Why Are My “Connections” Important To Know During Tax Season?

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In the realm of tax law, a critical concept revolves around understanding the notion of “entities connected with you.”

This concept serves as a linchpin in several aspects of taxation, from determining one’s status as a Small Business Entity to ascertaining the value of assets when seeking eligibility for Small Business Capital Gains Tax (CGT) Concessions. Furthermore, it holds significance when an individual has sold an asset and claimed it was used by an ‘entity connected with them.’

In various tax scenarios, having an entity connected to you can either prove beneficial or burdensome. A prime example of the former is when you sell a factory unit, and a company affiliated with you operates a mechanics business within that unit. In this case, you become eligible to claim the Small Business CGT Concessions on the sale of the factory unit, potentially leading to substantial tax benefits.

Conversely, connected entities can have adverse consequences, particularly in specific asset tests. When evaluating certain asset-related criteria, the value of assets connected entities hold is aggregated with your own. Consequently, having entities connected with you in such situations may not be advantageous.

Consider a scenario involving a family trust and a distribution made to the adult daughter. In this instance, her assets may need to be added to the overall asset pool when determining your eligibility for tax concessions. A key threshold for determining connection to a trust is if an individual has received 40% of the income or capital of that trust in the preceding four years.

Entities controlled by the same person or entity are also considered connected with each other. For instance, if you oversee two trusts, those trusts are not only connected to you but also to each other. This interconnectedness has implications for tax planning and assessment.

In the eyes of tax law, spouses are not automatically deemed connected to each other. This is not the default assumption; spouses are typically not considered connected entities. For instance, if you are in control of a company, and your spouse independently manages their own separate company, they would generally not be considered connected to each other. The implications of this can vary depending on the specific tax scenario.

While the concept of entities connected with you may seem intricate, it is a dynamic factor that necessitates ongoing attention and evaluation. Circumstances surrounding the connections can change over time. Returning to the example of the factory unit, the nature of its disposal could alter the connection dynamics. For instance, you may have retained ownership of the factory unit while transferring ownership of the company to your son five years ago. In this case, the company is no longer connected with you, potentially affecting your eligibility for specific tax concessions.

Understanding and managing the relationships between entities and their connections is pivotal in navigating the complexities of tax law. It is not a static concept, but one that requires ongoing consideration, as changes in these connections can have significant implications for an individual’s tax obligations and eligibility for various concessions.

Therefore, individuals and businesses should remain vigilant and seek professional advice when dealing with entities connected with them in the realm of taxation. Keeping us apprised of your future plans for your assets and of changes that could impact your connections means that we can ensure that you do not inadvertently miss out on any of the tax concessions available.

Who Has The Power To Make Your Financial Decisions?

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As you grow older, your aim may be to live a long, happy and healthy life. This is hopefully with the mental capacity to make your own financial and lifestyle decisions, and the appropriate superannuation to fund it.

But not everyone is always able to do this as they grow older. In the worst-case scenario, you may find yourself unable to make those choices yourself due to a diminished mental capacity (such as from mental deterioration, illness etc). If you can’t make your financial decisions, this could be bad.

There is often a misconception that people who lose their capacity to make, for example, financial decisions will simply be able to have their partner or spouse step in to make those decisions on their behalf. This is not the case.

Even if you are in a relationship with someone or own property jointly with them, they do not automatically have the power to make those financial decisions for you. This is where estate planning comes into play.

An estate plan records what you want to be done with your assets after your death. It can include documents such as:

  • your will
  • a testamentary trust (as part of your will)
  • superannuation binding nominations

It also covers how you want to be cared for — medically and financially — if you can no longer make your own decisions. This part of your estate plan may be in documents such as:

  • any powers of attorney
  • a power of guardianship (giving someone the right to choose where you live and to make decisions about your medical care)
  • an advance healthcare directive (your needs, values and preferences for your future care)

You may also choose to create an Enduring Power Of Attorney, which is a substitute decision-maker on your behalf. An EPOA is essential for clients who have their own Self-Managed Super Fund (SMSF).

The SMSF regulations require that members of the SMSF are either a trustee of the fund or directors of a company acting as the trustee. If a fund member is incapacitated, the member cannot be a trustee or a Director of a company. If that occurs, the SMSF becomes ‘non-complying’ which means it loses the tax concessions given by the super regulations.

