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The income tax implications of property lease incentives Lease incentives are commonly used by landlords to entice tenants to enter into a lease. The most common type of lease incentive relates to new tenancies in commercial buildings. These inducements can take many forms, including upfront cash payments, non-cash items such as motor vehicles or boats, expensive paintings, holiday packages, rent-free or rent-discounted periods for the leased premises or for premises in other cities, free fit-out of the premises, payment of removal costs or for the surrender of any existing leased premises, and interest-free loans. The enticements can even be a combination of any of the above. What are the income tax implications? The income tax treatment however of such lease incentives can vary depending on the nature of the incentive provided. Tenants For tenants in receipt of a lease incentive, it must be determined as to whether the incentive is assessable in their hands as “ordinary income” or alternatively under a specific tax provision. Certain incentives may not be assessable. Further, the incentive may affect the extent to which certain tenancy costs are deductible to the tenant. The circumstances in which certain lease incentives are assessable to the tenant have been established based on a body of case law. As a general rule, lease incentives received by a tenant would be treated as assessable income in their hands. For cash incentives, the Tax Office considers that the receipt would typically be assessed as ordinary income. This applies irrespective of whether it is an incentive to: • move into a new building • stay in an existing building • to take up additional floor space, or • a relocation in the same building. Non-cash incentives such as cars, boats, paintings and other benefits, which can be converted into cash, will be taxable at their full money value. The law would ordinarily assess taxpayers on the receipt of a non-cash benefit as if it were convertible into cash. The value assessed would generally be the arm’s length value less any consideration paid. It should be noted, however, that the assessable amount would be reduced to the extent that: •the cost of the benefit, if it had been incurred by the tenant, would have been deductible, or •the provider of the benefit would not be entitled to a deduction for the cost of the benefit provided (such as where the expenditure would constitute entertainment). Further, a deduction for depreciation will generally be available if the item is used to produce assessable income. The receipt of a rent-free period will typically not be subject to tax. The receipt of a rent free period or reduced rent from a landlord would result in an assessable amount, but a deduction equal to the value of the incentive would also be available. The net effect is that no amount would be assessed to the lessee. For other non-cash incentives (such as free fit-outs, holidays, interest free loans, free plant, holiday packages, etc), the tax treatment can vary. For example, the receipt of an interest-free loan is generally treated as tax-free if it is a genuine business loan. Free fit-out is typically assessable on value provided, and a capital allowance deduction may be available if the tenant becomes the “holder” of the fit-out. Conversely, the fit-out may not be assessable if it is owned by the landlord instead. Removal expenses are normally assessable.
Tax Office continues to target online sellers Many taxpayers will have noticed that “pre-filling” has become much more widespread, which is only possible due to the amount of financial information that is able to be accessed by the Tax Office. Each year the government’s revenue collection arm extends further and further into the databases of financial institutions, employers and to other sources of relevant records, and with millions of dollars in play, the taxman’s ability to pre-fill and use tools such as data-matching and performance benchmarks looks likely to increase. With the amount of data kept online about taxpayers, it pays to be ever vigilant about meeting tax obligations and therefore avoiding otherwise unnecessary penalties. This is especially so given the Tax Office’s recent update to the protocols governing its Online Selling Data Matching Program. Now in its fourth year, the program was developed to assess the overall level of tax compliance for anyone involved in selling goods or services via online selling sites, such as eBay. Both the Tax Office and the Department of Human Services (which governs Centrelink) have in the past asked for data from eBay, which is legally required to comply with a formal request for information. For a recent financial year for example, eBay was asked to reveal the identities of about 15,000 people who sold more than $20,000 worth of goods on the trading site. The current program’s threshold target is now $10,000 — so obviously a lot more buyers and sellers will be tapped on the shoulder. Matching this data to its own records, the Tax Office will use this information to identify omitted income as well as registration, reporting and lodgement obligations.
FBT — your business basics Own a business that employs staff, and provide remuneration to employees in a form other than straight salary, you may be up for fringe benefits tax (FBT). Your workers do not then have to pay income tax on the value of the benefits provided to them. FBT is separate to income tax and has its own tax year, from April 1 to March 31 (with the FBT return lodgement deadline 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 and 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 Tax Office has several different categories of fringe benefits, • 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.
