I have taken on several new clients in recent times. Each time it reminded me that everyone has a tax status that is unique to them and any advice given should be carefully considered based on the circumstances of that client.
It is easy to base our decisions in life based on what we hear and see (heresay). Whats harder is to realise that unless that advice is professionally based, it may be incorrect or worthless to you.
I have noticed that more than ever people are looking for honest professional advice, before thay make decisions that impact their financial and or tax status. This is not an ad for my services, it is an observation as a practicing accountant.
And back to heresay. I see it every day. e.g. “my mate says that I can claim a deduction for all work related travel”…or “according to what they are saying out there, with an ABN, I can claim for my car, including trips to work”, or “a novated lease is preferable for EV’s”, or “I can get a tax deduction for up to $27,500 per year on super contributions” or “if I buy property overseas it does not affect my tax” or “I haven’t registered for GST because my turnover has not reached $75,000”
Some or all of these may be true or partially true. It depends on your individual tax status and a string of provisos and rules attached to all of these statements. Some are definitely incorrect. I will explain
“my mate says that I can claim a deduction for all work related travel”
This is correct in essence, but your claim may not meet the definition of work related travel. i.e. it must be directly related to the income earned, , it must be incurred (spent or committed), and it cannot be for travel to and from your place of work.
There are exceptions to deductibility for travel to your workplace like multiple ad hoc work places, or multiple clients. Generally if you have one regular workplace, then cost of travel to and from this place is not deductible.
Check the ATO definition and consult an accountant if you are nor sure. The ATO continues to close in on work related expenses so be careful.
“according to what they are saying out there, with an ABN, I can claim for my car, including trips to work”
This one is coming up more and more these days. Categorically this is incorrect.
An ABN is required if you run a business. Getting an ABN does not qualify the associated activity as a business and deductibility may be denied in the activities are deemed non commercial.
This is a massive subject in tax law, but it comes back to the question..are you in business?
The ATO says
Your activities are not a business when they are:
a one-off transaction (unless it is the first step in carrying on a business or intended to be repeated)
done as an employee
a hobby or recreation from which you don't seek to profit
a simple investment, such as passively holding shares on which you receive dividends or a rental property you let through an agent.
and certain income tests need to be filled to comply as a business
You must comply with one of the following
assessable income flowing from the business activity, or
have made profits in 3 of the last 5 years, or
have invested on $500,000 of real property for the business, or
$100,000 in plant (tools of trade etc)
Most ABN holders qualify as a business through point 1 above. If you qualify as a business, then can claim all expenses incurred in operating the business and this includes travel to customers if they are not the same place of work throughout the year.
Qualifying as a business allows you to treat the income as part of your business and to include it in your tax return as assesssable income and associated costs of the business. If you make a loss in any one year, you can then offset the loss against other assessable income e.g. employee on a PAYG basis, or capital gains on the sale of shares or property.
You may claim the costs of operating your car, but only for business related travel, and you must keep a log book for 12 weeks of the year, showing the business travel in detail. The log book entries must detail the date klms travelled and from to locations, the client, and the reason for travel. Alternatively you can claim business related travel at 78 cents per kilometre, but you cannot claim for any other costs related to the motor vehicle during the tax year. (max 5,000 klms)
In general, an ABN does not give you the right to claim for travel to your place of work and back, unless there are multiple clients, or multiple places of work.
“a novated lease is preferable for EV’s”
This one has reared its head on occasions. Usually in the scenario of “Do I lease, Commercial HP , pay cash or or take out a Chattel Mortgage on the motor vehicle?”
A novated lease is not necessarily preferable for EV’s.
A client raised this recently regarding electric vehicles. I am not sure what is with the EV reference, except that the risk (if any) until disposed of, remains with the employer in a Novated Lease. Apart from that fact I found no evidence of a Novated Lease being a preferred option for the purchase of an EV.
The difference between a Novated Lease and a Chattel Mortgage comes back to ownership. In a Novated Lease the employer, the employee and the lease company enter into an agreement. The employee receives ‘before tax’ adjustments to his salary for vehicle operating costs, has the use of the car, but does not own it until all debts are fully paid. An employer can restrict the expenses included in the lease. i.e. the employee may end up paying for many costs directly, and outside the lease, depending on how the employer has set up the Novated Lease. Fringe Benefits Tax paid by the company, will usually increase the cost to the employee as these are passed on to the employee. The employer controls the lease terms.
The upside of a novated lease is in the event of employees unable to get approval for a mortgage over the asset. However generally a Novated Lease is more expensive than other forms of finance.
A Chattel Mortgage is a popular business finance arrangement, because all the rights of deductibility (and more) given in a Novated Lease apply to a Chattel Mortgage. In a Chattel Mortgage, all vehicle operating costs that relate to a business can be claimed as a deduction and the same rules apply. There are only two parties to the transaction. You and the Finance Company. Generally, you are in control. All interest charges and depreciation can be claimed. In my experience this provides additional leverage to the business owner through accelerated depreciation (tax incentives for small business) and interest costs, which will exceed deductibility from lease payments in a novated lease.
“I can get a tax deduction for up to $27,500 per year on super contributions”
Not true. The correct statement is that you can contribute up to $27,500 as a concessional contribution to superannuation annually. This is a ‘before tax’ contribution and usually from your ‘pre tax’ salary. Compulsory super contributions form part of all concessional contributions so you need to add the two together in calculating your super cap.
The ATO is now advised of all super contributions, so you can check your YTD super cap balance through your accountant or MYGov.
“if I buy property overseas it does not affect my tax”
Tax is governed by the jurisdiction of domicile. i.e. If you are a resident of Australia, the ATO (using relevant legislation) determines your taxable income. You are taxed on your world wide income. This includes the sale of international property or investments. You will be liable for capital gains tax on the sale of a property or other investment in which you have an interest, no matter where it is located or sourced. If Australia has an international tax agreement with the taxing country, you may offset your liability for tax payable in Australia by any tax paid internationally.
Do not underestimate the ATO’s ability to track transactions internationally. Australia has international tax agreements with most countries and through AUSTRAC and other software, the ATO will likely know about your activities around the world.
“I haven’t registered for GST because my turnover has not reached $75,000”
GST is widely misunderstood as a tax in Australia. If you are in business and you have an ABN, you can register for GST regardless of your annual turnover. It is compulsory to register if your turnover exceeds $75,000 per annum.
If you are registered for GST you must include GST in all invoices to Australian registered businesses. You collect the GST and can claim a tax credit for GST paid on invoices issued to your business. The net amount is remitted to or refunded from the ATO (usually quarterly).
The benefit of GST registration is that you effectively recover 1/11 of your costs each quarter, rather than the full expense at tax time at which time the balance of the cost is claimed as an expense. This potentially improves funds from operations by 2.96% ($1480/$50,000)* for your small business and it improves cash flow through the year. e.g. If your business has invoicing of $50,000 and GST of $5000, and GST inclusive costs of $22,000 (GST $2,000), then your net GST collected is $3,000, so you keep $2,000 but you cannot claim $2,000 as a cost which leaves a tax differential of $520 ($30,000 profit -$28,000 profit = $2,000 @ 26% if not registered for GST).
*The tax on $2,000 is assumed at 26% for an SBE. The net benefit is $1480 ($2,000-520).
If you think GST may be applicable to you, then call me to check your eligibility.
Well that’s it for this post.