Posts Categorized: Tax

Be careful when claiming bad debts

A bad debt can be claimed as a tax deduction. And with the end of financial year rapidly approaching, now is the time to determine what can be written off.

Probably the more important discussion is how to avoid bad debts in the first place. That will be left to a future post.

To claim a bad debt, it must have already been reported as income. That means those who report their income for tax purposes on a cash basis can’t claim a bad debt.

So for those who recognise income on an accruals basis – meaning income is recognised when the invoice is raised – they must have reached a position where all reasonable attempts to collect have failed. It must therefore be more than doubtful.

You then need to make an entry into your accounting system. Those who are using a cloud file must process the bad debt in June. Don’t fall for the trap of ding it later as cloud systems time date entries.

But what if I collect the money later?

There are genuine cases where this happens. The customer could come into money through an inheritance or windfall and do the right thing and pay back their creditors. In that case, you re-recognise the income as a bad debt recovered.

Beware of schemes of arrangement

Sometimes a business may not write off a debt but later accept so many cents in the dollar from a liquidator’s offer. The problem here that accepting say 40 cents in the dollar does not entitle you to claim the other 60% as a bad debt. So keep on top of your customers and ensure you write off bad debts as soon as you can.

Tip

It is always a good idea to document the attempts you have made. That way you will have some contemporaneous evidence as to your decision if the ATO start asking questions.

As I already said, the real question is what can you do to prevent bad debts in the first place – we welcome that discussion with you.

Instant asset write-off warning

The Instant Asset Write-Off is a great way to reduce both your 2021 tax liability and your 2021/22 PAYG Instalments. And you won’t drain you cash flow if you finance the asset purchased.

But beware!

To be able to claim the write off in the 2021 tax year, you must have the asset installed and/or ready for sue before July.

If the car you ordered is not delivered until July then you won’t be able to claim until next tax year.

And as a footnote to the above, financing a lease will not able you to claim the write-off. Under a lease, you are not the owner until you pay the final instalment. This is just another trap.

If you want to know more then call us.

What’s in the Budget for you?

Probably significantly more than you think.

As what is now unfortunately the norm, there were plenty of pre-announcements before Budget night. But there is much more to the Budget that was announced on Budget night or leading up to it.

In addition to some key business announcements (extension of loss carry back company rules and instant asset write-off) there were very welcome announcements to being able to getting more money into super. Welcome I say as how can one provide for retirement with a contribution cap – which currently sists at $25,000 before being eroded by 15% tax, life insurance premiums and for some an extra 15% tax).

Also of note were the proposed changes to personal and self managed super fund residency rules. I say welcome as the existing rules are quiet archaic in context of how people today live, work and travel – mind you we still aren’t going anywhere for a while with covid.

We will explore some of the key measures in our next survive and thrive webinar. It will beheld at 5.30pm on Wednesday 2^nd June and you can book here – https://tinyurl.com/reg0206

We will also flesh out some opportunities in upcoming blogs.

But having said all that, please keep in mind that:-

A Budget is only ever a series of announcements,
They still have to be legislated,
They may be changed slightly and
Many have start dates form July 2021 – and we may have a change of government before then.

Please though don’t hesitate to call us if you any questions.

Entertainment can be taxing

Entertainment can be taxing. That’s an understatement as there are 3 aspects – tax deductibility, GST and Fringe Benefits Tax (FBT). There are 38 outcomes depending on who does with whom where and why. It therefore requires careful analysis

No wonder the ATO has such a great strike right in FBT audits on entertainment.

But that’s not all that has to be considered. For FBT purposes, an employer has to determine which of three methods produces the best result. Although that said, the actual method for quantifying the FBT taxable value of entertainment is usually best for small employers (but not always!).

You can read more on the following factsheet – FBT Flyer – Meal Entertainment Factsheet

Confused or concerned? That’s understandable. We would be happy to discuss your situation.

We take this opportunity to state that the prudent action is to lodge an FBT Tax Return – even if nothing is payable (which is usually the case for small businesses). This extra step is not a waste of time nor money as it starts the audit clock ticking – after 3 years the ATO can’t go back and audit you; don’t lodge an FBT Tax Return and the ATO can go back as far as they like.

Why is the ATO suddenly asking you for money?

If you want someone to pay you then it is a good idea to send them a bill so they can. Seems like common sense – but not to the ATO.

A number of clients have been surprised, offended and/or doubtful of recent payment requests from the ATO. This happened as the ATO elected to cease sending paper activity statements. It seems as though many did not receive a reminder through their MyGov account – or if they did, ignored it legitimately thinking it was a scam.

So will you get into trouble?

The answer is no.

We understand that the ATO will revert to issuing paper statements.

We do though recommend periodically checking your MyGov account just in case you have missed something. Once you have opened a My Gov account, they will no longer issue you with a physical assessment notice; even we aren’t issued with one. They also cease issuing super S293 notices and the like.

But never click on a link within a MyGov email as it may well be a hoax. Log in separately from your internet browser.