Do you have Employees on 457 or RSMS visas – Then you must ready this DIBP may contact you soon (if they haven’t already done so) to commence monitoring and request you to produce records and information in relation to employment of the sponsored employees. Failure to comply with visa and sponsorship conditions would result in penalties, fines, sanctions and civil prosecution. Some facts from DIBP Immigration Blog -In 2010-2011, the department sanctioned 137 sponsors, and warned 453 sponsors -in the last 18 months, the department have issued 12 infringements to 12 sponsors, and are considering civil action against a few sponsors at the moment for serious failures of their sponsorship obligations Source- migrationblog.immi.gov.au/category/sponsor-monitoring/ What to do then For those who haven’t received it as yet, should have their records reviewed by their accountant who has dealt in similar immigration matters. We offer an initial review at no costs so we are happy to answer any questions or queries you may have. And for those who have received it they shouldn’t waste any time and should prepare a response but more importantly review their financials and employment related documents for any gaps or mistakes and make a correction plan. We have helped various client navigate this audit with satisfactory - Feel free to contact us for a confidential chat.
Tips and traps for SMSFs investing in property -Use of property in retirement When an SMSF starts to pay a pension, all property investments must continue to be maintained in accordance with super laws, in particular the sole purpose test and in-house asset rules. For example, members are not able to occupy or lease residential property on retirement without the asset first being sold or transferred to the member(s) as a benefit payment. Trustees need to keep in mind that the transfer of any asset from an SMSF to a member must also be permitted under the governing rules of the fund and that a capital gains tax (CGT) event may occur, with possible taxation implications for the fund. Offshore investments The Tax Office warns that the risks and issues that are associated with property investments may be heightened when these investments are located in an offshore jurisdiction. The Tax Office notification says that there is no specific guidance other than the rules of the superannuation laws as to what trustees can invest in regarding to real property, and also emphasised that it is not its role to provide investment advice. It is important to be mindful that the trustees of any SMSF are ultimately responsible for managing the super fund, so appropriate research and scrutiny should be applied when making investment decisions. The Tax Office encourages trustees to seek professional advice. Insurance SMSF trustees also need to seriously consider insurance for their fund to cover unforseen events. This cover can include: •general insurance – trustees should ensure they have adequate insurance to cover property repair or replacement costs in the event that the property is damaged. •third-party liability insurance – trustees should be aware that as a property owner, the fund can be sued. This may put the fund’s assets at risk. •death or total and permanent disability insurance – trustees should consider the benefit of policy proceeds to assist in meeting ongoing obligations, including where the property is business real property used in a family business.
Tips and traps for SMSFs investing in property SMSF trustees contemplate investing in real property as part of the fund’s investment strategy. However a recent Tax Office (TO) notification raised its concerns that some trustees may not fully consider the risks and issues associated with holding a real property investment and how this can affect other aspects of the fund, such as benefit payments. The TO notification alerted trustees to consider the following issues. Investment strategy Trustees are required to invest in accordance with the investment strategy of the fund, including giving regard to liquidity. When deciding whether to invest in property, trustees should consider if this meets the diversification and liquidity requirements of their fund. For example, when members retire and start receiving pensions, there needs to be sufficient money in the fund to meet minimum pension payment requirements. Borrowing Superannuation law allows a fund to borrow only in limited circumstances. When an SMSF borrows money to invest in property, it needs to do so via a limited recourse borrowing arrangement (LRBA). These borrowings need to be made on commercial terms to avoid adverse income tax consequences, such as income being deemed non-arm’s length income that would attract non-concessional tax rates. Related party transactions In the case of the property being leased to a related party, trustees need to ensure compliance with the super laws, such as: • in-house asset rules • sole purpose test • arm’s length requirements.
