September 19
AUSTRALIANS TURN TO STORING THEIR TAX RETURN INVOICES DIGITALLY
Many Australians are doing away with tucking their receipts into a shoebox and instead now store them digitally.
This helps to speed up lodging tax returns because all the relevant information is already uploaded to one place.
The digital shoebox is becoming popular and ATO figures revealed that in the first two weeks of July over 26,000 Australians uploaded their deduction information using the ATO’s app.
The myDeductions tab on the app can be used to take photos of receipts and note relevant information relating to expenses.
According to ATO assistant commissioner Karen Foat this has made it easier than ever to keep tax information in one place and remove the worry of misplacing paperwork.
- On the app you can store a photo of the receipt and details of the deduction you want to claim.
- You don’t have to go into your return and upload all the deduction details in your tax return. If you are using the myDeductions app you can synch all that information up and that will be in your return for you.
- You also have the peace of mind of having all your receipts in case the ATO comes knocking.
- The (traditional) shoebox is a really dangerous way of keeping all your records. Receipts fade, and it’s pretty easy while you are on the go throughout the year to snap a photo of that receipt and store it somewhere more secure.
Many taxpayers now gather everything, including bank statements, dividend statements and rental property expenses, and keep them in one digital file on their home computer.
ATO PUTS THE BRAKES ON DODGY CAR CLAIMS
The Australian Taxation Office (ATO) is making work-related car expenses a key focus again during Tax Time 2019. This follows warnings by the ATO last year that work-related car expenses would face greater scrutiny.
Over 3.6 million people made a work-related car expense claim in 2017–18, totalling more than $7.2 billion.
One in five car claims are exactly at the maximum limit that doesn’t require receipts. Under the cents per kilometre method, taxpayers don’t need to keep receipts, but they do need to be able to demonstrate how they worked out the number of kilometres they travelled for work purposes.
The ATO maintains that while some claims of exactly 5,000 km are legitimate, they’re found many people are unable to show how they arrived at this amount, and as a result their claim was reduced or disallowed in full.
The ATO’s sophisticated analytics compares taxpayer claims with others earning similar amounts in similar jobs.
Where the ATO identifies questionable claims, they will contact taxpayers and ask them to show how they have calculated their claim. In some cases, where further scrutiny is warranted, the ATO may even contact employers to confirm whether a taxpayer was required to use their own car for work-related travel.
It is clear that simply driving between work and home is not enough to warrant a deduction. You must have a work-related need to travel while performing your job, like traveling from site to site or be required to transport bulky tools.
There are three golden rules for taxpayers to remember to get it right when it comes to car expenses:
- generally, trips between home and work cannot be claimed, unless you are required to transport bulky equipment;
- don’t ‘double dip’ by claiming car expenses paid for or reimbursed by your employer; and
- make sure you keep records to prove how you worked out your claim.
Making a claim for car expenses
There are two ways to calculate a deduction for car expenses – the cents per kilometre method which limits claims to a maximum of 5,000 kilometres, and the logbook method where claims are worked out using the percentage of work use of your car and actual expenses.
Cents per kilometre
You don’t need receipts, but you need to be able to show how you worked out your business kilometres (for example, by producing diary records of your work-related trips). If you use the cents per kilometre method, your claim is based on a set rate (68c per kilometre from 1 July 2018) for each work-related kilometre travelled. You can claim a maximum of 5,000 kilometres per car.
Logbook
If you use the logbook method your claim is based on the percentage of work use of your car and your actual expenses. To make a claim using this method you need to keep a logbook as well as records of your car expenses.
Your logbook must be kept for a minimum continuous period of 12 weeks and be broadly representative of your work-related car travel throughout the year. When keeping a logbook, you need to record odometer readings at the start and end of each journey as well as the journey’s purpose. You will also need to keep a record of your odometer readings at the start and end of each income year.
When calculating your car expenses, you can use your receipts to claim fuel and oil costs, or you can estimate your expenses based on odometer readings for the period in which you used the car. For all other car expenses you claim you must keep receipts. You will also need to keep details of how you calculated your claim for decline in value of your car.