Depending on your state of residence, powers of attorney may have different rights and obligations, particularly with respect to financial matters. Doing research and consulting with us about what your course of action could be if you were to lose your mental capacity for financial decisions could be a great start.

Which Structure Would Suit Your Business?

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One of the most important decisions you must make before starting a business is in what structure your business will be operating under. This will be reflected in all facets of your business, so you should spend time understanding the implications of each structure before making a decision.

Sole Proprietorship

A sole proprietorship business structure is a type of business with only one owner. However, that owner has complete authority and control over every aspect of the business. Sole proprietors are generally easy to set up as they do not need to be registered as a business, but you may need a license to operate (depending on the field).

There are liabilities that you need to be aware of when it comes to undertaking a sole proprietorship. A sole proprietor’s income through the business is treated as personal income. However, if the business runs into debt & bankruptcy, your personal and business assets will be at risk as the owner is accountable.

In summary, with a sole proprietorship:

  • You have complete control of your business
  • The owner and the business are not separate legal entities
  • Your business assets and liabilities are not separate from your personal assets and liabilities
  • You are personally liable for debts and obligations of the business
  • Generally a low-cost structure to set up

Partnership

A partnership is a business structure comprising 2 or more people who distribute income or losses between themselves.

There are 3 main types of partnerships:

  • A general partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
  • A limited partnership (LP) – is comprised of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.
  • Incorporated Limited Partnership (ILP) – is where partners in an ILP can have limited liability for the business’s debts. However, under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) becomes personally liable for the shortfall.

Individual states and territories have different laws regarding partnerships. Following these according to what is set out for your state is essential.

In a partnership:

  • Partners share control and management of business
  • An ABN must be obtained and used for all business proceedings
  • Each partner pays tax on the share of net partnership income each receives
  • Each partner needs to provide separate tax file numbers and are responsible for their own superannuation arrangements
  • Minimal reporting requirements and inexpensive to set up
  • Must register for GST if turnover exceeds $75,000.

Company

A company as a business structure is a separate legal entity, unlike a sole trader or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued. All directors of a company must have a Director ID. 

As a member, you’re not liable (in your capacity as a member) for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so. However, directors of the company may be held personally liable if found to be in breach of their legal obligations.

Companies can be expensive and complicated to set up and generally suit people who expect their business income to be highly variable and want the option to use losses to offset future profits.

Companies and directors have key legal and reporting obligations they must comply with. Some of the more common obligations include:

  • update Australian Securities and Investments Commission (ASIC) within 28 days of key changes to company details
  • keep financial records
  • understand and comply with all your obligations as a director

A company, in summary:

  • Is a separate legal entity from its owners
    • All profit, tax, and legal liability are direct to the corporation
  • requires you to understand and comply with all obligations under the Corporations Act 2001
  • requires an annual company tax return to be lodged with the Australian Taxation Office (ATO)
  • requires you to complete an annual review and pay an annual review fee
  • directors are required to have a director ID.
  • Members are not liable for the company’s debt (only liable if you breach legal obligations)
  • Complex business structure plus extensive documentation and record-keeping
  • Wider access to capital

Trust

In a trust structure, a trustee holds your business for the benefit of others (the beneficiaries).

A trustee can be a person or a company an is responsible for everything in the trust, including income and losses. They are the ones legally responsible for its operations.

Trust structures are expensive and complicated to set up, and are generally used to protect the business assets for beneficiaries. The trustee decides how business profits should be distributed to the beneficiaries.

In summary, trusts:

  • Have an expensive set-up and operation
  • Require a formal trust deed outlining the operation required
  • Trustee responsible for yearly administrative tasks
  • Assets are protected
  • Difficult to dissolve or make changes once established.

Setting up a trust is best done with a licensed professional to assist with the registrations and documentation.

It is best to consult with a professional business adviser before deciding on a structure for your business, as they can provide more information based on your specific needs and circumstances.

Why not start that conversation with us today?

Which bad money habits could be getting in your way

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How you spend your money determines how well you can save you money. Spending more than you have or buying unnecessarily can severely impact how efficiently you can save. Sometimes you aren’t even aware of the small habits that are actually limiting your savings capabilities. Here are a few bad money habits that are getting in your way.

