Money Saving

Super guarantee: are you ready for ATO crack down?

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The ATO is increasing its efforts to crack down on employers who fail to make quarterly superannuation guarantee (SG) contributions of 9.5% on behalf of their employees. If you are an employer, regardless of whether you run a small or large business, now might be a good time to review your SG obligations before the ATO comes knocking. If a shortfall is discovered, simply rushing to make extra super contributions will not always be the best course of action. In fact, it can result in a double liability, so careful planning is required for dealing with any identified problems.

It is estimated that the shortfall – or gap – in SG payments could be around 5.2%, equivalent to $2.85 billion in missing super contributions (based on estimated figures for 2014–15). This gap is the difference between the theoretical amount due by employers to be fully compliant with their SG obligations and the actual contributions received by super funds. The Minister for Revenue said the failure of some employers to meet their SG obligations to employees has been a problem ever since SG was introduced in 1992.

ATO Deputy Commissioner, James O’Halloran reported recently: “While this analysis shows that 95% of the estimated superannuation guarantee is paid to employees, the gap exists because some employers appear not to be meeting their super guarantee obligations either by not paying enough or not paying it at all”. This follows recent pressure from a Senate Committee calling for the ATO to adopt stronger compliance activities, rather than its previous reactive approach.

In addition to following up all reports of unpaid SG, the ATO says it is increasing its proactive SG case work by a third this financial year. Mr O’Halloran added:

“We have improved our analysis of data to detect patterns in non-payment, and are working more closely with other government agencies to exchange information”

Package of reforms

As if the Commissioner doesn’t have enough powers already, the Government has announced a package of reforms to give the ATO real-time visibility over SG compliance by employers. One of these involves additional ATO funding for a Superannuation Guarantee Taskforce to crack down on non-compliant employers.

Other key recommendations include the following:

Monthly contribution reporting

Superannuation funds will be required to report to the ATO on contributions received more frequently, at least monthly. The Government says this will enable the ATO to identify non-compliance and take prompt action. It has been noted that this move to more regular SG reporting will place a greater cost burden on super funds, especially smaller ones.

Single Touch Payroll (STP) roll out

Employers with 20 or more employees will transition to STP from 1 July 2018, while smaller employers (ie, those with 19 or less employees) will move to STP from 1 July 2019. Rather than being a check on businesses, this new system is designed to reduce the regulatory burden and transform compliance.

Director penalty notices

The issue of director penalty notices and the use of security bonds for high-risk employers are measures set to improve the effectiveness of the ATO’s recovery powers, to ensure that unpaid superannuation is collected and paid to employees’ super accounts.

Penalties by court order

The ATO will have the ability to seek court-ordered penalties in the most serious cases of non-payment, including those employers who are repeatedly caught but still fail to pay SG liabilities.

 Super contribution due dates

Quarter ending          Employer contribution           Late contributions,

                                               due date                         SGC statement and

                                                                                         payment due date

           30 September                   28 October                            28 November

           31 December                    28 January                             28 February

           31 March                           28 April                                  28 May

           30 June                               28 July                                    28 August

Employers are required to make quarterly super contributions of at least 9.5% of an employee’s ordinary time earnings. If the super fund receives the SG contributions by the quarterly due dates (see table) the contribution is tax-deductible for the employer, whereas a late payment is not tax-deductible.

Where an employer does not make sufficient quarterly super contributions by the due date, the employer becomes liable for the superannuation guarantee charge (SGC). The SGC is payable to the ATO and automatically arises as soon as the contributions are not made by the due date. This means that if an employer discovers a shortfall in SG contributions after the due date, making a contribution to the employee’s super fund to cover the shortfall isn’t always the best course of action as it may not reduce the SGC liability. Generally, an employer can only use late contributions to offset a portion of the SGC that relates to the relevant employee. However, a late contribution cannot be used to offset the SGC in respect of a person who is no longer an employee.

Fixing a SG problem

If you are expecting leniency from the ATO for a first offence, think again. The Commissioner does not have any discretion at law to remit the SGC itself. The best a non-compliant employer can hope for is that the ATO may remit the 200% additional SGC penalty that applies for the late lodgment of a SGC statement.

Employers can also request the ATO to defer the due date for lodgment of a SGC statement. However, a deferral of time to lodge the statement does not defer the time for payment. The ATO will generally only extend the due date for payment where there are circumstances beyond the employer’s control (eg, a natural disaster or illness) and the payment can be made in full at a later time (or by instalments).

