Category Archives for "Tax"

Tax deduction secrets that women need to know

by Bianca Hartge-Hazelman

Tax isn’t sexy, but talk shopping and tax deductions, and then you’ve got something most women want.

Handbags, gloves, makeup, clothes, sunglasses, sunscreen and hats may all be tax deductible but the success really depends on meeting the ATO’s three golden rules:

  • You must’ve spent the money yourself

  • The expense must be related to your work and;

  • You need to have a record to prove it.

Assistant Commissioner at the Australian Tax Office Graham Whyte told Financy the purchase of handbags used to carry work items, such as papers and electronic devices, could be tax deductible. This is despite earlier reports which suggested that this couldn’t be done.

But he added that a wallet, purse, and business suits are unlikely to be successfully claimed.

A wallet or business suit will usually be considered private, even though in many professional circumstances it may be an expected component of work,” said Mr Whyte.

Whitehead Dingley & Betar partner and chartered accountant Kate Hills says the most common items that women claim tax deductions for are sunglasses, driving gloves, sunscreen and bags.

Flight attendants 

Clothing is not usually tax deductible because it’s a private expense in that we all need clothes. However there have been successful claims made for extraordinary items.

The courts have consistently looked for ‘additional features’ which would take these purchases out of the category of private expenditure,” said Ms Hills.

For example, in the Mansfield Case, the taxpayer, who was a flight attendant, purchased conventional shoes for work.

These shoes needed to be a half-size too big for ordinary use due to the cabin pressure of the aircraft.

They were also subject to regular scuffing while working on the aircraft.

The courts allowed a tax deduction due to ‘additional features’ which took the purchase out of the category of private expenditure.”

Sales reps, construction work and couriers

Protective clothing can also be tax deductible but only if the items protect you from the risk of ‘illness or injury’ while at work.

For example, a woman working as a courier or in a sales role, who spends most of her time in the car visiting clients, could claim the purchase of driving gloves, sunglasses and sunscreen to protect her from the sun whilst in the car,” said Ms Hills. 

This could also apply to a women who works for a construction company as a project manager and spends are large portion of her time exposed to the sun whilst visiting construction sites.

In addition to the above purchases, she may also have expenditure on a sun hat.”

Make up and the arts

Makeup is much easier for performing artist to claim, such as actors, musicians or presenters on stage, film and television. But for everyone else, it’s a lot tougher.

This is because makeup and other grooming items are private everyday expenses, and not necessarily needed at work.

The courts have been known to even deny the claims of flight attendants, despite the need to look presentable, and hairdressers, where claims for personal hair expenses have been made.

12 common myths – Employee or contractor?

There are several myths and assumptions by both workers and employers when it comes to trying to decide whether or not someone is a contractor or an employee.

Here are 12 common myths that often get both businesses and workers into hot water.

  1. Having an Australian business number (ABN)

Myth: If a worker has an ABN they are a contractor.

Fact: Just because a worker has an ABN does not mean they will be a contractor for every job. Whether the worker has or quotes an ABN makes no difference and will not change the worker into a contractor. To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.

  1. Common industry practice

Myth: “Everyone in my industry takes on workers as contractors, so my business should too.”

Fact: Just because “everyone” in an industry uses contractors does not mean they’re correct. Don’t use “common industry practice” to make determinations.

  1. Short-term work

Myth: Employees cannot be used for short jobs or to get extra work done during busy periods.

Fact: The length of a job (short or long duration) or regularity of work makes no difference to whether a worker is an employee or contractor. Both employees and contractors can be used for:

  • casual, temporary, on call and infrequent work
  • busy periods
  • short jobs, specific tasks and projects.

To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.

  1. The 80% rule

Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.

Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and how a contractor:

  • reports their income in their own tax return
  • determines if they can claim some business-like deductions.

It is not a factor a business should consider when they determine whether a worker is an employee or contractor.

  1. Past use of contractors

Myth: “My business has always used contractors, so we do not need to check whether new workers are employees or contractors.”