Not having a budget:

Spending a substantial amount of money each month on purchases and experiences adds up. Not preparing and sticking to a budget is a common mistake, as many people believe that a budget isn’t necessary for their lifestyle and income. Regardless of how much you earn, individuals need budgets to know where their money goes and what needs to be set aside to achieve their goals.

Eating Out:

Dining in restaurants or grabbing take away most nights in the week is a good way to deplete your finances. Save money by eating out one or two nights and cooking the rest of your meals in bulk at home. Preparation of food will help on those nights when you don’t want to cook and stops you from ordering food.

Impulse Buying:

Purchasing items without a second thought is an easy way to lose money. A good way to avoid this can be to ask yourself if you are buying something because you ‘want’ it, rather than if you ‘need’ it? Learn how to recognise when you do the action and force yourself to wait. You can then consider if you have the extra money to spend on that item, giving you time to properly think about your decision.

Credit Cards:

A credit card is an easy way to spend money you may not have. Living beyond your means is a fast way to fall into debt and is one of the worst things you can do for your finances. Remember, if you don’t pay the card in full each month, every dollar you put on a card will cost you many times more in interest charges. Avoid this problem by thinking of your credit card as an emergency-only option.

When it’s okay to ask your coworkers for help

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People often perceive asking for help as a weakness, but sometimes, asking for help demonstrates strength. It shows self-awareness and a willingness to learn and grow. 

If you find yourself in the following situations, you should consider asking for assistance:  

You don’t know what you’re doing

This sounds straightforward, but if you’ve been given a task that you haven’t done before and you’re struggling, it is worthwhile to approach someone for assistance. You could ask your manager for clarification about the task, or some support in completing the task. There is no point in trying to repeatedly re-attempt the task if you have no idea what you are trying to achieve. This is not an effective way to spend your time, and you will end up stressing yourself out more than anything else. 

When there is too much work

Although well-intentioned, being overly enthusiastic about your work practices can cause trouble. Having too much work on your hands will prevent you from completing it to the best standard and leave you overwhelmed. In this scenario, asking coworkers to help you can seem as though you are shirking responsibilities that you chose to take, but it is more likely that people have been in similar situations to you. However, make sure that the next time you take on more responsibilities, you don’t take on more than you can handle. 

When you make a mistake

It is inevitable that you make a mistake at some point – it is part of being human. But managing your response is where it counts. Rather than trying to sweep it under the rug, you talking to someone about how you could fix it is a much better response. You will not be the first person to make a mistake and there will be others after you that will make mistakes after you. 

When It Comes To Tax, Is It A Business Or A Hobby?

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There are critical differences between having a hobby and running a business, and they mostly have to do with your tax, insurance and legal obligations.

Understanding the characteristics of businesses and hobbies is essential to ensure you correctly determine your activities.

Are You In Business? 

While there is no single, defining factor that determines whether or not you are in business, some of the factors that you still need to consider include:

  • You intend to make a profit – or genuinely believe you will make a profit from the activity – even if you are unlikely to do so in the short term.
  • You’ve made a decision to start a business and have done something about it to operate in a businesslike manner, such as:
    • registered a business name
    • obtained an ABN.
  • You repeat similar types of activities.
  • The size or scale of your activity is consistent with other businesses in your industry.
  • Your activity is planned, organised and carried out in a businesslike manner. This may include:
    • keeping business records and account books
    • having a separate business bank account
    • operating from business premises
    • having licenses or qualifications
    • having a registered business name.

The Benefits Of Running A Business 

If you run a business you can:

  •  apply for an ABN to use in your business transactions
  • have the flexibility to manage your time and work your own hours
  • register a .com.au website or a .au website once you have an ABN
  • access to government information, services and concessions for business
  • establish a business identity when selling to customers and other businesses
  • claim tax deductions for business expenses against your taxable income.
Is It A Hobby? 

A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure. While you may create a business from the starting point of a hobby (such as crocheting or painting, etc), that is not the primary purpose of the hobby.

The Benefits Of A Hobby

Having a hobby allows you to:

  • gain personal enjoyment and satisfaction from the activity
  • gift or sell your work for the cost of materials
  • do it in your own time or when people contact you
  • have no reporting obligations of a business.
What Are The Differences? 

