Are you eligible for the small business income tax offset?

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The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year. Also known as the unincorporated small business tax discount, the offset is worked out on the proportion of tax payable on your business income.

The rate of offset is 13% for the 2020-21 financial year and 16% for the 2021-22 financial year and onwards. The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.

The ATO will work out your offset based on your income tax return and uses your:

  • Net small business income you earned as a sole trader, or
  • Share of net small business income from a partnership or trust.

Conditions for sole traders

The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions). Sole traders are not entitled to the offset in the event that their net small business income is a loss.

Income and deductions that you need to include in your net small business income include:

  • farm management deposits claimed as a deduction,
  • repayments of farm management deposits included as income,
  • net foreign business income related to your sole trading business, and
  • other income or deductions such as interest or dividends derived in the course of conducting your business.

Conditions for partnership and trust distributions

You may be eligible for the tax offset if:

  • you have a share of net small business income distributed from a partnership or trust that is a small business entity,
  • you were a partner or beneficiary of that small business partnership or trust,
  • the business income was derived by the small business partnership or trust from carrying on its own business activities, or
  • your assessable income includes a distribution or share of net income from that partnership or trust.

Keep in mind that there are income and deductions that you cannot include when working out your net small business income for the small business income tax offset. Such income amounts include wages, government allowances and net capital gains you made from carrying on your business. Discuss with a financial advisor or accountant for more information on the offset conditions for your business.

Are they an employee or a contractor?

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Employers that incorrectly treat employees as contractors can face hefty penalties and charges as well as claims for entitlements and superannuation contributions. Even if employers are only hiring someone for a few hours or a couple of days at a time, it must be established whether they are employees or contractors to get tax and super requirements right.

When hiring an individual, it is the details within the working agreement or contract that determines whether they are a contractor or employee for tax and super purposes. The agreement or contract the business has with the worker can be written or verbal.

Workers such as apprentices, trainees, labourers and trades assistants are always treated as employees. In most cases, apprentices and trainees are paid under an award and receive specific pay and conditions. Employers must meet the same tax and super obligations as they would for any other employees of the business.

Companies, trusts and partnerships are always contractors as an employee must be a person. If a company, trust or partnership has been hired to work, then it is a contracting relationship for tax and super purposes. The people who actually do the work may be directors, partners or employees of the contractor.

Sham contracting arrangements, where an employer attempts to disguise an employment relationship as an independent contracting arrangement, are illegal and breach the Fair Work Act 2009. Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:

  • Misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement.
  • Dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor.
  • Make a knowingly false statement to persuade or influence an employee to become an independent contractor

Employers who engage in sham contracting arrangements can face serious penalties for contraventions of these provisions. The courts may impose a maximum penalty of $54,000 per contravention.

Approaching difficult conversations at work

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Difficult conversations are apart of every aspect of life, including work. Employers and employees all face having to initiate difficult discussions at some point during their working life and avoiding these conversations can increase the potential for issues in the workplace or in extreme cases, legal claims.

Sensitive topics may initially be uncomfortable to approach but they can end up being important learning experiences for everyone involved. Addressing issues head on can allow people to work better together, understand different perspectives, practice empathy, and grow as individuals. As this is easier said than done, here a few ways you can prepare for a difficult conversation in the workplace.

Prepare:
Going into a difficult conversation prepared can help you cover the areas ou wish to discuss and possible solutions you can present. This will help you present issues in a calm and positive way. Before approaching the conversation, ask yourself questions like;

  • What is the purpose of the conversation? Establishing to yourself what you wish to achieve can help you direct the conversation to an outcome.
  • What attitude are you going to have? Depending on what outcome you are looking for will dictate what mood to enter the conversation in. Going in with a heated or negative stance will intimidate the person you are talking to whereas a gentler attitude will encourage conversation.

While planning can help you prepare for a difficult discussion, completely scripting your interaction can often create a disadvantage for you. Overly prepared responses can appear disingenuous, instead, prepare questions that can elicit discussion.

Listen:
The point of difficult conversations is to resolve an issue that is affecting the workplace. Listening to the person you are discussing this with is the first step to fixing the problem. Communication in the workplace needs to go both ways for a cohesive environment so listening to the other persons’ point of view or suggestions will reflect positively on you and the situation.

Solve:
Don’t leave a difficult conversation unresolved. This will only mean having to revisit the same issue at a later point, only this time everyone involved will have preconceived ideas of how the discussion will go and the lack of outcome. Having a clear plan moving forward helps ensure accountability and acts as a reference should something arise again.

Applying for your superannuation guarantee amnesty

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If you are an employer looking to correct past unpaid superannuation guarantee (SG) amounts, you now have a six-month window until 7 September 2020 to apply for SG amnesty. Up until early September, employers will be able to disclose, lodge and pay unpaid SG amounts for their employees.

Employers are encouraged to apply for SG amnesty to get their obligations up to date. You can also claim deductions and not incur administration charges or penalties during this amnesty.

