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The Australian Taxation Office has hit out at cash-only businesses, citing internal research that proves customers find such firms to be "inconvenient" and potentially dishonest.

Research conducted by Colmar Brunton, commissioned by the ATO, found that almost half of Australian consumers are inconvenienced by businesses that do not accept electronic payments.

Even more (around two-thirds) suggested businesses that do rely solely on cash are likely to be dodging their tax liabilities – regardless of whether or not this is true – suggesting that reputational damage can also arise in addition to lost sales.

"The real cost of cash to business seems to be twofold. Consumers are twice as likely to associate 'cash only' as negative rather than positive. While the majority of businesses are run by honest Australians who want to do the right thing, being cash-only may have a direct impact on reputation," said Matthew Bambrick, the ATO's assistant commissioner.

"Secondly, time is money for business. Tap-and-go payments cost an average of nine cents less than cash payments, and are nearly twice as fast. This research suggests cash-only businesses take a hit to their bottom line by not offering electronic payment."

Mr Bambrick added: "While cash is legal tender and we know that some businesses may be used to dealing only in cash, this research suggests that business owners may want to think about the benefits electronic payments can bring and consider what might work best for them."

Surprisingly, the research found that of the businesses polled that are cash-only, 42 per cent have "never" investigated the use of electronic payments, while 20 per cent cited the cost of electronic payments as their reason for maintaining cash-only payments.

However, the ATO did not include a sample size for the poll, nor did it reveal the full research. A request has been made for both to be provided.

Last month, the tax office released separate research that suggested only one in five shoppers continue to use cash to make purchases.

It comes as the government is attempting to crack down on tax dodgers and the black economy, including a proposal to limit all cash transactions to a maximum of $10,000.

 

 

 A focus on work-related clothing and laundry expenses this Tax Time will see the ATO "more closely examine taxpayers whose clothing claims don't suit them".

 

Do you need to wear a uniform to work? Or perhaps you need to wear industry specific clothing? 

You may be eligible to claim a deduction for work clothing or a uniform, but in order for your claim to be eligible it must fall into one of the following categories for which there are specific tax rulings.  These are: 

  1. a compulsory work uniform (for instance, clothing that identifies you as an employee of an organisation with a strictly enforced policy such as a flight attendant),
  2. a non-compulsory work uniform (a uniform that has an AusIndustry registered logo on the top, skirt or slacks and one that may not be worn as everyday clothing - which excludes black slacks or skirts),
  3. clothing specific to your occupation (such as a chef's checked pants), or
  4. protective clothing (like non-slip shoes for a nurse or steel capped boots for a labourer).   Items such as shoes, socks and stockings can never form part of a non-compulsory work uniform, and neither can a single item such as a jumper.

 According to Assistant Commissioner Kath Anderson, around 6 million people claimed work-related clothing and laundry expenses last year, with total claims adding up to nearly $1.8 billion.

 Commissioner Anderson went on to say:  "While many of these claims will be legitimate, we don't think that half of all taxpayers would have been required to wear uniforms, protective clothing, or occupation-specific clothing."  With clothing claims up nearly 20% over the last five years, the ATO believes a lot of taxpayers are either making mistakes or deliberately over-claiming.  Common mistakes include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

"Around a quarter of all clothing and laundry claims were exactly $150, which is the threshold that requires taxpayers to keep detailed records.  We are concerned that some taxpayers think they are entitled to claim $150 as a 'standard deduction' or a 'safe amount', even if they don't meet the clothing and laundry requirements," Ms Anderson said. 

 "Just to be clear, the $150 limit is there to reduce the record-keeping burden, but it is not an automatic entitlement for everyone.  While you don't need written evidence for claims under $150, you must have spent the money, it must have been for uniform, protective or occupation-specific clothing that you were required to wear to earn your income, and you must be able to show us how you calculated your claim."

 

Ms Anderson said the ATO also has conventional clothing in its sights this year. "Many taxpayers do wear uniforms, occupation-specific or protective clothing and have legitimate claims.  However, far too many are claiming for normal clothing, such as a suit or black pants.  Some people think they can claim normal clothes because their boss told them to wear a certain colour, or items from the latest fashion clothing line.  Others think they can claim normal clothes because they bought them just to wear to work.  Unfortunately they are all wrong – you can't claim a deduction for normal clothing, even if your employer requires you to wear it, or you only wear it to work". 