Reducing the tax on Christmas

Entertaining and providing gifts at Christmas time to staff, customers and suppliers is a cost of doing business. However, there are some important FBT, GST and income tax considerations and outcomes.

As an employer, you need to be careful at what you provide at Christmas. The rules are complex and the costs of getting it wrong can prove very expensive.

We will outline some of the more common scenarios and what to be careful of.

Under-pinning the implications are the following key points:-

Christmas parties, entertainment and gifts are all treated under entertainment tax rules.
FBT applies to benefits given to employees.
There are no FBT implications on entertainment and gifts given to customers, clients and suppliers.
There are three methods under which an employer can quantify the taxable components of any entertainment expenditure – in fact there are 38 permutations depending on who is entertained where, how and with whom. We will largely address the actual method which is the one used by most small businesses (as it usually results in the best outcome). It is beyond the scope of this briefing to address the 12 week log method and we will only touch upon the 50/50 method where relevant.
Christmas comes but once a year and to the best of my knowledge and experience does so on 25^th December. Nevertheless, the ATO treats Christmas parties and gifts as being what are called minor, infrequent and irregular benefits.
Such minor benefits are FBT exempt where they cost less than $300 (including GST) provided the actual method is used to quantify entertainment.

The Christmas party

Where entertainment is calculated under the actual expenditure method (which is the most common method for small businesses):-

If a Christmas party is held on-site on a work day, the whole cost for each employee will be an exempt fringe benefit. So too will the spouse’s cost provided the cost per spouse is less than $300. No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend. Taxi travel to or from the workplace (not both ways) will be exempt from FBT and not tax deductible.
If a Christmas party is held off the work premises, then the whole cost will be exempt from FBT provided the party costs less than $300 per person (employees and their spouses). No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend.
If an external Christmas party costs more than $300 or more per person then the total cost is subject to FBT.
The cost of any entertainment provided during the party (whether that be at the work premises or outside) will be exempt if it costs less than $300 per head – for example a DJ, musician, clown and comedian.
The cost of entertaining clients, customers and suppliers is not subject to FBT and is not tax deductible.
If any exemption is exceeded then FBT is payable. Consequently, an FBT Tax Return must be lodged and FBT paid (the FBT tax rate being the same as the top marginal tax rate). Please keep this in mind when completing the 2018/19 FBT Questionnaire in early April 2019.
All other entertainment during the year will be subject to FBT on a case by case basis.

Where entertainment is calculated under the 50/50 method:-

50% of the cost will be subject to FBT and this portion will be tax deductible. The other 50% will not be subject to FBT and will not be tax deductible. An FBT Tax Return must be lodged and FBT paid.
Only taxi travel from home to the venue will be FBT exempt and not deductible for tax.
50% of all other entertainment during the year will be subject to FBT.

Gifts

The following gifts are exempt from FBT and are tax deductible:-

Hampers, bottles of wine, gift vouchers, a pen set costing less than $300 (inclusive of GST).

The following gifts are subject to FBT and are not tax deductible:-

Tickets to a sporting event or theatre, holiday, accommodation, etc.

The GST treatment of gifts is:-

The GST component of any tax deductible portion can be claimed back.
The GST component that relates to the non tax deductible portion can’t be claimed.

Please do not hesitate to call us should you have any queries.

Are you missing out on the Family Tax Benefit?

The Family Tax Benefit is designed to support low and middle income with the cost of raising a family. It is not only a generous payment, it is non-taxable – meaning you get to keep the lot.

So generous that they must be taken into account when undertaking any tax planning.

There are two Family Tax Benefit components:-

Part A is based of combined family income.
Part B is based of the secondary earner’s income (but the main income earner’s income must be below $100,000).

Part A is paid in graduated levels:-

The full amount per child is paid where the combined family income is under $55,626.
For every dollar of income over $55,626, the Part A entitlement is reduced by 20 cents until it reaches what is called a base rate.
Families are paid the base rate until combined income exceeds $98,988. Every extra dollar of income then reduces the benefit by 30 cents in the dollar until any entitlement is exhausted.
The maximum payment rates are $4,929pa for each child under 13, $6,410pa for children aged between 13 and 15 and the same rate for children aged between 16 and 19 who meet study requirements.
The base rate is $1,583pa.

Part B is paid in respect of one child only:-

Is paid at $4,190pa where the youngest child is under 5.
Is paid at $2,927pa where the youngest child is aged 5 to 18.
After the first $5,767 of annual income of the secondary income earner, the rate of payment is reduced by 20 cents for extra dollar of income.
This means that no entitlement is paid where the youngest child is under 5 and the secondary income earner’s income exceeds $28,671; $22,388 for youngest child being 5 and over.

Payments can be received either fortnightly or after lodgement of your Tax Return for that year. But a Tax Return must be lodged by the following 30^th June otherwise all entitlements are denied.

The amounts payable can be substantial. They can mean that a two child family can effectively be paying no income tax on incomes of $60,000.