The key differences between a business and a hobby are as follows:

  • Declaring Payments:

You do not need to declare the amount made from your hobby to the ATO. However, you must declare your income to the ATO in your annual return as a business.

  • Claiming Tax Deductions:

You cannot claim a deduction for any losses from your creative work if it is a hobby. As a business, you can claim for deductions on your expenses and generally need an ABN to do this.

  • Keeping Records:

You do not need to keep records of your hobby for the ATO, however it’s good practice to keep records in case your circumstances change.You must keep records for your business for tax and other obligations.

  • Licences & Permits: 

Generally, you will not need to hold licences and permits for your hobby. However, you may need licences and permits specific to your type of business.

  • Australian Business Number (ABN) eligibility:

As a hobby, you are not eligible for an ABN for a hobby, however if you sell goods or services to businesses, they may ask you for an ABN when they pay you. You can use a Statement by a supplier form to avoid the business withholding an amount from the payment to you for not having an ABN. The statement lets the business know you are selling the goods or services as a hobby.

As a business, it is not compulsory for businesses to register for an ABN, however getting an ABN is free and makes running your business easier, particularly if you have to register for other taxes like GST. Without an ABN, other businesses must withhold 47% from payments they make to you for tax purposes.

  • Selling Goods

If you’re selling goods, you’ll need to comply with Australian Consumer Law (ACL). Your customers have automatic rights if they buy a product that breaks easily, doesn’t work or doesn’t perform as generally expected.

If you are not sure about whether your activity would be classified as a business or hobby, you can seek professional advice from an accountant, legal expert or business adviser who can help you decide what exactly it is that you’re running.

When is unpaid work legal?

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There are circumstances where unpaid work is okay, however, legal unpaid work situations are limited, and in most circumstances, workers should be paid. Employers who are not meeting the Fair Work Act guidelines can be penalised for breaking the law by paying workers’ compensation and fines up to $63,000 for corporations and $12,600 for individuals.

If no employment relationship exists between the worker and employer, then the worker does not legally have to be paid. An employment relationship can involve:

  • Intention to perform work for the employer under the arrangement.
  • Helping with the ordinary operation of the business.
  • Working for a long period of time.
  • An expectation of payment.
  • The employer receiving the main benefit of the arrangement.

Unpaid work is legal if the work is to provide someone with experience in that particular job/industry, to provide training and skills as part of formal programs (e.g. university placement), to test someone’s job skills, or if it is volunteer work for a non-for-profit organisation. These include:

Vocational placements:
A vocational placement is formal work experience that is part of an educational or training course. The aim of vocational placements is to give students important skills to help them transition smoothly into the workforce through industry experience. The placement must be approved through the legal authorisation of the institution delivering the course; programs offered at universities, TAFE and schools will meet this requirement. If the work meets the definition of vocational placement under the Fair Work Act, then the position can be lawfully unpaid.

Internships and work experience:
An internship or work experience arrangement is a type of on-the-job training, where someone works to gain experience in a particular occupation or industry. This type of work can be legally unpaid if it is a vocational placement, or if there is no employment relationship.

Trials and skill demonstrations:
This is when someone is asked to perform work or undertake a trial in order to be evaluated for a job position. This work trial is used to determine someone’s suitability for the job on offer. It can be unpaid if:

  • It is necessary to evaluate someone’s suitability for the job.
  • The trial is only for as long as necessary to demonstrate the skills required for the job.
  • The worker is supervised by the potential employer or other appropriate staff for the entire duration of the trial.

Volunteering:
Work is counted as volunteering when its main purpose is to benefit others, such as a church, sporting club, government school, charity or community organisation. A genuine volunteering arrangement occurs when:

  • The parties did not intend to create an employment relationship.
  • The volunteer is not obligated to attend the workplace or perform work.
  • The volunteer doesn’t expect to be paid for their work.

When is taking a pay cut okay?

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Taking a pay cut is never easy but there are some situations where it makes sense. Focusing exclusively on the salary could prevent you from looking at other factors which are also important.

You may need to take a pay cut when you are making a career change. This is because you won’t have the relevant experience or the skills for the same pay grade in a new industry.  You will need to acquire the same level of skills and experience in your new career to be able to demand or be offered the same pay. This isn’t necessarily a bad thing, as getting your foot in the door to a completely new industry is extremely important. 