Tax Health

What is Tax Planning?

Tax planning is a process we use toward the end of the financial year  to structure our clients business and personal  affairs to legally reduce tax liability and make savings. This is achieved by a review of the past 11 months of trading or earnings and by using deductions, exemptions and where practicable, using structures to reduce taxable income.

According to the Australian Taxation Office we all have the right to arrange our financial affairs to keep tax to a minimum – this is often referred to as tax planning, or tax-effective investing.

"Tax planning is legitimate when you do it within the letter and the spirit of the law." ATO

 

Who Can Benefit From Tax Planning?

It's simple - All taxpayers can benefit from tax planning and the savings that are created. search shows that 95% of taxpayers are paying more tax than they are legally required to.

Approximately 50% of Australian taxpayers use legal tax planning strategies to minimise their tax with the most popular strategies being negative gearing of residential properties (2.1 million taxpayers), and salary sacrificing super contributions (4 million taxpayers).

Need some end of financial year help?  Contact us.

How does the ATO treat Uber, Airbnb style services? What you need to know

 

Uber is calling for drivers, Airbnb is seeking more hosts but what are the implications of becoming part of the sharing economy? 

With the ATO increasingly relying on data matching and other online resources to target untaxed income and the cash economy, it is important to understand the tax implications of your arrangement.

 

The basics of tax apply regardless of how you earn money. That is, even though you may be earning income from different sources or using different platforms to generate income, the fundamental tax issues remain the same. You don't have to be carrying on a business to pay tax on income you earn.

 

And, given that so many of these services are through sharing platforms, the Australian Tax Office (ATO) has the capacity to data match money flowing through to financial institutions specifically from these platforms.

 

'Sharing' a room or an entire house

Sharing a room or your house through services such as Airbnb can be a great way to earn income from an existing asset. The tax treatment of what you earn from these services is the same as any other residential rental property arrangement. This means you must include the rental income in your income tax return. For example, if a husband and wife jointly own a property that they rent out through a sharing service, whatever they earn needs to be declared on their income tax returns in the same proportion as the ownership of the house in the year they earned the income.

Hosts can also claim tax deductions for expenses associated to the rental, such as the interest on your home loan, professional cleaning, fees charged by the facilitator, council rates, insurance, etc. But, these deductions need to be in proportion to how much and how long you rent your home out. For example, if you rent your home for two months of the financial year, then you can only claim up to 1/6th of expenses such as interest on your home loan as a deduction. This would need to be further reduced if you only rented out a specific portion of the home.   GST does not generally apply to residential rental income.

Be aware that renting out your home may have a direct impact on your tax-free main residence exemption for capital gains tax (CGT) purposes. In general, your home is exempt from CGT when you sell it. However, if you use your home to earn assessable income, then you might only qualify for a partial exemption on the sale unless special concessions apply. If you are renting out part of your home while still living in the property, then it is unlikely that any gain you make on your home will be fully CGT-free. You might also need to obtain a valuation of your home at the time it was first used to generate rental income.

 

Hosting for investors

A number of investors are generating income from renting residential investment properties exclusively on sharing services rather than traditional longer-term rental arrangements – rental income can be higher for short-term accommodation and the host has the capacity to increase prices easily for peak periods. Just a quick look at properties available around the world on sharing sites shows how quickly this style of arrangement has attracted investors, particularly where the property is located in high demand tourist areas.

But what are the tax implications if you own one or multiple investment properties and rent them on a sharing service? Firstly, it's important to get good advice as this can be a complex area and being on the wrong side of the tax law can have significant implications. For example, if the ATO deems you to be providing commercial residential accommodation, they will treat your activities in the same way as hotels and motels meaning that the rent could trigger a GST liability for you (although you might be able to claim back some GST credits on expenses you pay). Broadly, accommodation falling into this category would have multiple occupancies such as a block of apartments, central management of the properties, and provide services to the guests beyond the accommodation such as breakfast or room servicing.

Finally, check if there are council restrictions, and ensure that you have the right insurance in place and if in doubt be sure to Contact us  before you start hosting or driving.  

Will your business be audited?