A tax deduction for your commercial website There is no denying that the internet pervades our everyday living in multiple and various ways these days. The commercial world is not only similarly tied-in with all things “cyber”, but in fact many businesses rely to such an extent on being “online” that they couldn’t survive without it. Of course the internet is not a “one-size-fits-all” tool for commercial activities, as the purpose behind having an online presence varies greatly depending on the business involved. A particular website could be just for promotions and marketing, or it could provide essential contact details or information about services offered. Another business will require e-commerce capabilities, or other interactive services such as online quotes, or be capable of taking customer feedback. Depending whether a complex or a “plain-vanilla” web presence is needed by a business, the costs involved in creating, running and maintaining a website can vary greatly. Therefore estimating the financial demands of website development and maintenance — and the resulting tax consequences — can be far from straightforward. From a tax treatment point of view, the sticking point with website expenditure is determining whether such costs are essentially of a “capital” nature, or operational outgoings. The software that allows the website to operate may be deemed by the Tax Office to be “in-house software” if it is used to perform the functions for which it is developed. The software in these circumstances is an intangible asset. However, where an intangible asset is determined to be in-house software, as in this case, it would be classified for tax purposes as a depreciating asset that can be written off over time. Of course uncontrovertibly the hardware (such as a computer server) if used in-house would likely be considered “plant and equipment” and can be depreciated, with the effective life for such assets generally being four years. Businesses owners should be mindful however that costs dedicated to maintaining their website, and expenses associated with uploading content, such as price lists or changing details of goods or services on offer, and replacing text or pictures, can generally be seen as operating costs in the ordinary course of business. This would mean that these types of costs may therefore be deductible in the same year that they are incurred. An example of these types of costs may be the hosting of a website, as this is part of the regular ongoing cost of operations.
Change to Commonwealth Seniors Health Card eligibility Current and prospective holders of the Commonwealth Seniors Health Card should be aware of changes made to the eligibility requirements of this entitlement. The income test that applies to this entitlement is being expanded to include tax-free superannuation income streams and lump sums (superannuation benefits) of you and your partner. The measure will not affect current card holders who have a tax-free superannuation benefits introduced before January 1, 2015. However, where a person temporarily loses entitlement to their card after that date, any tax-free superannuation benefits (even one that arose before January 1, 2015) will be included for the purposes of determining their eligibility to the replacement or new card. Please also note that where a member of a couple is not yet entitled to a card after this date, but had a tax-free superannuation benefit commence before then, these rules may apply to the couple. The relevant tax-free superannuation benefit in this situation will not be used to determine the eligibility of the existing cardholder; however this benefit will be used to determine the income test eligibility of the member of the couple who did not hold a card as of January 1, 2015. The other implication is that where either member of a couple enters into a tax-free superannuation income stream or receives a lump sum after this date, this income will be included for the purpose of both member’s eligibility to a card, whether it be an existing card or a new card, being applied for after January 1.
Tips to Ensure Prompt Payments Credit reporting and receivables management company Dun & Bradstreet (D&B) said that while business owners often find themselves focused on the job at hand, the job isn’t really over until it has been paid for, it is essential for a business’s health and cash flow to have a timely turnaround on all accounts. D&B top five tips on collecting payments (and limiting the possibility of acquiring a bad debt). 1) Record customer details It is important to have all the relevant customer details you need before you deliver a service or product. Not all late payments are due to bad debts, maintain the details of your customers to investigate the payment as it becomes overdue. “Additionally, customer details are also perfect for initiating a marketing strategy or activity, so it’s a good idea to keep them on file.” 2) Clearly state trading terms Not all late payments will be a result of bad debt. Sometimes customers will forget to pay due to poorly devised invoices. “In order to help guarantee your payments it’s essential you outline your company’s credit policy, the due date and total amount owing on the invoice.” By providing all these details, you equip your customers with the information they need to make a prompt payment. 3) Offer early discounts Sometimes customers will need an incentive to make early or even on-time payment, it is common for debtors to ignore your invoice if they don’t see it as a priority. One way to confirm the importance of your invoice is by offering a discount for early payments. “Customers will always try to make savings wherever possible, so even a minor discount of 5% is enough to confirm a prompt payment.” 4) Keep in telephone contact It can be too easy for customers to ignore a letter or email that outlines the payment they owe. Telephone follow ups have a higher chance of success, largely because it is a lot more difficult to ignore a phone call. Another major benefit of a telephone follow up is that you are guaranteed direct communication with your debtor if they answer, which is never the case with an email or letter. 5) Refer to a collection agency Debt collection agencies are designed to collect payment for delinquent accounts. D&B’s advice, if you find yourself spending too much time or resources and still not getting anywhere, is that it may be worthwhile outsourcing your debt collection. “Agencies deal with debt collection everyday, so it’s only natural that they are better positioned to reclaim money.”
