Penalty interest deductibles

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The ATO has recently replaced the Taxation Ruling (TR) 93/7W on whether penalty interest is deductible to the new TR 2019/2. This new ruling highlights the circumstances in which penalty interest is deductible and the situations where it is not.

“Penalty interest” refers to an amount charged by a lender to a borrower under a loan agreement if instalments are not paid. The payable amount is then calculated by reference to a number of months of interest that would have been received.

The new ruling made provisions that directly related to the previous rulings of:

  • Section 8-1: general deductions.
  • Section 25-25: borrowing expenses.
  • Section 25-30: expenses of discharging a mortgage
  • Section 25-90: specific debt deductions relating to foreign non-assessable non-exempt income.
  • Section 40-880: business-related costs.

TR 2019/2 says that penalty interest is generally deductible under section 8-1 where:

  • The borrowings are incurred when gaining or producing your assessable income; or
  • It is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Penalty interest that is incurred to discharge a mortgage is also deductible under section 25-30, to the extent that borrowed funds were used to produce assessable income. The ATO makes a note that unlike the general deduction provisions, there’s no influence from the expense being capital or revenue in nature.

You cannot deduct a loss or outgoing under section 8-1(2) to the extent that:

  • It is of capital or capital in nature.
  • It is of a private or domestic nature.
  • It is incurred in relation to gaining or producing your exempt income; or
  • A provision of the Act prevents you from deducting it.

Paying tax on term deposits

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The interest you earn from term deposits is subject to tax, just like your regular income. You have to declare investment income on your tax return, including interest in the year it was credited or received.

The amount of tax you need to pay depends on the amount of interest you earn on your term deposit as it is part of your overall taxable income and will therefore be taxed at the same marginal tax rate that applies to the rest of your income. The ATO’s marginal tax rates for the current financial year are:

  • $0 for an income of $18,200
  • 19c for each $1 over $18,200 for an income of $18,201 – $37,000
  • $3,572 plus 32.5c for each $1 over $37,000 for an income of $37,001 – $90,000
  • $20,797 plus 37c for each $1 over $90,000 for an income of $90,001 – $180,000
  • $54,097 plus 45c for each $1 over $180,000 for an income of $180,001 and over

If you decide to roll over your interest earnings into a new term deposit, you will still need to declare the interest on your tax return if you choose to reinvest the money instead of accessing it.

Term deposits run under a joint account will have the ATO assuming each person has equal ownership to the funds in the account. This means that the interest earned is equally split between you and your account partner(s), where you will have to pay tax on your portion. If the funds in your account are not split equally, you can provide the ATO with documentation proving the amount you each earn and be taxed different amounts accordingly.

Paying Off A Mortgage Debt Quicker

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Paying off the mortgage may sound like a dreary trudge to the end of a marathon’s finish line. However, there are options available for those who currently have a debt from a loan for their mortgage, and wish to reduce the time they spend paying it off. Here are a few simple ways to ensure that your mortgage debt decreases over less time.

Switching to fortnightly repayments from monthly could potentially increase the amount you are actually paying back on your mortgage. By paying half the monthly amount every two weeks, you’ll be making the equivalent of an extra month’s repayment each year (due to there being 26 fortnights in a year, as opposed to paying once a month over the year).

If the interest rate of your mortgage loan is too high, it may be worthwhile finding a lower interest rate in an alternative loan. Work out what features of the loan are ons that you would like to keep, and compare the interest rate on similar loans. If you can find a better rate elsewhere, you can ask your current lender to match it or offer you a cheaper alternative. Shop around to see what the best options for your particular loan may be. If you choose to switch your home loan to another lender, ensure that the benefits from that loan will outweigh the fees that you will have to pay to close your current loan and apply for another.

If you can afford to do so, making extra repayments on your mortgage can often cut your loan repayment time by years. If your mortgage is a typical 25-year principal and interest mortgage, most of your payments during the first five to eight years will go towards paying off the interest from your loan. If you put in extra payments during that period of time, you could potentially reduce the amount of interest that you pay and shorten the loan’s lifespan overall. Simple ways to make these extra repayments could include putting your tax refund or bonus into your mortgage. These extra repayments could incur a fee though, so always check with your loan provider if that could be the case.

You can also choose to make higher repayments, as though you had a loan with a higher rate of interest. If you switch to a loan with a lower interest rate, you can continue to make those repayments at the same value of the higher interest rate repayments. This method again can decrease the overall time you will spend paying off a home loan.

An offset account is something that you can also consider creating to assist in paying off your mortgage debt. It is a savings or transaction account linked to your mortgage, where the balance of the offset account reduces the amount that you owe on your mortgage. It helps to pay off the mortgage faster and reduces the amount of interest that you will pay overall.