How the ATO identifies audit targets

The ATO is very upfront when it comes to their compliance activity. Every year they publish small business benchmarks that outline what a typical business 'looks like' in different industries. If your business falls outside of those benchmarks, the ATO is likely to take a closer look at why that is.

 

Falling outside of the benchmarks might not indicate a tax related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry. If your business does fall outside of the benchmark however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment.

 

The ATO look at:

·         cost of sales to turnover (excluding labour)

·         total expenses to turnover

·         rent to turnover

·         labour to turnover

·         motor vehicle expenses to turnover

·         non-capital purchases to total sales, and

·         GST-free sales to total sales.

 

For example, for a veterinary practice with a turnover between $300,001 and $800,00, the cost of sales to turnover ratio is expected to be between 25% and 29% (averaging at 27%), and average total expenses are 78%. The cost of labour to turnover ratio is between 21% and 29% and rent is between 5% and 8%.

 

The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.

 

If you have any concerns about your record keeping, please contact us for advice or consult our website under the Client Resources section and Compliance.

 

Given the state of the property market in Australia these days, a not-uncommon situation can arise where a residential property owner seeks to demolish and subdivide the block containing the family home and build residential units.T implications of subdividing and building on the family property.

If a taxpayer has the available land of course, this can be a solid strategy. However it can cause headaches from a tax perspective - and in some cases the ability to access the main residence exemption and even the CGT discount can be lost.

Divvying up the backyard
A question that arises every now and then concerns the effects on the CGT main residence exemption where the owner decides to subdivide the land containing their principal place of residence, in some cases demolishing the existing home, and build residential units.

The scenarios that are typically raised involve one of the following choices:

  • demolish the main residence, subdivide the land, build two home units, sell one and live in the other
  • subdivide the land, build a home unit on the newly created previously vacant portion, and sell the new unit (with the original residence staying intact)
  • subdivide the land and sell the non-main residence block (with original dwelling staying intact on the remaining block).
  • When dealing with these situations, the following pertinent tax questions may need consideration:

    1. Whether demolition of the original main residence would trigger a capital gain or loss (if any)?
    2. What are the CGT implications of subdividing the property?
    3. Is the sale of the home unit or vacant land a "mere realisation" or is there is a profit-making activity conducted?
    4. How would the original dwelling/unit, retained and lived in by the taxpayer, be treated for CGT purposes?

    Note that there may be some GST implications that are not dealt with in detail here. Suffice to say that any venture undertaken by home owners in building units for the purposes of sale would, from the ATO's viewpoint, most likely constitute an "enterprise" and in some cases, depending on the circumstances, may necessitate an ABN and registration for GST.

    For a consultation about building on the family property and the possible tax implications contact us or  Book an Appointment.

     

    Self Preparers Deadline 31 October

    With the Self Preparers deadline of 31 October fast approaching many of us will spend the coming weekend sorting out our taxes.  And it is not just getting the figures right that we have to worry about.

    Every year the Tax Office warns the community to be aware of fraudsters as they target people lodging their income tax returns by the 31 October deadline.

    Statistics reveal that in past years, the number of scams reported to the ATO more than doubled in just one month from 2,465 in September to 6,593 in October, which means that now is the time to beware.

    The ATO's Chief Technology Officer stated that: "Scammers are out to get taxpayers hurrying to lodge their return by the deadline." People should be on the look-out for tax scams and report them to us directly."

    The  Tax Office is also seeing more targeted scams sent to taxpayers where the perpetrators make the email more convincing by using the latest ATO website imagery and the names and signatures of real ATO staff.

    "People should also be aware of a nasty phone scam where taxpayers are threatened with arrest if they do not pay a fake tax debt over the phone."

    If people believe they have received a telephone, email or SMS scam they should contact the ATO on 1800 060 062 (8.00am–6.00pm, Monday to Friday).

    "When the public reports a scam to the ATO we work with our local and international partner agencies to shut down the scam website and pursue the scammers directly," said Mr Heather.

    From time-to-time the ATO will send emails, SMS messages or official social media updates advising of new services. The ATO's messages will never request personal or financial information by SMS or email.

    To increase community awareness of scams the ATO launched a video campaign on www.ato.gov.au/identitycrime with helpful tips for taxpayer to protect their personal information.