Do you think you could have a problem with your SG obligations? Speak to us about your options before the ATO is on your doorstep.

Tax and Credits

Company tax rate cut decreases value of franking credits

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Recent media coverage has been devoted not only to whether or not passive investment companies are eligible for the reduced company tax rate of 27.5%, but also to the consequent loss in value (2.5%) of franking credits by the shareholders of small incorporated businesses that qualify for the tax rate reduction.

The legislation that reduced the corporate tax rate to 27.5% for small businesses became law on 19 May 2017, and applies retrospectively from 1 July 2016. To qualify for this concessional tax rate a company must have an aggregated turnover of below $10 million.

This is in stark contrast to the prior rules that introduced the former 28.5% rate for small businesses for the 2015-2016 income year, but allowed companies to keep franking dividends up to 30%, ie, the standard corporate tax rate, instead of at the applicable rate of 28.5%.

Given that the tax return process for 2016-2017 is now in full swing, it is important that both businesses and shareholders are aware of the impact of this tax rate change on the franking credit distribution.

How does the reduction of 2.5% in franking credits emerge?

It appears that obtaining the new tax rate reduction could be a pyrrhic victory for some small and medium-sized companies as the benefit of the company tax cut (from 30% to 27.5%) would not be passed on to shareholders if distribution of dividends is fully franked. Instead, shareholders will receive reduced franking credits based on a 27.5% tax rate in lieu of 30%, so essentially a 2.5% reduction in the value of franking credits.

What do reduced franking credits mean for you?

Under the Australian imputation system, when a company distributes its profits to its shareholders, the company can pass to the shareholders credits for income tax paid by the company on the profits. This is achieved by franking the distribution and those credits given to the shareholders are called “franking credits”.

Franking credits help to reduce the shareholder’s personal tax bill so the higher they are the better for the shareholder.

Basically, the idea of the franking credits is to prevent double taxation of a company’s profits, first in the hands of the company and then in the hands of the shareholders.

While companies pay taxes on the current year turnover, franking credits are calculated based on turnover for the previous year. The result could be, for example, that while tax is paid at 30% (or even 28.5% if you are a small business with a turnover below $2 million for 2015-2016 income year), credits can only be franked at 27.5%; hence the disparity.

This change will have greatest effect on corporate tax entities that paid a fully franked (or close to fully franked) distribution at the 30% rate between 1 July 2016 and 18 May 2017, but that distribution was over-franked due to their tax rate being reduced to 27.5%.

“During the 2016-2017 income year, “Company A” paid a franked dividend based on profits of a previous year (2015-2016 income year) where the company’s tax rate was higher (30%) than the year in which it paid the dividend (27.5% for 2016-2017 income year). This means that the shareholders of Company A will receive franking credits at 27.5% instead of 30%, resulting in a loss of 2.5% in franking credits that cannot be offset against the tax paid by the shareholder.”

As a consequence of these changes, the ATO has released the Practical Compliance Guideline PCG 2017/D7. It notes that if a small business entity fully franked a 2016-2017 distribution prior to 19 May 2017 (before the legislation that reduced the company tax rate to 27.5% was enacted), the amount of the franking credit on members’ distribution statements may be incorrect if it was based on the 30% corporate tax rate.

The draft guideline recommends that affected companies advise shareholders in writing of their correct franking credit for the 2016-2017 income year, without re-issuing the distribution statement. By doing this, such companies will avoid the imposition of penalties.

Are you still in doubt?

Essentially, the change in tax rate will represent a higher cost to shareholders (who will see a reduction to the franking credits they can claim), which perhaps defeats the purpose of the company tax reduction. If you are in doubt about the implications and consequences of the franking credits please contact us.

Home

Renting out your holiday home

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A holiday home is a common investment for many Australians. Often the holiday home is rented out for part of the year to help finance the cost of owing the property or just to provide an additional source of income. The rent received must be declared in the owner’s tax return as income against which related expenses can be claimed as tax deductions. In this article we cover some of the essentials in claiming holiday home rental expenses.

What can be claimed as a tax deduction?

As with traditional rental properties most expenses incurred in running a holiday home may be deductible. These include:

  • Advertising costs

  • Agents fees and commissions

  • Body corporate fees

  • Council rates

  • Depreciation on assets and buildings

  • Insurance – building/landlord

  • Interest on funds borrowed to acquire the property

  • Land tax

  • Repairs and maintenance

  • Water rates

  • And more

When are these expenses deductible?