Fact: Before engaging a new worker (and entering into any agreement or contract), a business should always check whether the worker is an employee or contractor by examining the working arrangement. Unless a working arrangement (including the specific terms and conditions under which the work is performed) are identical to previous arrangements, it could change the outcome of whether the worker is an employee or contractor.

Sometimes a business may also have incorrectly determined their worker is a contractor. Continuing to rely on the original “contractor” decision would mean the business is incorrectly treating all future workers as contractors when they are employees.

  1. Registered business name

Myth: If a worker has a registered business name, they are a contractor.

Fact: Having a registered business name makes no difference to whether a worker should be an employee or contractor for a particular job. Just because a worker has registered their business name does not mean they will be a contractor for every job or working arrangement.

  1. Contracting on different jobs

Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.

Fact: If a worker is a contractor for one job, it does not guarantee they will be a contractor for every job. The working arrangement and specific terms and conditions under which the work is performed will determine whether a worker is an employee or contractor for each job.

Depending on the working arrangement, a worker could be an:

  • employee for one job and a contractor for the next job
  • employee and a contractor if completing two jobs at the same time for different businesses.
  1. Paying super

Myth: “My business should only take on contractors so we do not have to worry about super.”

Fact: A business always needs to look at the working arrangement and examine the specific terms and conditions under which the work is performed to determine whether a worker is an employee or contractor. A business cannot decide to treat a worker as a contractor when they are an employee.

Additionally, businesses may be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the labour of the person, you have to pay super contributions for them.

  1. Specialist skills or qualifications

Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.

Fact: If a business takes on a worker for their specialist skills or qualifications it does not automatically mean they are a contractor. A worker with specialist skills or qualifications can either be an employee or contractor depending on the terms and conditions under which the work is performed. Qualifications or the level of skill a worker has (including whether they are “blue” or “white” collar) makes no difference to whether a worker is an employee or contractor.

  1. Worker wants to be a contractor

Myth: “My worker wants to be a contractor, so my business should take them on as a contractor.”

Fact: Just because a worker has a preference to work as a contractor does not mean your business should engage them as such. Whether a worker is an employee or contractor is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions under which the work is done.

If you give into pressure and agree to treat an employee as a contractor, you can face penalties, interest and charges for not meeting your tax and super obligations.

  1. Using invoices

Myth: “If a worker submits an invoice for their work, they are a contractor.”

Fact: Submitting an invoice for work done or being “paid on invoice” does not automatically make a worker a contractor.

To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed. If based on the working arrangement a worker is an employee, submitting an invoice or being paid on the basis of an invoice will not change the worker into a contractor.

  1. Contracts

Myth: “If a worker’s contract has a section that says they are a contractor, then legally they are a contractor.”

Fact: If a worker is legally an employee, a contract saying the worker is a contractor will not make the worker a contractor at law. Businesses and workers will sometimes include specific words in a written contract to say that the working arrangement is contracting in the mistaken belief that this will make the worker (who is an employee) a contractor at law.

If a worker is legally an employee, a contract specifying the worker is a contractor makes no difference and will not:

    • override the employment relationship or change the worker into a contractor
    • change the PAYG withholding and super obligations a business is required to meet

 

I know it’s confusing but if you are unsure the ATO has a fabulous tool which can be found here which can help you and best of all you can rely on the result.

It’s Fringe Benefits Tax time

FBT — your business basics

If you own a business that employs staff, and provide remuneration to your employees in a form other than straight salary, you may be up for fringe benefits tax (FBT). The upside for your workers is that they do not then have to pay income tax on the value of the benefits provided to them.

FBT is separate to income tax.  The FBT regime has its own tax year, from April 1 to March 31 (with the FBT return lodgement deadline being May 21, but longer if you use the services of this office).

FBT is calculated using a “grossed-up taxable value” of the relevant benefit provided. It is payable at the current FBT rate of 47% for the FBT year ended March 31, 2015.  Note that the rate increases to 49% as a result of the Temporary Budget Repair Levy for the 2016 and 2017 FBT years.