    If you think you may have been the target of a scam get in touch with the Tax Office as soon as possible. And, if you would like to free your time up this year you can always contact us by next Tuesday for a lodgement extension past October 31.

    #clarkemcewan #selfpreparers #lodgement deadline #taxreturns

     

    Tax Advice for Doctors

     

    As a medical professional in Australia you generally are classified as a high-income earner and as such, the rate of tax applied is also high with almost half of earned income going to tax.

    For doctors who are also in business this can be extremely frustrating because you are not eligible for the 30% tax rate on 'personal services', which leaves you with a marginal tax rate of  up to 46.5%.

    Our specialist accountants and tax advisors at Clarke McEwan can outline for you some of the many options  from which to choose to make sure your income is protected through legal and easy to manage methods.  

    There are some easy and effective ways to reduce tax if you are a Medical Practitioner or a Medical Practice business owner. A consultation with us can help you determine which method is the right one for your lifestyle, needs, employment or business.

    To give an idea of some of these are methods, we've compiled a list of the more common yet often overlooked allowable tax minimization strategies geared specifically to medical practitioners.

    Specialised tax deductions

    Most practitioners will know that allowable deductions are the expenses incurred in producing income. In Australia once these allowable deductions have been applied to assessable income, what remains is your 'taxable income'.  Basically, if the cost was paid in the medical practice of your profession, you can make a tax deduction claim by maximising your "allowable deductions". Some of these deductions may include:

    • Medical supplies, equipment, medicines and materials
    • Education – as long as it is relevant and/or related to your current employment or income
    • Professional subscriptions, accreditations, memberships and literature
    • Computer and office equipment
    • Professional Indemnity Insurance.

    At Clarke McEwan we have tax bookkeepers who can assist you to maintain an orderly record keeping system either electronically or manually that clearly indicates your expenses for the year. This will make reviewing your expenses easier, reducing accounting fees and eliminating those ambiguous claims which could lead to an audit by the ATO.   For further information, refer to our post about outsourcing your bookkeeping.

    Transitioning to retirement | Early retirement

    Doctors over the age of 60 can  consider beginning the process of transitioning into retirement in the form of a pension that uses money from your super fund.

    Specialised business structures

    A legitimate business structures in the medical field is legal as long as you thoroughly follow the rules, regulations and guidelines.  Advice from your accountant or business adviser is critical to pass an audit from the ATO. 

     If you are thinking of undertaking one of these business structures contact Clarke McEwan.  We specialise in the medical sector and understand its unique landscape.

    Use of a Service trust

    This arrangement allows doctors to distribute some of their income to family members who work within the practice. For example, a partner who maintains the books or manages administration within the business. As they have a lower marginal tax rate, they can be paid a moderate salary.

    Use of an Investment trust

    This business structure is set up so that medical professionals don't have to buy their assets in their own name. They can also distribute income and capital to beneficiaries such as a partner on a low or income. Beneficiaries can also be companies, of which operate to store the income generated from the medical practitioner's. However this income excludes personal services income earned specifically by the doctor.

    To make sure that you have the best structure in place to legally minimise tax and grow your wealth, we highly recommend you get appropriate advice before putting them in place.  Again, proper consultation and prudent counsel will ensure your structure is completely legal.  Without advice, these set ups can leave your business vulnerable, or to appear out of line with the Australian Tax Office's legalities. 

     

    Family trusts could be eligible for 'mind-boggling' tax cut

    The Australian Tax Office has tweaked its view about whether companies linked to family trusts are eligible for tax relief, but industry veterans say the situation remains "utterly confused" and "mind-boggling".

    A new statement on the ATO website says companies will be eligible for the lower 27.5 per cent rate afforded under the Enterprise Tax Plan even if their activities are "relatively passive".

    The word "relatively" has been added since similar advice was provided in a footnote to a draft ruling earlier this year.

    The footnote caused a stir among tax practitioners because it seemed to expand the range of businesses eligible for cuts to include companies holding passive investments, such as so-called bucket companies that receive income from discretionary trusts.

    Revenue Minister Kelly O'Dwyer has been eager to quash the idea that wealthy families might be beneficiaries of the government's small business tax cuts, which were "not meant to apply to passive investment companies".

