Tax time: your business in the ATO’s sights

Around 3.8M small businesses, including 1.6M sole traders, in Australia

We employ around 5.5 million people and contribute $380bn to the economy. Small business is also in debt to the ATO to the tune of $15bn.

ATO looking closely at businessThis tax time, the ATO has stated they are looking closely at taxpayers:
  • setting up or changing to a company structure (See our free factsheet DIY Business Structures)
  • claiming motor vehicle expenses
  • who may not be correctly apportioning between personal and business use

There is a multitude of data-matching programs and benchmarks to catch out those attempting to rort the system. 

For wealthy groups and medium businesses, the focus is on structuring to avoid tax:

  • international risk - international profit shifting and corporate restructuring
  • inappropriate arrangements that seek to extract profits or capital without the right amount of tax being paid
  • high risk trust arrangements attempting to gain advantage beyond ordinary trust arrangements or tax planning associated with genuine business or family dealings.

If the ATO suspects there is a problem, you may be contacted to justify why decisions were made to structure your affairs or the affairs of your company in a particular way.

No tax deductions if you don't meet your tax obligations
From 1 July 2019, if taxpayers do not meet their PAYG withholding and reporting obligations, they will not be able to claim a tax deduction for payments: 

  • of salary, wages, commissions, bonuses or allowances to an employee;
  • of directors' fees;
  • to a religious practitioner;
  • under a labour hire arrangement; or
  • made for services where the supplier does not provide their ABN. 

The main exception is where you realise there is a mistake and voluntarily correct it before the ATO begins a review or audit. In these circumstances, a deduction may still be available if you voluntarily correct the problem but penalties may still apply for the failure to withhold the correct amount of tax. There is also an exception for situations where you make payments to a contractor but then later realise that they should have been paid as an employee, as long as the worker has provided an ABN. 

The Government has also proposed that from 1 July 2021, the ABNs of those required to lodge a tax return but have not done so will be cancelled, and from 1 July 2022, ABN holders will be required to confirm the accuracy of their Australian Business Register details each year. 

Recording payments to contractors

The taxable payments reporting system requires businesses in certain industries to record and report payments made to contractors to the ATO.

From 1 July 2019, security providers and investigation services, road freight transport, and computer system design and related services businesses will need to collect specific information in relation to payments made to contractors (individual payments and total for the year). These businesses will need to lodge an additional report to the ATO with this information. The first report will be due by 28 August 2020.

Businesses within the building and construction industry, cleaning, and courier services need to report payments to contractors in the year ending 30 June 2019 by 28 August 2019.

This reporting requirement is focussed on industries identified as active participants in the black economy, raising around $2.7bn per year in income and GST liabilities.

Let Collins Hume partner with you to achieve greater business and lifestyle success as your trusted advisers. Call us in Ballina or Byron Bay on 02 6686 3000.

New Superannuation Personal Liability Regime

Before you become a director

If you are about to become a company director, check for any unpaid or unreported PAYG withholding or SGC liabilities.

directorIf you become a company director and the company has outstanding PAYG withholding and SGC obligations, you will become personally liable for a penalty equal to these amounts (these are called director penalties).

As a new director, you have 30 days, starting on the day of your appointment, before you become liable to director penalties equal to both:

  • all of the company's unpaid PAYG withholding liabilities;
  • all unpaid SGC liabilities from 1 April 2012.

However, as a new director, you will not be liable to director penalties for amounts due before your appointment if, within 30 days starting on the date of your appointment, the company does one of the following:

  • pays their PAYG withholding and/or SGC debt in full
  • appoints an administrator under section 436A, 436B or 436C of the Corporations Act 2001
  • begins to be wound up (within the meaning of the Corporations Act 2001).

Even if you become a new director and you resign within the 30 day period, you will still be liable for the unpaid PAYG withholding and SGC liabilities of the company that were due before your appointment.

For PAYG withholding, you will also be liable for any unpaid liabilities for reporting periods that started while you were a director, except if you resigned before the first withholding event in that period.

For SGC, you will also be liable for any unpaid liabilities for reporting periods that started while you were a director, except if you resigned before the last day of the quarter.

Kevin and Ashley are directors of XYZ Pty Ltd (the company). During the January to March quarter of the 2018–19 income year, the company withheld tax from employees' wages but failed to pay the amounts withheld. When the company did not pay by the due date of 28 April 2019, Kevin and Ashley both became personally liable for a penalty amount equal to the unpaid amounts.

On 2 June 2019, Michael became a director of the company. To avoid incurring a director penalty, Michael had 30 days from the date of his appointment to cause the company to pay the amount, appoint a voluntary administrator or have the company put into liquidation.