Most home loans are principal and interest loans, which means that any repayments reduce the principal (amount borrowed) and cover the interest for the period. An interest-only loan means that you will only be paying the interest on the amount that you have borrowed, over a set period of time. The principal does not reduce during the interest-only period, which means that the debt does not reduce and you will in fact end up paying more interest. Paying both the principal and the interest is a simple and the best way to get your mortgage paid off faster.

You can also speak with your accountant or your lender about other options for paying back mortgage debt a little quicker.

PAYG reporting dates approach

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Changes have been made throughout the year regarding SMSFs and their pay-as-you-go (PAYG) withholding. As the end of the financial year and the due date for PAYG reporting approaches, SMSF trustees should be checking whether they are meeting new withholding obligations for capped defined benefit income streams paid to their members.

If you have PAYG withholding obligations in 2018–19 you must provide your members with a PAYG payment summary by 14 July 2019 and lodge a PAYG withholding payment summary annual report with the ATO by 14 August 2019.

SMSFs have PAYG withholding obligations for super benefits paid to members who are:

  • Under 60 and the benefit is an income stream (pension) or a lump sum.
  • Under 60 and the death benefit is a pension which is a capped defined benefit income stream where the deceased was 60 or over when they died.
  • 60 or over and the benefit is a pension which is a capped defined benefit income stream.

Capped defined benefit income streams include life expectancy and market linked pensions which were payable before 1 July 2017 and reversionary income streams paid to beneficiaries.

SMSF trustees who are paying a capped defined benefit income stream to a member must ensure to meet all obligations. These include registering for PAYG, providing your member and the ATO with payment summary information, and making sure to comply with the withholding obligations of your activity statement. By doing this, the ATO can ensure individuals are paying the correct rate of tax once all their pension income from all their funds is taken into consideration.

PAYG Is A Good Thing! Don’t Freak Out (The ATO Is Not Stealing Your Money)

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As a taxpayer, you may have encountered the term pay-as-you-go (PAYG).

PAYG is generally a good thing, but there can be confusion between PAYG withholding and PAYG instalments, particularly if you’re an individual who is eligible for both. Both are amounts by which your tax bill can be offset at the end of the financial year.

So there’s no need to worry – the ATO is not stealing your money. Here’s how to distinguish between the two types of PAYG you may have encountered as a taxpayer.

PAYG Withholding

As an employer, you have a role in helping your payees meet their end-of-year tax liabilities. You do this by collecting pay-as-you-go (PAYG) withholding amounts from payments you make to:

  • your employees
  • other workers, such as contractors that you have voluntary agreements with
  • businesses that don’t quote their Australian business number (ABN).

This is to assist in minimising the impact of your employee’s tax bill at the end of the financial year. If you’re an employee, there’s no need to worry about this amount – it is what is used to work out how much tax you may owe or be owed by the Australian Taxation Office at the end of the year.

Payments other than income from employment may also need tax withheld, including:

  • investment income to someone who does not provide their TFN
  • dividends, interest and royalties paid to non-residents of Australia
  • payments to certain foreign residents for activities related to gaming, entertainment and sports, and construction
  • payments to Australian residents working overseas
  • super income streams and annuities
  • payments made to beneficiaries of closely held trusts.

PAYG Instalments

Pay-as-you-go (PAYG) instalments are regular tax prepayments on your business and investment income.

They’re a way to offset your tax bill by paying regular instalments at the end of the financial year. This way, you should not have a large tax bill when you lodge your tax returns.

If your financial situation has changed, your expected tax may also change. This means your current PAYG instalments may add up to more or less than your tax at the end of the year.

When Do You Have To Pay PAYG Instalments? 

If you are an individual (including a sole trader) or trust, you will automatically enter the PAYG instalments system if you have all of the following:

  • instalment income from your latest tax return of $4,000 or more
  • tax payable on your latest notice of assessment of $1,000 or more, and
  • an estimated (notional) tax of $500 or more.

A company or super fund will automatically enter the PAYG instalments system if any of the following apply:

  • it has instalment income from its latest tax return of $2 million or more
  • it has an estimated (notional) tax of $500 or more, or
  • it is the head company of a consolidated group.

PAYG Varying Instalments

You can vary your PAYG instalments if you think your current payments will result in you paying too much or too little tax for the income year. Variations must be made on or before the payment due date (28 days after the end of each quarter, generally).

You do not have to vary your PAYG instalments at all. It will not change how much income tax you pay for the year.

After you lodge your tax return, if your instalments were:

  • too high, the excess is refunded to you
  • too low, you pay the shortfall.

Your varied amount will apply for all your remaining instalments unless you make another variation before the end of the income year.

You might need to vary your PAYG instalments if any disasters over the past financial year have impacted you.