    Tax Institute senior tax counsel Bob Deutsch said the ATO's latest statement did nothing to clear up confusion about eligibility.

    "The position with all this is, in my view, utterly confused and will lead to countless errors being made by tax practitioners," he said.

    "The bar appears to have been set relatively low in satisfying the requirement for carrying on a business in this context. Concrete examples would be required to give the community a better understanding of what is meant by 'relatively passive'."

    Arnold Bloch Leibler tax practice chief Mark Leibler said it was obvious the tax cuts were only ever meant to apply to active trading businesses.

    "I have never seen a standoff like this before between the Tax Office and Treasury and the responsible ministers," he said.

    "I find this mind-boggling. What the government contemplated was people who are actually engaged in real, active business activities...not bucket companies sitting around and deriving passive income."

    At present, companies with turnover of up to $25 million are eligible for the 27.5 per cent rate. The Coalition plan is for companies of all sizes to progressively qualify for the lower rate, which will then be dropped to 25 per cent.

    Australian Council of Social Services senior adviser Peter Davidson said most people had the impression the tax cuts were going to businesses whose owners struggle on low incomes.

    "The reality is that most of those businesses don't use companies or trusts," he said.

    "Those that do are more likely to be professional such as doctors and lawyers than shopkeepers or personal trainers. And now the tax office has raised the prospect that wealthy people using bucket companies to warehouse their investment income could also benefit."

    The ATO footnote said: "Generally where a company is established or maintained to make profit or gain for the shareholders it is likely to be carrying on business...this is so even if the company holds passive investments and its activities consist of receiving rents or returns on its investments and distributing them to shareholders."

    Mr Davidson said the government would probably need to amend its legislation to prevent passive investors from taking advantage of the lower rate.

    But the policy presented even bigger opportunities for tax planning by the wealthy and the only way to close the loopholes was to tax trusts at top marginal rates, he added.

    "A common tax avoidance structure combines a trust with a private company beneficiary," he said.

    "In 2015, small private companies received $17 billion in distributions from trusts."

    The tax cuts also have consequences for franking credits.

    Once a company moves on to the 27.5 per cent rate, dividends will be franked at the lower rate even if tax was paid at 30 per cent.

    According to tax advisers BDO, this means dividends paid to shareholders on the top marginal rate will end up being taxed at 51 per cent, with the government to pocket the other 2 per cent.

    Mr Leibler said the government had overlooked another element that would ultimately prove detrimental to shareholders.

    "Unfortunately, what the government has done through its legislation is to provide that while a company is categorised as carrying on a small business and is being taxed at 27.5 per cent, that company can only frank to 27.5 per cent," he said.

    "And that applies not only to reserves previously taxed in the hands of the company at 27.5 per cent but also distributions of all or any of the company's reserves that have previously been taxed at 30 per cent."

     
     

    Simpler BAS is coming your way

    Good news for small business owners is that from 1 July 2017 the ATO is reducing the amount of information needed for the business activity statement (BAS) to simplify your GST reporting.

    From 1 July 2017, Simpler BAS will be the default GST reporting method for small businesses with a GST turnover of less than $10 million. Simpler BAS is a partnership between the ATO, software developers, tax professionals and small business associations.

    Eligible businesses will only need to report their (1) Total sales (2) GST on sales and (3) GST on purchases.

    This will not change the reporting cycle, record keeping requirements, or how you report other taxes on the BAS.

    Simpler BAS will make it easier to classify transactions and lodge activity statements and reduce the time small business owners need to spend on paperwork and form-filling without  making changes that would impact the final GST amount. 

    Simpler BAS will not affect how other taxes are reported such as your PAYG income tax instalments or PAYG tax withheld, or how often you submit your BAS.

    You still need to keep records, such as invoices, as proof of any claims you make in your BAS and income tax return lodgements.

    What's next?

    The ATO will be automatically transitioning eligible small business' GST reporting methods to Simpler BAS from 1 July 2017. To help the transition, the ATO will email Clarke McEwan to advise whether clients are affected and how they can benefit from Simpler BAS.

    Small business owners can choose whether to change their GST bookkeeping software settings to reduce the number of GST tax classification codes.

    Before making any adjustments please talk to us at Clarke McEwan about whether reduced or detailed GST tax code settings are best for your business.


    Contact Clarke McEwan