A work-life balance is desirable, although can mean that you need to make certain sacrifices. A higher pay comes with greater responsibilities and expectations, which can often be time occupying. Prioritising a balance could mean that you have to reduce responsibilities and take a pay cut. 

You may come across the perfect opportunity but it may not come with the same paycheck. At times like this, it might be worth taking the reduction in pay to pursue the opportunity which involves work that you are more excited and passionate about. 

Focusing exclusively on salary is tempting because there are always costs to cover and bills to pay. However, disregarding these other relevant factors could mean that you pass on a valuable opportunity for the sake of your paycheck. 

When Does A CGT Concession Or Exemption Apply To Your Small Business?

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Small businesses are facing a set of challenges once again that can make fulfilling tax obligations seem like a daunting task. However, as a small business, capital gains tax concessions on assets used to conduct your business may be of interest to you. These assets are known as “active assets” and can, for example, be a tangible asset (such as commercial property), or an intangible asset (such as goodwill).

The turnover threshold for such CGT concessions is $2 million, according to the ATO.  If your turnover is more than $2 million, then you need to satisfy an assets test.

There are stringent eligibility requirements and conditions that you must meet in order to access these concessions.

If you have owned an active business asset, you may only be required to pay tax on 25% of the capital gain when the asset is disposed of.

If you are 55 years of age or older, and are retiring or are permanently incapacitated (and have owned an active business asset for at least 15 years), you may not have to pay any CGT when disposing of an asset by sale, gift or transfer. You might also be able to contribute the amount that you make from this exemption to your super fund without affecting your non-concessional contributions limits (you can speak with us about this if you are unsure about this process).

If you are under 55, the taxable 25% of the disposal of an asset can be paid into a complying fund or a retirement savings account. There is then a full CGT exemption on the sale of an active business asset of up to $500,000 (the lifetime limit). Any amounts earned from this exemption to CGT may be able to be paid into your super fund without affecting the non-concessional contributions limit).

Disposing of an active asset, but are going to buy a replacement asset or improve on an existing one? You can defer your capital gain in this instance until a later year. The replacement asset can be acquired one year before or up to two years after the last CGT event in the income year that you choose the roll-over for.

If the asset is a share in a company or an interest in a trust, there will be additional conditions that you will be required to meet as well. If you are a small business, there are other CGT exemptions, rollovers and concessions specific to small businesses that you may be able to access, if you meet the eligibility criteria. These small business CGT concessions will reduce the taxable capital gain and in some cases result in no tax being paid at all on the gain.

Speak with us to find out what you may be entitled to when it comes to CGT and your business to ensure that you are doing the right thing with your tax obligations after selling an asset.

When do you need an ABN?

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An Australian business number (ABN) is a unique 11-digit number that the Australian Business Register issues to all businesses, identifying your business to the community and government whilst also making it easier to keep track of business transactions for tax purposes.

While it is compulsory for businesses with a GST turnover of $75,000 or more to have an ABN and to be registered for GST, businesses with a GST turnover of less than $75,000 can still apply for an ABN and may choose to register for GST. You are entitled to an ABN if you are aligned with the following entitlement criteria.

Carrying on or starting an enterprise in Australia:
An enterprise includes activities done in the form of a business, as well as acting as the trustee of a super fund, operating a charity and renting or leasing property. Features of a business include:

  • Significant commercial activity, involving commercial sales of products or services, and is of a reasonable size and scale.
  • Intention to make a profit from the activity as demonstrated by a business plan and a set rate of pay.
  • The activity is repeated, systematic, organised and carried on in a business-like way with records being kept.
  • The activity is carried on in a similar way to that of other businesses in the same or similar industry.
  • The entity has relevant knowledge or skill.
  • The entity has the appropriate insurance, such as public liability and WorkCover.

Making supplies connected with Australia’s indirect tax zone:
Even if your business or organisation is located outside Australia, you may be entitled to an ABN if you are carrying on an enterprise in Australia or involves making supplies connected with Australia’s indirect tax zone.

A Corporations Act company:
Companies registered with the Australian Securities & Investments Commission (ASIC) are entitled to an ABN.