Case studies
The ATO’s sophisticated data analytics found a range of unsupported claims in 2018. Claims by taxpayers that triggered additional scrutiny and ATO action included:
- A claim of $4,800 using the logbook method triggered a red flag. When the ATO asked the taxpayer to provide the logbook to support the claim, they found the taxpayer was referring to a car service logbook rather than a logbook kept for calculating their work use car percentage. The taxpayer had not undertaken any work-related car travel during the year.
- Another claim was flagged after analytics indicated taxpayers with similar occupations, salaries and in similar locations had not made claims for car expenses. The ATO found that the taxpayer, a retail worker, had incorrectly claimed $350 for the cost of public transport to and from work.
- The ATO also identified an office worker claiming $3,300 for 5000 kilometres of work-related travel using the cents per kilometre method. The taxpayer advised that his employer did not require him to use his car for work and that his claim was based on trips he made from home to work.
In each case, the claims were disallowed as the expenses were private and not substantiated.
ATO’S $50 THRESHOLD CUTS PAPERWORK FOR EMPLOYERS
The ATO has outlined its expectations regarding the record keeping requirements imposed on employers for the reimbursement of home phone and internet expenses.
With more employers encouraging flexible working from home, the reimbursement of home office expenses has been reviewed.
The ATO has introduced a $50 threshold which will be used to determine the record keeping requirements for the purpose of applying the otherwise deductible rule to expense payment fringe benefits for the cost of home phone and internet expenses.
The threshold will apply as follows:
1. Reimbursement of home telephone and internet costs up to $50 for an employee for an FBT year.
You can reduce the taxable value under the otherwise deductible rule by up to $50 with limited documentation retained by the employee. In practical terms, you should be able to explain the nexus between the employment and the expenses incurred by the employee. The employer is still required to obtain a declaration from the employee in these circumstances.
2. Reimbursement of home telephone and internet costs greater than $50 for an employee for an FBT year.
It is necessary to keep records of the actual expenses incurred and reduce the taxable value by the amount which reflects documented use. The declaration alone is not a sufficient record in these circumstances.
Employers should review their policies regarding the reimbursement of home and internet expenses so to align with the ATO’s new rules.
Where you are reimbursing employees for home phone and internet related expenses, always ensure an expense payment declaration from the employee is done to indicate the business use of the device.
Where the reimbursement is in excess of a cumulative $50 in a FBT year, review the documentation the employee holds to verify it substantiates the business use of the device.
Ensure that the employee provides this documentation along with the expense payment declaration, to ensure the business percentage claimed is accurate.
BEER PRICES CONTINUE TO RISE
In August, brewers commenced a campaign to ease the burden on the nation’s beer drinkers as data revealed Australians are paying a greater proportion of their income in beer taxes than any other developed nation.
The beer lobby is lobbying the Morrison government to lower the price of a slab and a pint in a bid to stimulate the hospitality industry in a sluggish domestic economy.
In August, the ATO take on beer rose another 21 cents a litre on draught and 30 cents a litre for stubbies, cans and bottles in line with the twice-yearly increase in indexation (inflation).
New analysis from the University of Adelaide, disclosed the single biggest cost in the price of an Australian-made beer is tax – accounting for 42 per cent of a typical carton of full-strength beer including GST.
The tax at $2.19 a litre for packaged beer, is three-times the average of other developed nations of about 70 cents.
Australians pay about 18 times more beer tax than Germany, eight times more than the US and 37.5 per cent more than the Brits, it found.
Australians come fourth in the world for beer tax, behind Norway, Japan and Finland, but compared to other countries of similar wealth, pay the highest proportion of income.
In 2017/8, beer taxes contributed more than $3.6 billion to the federal budget’s bottom line.
All of this must be weighed against the social cost of alcohol with health professionals concerned that lobbyists for the alcohol industry were undermining its National Alcohol Strategy.
GST INPUT TAX CREDITS DENIED
Byron Pty Ltd and Commissioner of Taxation [2019] AATA 2042
This case considered the following:
- entitlement to claim input tax credits with respect to the purchase of vehicles and equipment from a related entity;
- whether creditable acquisitions were made;
- where the vendor could make a taxable supply because it was not the lawful owner of the vehicles and equipment;
- the meaning of “supply”;
- the meaning of “acquisition”;
- whether applicant was liable to provide consideration;
- the administrative penalty and whether the conduct involved recklessness;
- whether applicant was entitled to remission of penalty.