Lost my Tax File Number (TFN) If you have lost your TFN don’t panic. You need to call the Tax Office and they will give yours to you. TFN are not available online due to security reasons. You can try anyone of the 2 options Option 1 – The paper trail Rifle through your paperwork you should have the TFN there. You can check the following: 1.Your income tax ‘notice of assessment’ for a previous year 2.Any correspondence sent to you from the Tax Office 3.A payment summary from your employer 4.An account statement from your superannuation fund. 5.If you use a tax agent or accountant you can ask them for your TFN. Option 2 — Contact the Tax Office 1.You can call 13 28 61 from 8.00am to 6.00pm (Monday to Friday). 2.You can fill in a form provided by the Tax Office to apply for, or inquire about, a TFN. But as the Tax Office will only process the bona fide paperwork it provides taxpayers, you will need to order an actual paper form. Do you need your TFN for a new job? If it's not a tax-time panic over your lost TFN, relax! You have 28 days in which to provide your new employer with your tax file number before your employer has to start withholding tax from your pay at the maximum rate of 47%, plus Medicare levy of 2%. This should be ample time to try the measures mentioned above.
Firms warned of audits on income splitting Draft guidelines have been released by the Tax Office(TO) on how the general anti-avoidance legislation should apply to professional firms that allocate profits to individual professional practitioners with proprietorship in the firm. Firms potentially affected include those providing services in the accounting, architectural, engineering, financial services, legal and medical professions. Professional firms can be structured in a range of ways, depending on the choices made by the owners, but the TO has warned that in some cases the way a business is structured “can be used in ways that give rise to different tax consequences and resulting tax compliance risks”. Its concerns about tax compliance in these instances are based on where arrangements are set up so that a practice’s income is treated as being derived from the business itself, even though the source of that income is actually the provision of professional services by individuals. It said this is particularly the case where: 1.the level of income received by the practitioner, whether by way of salary, distribution of partnership or trust profit, dividend or any combination of them, does not reflect their contribution to the business and is not otherwise explicable by the commercial circumstances of the business 2. tax paid by the practitioner and/or associated entities on profits of the practice entity is less than that which would have been paid if the amounts were assessed in the hands of the practitioner directly 3.the practitioner is, in substance, being remunerated through arrangements with their associates, and 4.the structure does not provide the practitioner with advantages, such as limited liability or asset protection. To know more contact us at 9242 3555 or write in at: firstname.lastname@example.org
Time is running out to disclose offshore income The Tax Office has issued a final warning — taxpayers with undeclared offshore assets or income are running out of time and need to act now if they want to take advantage of an amnesty that runs out by December 19. The Tax Office said that the rare opportunity provided by its offshore voluntary disclosure initiative is unlikely to be repeated. Its “Project DO IT” (disclose offshore income today) allows eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets, such as amounts not reported or in tax returns. These can include: • foreign income or a transaction with an offshore structure • deductions relating to foreign income that have been claimed incorrectly • capital gains in respect of foreign assets or Australian assets transferred offshore • income from an offshore entity that is taxable in your hands • offshore deductions relating to domestic income. The Tax Office said that coming forward now, ahead of a global crackdown on people using international tax havens, is the last chance for many taxpayers to escape hefty fines. With the increased global exchange of financial information, it said that it is almost certain that taxpayers doing the wrong thing with their international assets will be caught. To know more contact us at 9242 3555
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In these challenging times many companies are turning to Business Mantra for a second opinion on how they can leverage their current situation to enhance performance and market share.
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When comparing it to being an employee, some of the benefits include;
Relative easy to set up and run for smaller business owners Set up costs are very low (when compared to other structures) Likely to be eligible to small business tax concessions.
Increased ability to claim business related deductions for business related items.
It’s a question often asked, do I need to have a specific tax accountant?
A good accountant should be able to answer your questions, and guide you throughout the course of your business’ life.
So picking the right one is just as important as picking the right business partner.
They should be able to tell you tax or other government incentives, that could allow your business to thrive.
You understand your fee structure, and never feel surprised by an accounting bill.
Everyone gets busy, but a good accountant will at least be able to get back to you in a timely manner (not weeks later) Has the ability to do more than lodge a tax return.
Can advise you on how to grow your business, or achieve your goals.
Your first point of call before setting up a business should be to find an accountant that can help you.
You don’t want to have to worry about this again once you are up and running Setting up your internal systems and accounting package based on the business you want be in the future, not the business you are now Make sure your insurances are all in place & you are covered for the industry you are in Build your business plan.
Without them, the big goals appear too far away and you don’t have anything to guide you