If you have any concerns regarding your exposure to ATO liabilities, then please feel free to contact our office in Ballina or Byron Bay to discuss.

Let Collins Hume partner with you to achieve greater business and lifestyle success as your trusted advisers. Call us in Ballina or Byron Bay on 02 6686 3000.

Source ATO

Business structures

Setting up a business structure

If you are starting a business you will need to work out which type of business structure to use. 

We explain the benefits and disadvantages of different types of business structures.

Sole trader
A sole trader is the simplest business structure and it is inexpensive to set up because there are few legal and tax formalities.

If you operate as a sole trader, you're responsible for all aspects of the business, including any debts the business incurs and there are no limits on this liability.

You do not need to register the business with ASIC unless you are conducting business under a name other than your personal name. See registering a business name for information on how to register.

A partnership is two or more people or entities who do business as partners or receive income jointly.

In a partnership, control or management of the business is shared. A partnership is not a separate legal entity so you and your partners are liable for all debts and obligations of the business. A formal partnership agreement is common, but not essential.

The information you need to provide when registering a business name depends on who holds that name. 

Joint venture
A joint venture is two or more people or entities who join to do business together for a particular purpose, usually a single project, rather than as an ongoing business. A joint venture will often have a joint venture agreement. 

A trust is an obligation imposed on a person, the trustee, to hold property or assets (e.g. business assets) for the benefit of others (known as beneficiaries).

Setting up a trust requires a formal deed, as well as the completion of yearly administrative tasks. If you operate as a trust, the trustee is responsible for its operation. Using a trust structure for your business may have tax advantages.

A trustee can be a company registered with ASIC. If the trust does business under a name other than its own, that name must be registered as a business name.

A company is a separate legal entity. This means it has the same rights as a natural person and can incur debt, sue and be sued. The company's owners (called 'members' or 'shareholders') can limit their personal liability and are generally not liable for company debts (unless they give personal guarantees to borrow money). Companies are taxed at a different rate.

A company is a complex business structure, with higher set-up and administrative costs. Companies must be registered with ASIC and company officeholders have legal obligations under the Corporations Act.

You need to register the company with ASIC. Company officers must comply with other legal obligations under the Corporations Act. 

Finally, many risks apply to doing-it-yourself with business names. Can you really use the name you've registered, for example? Find out more about what's involved and your potential exposure by calling us in Ballina or Byron Bay on 02 6686 3000 or get our DIY Business Structures factsheet before you take action.

Source ASIC

Tax time: deductions in the ATO’s sights

Work related deductions for you

Last financial year, over 8.8 million taxpayers claimed $21.98 billion in deductions for work related expenses. 

accountingIt's an area under intense review by the ATO. If you claim work-related deductions, it's important to ensure that you are able to substantiate any claim you make. 

To claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business, in most cases you need a record proving you incurred the expense, and the expense has to be directly related to how you earn your income – that is, the expense is directly (not sort of) related to your work. 

This also means ensuring that you only claim the work-related portion of items you use personally, such as mobile phones or internet services.

When you don't have to keep records 
If your claim for work related deductions is below $300 you do not have to keep a record of the expense, such as a receipt. Work related clothing has a $150 record keeping limit. However, the ATO is concerned that taxpayers are 'automatically' claiming these deductions without incurring any expenses because of a belief that you don't have to support the claim. If you have claimed an amount up to the record keeping threshold, you may find that the ATO will ask you to explain how you came to that amount. If you don't have diary entries or a good explanation, your claim might be denied.

Working from home
If you don't have a dedicated work area but you do some work on the couch or at the dining room table, you can claim some of your expenses like the work-related portion of your phone and internet expenses and the decline in value of your computer. If you have a dedicated work area, there are a few more expenses you can claim including some of the running costs of your home such as a portion of your electricity expenses and the decline in value of office equipment.

If your home is your principal place of business, you might be able to claim a range of expenses related to the portion of your home set aside for your business. What the ATO is looking for is an identifiable area of the home used for business.

Ensure any claims are in proportion to the work related use. You can't, for example, claim all of your internet expenses because you do a bit of work from home in the evenings and need the internet.

Work related clothing
In general, you cannot claim the cost of your work clothes or dry cleaning expenses unless the clothes are occupation specific, such as chefs whites or a uniform with a logo, or protective gear because your workplace has hazards (jeans don't count as protective wear). 

Just because you have to wear a suit to work does not make it deductible. 