Under the FBT law, a fringe benefit typically arises when one of the categories of benefits (see below) is provided by an employer, an “associate” of an employer, or a third party under arrangement with either of the former.

An employer is providing a fringe benefit if, for example:

  • it allows a staff member to use a work vehicle for private purposes
  • provides a loan to the employee with interest charged (even a minimal level of interest), or
  • reimburses a worker for a private expense, such as school fees.

Fringe benefit categories

The FBT law has several different categories of fringe benefits, which include:

  • car fringe benefit
  • debt waiver
  • loan fringe benefit
  • expense payment
  • housing fringe benefit
  • living away from home allowance
  • airline transport
  • board (accommodation)
  • entertainment
  • tax-exempt body entertainment
  • car parking
  • property fringe benefit, and
  • residual benefits (that is, other benefits not covered by the above).

Salary of course is not a fringe benefit, and neither is a super contribution. Entitlements under employee share acquisition schemes are not deemed to be a fringe benefit, nor are termination payments.

Calculating FBT

The rules for calculating the grossed-up taxable value of a fringe benefit are subject to two separate “gross-up” rates – a higher and a lower gross-up rate.

Grossing-up means increasing the taxable value of benefits you provide to reflect the gross salary employees would have to earn at the highest marginal tax rate (including Medicare levy) if they were to buy the benefits after paying tax.

The higher gross-up rate (2.0802 for the 2014-15 FBT year, and 2.1463 for the 2015-16 FBT year) is used where you are entitled to claim a GST credit for GST paid on benefits provided to an employee, known as GST-creditable benefits. The lower gross-up rate (1.8868 for 2014-15 and 1.9608 for 2015-16) is used where there is no entitlement to a GST credit.

 

Consequences of increased FBT and gross-up rates

With the temporary increase to the FBT rate, there could be a case for employers to reconsider their current fringe benefit arrangements with affected employees in light of the increase.

For employees on packages of less than $180,000 a year, it may end up that upon examination from April 1, 2015 it will be more beneficial to provide remuneration via salary and allowances rather than fringe benefits. Where employers provide fully taxable benefits, such as paying for an employee’s private health insurance, it may be a better option to provide additional salary, which would be taxed at a substantially lower rate than 49%.

The increase in both the FBT rate and the gross-up factors means that employers should reconsider all current fringe benefits arrangements with their staff to limit the impact of possible additional costs and ensure that any arrangement is still as beneficial as possible for both employee and employer.  Employers should also note that the value of taxable fringe benefits once grossed-up are included in the calculation of taxable wages for payroll tax purposes.

Exemptions from FBT

Minor benefits

Minor benefits (that is benefits that have a GST-inclusive value of $300 or less) are generally exempt from FBT. However one of the conditions to maintain this exemption is that minor benefits must be offered with “infrequency and irregularity”. There can also be other conditions (check with us). Examples of minor benefits can include the occasional lunch, birthday gifts, flowers on special occasions, the Christmas party, or a one-off interest free loan. Note also that there can be multiple minor benefits (that is, each can have a value of less than $300).

Certain exempt vehicles

There are also circumstances when private use of a car may be exempt from FBT. An employee’s private use of a taxi, panel van or a utility designed to carry less than one tonne, or any other road vehicle designed to carry a load of less than one tonne (that is, one not designed principally to carry passengers) is exempt if their private use of such a vehicle is limited to:

  • travel between home and work
  • travel that is incidental to travel in the course of performing employment-related duties
  • non-work-related use that is minor, infrequent and irregular – for example, occasional use of the vehicle to remove domestic rubbish.

Certain work-related items

Providing certain work-related items to staff will not make a business liable for FBT. These include protective clothing, a briefcase, calculator or tools of trade, portable computer (limited to one per year for each employee) and other items. There are other benefits that escape the FBT net, which you can ask this office about, but generally a condition of exemption is that the benefit or item is primarily used to enable your employee to do their job.

Record keeping

The Tax Office has relaxed the FBT record keeping regime for small businesses to some extent by creating a value of benefits threshold under which full records need not be kept.  You will still however need to show the value of benefits on employee payment summaries.