The most common mistake when accounting for holiday homes in a tax return is claiming expenses for the entire year.

Expenses are only deductible where the property is rented out or when it is genuinely available for rent even if it is not rented at that time. Therefore, expenses incurred when the property is used for private purposes or while it is not genuinely available for rent are not claimable.

Private purposes include periods where it is used by the owners or the owners’ family or friends for free. Genuinely available for rent means the owner is making a bona fide attempt to rent the property and that it has a realistic chance of being rented. Factors that suggest it is not genuinely available for rent include:

  • Only using advertising that has limited exposure (such as word of mouth)

  • Only making the property available at low demand times (i.e. when it is unlikely to be rented)

  • Poor property condition

  • Poor location and accessibility that make rental unlikely

  • Placing unreasonable conditions on renting the property

  • Asking for an unrealistic rental amount

How to calculate deductions correctly

Where a holiday home is used to genuinely produce rental income during a year, but is also used for private purposes or has periods where it is not genuinely available for rent, expenses must be apportioned. Generally, this is done on a time basis. For instance, where a holiday home is rented for 3 months and not available for rent for the other 9 months, 25% of expenses, representing 3 months out of the entire year, will be deductible.

Expenses that relate directly to rental income such as advertising and agents commission do not need to be apportioned.

Where the holiday home is rented at below market rates to a related party, the deductions for that period are limited to the rental income received in that period.

Is the sale of a holiday home subject to capital gains tax?

In most cases, a holiday home will be subject to capital gains tax. This is because generally the owners will claim the main residence exemption on another property (such as their home). However, in addition to purchase, selling and capital costs, expenses incurred in holding the property that could not be claimed as tax deductions will also reduce any capital gain. These include rates, land taxes, insurance and repairs while the holiday home is not rented or available for rent. For this reason, it is important to keep records for all holiday home expenses for the entire period of ownership.

For more information on this topic, or for assistance with correctly declaring your holiday home, contact our team at Private Wealth Accountants.

Refund

Maximise your refund, don’t miss any deductions

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People who lodge their own tax return commonly make two mistakes which will cost them dearly.

The first mistake is claiming personal expenses that are not deductible.

Claiming expenses that are not deductible can be disastrous. Not only do they run the risk of getting audited by the ATO, but if they are audited, they will have to repay the tax refund that was wrongfully received and may also face additional fines and penalties.

The second mistake is not knowing what expenses can be legitimately claimed in their tax return. Not knowing which expenses to deduct will also hurt the hip pocket. The ATO does not automatically include deductions in a tax return, so not knowing what to claim can mean the refund could be lost forever.

Different professions are able to claim different types of expenses. There is no “one size fits all” guide to claiming tax deductions. If you are unsure if your expenses are deductible, its always best to keep your receipts and ask your accountant when completing your tax return.

You can avoid both these mistakes by going to a qualified chartered accountant and registered tax agent. In order to complete your tax return accurately and get the best refund you are entitled to, contact us and we can put you on the right path.

Private Wealth Accountants

Our new office at 1/193 McKinnon Road

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To serve our clients better and have a greater presence in the community we have decided to establish a permanent office. We would not have been able to achieve this goal without the support patronage of our wonderful clients.

From the 10th of July we will open our doors to you at our brand new office on 1/193 McKinnon Road, McKinnon.

Where we used to be an “appointment only” firm, we are now operating full time with extended hours. Just like in the past, we still accept weekend and after-hours bookings in addition to the standard business hours.

We hope to be operating from our new office for many years to come and hope to see you there in the near future.

I have shared with you the Top 4 Tax Deductions that Most People Miss. I hope that this article can help you better understand what you can claim to increase your tax refund.

If you have any question, free feel to email us at admin@privatewealthaccounts.com.au or call us at (03) 9973 5905. We are here to help.

Wealth Accountants

L & D Associates is now Private Wealth Accountants

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L & D Associates started seven years ago. We have seen it grow from a part time operation to a fledgling firm with an expanding and more discerning client base. Our clients come to expect and demand a high level of service. We believe the switch to Private Wealth Accountants will assist us in delivering that service.

To provide a more holistic service to our clients, we have added complementary services which will benefit our clients immensely. In addition to our core business, we will now also offer financial planning and mortgage broking.

The addition of these services will allow us to better serve you. Not only are we dedicated to providing you with exceptional accounting services, we hope to assist you in growing your personal wealth and superannuation.

Check out our list of services here.