The AAT held that the taxpayer had failed to discharge the burden of proving that the assessments issued to them were excessive and that the assessments of net amounts for the relevant tax periods should be.
The taxpayer was not entitled to claim ITCs as there was a lack of evidence the taxpayer had entered into any agreement to acquire assets from a related party. Further, the taxpayer failed to demonstrate that they made any “acquisitions” as they did not have any financial capacity to pay for the vehicles and equipment involved.
Even if the taxpayer had made “acquisitions” as defined in the GST Act, they were not “creditable acquisitions” as the taxpayer did not provide any “consideration” for the claimed purchase of the vehicles and equipment.
The AAT affirmed the ATO objection to decisions regarding the notice of assessment of GST amount and the administrative penalty. The taxpayer was found to be reckless in claiming ITCs foreseeable by a reasonable person.
The takeout here is be very careful when claiming input put credits where related entities are concerned.
This really is getting back to the basics…
- Is there a valid tax invoice?
- If the party is associated, consider whether the GST is being properly remitted to the A.T.O.
- Has there been consideration paid for the productor service?
For the reasons listed above the taxpayer was never going to prevail in this case.
What accounting method do I use to report my GST?
If you have an aggregated turnover of less than $10 million, or use cash accounting for income tax, you can use one of two methods for accounting your GST.
1. Cash accounting
GST is reported on the activity statement for the period in which you either:
- receive payment for your sales,
- make payment on your purchases.
It is an easy way of keeping track of your business cash flow and suited to smaller businesses that handle cash transactions for example, hairdressers.
2. Non-cash accounting (accruals)
GST is reported on the activity statement for the period in which you either:
- issue a tax invoice,
- received any payment (for a sale),
- receive an invoice from your supplier (for a purchase).
The ATO maintain this method is better suited to businesses that don’t get paid straight away and is:
a way to track your true financial position – what is owed and what you owe,
helpful if you’re dealing with multiple contracts and large amounts of money.
However, if you are top heavy in trade debtors you are effectively paying GST on income you have not received. This could be placing unnecessary pressure on your cashflow. From 1.7.2016 the choice threshold for the cash or accruals method was increased from $2 million per annum to $10 million. If you are in this category you may want to review your GST method.
Non-cash accounting (accruals) can be more complicated than cash accounting and we can offer assistance if required.
SALARY SACRIFICING SUPER
Salary sacrifice is an arrangement with your employer to forego part of your salary or wages in return for your employer providing benefits of a similar value.
If you make voluntary super contributions through a salary sacrifice agreement you should be aware of how your contributions will affect your super balance. You can agree with your employer for your voluntary contribution to be in addition to your employer’s compulsory super contribution.
If you are deciding whether you should salary sacrifice some of your income into your super, or if you are already salary sacrificing, you may want to find more information or check your entitlements under the Fair Work Act 2009.
One example of a salary sacrifice arrangement is to have some of your salary or wages paid into your super fund instead of to you.
Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This reduces the amount of super guarantee contributions that your employer is required to make for you, unless the terms of the agreement between you and your employer specify that they continue to pay the minimum super guarantee amount. If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%. Generally, this tax rate is much less than your marginal tax rate and allows you to accumulate more assets in a tax effective way.
The sacrificed component of your total salary package is not counted as assessable income for tax purposes. This means that it is not subject to pay as you go (PAYG) withholding tax.
If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit.
The Fair Work Commission regulates employment agreements and conditions. To check your conditions, contact Fair Work Commission(https://www.fwc.gov.au).
The Fair Work Ombudsman has information on deducting pay & overpayments (https://www.fairwork.gov.au/pay/deducting-pay-and-overpayments).
You can contact the Fair Work Ombudsman on 13 13 94.
Salary sacrifice limitations
If there are no limitations specified in the terms of your employment, there is no limit to the amount you can salary sacrifice into super. However, you should also consider whether the:
· Additional salary you wish to sacrifice will cause you to exceed your concessional (before-tax) $25,000 contributions cap and attract additional tax;
· This limits the amounts that can be contributed to your super fund and still receive the concessional tax rate of 15%. Note the $25,000 cap includes both the 9.5% mandated employer contribution and amount salary sacrificed.
