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Business Tax Tips – Starting a business – The tax and super responsibilities

Business Tax Tips – Starting a business – The tax and super responsibilities

Starting a business – The tax and super responsibilities

Starting a business? Do you know your tax and super responsibilities? The ATO (Australian Tax Office) have many things to support you with the running (and start-up) of your business.

Here is what is available with some explanation –

From ATO site

When you start a business, there are tax and super responsibilities you need to be aware of, including:

  • the tax implications of your business structure
  • whether you’re entitled to an ABN
  • registering your business
  • records you need to keep
  • deductions you can claim.

We provide information about the key things you need to know and do when starting your own business.

Find out about:

For your tax and super basics, this video is a good starting point:

AKP link 22-11-18

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Business Tax Tips – GST on Hire Purchase – How it works and how GST applies

Business Tax Tips – GST on Hire Purchase – How it works and how GST applies

GST on Hire Purchase – How it works and how GST applies

Instead of paying the full price upfront for a high purchase asset such as equipment or vehicle, a business can acquire assets by entering into hire purchase to pay for and use goods over a period of time – then they need to account correctly for the GST on hire purchase. Next they need to know how GST applies. Here is some information from the ATO website to assist, including links for further information –

From the ATO website at this current date

Under a hire purchase agreement, you:

  • purchase goods through instalment payments;
  • use the goods while paying for them;
  • do not own the goods until you have paid the final instalment.

Where the supply of goods to you under a hire purchase agreement is a taxable supply, the price you pay for the goods includes GST. If you use the goods in your business, you can generally claim a GST credit.

You treat a hire purchase agreement as a stand-alone sale or purchase in a tax period – that is, the same rules apply as they would for any sale and purchase of goods under an ordinary sale agreement. A hire purchase agreement is not treated as a sale or purchase made on a progressive or periodic basis.

Paying GST on hire purchases

If you enter into a hire purchase agreement on or after 1 July 2012, all components of the supply made under the agreement are taxable, whether or not the credit component is separately disclosed. Any associated fees and charges, such as late payment fees incurred under the terms of the hire purchase arrangement, are also subject to GST.

If you enter a hire purchase agreement before 1 July 2012, and the supplier:

  • separately identifies and discloses the interest charge to you, you don’t have to pay GST on the interest as it is a financial supply;
  • doesn’t separately identify and disclose the interest charge to you, you must pay GST on the total amount payable under the contract.

The interest charge is ‘disclosed’ to you if the supplier tells you any of the following in the hire purchase agreement:

  • the dollar amount of the credit charge;
  • the interest rate;
  • the formula or formulas used to work out the credit charge amount;
  • any other information sufficient to work out the credit charge amount.

A hire purchase agreement entered into before 1 July 2012 continues to be treated in this way even if there’s a subsequent change to the agreement, provided the change doesn’t result in a new agreement. That is, the supply of a separately disclosed credit component will continue to be an input taxed financial supply.

Claiming GST credits on hire purchases

If you account for GST on a cash basis.

As all components of a hire purchase agreement entered into on or after 1 July 2012 are subject to GST, you can claim one-eleventh of all components, including the credit component and any associated fees and charges that have been subject to GST under the agreement.

For hire purchase agreements entered into on or after 1 July 2012, you can claim input tax credits up front instead of waiting until each instalment is paid, in the same way as you would if you accounted for GST on a non-cash basis.

For hire purchase agreements entered into before 1 July 2012 you can claim one-eleventh of the principal component of each instalment in the period you pay it. If the supplier provides regular accounts or statements that show the principal and interest components for each instalment, you must use that information to work out GST credits in the relevant tax period. If you don’t know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.

If you account for GST on a non-cash (accruals) basis.

You can claim the full GST credit on your hire purchase agreement in the tax period when either:

  • you make your first payment;
  • a tax invoice is issued to you, provided you haven’t already made your first payment.

For agreements entered into before 1 July 2012, you claim a GST credit only for the principal component of the agreement, not the credit component. 

Example: Hire purchase agreement entered into on or after 1 July 2012

Albert’s Abattoir (Albert) is registered for GST and reports GST quarterly.

Continuing the example above, Albert decides to buy a second freezer on hire purchase from Friendly, …on 20 July 2012.

Albert buys a freezer from the Friendly Freezer Store (Friendly) for $33,000 through a hire purchase agreement. Under the terms of the agreement, which separately discloses the interest charge, Albert will repay $670 per month for five years. The total payment will be $40,200 ($33,000 plus $7,200 interest).