If you cannot pay your instalment amount, you should still lodge your instalment notice and discuss a payment arrangement with the ATO. You may wish to obtain advice from a tax agent on whether you should vary your instalments.

PAYG instalments for business and investment income

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Pay as you go (PAYG) instalments are payments you can make throughout the year to avoid accumulating a large tax bill to pay at the end of the year. Making these payments is a great way to budget for income tax and keep a healthy cash flow. 

To qualify for PAYG instalments, you must earn over a threshold amount from your business or investment income (also known as instalment income).

The amount that you pay in PAYG instalments throughout the year will be offset against any owed tax for the entire year. But it is important to lodge your activity statements and pay all PAYG instalments before lodgment of tax returns if you want these to be included in your tax assessment. 

There are two options for calculating and paying PAYG instalments:

  • Instalment Amount: Simplest option which involves paying instalment amounts the ATO calculates based on relevant information. 
  • Instalment Rate: You calculate the instalment amount using instalment rate provided by the ATO and your instalment income. Therefore, dependent on income as you earn it and not predetermined. 

Passing The Business To Family? Here Are Three Things You Probably Hadn’t Considered

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Succession planning for the family businesses has a number of factors that could impact the decision to pass the business onto the next generation. Namely,  you’ll be looking for someone in the family who is willing to assume the responsibility.

But if you intend to pass your business down the family tree there are also a number of taxation, financial and managerial considerations that need to be taken into account for a successful succession.

Taxation Implications

When transferring your family business and placing it in the name of another family member you may trigger a myriad of taxable consequences, including Capital Gains Tax (CGT), wine equalisation tax, fuel tax credits and excise duty. You need to consider, when preparing the business for succession include:

  •     Consulting the ATO to check if you are eligible for tax concessions
  •     Document all business restructuring operations and the tax impact in the succession plan

Consider A Family Trust

It is often suggested before a younger family member gains ownership of the business they should first assume managing responsibilities to prove themselves. If you want to relinquish control gradually rather than permanently, re-structuring the business as a family trust is an option.

Although this may be complicated and incur costs, as a trustee you will be able to have control of the assets from a distance and be able to step in should the need arise in the early phases of new leadership. Family trusts also carry increased tax benefits and concessions that can be taken advantage of.

This is a great solution for those looking to go into semi-retirement or looking to step back from the business but still want some involvement with the process.

Create A Family Constitution

To make the hand-off occur as smoothly as possible a family constitution should be drawn up collaboratively by all, directly and indirectly, involved in the business. The following should be included:

  •     A detailed business plan, stipulating goals, outcomes
  •     Hierarchy of the business, both present and future
  •     Will of the business
  •     Code of conduct for interactions between family members in business

Develop A Succession Plan To Successfully Succeed

A succession plan is designed to assist you in transferring your business to a successor. To do so, it should include the following to further guide the process.

  • Choose A Successor

Identify who you would like to take over your business. If you wish to keep it in the family, you need to be certain that the person who will be taking over is skilled and prepared for the responsibilities to come. Make sure that you consider what is the best path for the business.

  • Value Your Business

Understand how much your business is currently worth by getting your business valued. By doing so consistently, you can mark out how much your business is worth during events, the general day-to-day and more. This valuation may change substantially before you plan to leave, but having a valuation may assist you with planning for your succession.   

  • Keep The Plan Current

Review your plan regularly, as your circumstances and the business’s circumstances may change over time. Having an up-to-date succession plan will ensure you’re always ready in the event that you need to pass the business on earlier than expected. 

  • Make The Final Handover

If the final preparations have been properly made, and you’re ready to go, you should simply be able to hand over the business and step aside. A clear and current succession plan should facilitate a smoother transition with far less chance of disruption to the business’s everyday operations.

Partnership Agreements: What you need to know

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A partnership agreement formalises the business relationship between two partners. It can cover everything from low-level processes, up to how dispute resolution will take place in the business.  

Business partners are personally liable for the business in a partnership, therefore, determining the finer details is extremely important and can prevent complications down the line. The agreement will help allocate the responsibilities and obligations of each partner. It will also help establish the rights of each partner and how profits and losses will be distributed amongst partners. 