· The salary amount your sacrifice may attract Division 293 tax – this occurs when your income (including concessional super contributions and other components) is more than:
o $300,000 in one year, before 1 July 2017
o $250,000 in one year, from 1 July 2017.
If you require advice on salary sacrifice, please contact us.
DOES YOUR SMSF INVESTMENT STRATEGY MEET DIVERSIFICATION REQUIREMENTS?
Throughout August the ATO contacted about 17,700self-managed super fund (SMSF) trustees and their auditors where their records indicate the SMSF may be holding 90% or more of its funds in one asset or a single asset class.
The ATO are concerned some trustees haven’t given due consideration to diversifying their fund’s investments; this can put the fund’s assets at risk.
Lack of diversification or concentration risk can expose the SMSF and its members to unnecessary risk if a significant investment fails.
The ATO will ask trustees to review their investment strategy and clearly document the reasons behind the investment decisions.
Trustees were also advised to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the funds compliance with these requirements.
Overview
Every self-managed superannuation fund MUST have a documented Investment Strategy. It is a requirement of the Superannuation Industry (Supervision) Act 1993 (“SIS Act”), the primary legislation governing SMSFs.
Section 52(2) of the SIS Act (and its Regulation 4.09(2)) provide that the trustee(s) of the fund must implement, and regularly review, an Investment Strategy taking into account –
- the risks associated with the investments covered by the strategy,
- the diversification of those investments,
- the liquidity of those investments,
- the fund’s ability to meet its liabilities,
- amongst other considerations.
The fund is also required to consider the insurance needs of the members and determine whether it is appropriate to meet those needs within the self-managed superannuation fund environment on their behalf.
We can assist you with these matters.
FEDERAL COURT PROVIDES CLARIFICATION ON THE PERSONAL SERVICES INCOME RULES
On 12.8.2018, the Federal Court handed down two decisions relating to personal services income (PSI) rule.
Income is classified as PSI when more than 50% of the income received under a contract is for a taxpayer’s labour, skills or expertise.
The personal services income rules are integrity provisions which ensure individuals cannot reduce or defer their income tax by diverting income for their personal services through companies, partnerships or trusts. If the rules apply, the individual is taxed on the income directly.
The rules do not apply if at least 75% of the individual’s personal services income is for producing a result, where the individual supplies all the required “tools of trade” and is liable for rectifying defects in the work. This is known as the “results test”.
In the matter of Douglass v Commissioner of Taxation [2019] FCA 1246 the Federal Court confirmed that the taxpayer did not meet the “results test”. The taxpayer argued that the “results test” is still satisfied even if they do not get paid for achieving a result, provided they can show this is the custom or practice of independent contractors in their industry. The Federal Court rejected this, agreeing with the ATO’s earlier determination. The ATO applied the PSI laws to tax Mr Douglass’s contract income as his own income rather than income split through a partnership with his spouse, which also meant certain deductions were not allowable.
The Federal Court also affirmed the imposition of penalties for recklessness, noting that the Tribunal had previously found the taxpayer’s failure to include income in his returns “merits characterisation as gross carelessness” and his subjective view as formed from a “self-interested misunderstanding of the legislative provisions”.
In the matter of Fortunatow v Commissioner of Taxation – SAD 9/2019 the Federal Court allowed the taxpayer’s appeal from an earlier Administrative Appeals Tribunal (AAT) decision. The Federal Court found the ATO and AAT had applied an exception for services provided through intermediaries (e.g. recruitment agencies) too broadly and instead the Court preferred a narrow interpretation of the exception. This matter has now been referred back to the AAT to be reconsidered.
The ATO will consider this decision and whether an appeal is appropriate.
The ATO supports partnerships and all legitimate business structures where legal and arising from a business structure of substance. The ATO recognises that a personal services business can exist where the results test is met. In such cases the income is derived by the business entity and not the individual who carried out the work.
It is vital to understand how the PSI provisions apply to individual circumstances and if you require assistance please contact us.
CONTACTING SMALL EMPLOYERS ABOUT STP
Single Touch Payroll (STP) reporting started on 1July 2019 for small employers (19 employees or less).
In August, the ATO started writing to small employers who have yet to start reporting or apply for a deferral, to remind them of their STP obligations.
Small employers have until 30 September 2019 to start reporting or apply for extra time to get ready. We can assist you in this regard.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.