Because the agreement is entered into after 1 July 2012, both the principal and interest component of the supply are subject to GST.

The freezer is delivered on 7 August 2012 and Friendly notifies Albert that the principal component of the first instalment is $550. This means the credit component of the first instalment is $120 (670-550).

Albert can claim a GST credit for the GST included in both the price of the freezer and the interest charged. As the agreement was after 1 July 2012, the interest is not a financial supply (even though it is separately disclosed).

Whether Albert accounts for GST on a cash or non-cash basis, he can claim a GST credit of $3,654.54 (one-eleventh of $40,200) for the tax period ending 30 September 2012, as this is the period in which he pays the first instalment.

(To see a pre-1 July 2012 Example: hire purchase agreement entered into before 1 July 2012, see the webpage)

See also:

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Business Tax Tips – How to do the Accounting for Barter transactions and Trade Exchanges

Business Tax Tips – How to do the Accounting for Barter transactions and Trade Exchanges

How to do the Accounting for Barter transactions and Trade Exchanges

In our previous post we explained all about how the Australian Tax Office views Barter and Trade Exchanges – in summary you have to record and report as if they were REAL money transactions.

Here is a summary of how to record in your accounts in MYOB, Xero, Reckon, Quickbooks – from the Xero support community

Set yourself up a new bank account called Bartercard – there won’t be bank feeds but you can then pay invoices from this account and also receive payments into it by completing the payment section at the bottom of an invoice. You could use a spend money to take accounts of the fees.”  Business Buddy. And further comment –

Yes simply treat Bartercard exactly the same as any other method of financing, such as a bank account or credit card account. The Bank Feed does work but at month end only and is the easiest way.
As a Chartered Accountant using Bartercard ourselves, and with lots of clients using Bartercard, it is really simple – treat Bartercard income and expenses exactly the same as cash income and expenses, pay/claim GST exactly the same, record income / profits / expenses exactly the same as if it were cash. 
So, although your transaction is similar to acquiring say a stock item for $10k and selling it for $45k, that’s a profit of $35k that would hit the P&L. However when the $T (Bartercard Trade Dollars) are spent on (say) accounting fees, stationery, cleaning etc in the business, these expenses are tax-deductible, and if all the $T is spent in the business, this ends up as tax neutral. Other than the cash saving by making these payments in $T instead of cash, that is a real cash profit the organisation has made and like any other profit, will hit the P&L positively.” Ian Malcolm.

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Business Tax Tips – Taxable Payments Annual Report – Building Industry (and others to be added?)

Business Tax Tips – Taxable Payments Annual Report – Building Industry and others to be added

Taxable Payments Annual Report – Building Industry and others to be added

Are you a business in the building and construction industry? You will probably need to report the total payments you make to each contractor for building and construction services each year.

If you’re a business that is primarily in the building and construction industry, you need to report payments you make to contractors if both of the following apply:

  • You make payments to contractors for building and construction services
  • You have an Australian business number (ABN)

Contractors can be sole traders (individuals), companies, partnerships or trusts.

You need to report these payments to us on the Taxable payments annual report by 28 August each year.

Activities and services that are considered to be building and construction are broad. Some examples include architectural work (including drafting and design), certification, decorating (including painting), engineering, landscaping and construction, project management and surveying.

Payments you need to report

Report only payments you make to contractors for building and constructions services.

Contractors can be sole traders (individuals), companies, partnerships or trusts.

If invoices you receive include both labour and materials, whether itemised or combined, you report the whole amount of the payment, unless the labour component is only incidental.

The definition of building and construction services is broad – it includes any of the activities listed below if they are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface:

  • Alteration
  • Assembly
  • Construction
  • Demolition
  • Design
  • Destruction
  • Dismantling
  • Erection
  • Excavation
  • Finishing
  • Improvement
  • Installation
  • Maintenance (excluding the maintenance, service or repairs of equipment and tools)
  • Management of building and construction services
  • Modification
  • Organisation of building and construction services
  • Removal
  • Repair (excluding the service or repairs of equipment and tools)
  • Site preparation

The ATO website tells us – (From Here)

You may need to lodge a Taxable payments annual report by 28 August each year if you are a:

  • Business in the building and construction industry
  • Government entity
  • May extend to Couriers and Cleaners

The Taxable payments annual report tells us about payments you have made to contractors for providing services. Some government entities also need to report the grants they have paid and payments they make to certain other entities.