An agreement should take the following into consideration for it to be an effective piece of documentation:

  • Percentage of ownership: How much will each partner contribute to the business? This contribution could be in the form of capital or equipment and service – regardless, this will determine how much ownership of the business the partner has. 
  • Division of profit and loss: Allocation of profits and losses might simply follow the ownership percentages or simply be equal between partners. Regardless of how the division will be allocated, it is important to clearly identify this in the agreement. 
  • Length of partnership: The agreement could be for an unspecified amount of time, or the design of the business could lend itself to be dissolved after a given period of time. This should be in the agreement – including if the time frame is unspecified. 
  • Decision making and dispute resolution: Outlining a decision-making process and instructions on how disputes between partners should be resolved is extremely important. A meditation clause will help with resolution without the interference of the court. 
  • Authority: A ‘binding power’ should be included in the agreement which allocates partner authority. If a business is bound to a debt or other contractual agreement, this can expose the company to unmanageable risks. Including terms that state which partners hold the authority to bind the company and what would need to be done in those situations will assist with reducing or avoiding these risks.
  • Withdrawal or death: The procedures for handling the departure or death of a partner should be stated in the agreement. This could involve how the valuation process will take place and might need each partner to maintain a life insurance policy as well as a designated beneficiary. 

Paid Parental Leave Scheme Update For Federal Budget Announcements

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If you have employees who are expecting to expand on their family (whether they are adopting or looking to become pregnant), the Federal Budget 2022-23 announced a change to paid parental leave that could impact you and your employees.

Single parents and fathers are now eligible for longer paid parental leave after the government proposed an ‘enhanced’ 20-week scheme from announcements made during the Federal Budget 2022.

Under existing arrangements, up to 18 weeks of paid parental leave can be taken by whoever is designated a baby’s primary carer – usually the mother – at the minimum wage, while a secondary carer is eligible to take two weeks. If the secondary carer does not use the two weeks, it is lost.

As a result of the recent announcements made in the Federal Budget 2022-23, the secondary carer’s leave will be merged with the 18 weeks of Paid Parental Leave to increase the government-funded scheme to 20 weeks of leave.

Single parents will see two additional weeks of paid parental leave added to what they normally would be entitled to, whereas two-parent households will be able to split the Paid Parental Leave as they would like. However, this leave must be taken within two years of the child’s birth or adoption.

The ‘use it or lose it’ incentive will not be implemented into the new scheme, but an emphasis may still be placed on the primary caregiver to take the bulk of the leave.

The enhanced scheme will also broaden the eligibility for paid parental leave to include a household income threshold of $350,000 per year.

This fully flexible leave aims to help working parents make caring decisions that suit their specific circumstances and encourage fathers to take up parental leave.

Presently, women who earn up to $151,350 can access paid leave, but women earning more than the threshold are not entitled to this scheme, even if their partner has lesser or no income.

The rate of paid parental leave has not increased either – it is simply that eligible parents will be able to access more of it. This may be a disincentive however to the higher income earner, as taking the paid time off may be less than what they would otherwise earn working.

Notably, though, the proposed scheme still does not include superannuation payments in parental paid leave. Paying super on paid parental leave would allow parents to continue building their retirement savings while taking time out of the paid workforce to care for children.

If all goes to plan, these changes to the paid parental leave scheme will take place no later than 1 March 2023.

Paid parental leave is a topic that can be tricky for employers. Having a discussion with a professional can be a way to alleviate concerns about what your employees are entitled to or the risks of failing to match standard employee obligations around the matter.

Overcoming public speaking anxiety in the workplace

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There will come a time, where no matter how much you despise it, you will need to speak in front of an audience. Being afraid of public speaking is fairly common and there are resources and programs which may help you overcome this. 

The following are tips which will help you through your public speaking fears. They may be more effective for one-off scenarios, as a more extensive program should be chosen by those who need to regularly participate in public-speaking but experience fear.

  • Write out notes: Write out what you are planning to say clearly. Even though you don’t want to be reading your notes exactly, having them there can alleviate anxiety because if you lose track, you can check your notes and start where you left off. 
  • Get there early: It helps to be comfortable with the setting you will be presenting in. Get there when no one else is around so you can familiarise yourself with your surroundings.
  • Imagine the worst: What is the worst thing that could happen to you? Identify your worst-case scenario and come up with a plan for what you would do if it happened. It isn’t going to happen – but what if it does? Most likely you’ll realise that public speaking won’t have career-ending consequences.
  • Focus on the content: What’s most important is that you know what you’re talking about, and talk about it. Why are you giving the presentation? Most likely because you are talking about something you know, or feel passionate about. Focusing on your material and using your knowledge to your advantage might also put you at ease because it transfers the attention from public speaking to your domain. 
  • Learn relaxation techniques: The usefulness of relaxation techniques to reduce public speaking should not be underestimated. Deep breathing immediately before you present can help calm your nerves and get your breathing in control. 
  • Remember that it isn’t all about you: When you are presenting you are hyper-focussed on yourself and how your body might look or how you might sound. But remember that the audience isn’t going to be nearly as focussed on you as you are on yourself, and they will not notice when your hands shake or you slip up while talking

Dealing with anxiety the right way is much more effective than ignoring it. Remember that if you have to speak in public regularly then a more comprehensive approach is more appropriate.