The ATO has a special taskforce dealing specifically with cryptocurrency. Cryptocurrency is considered an asset for tax purposes, rather than a form of currency. This means that gains or losses made on disposal or exchange of cryptocurrency will often be captured under the tax system – regardless of whether you're switching between currencies or 'cashing out' your asset into AUD.

You will need to keep records of all of your trades in order to work out whether you've made a taxable gain or loss each time you dispose of an asset. 

Capital gains tax can be complex and this is an area that the ATO is looking very closely at, particularly where taxpayers are claiming large losses. Also, some disposals can be taxed as ordinary income which means the CGT discount cannot apply and capital losses cannot be applied against the gains that have been made.

Rental property deductions
In the 2017-18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions and the ATO believes that is too much - one in ten is estimated to contain errors. 

What you can claim for your rental property has been significantly curbed. For example, you can no longer claim deductions for the cost of travelling to inspect the property. And, you can no longer claim depreciation deductions for second hand plant and equipment. Previously, you could for example, buy a rental property from someone else and then claim depreciation on the assets already in the property such as the kitchen appliances and carpet. From 1 July 2017, you can only claim deductions for new assets you purchase and install in the property.

4,500 audits of rental property deductions will be undertaken this year with the focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing. Deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim. 

When you own a share in a property
For tax purposes, rental income and expenses need to be recognised in line with the legal ownership of the property, except in very limited circumstances where it can be shown that the equitable interest in the property is different from the legal title. The ATO will assume that where the taxpayers are related, the equitable right is the same as the legal title (unless there is evidence to suggest otherwise such as a deed of trust, etc). 

This means that if you hold a 25% legal interest in a property then you should recognise 25% of the rental income and rental expenses in your tax returns even if you pay most or all of the rental property expenses (the ATO would treat this as a private arrangement between the owners).

The main exception is that if the parties have separately borrowed money to acquire their interest in the property then they would claim their own interest deductions.

Earning money from the sharing economy 
Income earned from the sharing economy, AirBNB, Uber, AirTasker, etc must be declared in your tax return. But you may also be able to claim proportional expenses associated to providing the service. Ensure that any deductions you claim are related to providing the service itself (not just switching on the app or making yourself available).

If you are a driver with Uber or another platform, you will need to be registered for GST regardless of how often you drive.

Let Collins Hume partner with you to achieve greater business and lifestyle success as your trusted advisers. Call us in Ballina or Byron Bay on 02 6686 3000.

Consolidating your loans this EOFY

Debt consolidation case study

Northern Rivers Lending Specialist, David Seymour, was introduced to a couple who were both wage earners, trying to get their debt under control with little success from the major lenders. 

debt consolidationBeing a small family with one child, they were living pay-to-pay but couldn't get their heads above water. It felt like they were continually paying off something all the time. 

To try and grab a break, they went to see major bank about consolidating their loans. When they were turned away they went to their existing lender to find out that they also had no time for them. 

They completed paperwork in the hope of being approved and the process only dragged on, so they became disenchanted and gave up. 

"They didn't fit the 'typical' profile so my name was put forward," says Lending Specialist David Seymour. "Once they contacted me we could talk through scenarios, consider different lenders and what each had to offer."

It took time to understand the couple's financial position and then to narrow down potential lenders.

"Once they'd made a choice, they could consolidate all their finances into one reduced monthly commitment," says David.

Doing so means they have control of their finances and can save for a proper holiday for the first time in five years! David was happy to invest the time to make it happen for them.

"I sat them down to gain an understanding of what they wanted to do going forward and look at options to discuss their scenario with lenders who were better suited to their needs."

The couple's feedback is nothing but positive, "Everything was better than we could have hoped for. Our situation was dire and we felt hopeless before we met David. Everything he has done has changed our lives."

"I like to see the finished result," adds David. "If I've been able to assist someone to have further wealth in their life, it's great satisfaction. The bottom line is that I help people to achieve outcomes they are looking for which allows me to do the same. I'm not a crusader – I just like to help people be successful."

"Most days are heads down and bums up working with people and business owners to get their lending and finance organised, so it's nice to come up for air occasionally to find someone putting in a good word on your behalf."

David Seymour operates from Collins Hume's Ballina office every Monday, Tuesday and Friday or he can schedule a meeting at your premises around your hours or even on a weekend if necessary. Call David on 0418 785 747 or connect with David to see his areas of expertise. 

Copyright 2019. @CollinsHume Accountants & Business Advisers Ballina & Byron Bay NSW

David is an Authorised Credit Representative No 477331 of Regional Finance Solutions Pty Ltd ABN 71163893945 Aust Credit License 484980.