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Expenses & Deductions
There's a chance you're tired of the everyday travel, or want more flexibility of working hours - or perhaps you have an expertise or talent that could lead to a fulfilling profession in your very own business. If operating from home appears to provide a work/life equilibrium (to have your cake and eat it too) there just may be icing for your cake by way of taxation benefits.
Home-based business allows you to be your own boss, and generate a living on your own terms and conditions. But the other part of earning money is not shelling out more than you need to, so understanding which tax savings you are eligible for could be an excellent aid in making a home-based business successful.
The tax deductible expenditures that come about from working from home can be categorised as:
• 'occupancy' costs
• 'running' costs
• motor vehicle costs.
Deductions for occupancy
These refer to costs for using your home obviously, although not specifically directly linked with the business itself. These may be leasing expenses, possibly home loan interest should you qualify, council rates or insurance charges.
In order to deduct part of your home loan interest expenses, you must pass the 'interest deductibility test'. To claim a tax deduction for almost any occupancy cost, areas you set aside for working will need to have the 'character of the place of business'.
Quite simply, it should resemble 'Maggie's Hair Salon', 'Jim's Catering', 'Bob's Accounting' or a place that provides whatever service or product your home-based business is involved with. Putting up business signage will help, however it is also essential to have the actual business area properly defined.
You can normally claim the same proportion of occupancy costs as the proportional area of your residence which is used to generate income (for instance, in case your home office is 10% of the overall area of your property, then you'll be able to claim 10% rent expenses, council rates etc.). Having said that if you decide to claim occupancy expenditures, specifically home loan interest, you will be required to account for any capital gain tax as a result of the business section of the house whenever you sell your house.
You can usually look at operating costs as those expenses that originate from you using amenities in your house to assist operate the business, so these could include energy, gas, telephone bills and possibly cleaning expenses. However, you are able to only claim a tax deduction for the amount of consumption in the business, not basic domestic expenses.
Immediate write-off of start-up expenses
From July 2016, new businesses won't have to wait for 5 years to write off start-up “professional costs”, and business registration is going to be streamlined using a single online registration site.
The 2015-16 federal budget also established that small enterprises with a total annual turnover smaller than $2 million will be permitted to change legal structure without bringing in a CGT liability at that time.
Immediate write-off for assets purchased from July 1, 2015 till 30 June, 2017: Small businesses (with a turnover < $2 million) are able to immediately write-off any assets they purchase that cost less than $20,000
In contrast to most employees, home-based workers can usually claim a tax deduction for business related travel expenses. Therefore, you might possibly claim the expense of visiting a client's premises, or travel to purchase tools or supplies, or going to the bank, visiting the accountant or any other business-related task. With all of the above, it is very important to document everything - keep receipts and invoices, petrol dockets as well as other notices.
Variations to work-related motor vehicle expenditure claims
Previously, there were 4 different ways in which individuals could claim motor vehicle expense deductions. The 4 options were:
• cents per kilometre
• the logbook method
• 12% of original value
• 1/3rd of actual expenses.
However, as proposed in the 2015-16 federal budget, the 4 options are going to be refined into two (first two options being kept, and the latter options being expunged).
No particular work area
You might still earn an income from your home, but haven't set a specific area aside mainly or solely for these income-producing activities. Jenny's Art Magic, for instance, could see Jenny making her creations next to the TV one day, on the front porch another day, or at the kitchen benchtop.
There is no defined area from which a business is conducted, but Jenny can still claim deductions for utility usage such as gas or electricity. She just needs to apportion expenses and be able to show how she reached these amounts. Then there are phone costs for business use, and even the decline on value of 'plant and equipment' (chair, desk, computer). She will however be unable to make any claims based on renting or owning the house, and also rates or insurance.
Benchmarking your business is important for understanding how successful your business is in comparison with others in the market. You don’t know how your business is doing in terms of its overall health and security until you know what normal looks like for your type of business such as size, profile etc.
By exploring the businesses that are similar to you in profile and size and analysing what constitutes their success or failure or average performance, you can ensure that your business is doing well or if it not doing so well, then create business plan to get in shape!
It is simple than it sounds, at least to get started. In order to benchmark your business, you need to go through a process of researching and comparing, finding averages and standards of your competitors and your industry and matching them to your business.
The most important things to look for are:
This is the most essential benchmarking measure. You need to analyse how much money your business is making. Understanding the average profit benchmark in your industry is the only way to know this. If you don’t know what that is, then researching is the key. You can generally count on independent studies available through trade associations. If they are not available, then look for financial experts in your network who may have access to that level of data and information. Does the average industry profit match yours? If it’s below it, then that’s surely a sign that there’s something going on in your business that is holding you back!