Contractors can include subcontractors, consultants and independent contractors. They can be operating as sole traders (individuals), companies, partnerships or trusts.

The details you need to report about each contractor are generally found on the invoice you should have received from them. This includes:

  • Their Australian business number (ABN), where known
  • Their name and address
  • Gross amount you paid to them for the financial year (including any GST)

We use this information to identify contractors who haven’t met their tax obligations.

Find out about:

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Business Tax Tips – What is Single Touch Payroll (STP) Reporting

Business Tax Tips – What is Single Touch Payroll (STP) Reporting

What is Single Touch Payroll (STP) Reporting

STP – Single Touch Payroll – means the software sends the pay-run details as well as the super due, as an amount that is total (year-to-date) as at each pay-run, to the ATO. It means Payment Summaries will not be required at Year End – the ATO will have all they need already, by the last pay-run that is recorded in June!

Preparing

  • Businesses with 20+ employees MUST be ready by 1 July 2018 – the software is due to be ready in June 2018
  • Businesses with 19 or LESS employees – must start next year 1 July 2019 – but you CAN opt-in to start 1 July 2018 if you choose!

Support  –

1.   ATO STP info site www.ato.gov.au/stp. – and their Fact sheet – From the ATO siteWe have produced the following summary factsheet as a handy resource: Single Touch Payroll factsheet (PDF 228KB) This link will download a file

Single Touch Payroll (STP) aligns your reporting obligations to your payroll processes.

You will report to us each time you pay your employees. Your pay cycle does not need to change. You can continue to pay your employees weekly, fortnightly or monthly.

The information you send us will include your employees’ salaries and wages, allowances, deductions (for example, workplace giving) and other payments, pay as you go (PAYG) withholding and superannuation information.

2.     Update to the latest version as it arrives – The software will notify us when the STP features are ready – I suspect we may just use the ABN to identify with the ATO – and/or an AUSKEY – they haven’t specified how yet

3.     Software that is ready https://www.absia.asn.au/page/product-catalogue

4.     Consulting – Paul will be available for either – onsite – or remote login with Teamviewer in June, as the features are available, if you need help setting up.

5.     Next weeks – STP and MYOB, Xero, Reckon – keep informed: subscribe to the right software

Need help? Not sure? Call for FREE 30min advice / strategy session today!

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Business Tax Tips – Can I claim Home Office Expenses?

Business Tax Tips - Can I claim Home Office Expenses?

Business Tax Tips – Can I claim Home Office Expenses?

Many clients ask “Can I claim Home Office Expenses?” There is great information on the ATO website, and links for more info and a cool expense calculator, as part-reproduced here –

If you are a sole trader and your home is also your place of business you can claim tax deductions for a portion of the costs of owning, maintaining and using your home for this purpose. When you sell your home you may be liable for capital gains tax.

If you operate a business at or from your home, you may be able to claim a deduction for some of the expenses relating to the area you use for business purposes.

These expenses can be divided into two broad categories:

  • Occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums);
  • Running expenses (such as gas and electricity, phone, decline in value of plant and equipment, decline in value and cost of repairs to furniture and furnishings, cleaning).

As for motor vehicles, if you are carrying on a home-based business you can claim the cost of trips between your home and other places if the travel is for business purposes.

Generally, you can ignore a capital gain or loss you make when you sell your home, unless you have used any part of it for business purposes.

Next step:

Home office expenses calculator

Disclaimer:

  •  All outcomes provided by this calculator are based on the information you provide and the deduction rates available at the time of calculation. You should use the outcomes as an estimate and for guidance purposes only;
  • You need to self-assess your eligibility and entitlement to a deduction for home office expenses before using this calculator.

Warning – Capital Gains Tax on Sale of Home

Be aware that if you claim home expenses for business, then Capital Gains Tax may apply if you sell the home.

The ATO explains further (and gives examples there)  –

Generally, you can ignore a capital gain or loss you make when you sell your home. However, you may have to pay CGT when you sell your home if you have used any part of it for business purposes.

CGT will not apply if any of the following apply:

  • You operate your business from a rented home;
  • You do not have an area specifically set aside for your business activities;
  • You operate your business through a company or trust.

In most cases, the portion of any capital gain on your home that is taxable is the same as the portion for which you could claim a deduction for interest. Generally, this is based on the floor area of your home you have set aside for business, for example 10%.

You do not have to pay CGT for those periods you did not use your home for your business.

If you have a capital gain because you use your home for business purposes, you may be able to apply one or more of the small business CGT concessions to reduce your capital gain.