A lack of proper planning by your accountant could see a loss of not just of tax of 39% but may be 30% of a Part A entitlement and even all of the Part B entitlement. As they say, proper planning prevents poor performance!

If your accountant hasn’t spoken to you about the Family Tax Benefit then you could be missing out on many thousands of dollars. We welcome the opportunity to discuss your situation.

The new improved instant asset write-off – part 3

As I said in parts 1 & 2, in all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.

And now with no upper threshold, that interest may grow.

In this the third and final part, we set out our last set of 7 tips.

Before jumping in and buying an asset , please consider these additional considerations:-

15/. You can only claim the business portion on an asset that is used both for business and privately – such as a car or lap-top. That said, one can deduct the whole cost of cars provided the Fringe Benefit Statutory Formula method.

16/. If your business has current or carried forward losses in excess of your intended asset purchase(s), then your business will not gain any tax saving in this financial year.

17/. Please refer to our separate blog about using this concession to claim back company tax paid in respect of the 2019 and 2020 tax years. The results can be amazing!

18/. Small businesses can also use this concession to deduct written down value of the depreciable (general pool) assets. As it was, a small business could write-off the carried forward written down value of assets at 1^st July 2020 when less than $30,000.

19/. As the write-offs can be large, we are now running two depreciation schedules for our business clients – one at normal rates and one with accelerated tax rates The reason for doing so is that the financial won’t show an artificially low profit which may deny a financial application or even review of existing arrangements.

20/. It applies to tangible assets – ones you can touch. This write-off threshold does not apply to intangible assets such as web pages.

21/. Beware of glitzy app based products as their rates tend to start above credit card rates. We can put you in contact with financiers who have access to the best deals.

With these 7 and the previous 14 common consideration, please don’t jump in and commit to an expensive asset without being absolutely assured of all of its consequences. We therefore welcome any question you have about the instant asset write-off.

Click here to read the first two sets of tips:-

Part 1

Part 2

21 tips about the new & improved instant asset write-off – part 2

As I said in part 1 last week, in all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.

And now the instant asset write-off has become even more attractive!

What was to be until December a $150,000 limit for small businesses has now become a complete write of all equipment purchases for any business with turnover under $5billion.

In such difficult times as this, it can deliver even greater outcomes when combined with the carry back of company losses.

But before doing so, please ensure you have factored in the following considerations (see part 1 last for the first 7 tips):-

8/. Your small business must own the asset. Your business either needs to pay for it or finance it by a loan, hire purchase or by way of a chattel mortgage contract.

9/. Assets that your business leases from others do not qualify for the write-off (as one does not own the asset until the final payment is made or the lease contract is paid out early).

10/. The incentive also doesn’t apply to assets that are leased by your business to others.

11/. It’s not about when you buy the asset. Your entitlement to claim is based on when you held the asset first ready for use. So for assets you need to have installed, it is not when you buy it; it is when you can first use it.

12/. Make sure you when buy an asset to have the installation date agreed upon.

13/. Installation and delivery costs comprise part of the cost of the asset.

14/. If you trade-in an asset, it is the cost of the new asset that qualifies. So if your business buys a car for $50,000 and trades in an old car for $8,000, then the deductible write-off is $50,000.

Please come back to this web page next week for a further 7 tips and traps.

You can read our first 7 tips here.

We welcome any question you may have in the meantime.

21 tips about the new & improved instant asset write-off – part 1

In all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.

And now it has become even more attractive!

And what was to be until December a $150,000 limit for small businesses has now become a complete write of all equipment purchases for any business with turnover under $5 billion.

In such difficult times as this, it can deliver even greater outcomes when combined with the carry back of company losses.

But before doing so, please ensure you have factored in the following 20 key considerations:-

This concession originally only applied to the purchase of new assets. However businesses with group turnover under $50 million can now deduct the cost of second hand assets.
It does not apply to building or capital works nor software development pools or primary production assets.
If your business sells expensive assets, this expanded concession should prove to be a major buying incentive for your customers; even more so if you offer funding solutions. Ask us if you would like a worked example to use with your customers
Only buy an asset if you need it. So, if a company registered for GST buys and asset for $11,000, it will get back $1,000 of GST and will have a tax deduction of $10,000. It will pay $2,600 less company income tax. It will still be $7,400 out of pocket. As tempting as this limit is, don’t get too carried away and buy assets that your cash flow cannot support.
A tax deduction in the 2020/21 tax year will have a flow on effect as it will reduce the PAYG Instalments for 2021/22 and part way into 2022/23.
An asset purchased in 2020/21 will also have a flow on effect for those small businesses paying GST under the instalment method. It will reduce the GST Instalments for 2021/22 and part way into 2022/23.
Writing of large assets may be great for tax but can make your financials look ordinary, possibly disastrous to a current or future financier. For this reason, we now run two sets of depreciation schedules; one for tax and one for accounting / financial statements purposes. Effectively the tax rates are a nonsense and they should not make your financials misleading.

Please come back to this web page for a further 14 tips and traps.

We welcome any question you may have in the meantime.