Another essential category is industry spends across various departments such as Marketing, IT costs, staff re-reimbursement - you need to know whether you’re spending above or below the average. This will help you understand where you’re allocating funds and what effect it could be having on your operations. It could also be some vital areas that your business could have overlooked, where you’re falling behind other industry competitors.
If you can understand the general direction that other players are moving in, you can highlight any strategic opportunities you may be missing out on. Do you think the client retention or service strategy for your industry stand up to yours? If yes then extend those services, if no then you need to figure out some other strategies that you could put in place. Do you think there are important strategic differences, why is that? Or have you simply overlooked some important avenues that could lead to you losing out strategically? You will need experienced and qualified Accountants who can analyse the different strategies and offer you the best suitable advice according to your business conditions.
This is the area where you’ll definitely find some interesting facts. Customers have ample of choices in the industry; it all comes down to the level of customer service and support you and your competitors are offering at the moment. When benchmarking customer service levels, you should be looking at information in industry wide customer satisfaction or experience, and the customer support options and strategies your competitors are employing. How does that compare with your own business?
You don’t need to be on the cutting edge of technology, but you surely do need to be keeping up with both industry and consumer trends. The real purpose of almost all the technology you’ll use in your business is either customer service or communication, and those are two areas where you can’t really afford to be lacking. If you can find data around what technology is being used, from hardware to software to websites, you will be able to match it to your existing systems and determine where your technical resources are lacking - or, if you’ve been leading. The information here can guide your future technology decisions or show you areas and processes that needs to be improved.
Benchmarking the businesses is a tool ATO is actively using to audit businesses. Any businesses that vary considerably from industry benchmarks are being consistently red flagged by the ATO.
Call our expert accountants Cranbourne at 1300 300 106 to discuss your business plans and Benchmark your business!!
Is there any trouble with using your business assets on your own personal use? Assets that belong to the company and are used for your own use or entertainment could possibly lead to a taxation issue referred to as “Division 7A”.
The operating structure of your small business might be set up by the accountant as a company for getting all of the “asset protection” benefits using a corporate veil. Even so, being a private company with the majority of the company directors and shareholders being friends or family, business decisions may be easily manipulated to profit individuals. This isn't however always deliberate as many people think of business assets as their own. However, taking into consideration the company income tax rate is 30% (or 28.5% in certain situations), and the maximum individual marginal tax rate is 49%, you will get some tax respite from this arbitrage. Division 7A is intended to avoid this tax avoidance.
What is Division 7A?
Division 7A treats a transaction or any other benefit supplied by a private company to the shareholder (or their affiliate) as being a payment for income tax purposes. This integrity measure may apply even when the individual treats the transaction as a present, or perhaps a loan, or even the waiving of the debt.
The Division 7A net is broad, and could possibly catch numerous transactions that, in substance, don't include a distribution of income, for instance utilizing a company’s property for personal use. The meaning of “payment” is widened to incorporate the availability of assets.
Can this occur if I use company resources for private use?
That is right. Actual physical assets will be at the greatest exposure you might have, with Division 7A without realising it.
For instance: a holiday house that is owned by a firm but is utilized by the shareholder of the corporation. Value of this use, under Division 7A, may be considered as a dividend and form a part of the shareholder’s assessable income. There are specific exceptions that could apply however - for instance, when the property was being utilized as a primary residence. Consult our expert Small Business Advisors and Accountants at 1300 300 106 for additional details.
Be Careful for Motor Vehicles
Yet another relatively frequent instance concerns motor vehicles, however they are most probably caught by fringe benefits tax (FBT) instead of Division 7A due to the fact those cars are generally given to company directors in their capacity as employees in spite of those company directors being shareholders .This will begin getting fairly complicated, so make sure you speak with our expert Cranbourne accountants in case you have cars used in this way by shareholders, company directors and employees.
One particular outcome from the ATO’s current ramping of its data matching actions is a greater triggering of both Division 7A and FBT provisions, after cars registered to companies have been discovered to be used privately by shareholders or employees.
In case your dealings are subject to Division 7A, you might also need to consider some other aspects of taxation, including FBT, concerns relevant to share dividends or family law.
Fringe Benefits Tax
Division 7A will not affect payments made to shareholders or their affiliates in their capacity as an employee or being an affiliate of the employee of a private firm. Nonetheless, these kinds of payments might be subject to FBT.
On the flip side, Division 7A applies to loans and debt forgiveness made available to shareholders or their affiliates, even where these kinds of benefits are offered in their capacity of being an employee or for an affiliate of the employee. To prevent dual taxation, these kinds of benefits will not be subject to FBT.
