | No |
| Immediate w/off for assets less than $ 1000 | No | No | No |
| Pooling of assets costing less than $ 1,000, deprec rate 37.5 DV % per full year or 18.75 % for items added to pool during year | No | Yes | Yes |
| Accelerated Rates IT 2685 til 20 Sept 1999 | Yes to 21/9/99 | No , unless acquired pre 21 Sept 99 | No , unless acquired pre 21 Sept 99 |
| Depreciation based upon effective life | Yes 21/9/99 to 30/6/00 | IT 2685 to 31 Dec 00 then TR 2000/18 | TR 2000/18 |
If you have borrowed from your Company or Trust you may have a fringe benefits tax problem if there is no commercial loan agreement specifying a benchmark rate of interest and minimum (prescribed by tax law) repayment period, or a deemed unfranked distribution problem. Please call for advice.
The legislation was reintroduced before the Federal Election, but proposals were made to provide a "carve out" or concession for small business but had not been legislated. Before assuming that funds are debt; not equity, seek advice here !
Note:
| Credit loans may be used as a buffer for reimbursement of otherwise taxable fringe benefits. |
| Credit loans may bear a commercial rate of interest. Interest is not subject to payroll tax, but : |
| The impact on shareholder quarterly or annual PAYG should be reviewed and |
| Liability to Superannuation surcharge should be reviewed prior to declaration (and payment by crediting loan account or otherwise) of dividend. |
If self employed you may be entitled to a deduction for $ up to $ 5000 or $ 5000 plus 75 % of the excess. Check Federal Budget Changes from 1 July 2007.
If an employee you may be able to salary sacrifice with your employer to save tax, but check your superannuation surcharge liability first.
If an employer, have you paid your minimum contribution for all eligible employees ? If you have not you may be liable for (self assessed) non-deductible penalties.
It is tax deductible (see current maximums) in the year ended that it is paid, but SGC compliance must be by 28 July succeeding the year end.
Note Federal Budget 9 May 2006 proposal: From 1 July 2007 RBLS to be abolished and retirees over 60 years of age will not be taxed on most superannuation payouts. This will provide major relief to those currently lucky to have "excess benefits" in their Fund prior to retirement.
A per annum cap of $ 150,000 on after tax or undeducted contributions per annum has been proposed, subject to a three year averaging system from Budget night for large lump payments. Seek advice from this Firm about tax; and to a financial planner prior to deciding. -It is an investment decision that may provide tax sheltering until retirement !
Legislation targets persons or entities whose income is mainly (more than 50 %) a reward from the efforts or skills of an individual.
2 . Results Test - If It is PSE, Is It a Personal Services Business ?
The Anti-avoidance measures do not apply if the Results Tests is satisfied. This occurs when having regard to the custom or practice in the relevant industry:
• the work is for producing a result;
• the individual or personal services entity supplies the equipment or tools, if
any, that are necessary to do the work; and
• the individual or personal services entity is liable for the cost of
rectifying any defective work.
The need to carry tools or bear entrepreneurial risk are in contrast to the ‘employee-like’ contractor.
If the Results tests may not be satisfied, then go to point 3 below.
3. Is the Bulk (80% or more) of income from one source?
If 80 % or more of your personal services income is from one client (including associates of that client), you are caught by measures that may deny you tax deductions and require you to effect additional PAYG withholdings, UNLESS YOU OBTAIN A PERSONAL SERVICES BUSINESS DETERMINATION.
Where an individual receives less than 80% of their personal services income from one source, they may self-assess the existence of a personal services business. The entity needs only to satisfy one of the following tests to ensure the APSI rules will not apply. The tests are:
• the unrelated clients test;
• the employment test; or
• the business premises test.
Special concessions will apply to entities that derive more than 80% of their income from a single source due to ‘unusual circumstances’.
If not a Business - Limitations re claiming income tax deductions
Any entity or individual not carrying on a personal services business, but deriving personal services income, will
be subject to limitations when claiming certain work-related deductions. In
addition you are subject to PAYG withholding obligations relating to the
"attributed personal services income" each BAS period.