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Business Tax Tips – Beware – Claiming “I didn’t know” is no excuse with the ATO and can lead to fines!

Business Tax Tips – Beware – Claiming “I didn’t know” is no excuse with the ATO and can lead to fines!

Beware – Claiming “I didn’t know” is no excuse with the ATO and can lead to fines!

Beware of your liability as a small business owner for tax credits you have claimed, or not knowing what your bookkeeper/wife is reporting in your BAS and tax returns – ignorance is not an excuse with the ATO! As Terry Hayes relates in Smart Company about a carpenter in a recent Dispute with the ATO –

While it’s often said that lawyers and accountants are their own worst clients, or doctors are their own worst patients, taxpayers too can be their own worst clients when they represent themselves in disputes with the Tax Office.

This happened recently with a carpenter who represented himself before the Administrative Appeals Tribunal in a GST dispute with the Tax Commissioner.

In that case, the AAT upheld the Tax Commissioner’s decision to impose on the taxpayer a 50% administrative penalty on the basis of “recklessness” because he had over-claimed GST credits.

The taxpayer is a carpenter by trade, a sub-contractor in the building industry. He is a sole trader and has no employees. The Commissioner audited his Business Activity Statements for the period 1 January 2007 to 30 June 2010 and found he had over-claimed input tax credits. The BASs showed that claims for ITCs exceeded his GST payable in all but six out of the 42 BASs lodged in the relevant period. The tax shortfall amount was around $130,000 and the penalty imposed was some $65,000 based on 50% of the shortfall amount.

The taxpayer said that his wife prepared and lodged his BASs and that he never reviewed them or any of the supporting documents, including the invoices that he kept in a box in the linen closet which, as it transpired, did not substantiate his ITC claims. He also did not keep vehicle log books. Nor did he ever check any of his bank statements and so he was unaware that he was receiving GST refunds from the Commissioner over a lengthy period of time in the joint bank account that he had with his wife.

The taxpayer did not dispute the tax shortfall but argued he was not responsible for the penalty maintaining that it was the Commissioner who was mostly responsible for it. He alleged that Tax Officers had represented to his wife that he was entitled to claim ITCs for the purchase of his family home because he maintained a home office (although the AAT noted the settlement statement for the purchase of the home did not show any GST having been charged by the vendor to the taxpayer and his wife as the purchasers). Additionally, the taxpayer claimed it was the Commissioner that allowed the situation to go on for so long without him being audited.

The taxpayer also alleged that a car salesman had represented to him that he could claim back the GST on the purchase of two vehicles, but he accepted before the AAT that he was given wrong information by the salesman.

The taxpayer also stated that he had lost a lot of information about his purchases when his old computer died and that many other receipts that he had stored had faded and were illegible. The taxpayer contended that the mistakes in his BASs “were not made intentionally by his wife and that he had always been honest with the Commissioner”.

The taxpayer was self-represented. The AAT did not accept what the taxpayer said his wife was told by the Tax Officers or what the taxpayer said he was told by the car salesman. It agreed with the Commissioner’s contention that the taxpayer had over-claimed ITCs “for a lengthy period of time in circumstances where he knew or should have known that he was not entitled to claim the ITCs”. The AAT said the taxpayer had conceded he was “indifferent as to whether the BASs were accurate”. It also noted the taxpayer “never checked any of the BASs or whether he had the supporting documentation for the ITC claims because he thought everything was fine”. The AAT was of the view that the taxpayer “chose to leave the preparation of his BASs in the hands of his wife who had no taxation expertise”.

In the Tribunal’s view, the taxpayer’s conduct amounted to recklessness because there were foreseeable risks as to a tax shortfall where his BASs included claims for ITCs to which he was not entitled. The AAT said a reasonable person in the taxpayer’s position should have known about those risks. The Tribunal said the taxpayer “displayed complete indifference to the high risk of non-compliance in his GST affairs”. Game, set and match to the Tax Office on this occasion.

The AAT held the taxpayer had failed to discharge the onus of proving that the penalty was excessive. It held the decision to impose an administrative penalty of 50% was correct and that it should not be remitted in the circumstances.

Taxpayers must exercise care in their taxation affairs. They have that responsibility, and while they may claim they have no intention of making mistakes, that does not unfortunately stack up. Leaving the preparation of BASs to a family member (even if they are well versed in this), be it a wife or someone else, does not absolve the taxpayer from his or her responsibilities.

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