Dividend Imputation, Franking Credits
Payments as well as other benefits taken to be Division 7A dividends are usually unfranked distributions except in cases where these are given under a family law obligation. Even so the ATO has a general discretion to permit a Division 7A dividend to be franked when it occurs due to a genuine error or accidental omission.
Payments and other benefits offered by a non-public company to shareholders or their affiliates resulting from separation and divorce or any other relationship breakdowns might be treated as Division 7A dividends and therefore are assessable income of the individual. Having said that this kind of payment or any other benefits are treated as franked dividends if paid under a family law requirement, like an order from the court, a maintenance arrangement approved by a court under the family law act or court orders in relation to a de facto relationship breakdown.
Call our expert Cranbourne Accountants and Cranbourne Tax Agents on 1300 300 106 to find out how you might be affected.
The baby boomer generation is at the retirement stage now. Recently there is an increase in Aussie business people retiring but the subject of succession planning continues to be a continually under-addressed matter.
Efficient succession planning can help diminish a lot of the income tax pitfalls that originate from the point that every medium and small size business proprietor will at one point retire, close-up shop, or else leave the business.
Although at some stage just about every business owner understands they ought to employ a succession plan, it appears less frequent to find a business owner who may have actually done something concerning this. Even the relatively simple assumption that you're going to at some point leave your enterprise ought to at the very least identify that there needs to be a procedure to tick off all the issues.
Obviously, there's more than merely the taxation issues to take into consideration – there's superannuation, pricing your enterprise, choosing the right person to hand over the reins, and selling or else you will be divesting yourself of something you have certainly put plenty of blood, sweat and tears into developing. Modern times might be a witness to an increase of baby boomers going through the process; however, this must cement the concept that succession planning will always be a significant decision of business lifecycle.
The ATO found that a majority of small business owners haven't carried out sufficient planning to make an easy transition into retirement. ATO mentions that it is finding that leaving a small business is much less risky if owners have been working with their accountants or tax advisers to tackle the tax concerns of an exit strategy or succession plan prior to leaving the enterprise.
The truth is whenever a business is sold quickly and without correct planning, things can fall through the cracks and lead to obligations not being fulfilled – or bring about avoidable and expensive financial outcomes (including taxation).
With a lot of issues to manage (for example dealing with capital assets, employees, final payouts and so forth) and perhaps your lifetime’s accomplishment on the line, it may be very useful to get expert assistance and suggestions to guarantee thorough planning – particularly with the substantial sums of money involved.
A few of the issues can centre around the point that selling or passing on a business is a one-off financial transaction from the business standpoint, but from a taxation point of view, what looks like a single sale (that of the business) is in fact several sales of individual assets that must be taken into account.
Because of this, it is very vital to effectively deal with the eligibility to use the 4 small business CGT concessions, the appropriate treatment of pre-CGT assets (especially, goodwill), the restructuring or occasionally de-merging of the company prior to selling, as well as the GST treatment when selling the business as a going concern.
Not deregistering for some activities can result in troubles, like GST and PAYG withholding as well as the ABN. A BAS will continue being issued in the event you fail to cancel the GST registration and you could be penalised if you do not lodge it on time; irrespective of whether the business is still actively trading or not.
ATO audits have uncovered misunderstandings over the tax treatment of the sale or some other disposal of assets, particularly over accessing the small business CGT concessions; 50% active asset reduction ,15-year exemption, roll-over for replacement assets and the retirement exemption.
It's a pre-requisite for any asset to be “active” to access these concessions, this addresses both tangible assets for example buildings, or intangible assets, which can be goodwill. An active asset is an asset that is utilized or kept ready for usage in the course of carrying on a business.
The profits from the sale of certain CGT assets might not be eligible for concessions due to this matter of “use”. As an example, assets that have a primary use of just deriving rent (which happens to be passive income for income tax purposes) is not qualified as active assets.
The 50% discount on CGT generally is applicable if the asset sold was held for 12 or more months by individuals and trusts. This CGT discount is not available to companies.
Decisions have to be made on selling the business enterprise itself or just the assets in the business, as there may be different taxation outcomes from each. Needless to say, when the business structure is a trust or partnership instead of a company, the tax implications will vary. We advice getting assistance with the tax implication of the different options, contact our expert tax agents and accountants if you need help.
When the business is being sold as a “going concern”, the sale might be eligible for GST exemption. However, there are several eligibility conditions, such as the vendor needs to remain in business up to the date of sale, the purchaser must be GST registered and consent in writing with the vendor that the “supply” of the business is as a going concern.