For example :
| rent or mortgage interest |
| payments to associated persons (eg spouse) unless they generate income) and |
| home to work travel (unless the vehicle is required to transport heavy equipment). |
Also :
| superannuation is limited to contributions for the individual deriving the principal income. |
| fringe benefits are restricted to one car for the individual deriving the principal income |
| limited deductions for the interposed entity. |
NOTES :
2001 Transitional Concessions -URGENT
If caught and not able to obtain a business determination, you must :
| comply with the PAYG obligations in your next BAS re attributed personal services income (there are multi step calculations !) |
| include a catch up payment in the fourth BAS (June) of the amount of any PAYG which should have been remitted in earlier periods. |
| Withhold PAYG on the correct basis from the commencement of the 2001-02 income year. |
Otherwise you will be liable for General Interest Charges.
In Fact Sheet 703 released by Treasury, tests to determine whether an entity is a business or not include factors such as availability to the public, assumption of risk, number of employees, and inclusion of income earning structure or assets.
An example of an exception would be a truck driver who is employed by his or her entity, which owns a truck; even though the entity may be wholly engaged by another Company (payer).
Special transitional provisions also applied to certain contractors who were previously subject to the Prescribed Payments System (PPS) (now
the new Pay-As-You-Go (PAYG) regime).
Further information on the personal services income provisions can be obtained through one of the following sources of information:
· Alienation of personal services income: Overview — factsheet.
· Personal services income — self-assessment guide.
· Personal services income — instructions for completing the application for personal services business determination.
IT 2503 -Previous Pronouncements -Professional Practice Companies
The previous requirement of professional practice entities to attempt to break-even after payment of salaries and superannuation still apply separately to the alienation of personal services measures. For example if a company derives a taxable income in one year it should pay a franked dividend the next.
The measures became law on 1 July 2000. All contractor clients or entities deriving personal services income regardless of whether 80 % is derived from one source, or whether they consider they are carrying on a business of personal services, should review their position and seek advice as to what proactive steps are feasible in their circumstances. - If the "Results Test"is not satisfied, are you able to justify requesting a determination that you are carrying on a business under one of the other tests ?
Australian Taxation Office External Reference
Special Arrangements Regarding the Alienation Legislation
Tax Office provided transitional arrangements for the 2000-01 income year to assist taxpayers who are affected by the new Alienation of Personal Services Income legislation. These arrangements included concessions on the application of penalty and the General Interest Charge -issued on 4 April 2001 for details:
http://law.ato.gov.au/atolaw/browse.htm?toc=04:RUL:Taxation:Draft
Basic warnings :
| Ownership of Properties by Companies or Trusts - care here as Land Tax may be incurred without any tax-free threshold. Avoid it ! |
| Ownership of Properties by Companies or Trusts - care here as the 50 % discount may be denied. Avoid it ! |
| Negative gearing may not assist in avoiding or reducing the superannuation surcharge. |
| Do not salary sacrifice loan repayments on a rental property as you may lose your deduction entitlement. |
| Joint ownership of a property will usually determine the profit or loss share. |
| Prepayment of interest -care to check whether it is allowable |
| Rental to associates or relatives should be at market value. |
| See Checklist for some items claimable. |
| Sample Model We can provide you with proactive advice relating to the taxation concessions applying to your acquisition and finance. This sample model is a rough guide; new models have been designed; updated for local land tax and stamp duty. |
| Initial Repairs - Be aware of the difference between "repairs" and capital expenditure. If you need to improve the property so that it may be let or derived increased income, chances are that it will not generate an immediate tax deduction. It may be eligible for depreciation (rates vary depending on item and date acquired) or building write off. (commonly 2.5 %) |
| Principal & Interest Repayments - you are entitled to a deduction for interest, not principal repayment. This is why it is popular to finance a high proportion of the purhase price with interest only funds. (commonly for three to five years) |
| Solicitor Settlement Statement - Please provide our firm with a copy of your solicitors letter and statement as it may contain deductions for adjustment items. |
| Selling a property in NSW now must involve consideration of NSW Vendor duty, GST, and CGT. |
Knowledge of changes in tax laws and your business situation behove you to take actions that are appropriate and legally permissible for your business.
These may relate to a proposed change in company tax rates or a change in the accounting method necessary due to expansion of your business.
Please refer to our Tax Planning Checklist
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