The threshold for the 2014-15 FBT year is $7,965, but it increases each year. As long as benefits paid do not exceed 20% on top of the previous year, the exemption can still apply for subsequent years.

For businesses, it makes no difference whether you are a sole trader, partnership, trustee, corporation, unincorporated association or government body, or whether you pay other taxes such as income tax – as an employer providing taxable benefits by way of remuneration to an employee, you are required to cover FBT. And remember your business will be liable even if that benefit is provided by an associate or by a third party – for example, you may deal with a supplier that, in turn, provides free goods to your employees.

All that is required is that the employee receives the benefit in their capacity as an employee of the business.  Also an employee is deemed to have received a fringe benefit if that benefit is directly received by the employee’s “associate” – in the main, these would be family members and relatives. So this catches the school fees paid for an employee’s children or the interest-free loan made out in a spouse’s name.

While an item’s “primary use” is important to determine if a taxable benefit has been provided, the Tax Office bases its decisions on the employee’s “intended use” at the time the benefit is provided. This means that you do not have to record the actual use of every item – you must however be able to provide a “reasonable basis” that would show that a benefit has been provided to facilitate employment; for example via job descriptions, duty statements or employment contracts.

Other documentation and declaration requirements can seem very particular. For travel, for example, a diary of the trip will need to be kept only if the employee is away for six continuous nights or more, but documentary evidence of travel expenses need to be kept no matter the duration of travel. If the trip is within Australia and not entirely for business purposes, receipts must be kept for food, drink, accommodation and incidentals. But if the trip is deemed to be entirely for business, these are not needed. And if the trip is overseas and solely for business, only accommodation receipts are required.

Can you pay less FBT?

There are options for businesses wanting to reduce the amount of FBT they are required to pay. The most obvious of course is to replace fringe benefits with straight salary, or simply focus on providing only those fringe benefits that are deemed exempt under FBT law.

Alternatively, FBT could be reduced if the employee shares some of the cost of the benefit provided with their employer.  This is commonly referred to as an “employee contribution”.

With a car fringe benefit, for example, an employee could agree to contribute to some of the operating costs, such as fuel, that you do not then reimburse. This then reduces the taxable value of the fringe benefit to the business.

You can also provide a benefit that your employee would normally be able to claim as an income tax deduction, had they paid for it themselves. Referred to as the “otherwise deductible” rule, you can reduce the taxable value of the fringe benefit by the amount your employee would have been able to claim. Say a staff member incurs a work expense, for example, that would have been a one-off wholly deductible amount for the employee in their own tax return. If you reimburse the employee for this expense (as an expense fringe benefit) the taxable value would be nil (but the employee won’t get the deduction).

Common mistakes

The Tax Office has released what it says are the most common mistakes regarding FBT obligations:

  • business vehicles garaged at an employee’s residence may be a car fringe benefit
  • you must keep logbooks when using the operating cost method for calculating vehicle benefits
  • when you use the operating cost method, the luxury car tax threshold does not apply when calculating the deemed interest and depreciation
  • contributions an employee makes to the employer to reduce the taxable value of a fringe benefit
    • are assessable income for income tax purposes, and
    • are possibly taxable supplies for GST purposes
  • if your employees have incurred any fuel and oil expenses they need to provide you with a declaration to substantiate these expenses
  • directors running their business through a company may be regarded as employees. This may mean that fringe benefits provided to directors result in the company having FBT obligations, and
  • when you include reportable fringe benefits on an employee’s payment summary, you must lodge an FBT return.

Note also that while the Tax Office has in the past published an annual “compliance program” spelling out areas of tax it deems to be complex or where it has detected a lot of errors being made, this is no longer available. Guidance on issues of concern to the Tax Office can now be found through its communications to consultation panels and notices issued to taxpayers.

The latest consultation with key stakeholders with regards to FBT concerns guidance around travel versus living-away-from-home allowance claims. The “21-day” rule is of particular focus, with attention being given to whether this still fits with current work trends. Consult this office if this is an area of concern.