Any conversation of succession planning unwraps questions about estate planning. Passing on a business in the Will can bring concerns about making sure a business remains viable if being operated by beneficiaries of the estate or by an executor. And should there be a Self-Managed Super Fund in place, the tax treatment of benefits from the super fund will have to be addressed specifically (these are not covered by a will, but by the SMSF’s trust deed).
For further information about BookSmart Accountants Cranbourne or our services, please contact us on 1300 300 106 or via our contact page.
Tax planning should not be the main reason for accountants in selecting a specific business structure. An important factor when selecting a business structure really should be asset protection. Most households want to safeguard their hard-earned wealth, may it be an enterprise, investments or perhaps the home, from the grabs of 3rd parties.
The best practice to safeguard an asset would be to have numerous defense mechanisms set up. These defense mechanisms can include:
Sufficient insurance protection is critical to ensure that even if an individual is negligent or discovered at wrong doing, instead of jeopardizing their personal belongings, the insurance policy cover will meet any claim. Whether or not the insurance policy is not able to completely fulfil the claim, it'll lessen the amount of money that the successful plaintiff is able to recuperate from the personal belongings of the individual.
Perhaps the most common type of asset protection is to make sure that individuals at an increased risk do not own any assets. When it comes to an enterprise, what this means is the business enterprise is carried on in one particular entity and the business assets locked in a different entity. The asset owning business can lease the assets to the trading business entity.
Personal possessions also need to be separated from business assets to ensure that in the event the business goes into financial trouble the private assets will not be in jeopardy. Likewise, if a person goes into financial problems the business enterprise assets could be safeguarded if the individual doesn't own them.
Frequently when a business wants to grow and start a whole new venture or business they often use the existing business entity. The issue being is that, in the event the start-up or business does not work out, the existing business is now at risk. New ventures and existing businesses should be operated in separate entities.
While most effective practice would be to have different assets owned by different entities, this could get costly. Usually there's a trade-off among cost and asset protection. An individual ought to consider the potential risk of being prosecuted as well as the expense to safeguard their assets.
For instance, there's a very small possibility that the owner of a rental property could be prosecuted under occupier's liability if personal injury occurs to a tenant or some 3rd party while on the property. Consequently, if several rental properties were owned, it might be a good idea to acquire each of those in a different entity. Nonetheless, the expense of doing this may possibly be greater than the potential risk for being litigated. Without doubt, the property owner will have insurance policy therefore, the likelihood of losing a number of the rental properties is very small. In this instance, it might be suitable to acquire several rental properties in the one entity.
Where the possibility of getting sued is greater, that entity ought to own little if any assets. For instance, a professional shouldn't own any assets in their name in the event they may be accused of professional neglect.
Possession of your family residence
Often, your family residence is a person's most important asset. For that reason, it is essential that it's protected against prospective creditors.
Generally, a great way to shield an asset from possible creditors would be to purchase it in a discretionary trust. Since it is held in a different entity, it would be shielded from any creditors or any other entities managed by the particular person.
The family residence is unique for the reason that there are various of tax concessions if it is held by an individual. The capital gains tax exemption is applicable if an individual owns it. However, in the event the family house is owned by a company, unit trust or discretionary trust, the main residence exemption won't be available when it's sold.
Also, the family residence is exempt from land tax in most states if it's owned by an individual. Should it be held by a company or a trust, it won't be exempt from land tax and, in certain states, a higher rate of land tax is applicable when it is held by a trust.
When it comes to a husband and wife where one of the spouse is a professional or has a high-risk for being sued, a very good compromise is for the family residence to be held by the low-risk partner. This will offer asset protection in case the high-risk partner be prosecuted whilst preserving the capital gains tax main residence exemption.
Other asset protection strategies
Occasionally assets have already been purchased in a person's name or perhaps in a specific entity that doesn't offer optimum asset protection. It is possible in this scenario, for the person or organization to transfer the assets to a related entity but that may likely to give rise to capital gains tax, stamp duty along with other tax implications in addition to being expensive. Additionally, there are rules that permit a trustee in bankruptcy to claw back assets which have been divested as a way to beat lenders.
In these scenarios, it might be feasible to provide some protection by employing other tactics. As an example, a person might own an asset however a lender may be unable to access that asset since a related party has a 1st mortgage over it. So even in the event the external creditor leads to the asset to be sold, the creditor won't be settled until after the related party has been settled what is owing to it. This may well contribute to little if any proceeds being paid to the outside creditor.
For further information about asset protection, BookSmart Accountants Cranbourne or our expert tax agent Cranbourne services, please contact us on 1300 300 106 or via our contact page