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Sep 30, 20205 min read

useful taxation notes from work (2020 ver.)

Updated: Dec 6, 2020




Individuals



Company


Non commercial losses - Four tests


you can offset your business losses against your other income in the relevant year:

  • assessable income test: assessable income from your business activity during the financial year must be at least $20,000 (also applies for capital gains and fuel tax credits).

  • profits test: if your business has made a tax profit in three out of the past five years (including the current year).

  • real property test: if real property of at least $500,000 in value is used in your business activity on a continuing basis.

  • other assets test: if the value of the 'other assets' you use in your business on a continuing basis is at least $100,000.


Fringe benefit tax (FBT)

  • a 'payment' or ‘non-cash benefit’ to an employee, but in a different form to salary or wages.

  • E.g. allowing an employee to use a work car for private purposes, paying an employee's gym membership, providing entertainment by way of free tickets to concerts. https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/

  • FBT rate: 47% of a benefit’s ‘taxable’.

  • FBT year: 1 April to 31 March.

  • FBT is separate to income tax and the employer must self-assess their FBT liability and lodge an FBT return.

  • The higher the proportion of work use, the lower the taxable value of the car will be for FBT purposes.

  • Employers can generally claim an income tax deduction for the FBT they pay and claim GST credits for items provided as fringe benefits.

  • Otherwise deductible rule: permits the gross taxable value of certain fringe benefits to be reduced by the amount of the notional once-only income tax deduction that the employee would "otherwise" have been entitled to claim. https://iknow.cch.com.au/topic/tlp227/overview/otherwise-deductible-rule


Utes and FBT


There is a common belief that ute’s are exempt from FBT (i.e. 100% business use), but the private use of such a vehicle is limited to:

  1. travel between home and work

  2. travel that is incidental to the course of duties of employment, ie between sites

  3. non-work related use that is minor, infrequent and irregular - if you own only 1 vehicle then it may be difficult to prove


Employee contribution

  • The taxable value of a car fringe benefit is meant to reflect an employee’s ‘private use’ of the vehicle, as only the private use of the car is subject to FBT. Additionally, the FBT law allows ‘employee contributions’ to reduce the taxable value of the car fringe benefit. https://changeaccountants.com.au/resources/fbt/CAA.FBT.Employee.Business.Cars.Tips.Traps.pdf

  • If the taxable value of a car can be reduced to nil, then no FBT will be payable.

  • There are 2 ways for an employee to make employee contributions being:

  1. after tax payments made from the employee directly back to the employer,

  2. the employee paying the running and maintenance costs for the car directly from their after-tax income.



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Foreign resident


Following forms of income would not normally need to be disclosed on foreign resident’s Australian tax return:

  • Foreign sourced income

  • Dividends

  • Interest

  • Royalties


Dividends, interest and royalties paid to a non-resident are generally subject to non-resident withholding tax. This is a final tax in Australia (although foreign tax could apply).


Dividend

  • fully franked dividend = exempt from Australian withholding tax = not assessable

  • unfranked dividend (conduit foreign income) = no Australian withholding tax = not assessable

  • unfranked dividend (not conduit foreign income) = subject to Australian withholding tax at a rate of 15%


CGT

  • only subject to CGT in Australia on assets that are classified as ‘taxable Australian property’ (TAP).

  • CGT event I1 Cessation of residency: the individual is deemed to have disposed of all their CGT assets for market value on that date (except pre-CGT assets and taxable Australian real property).


Interest

  • Rate of withholding tax 10%



Pay as you go (PAYG) instalments

  • PAYGI: regular payments based on your business and/or investment income (aka. instalment income) throughout the year

  • PAYGI will be offset against any tax you owe for the year when lodging your tax return

  • to estimate PAYGI = (gross sales - gst on sales) * PAYGI rate



Chattel Mortgage vs Lease vs Hire Purchase (CHP)


1. Chattel Mortgage

  • gives a business full ownership of the assets funded by a lender (asset is recorded on balance sheet)

  • generally have low interest rates, as the assets will always act as security on the loan itself

  • can also claim the initial GST amount of the asset’s purchase price

  • interest and depreciation expenses are tax deductible

  • can’t sell or dispose of the asset during the term


2. Leases

  • Your business will have both the use of business equipment and the benefits of ownership (you won’t own the asset),

  • while the lender will have actual ownership of the asset (very low risk to the lender)

  • No deposit


2.1. Finance Lease

  • mid-to-long-term lease (e.g. medical equipment)

  • Tax deductions for the lease payments

  • Responsible for maintenance and running costs & repairs and damage


2.2. Operating Lease

  • short-to-mid-term lease for assets which may become quickly obsolete (e.g. computers and IT equipment)

  • can commonly upgrade the assets purchased within the lease period

  • can also claim tax on your rental payments


3. Hire Purchase

  • will own the asset at the end of agreement

  • interest and depreciation expenses are tax deductible

  • The lender can reclaim the asset if you don’t meet your payment obligations

  • You’ll pay more over time for the asset you are financing through hire purchase than if you bought it outright


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