To be eligible for the SG amnesty, employers must declare and pay their SG shortfalls and interest charges. Payments made during the amnesty can later be claimed as tax deductions and payment plans can also be arranged to better accommodate for employers, including those which can:

  • Have flexible payment terms and amounts which the ATO will adjust as an employer’s circumstances changes.
  • Extend the payment plan to beyond 7 September 2020. However, keep in mind that only payments made before or on 7 September 2020 will be tax-deductible.

Due to the COVID-19 pandemic, the ATO will also be amending refund returns as quickly as possible for employers who lodged an SG charge statement between 24 May 2018 and 6 March 2020.

To apply for the SG amnesty:

  • Lodge an approved SG amnesty form with the ATO for each quarter by 11:59pm on 7 September 2020.
  • Check your amounts are correct and that there are no errors on the form.
  • Complete the declaration to confirm that you are applying for the SG amnesty
  • Save the form as a .xls file.

After correctly submitting your form, the ATO will contact you with which of your quarters are eligible for the SG amnesty.

Applying for small business income tax concessions

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Businesses looking to save on tax for the financial year may consider applying for income tax concessions.

Businesses classified as a small business entity are eligible for income tax concessions. Since 1 July 2016, businesses are considered small business entities in the case that they:

  • are a sole trader, partnership or trust,
  • operate as a business for all or part of the income year, and
  • have an aggregated turnover of less than $10 million.

In the event that you meet the above requirements as a small business entity, here are the income tax concessions available to you.

Small business structure rollover

Small business entities can change the legal structure of their business and transfer active assets from one entity to another without incurring any income tax liability. Assets such as capital gains tax assets, trading stock, revenue assets and depreciating assets are eligible in this rollover. The rollover is also only available in the case that it is part of a genuine restructure and there is no change to ultimate economic ownership.

Simplified trading stock rules

Under the simplified trading stock rules concession, you can estimate the value of your trading stock at the end of the financial year when reporting in your tax return. However, small businesses will also need to show how they calculated their estimated trading stock value. Businesses which choose not to use an estimate will need to account for value changes in their stock and conduct a stocktake. Stocktakes do not need to be conducted if there is a difference of $5,000 or less between the value of your stock at the start of the income year.

Immediate deductions for prepaid expenses

Payments which cover a period of 12 months or less that are ending in the next income year are eligible for immediate deductions. Prepaid expenditure is also immediately deductible when the period ends no later than the last day of the income year following the year in which the expenditure was incurred.

Two-year amendment period

Small businesses receiving a notice of assessment from the ATO have a two-year time limit for reviewing an assessment.

Annual leave and pay over the holidays

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As the holiday season approaches, so does the shutdown period for many businesses. This is the time of year when it is easier to take off work due to many businesses slowing down, however, there are questions that surround this period, namely if you will get paid or not.

When calculating leave over the Christmas and New Year period, for permanent staff that would typically work on the public holidays, those days must count as a public holiday rather than a day of annual leave. Regular employee rights apply to Christmas Day, Boxing Day and New Years Day public holidays. If you work in an industry that may require staff to work these days, normal requirements and relevant penalty rates are in effect. Employees can choose not to work on a public holiday on reasonable grounds such as how much notice the employee received or whether employers expected them to work on a public holiday. Employers do not have an automatic right to terminate an employee if they refuse to work on a public holiday.

Employees may be instructed to take their annual leave for the remaining days during the shutdown period. Employers can require this if the relevant award allows it or, if the industry’s award does not have a stance on compulsory annual leave over the holiday period, employers can still require employees to take annual leave if the business typically shuts down over Christmas. You cannot compel your employees to take their leave each year. However, an employee cannot unreasonably refuse your request to take annual leave, if they have accumulated it over a long period.

Employees that have not accrued enough leave to cover the holiday period can arrange with their employers to take leave in advance or unpaid. Workers who do not agree to this, however, cannot be forced by an employer to take unpaid leave unless the industry award allows them to. If not, employers will have to pay workers at a normal rate for the period of the shutdown.

To avoid issues in the midst of the holidays, review employment contracts and understand your holiday rights and obligations, as an employer or employee. Communicate with relevant parties before any shutdown period and organise any business needs. By getting this done early, you can fully enjoy the holidays when they arrive.

Announcement Made About $3 Million & Over Superannuation Balances

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Last week, the government announced a change to superannuation, introducing a new tax that will apply to member balances above $3 million.

From July 1, 2025, super earnings over $3 million will be taxed at 30 per cent, double the current rate of 15 per cent. According to the government, this change aims to ensure that sustainability and fairness remain central to the system.

To put it into perspective, the average Australian super fund contains an average balance of $150,000, and about two-thirds of Australians have less than $100,000.

This new tax concession increase will affect about 80,000 people, who will continue to have more generous tax breaks on earnings from the $3 million below the threshold (which will not rise over time). This will not be retrospectively applied and will only apply to future earnings.

A person with $3 million in super will likely receive a tax benefit at 30% still. However, serious thought could be given to leaving money in superannuation, where the tax rate is the same as putting it into a company.

Other considerations that may need to be thought through include

  • If you die and leave that super to non-death benefits dependent, they will pay 15% on the entire taxable component, leading to an effective tax rate of 45% on the earnings.
  • Taking money out of the company will come with franking credits but may put you in a position of paying top-up tax. Conversely, leaving it in the company and leaving the shares to a testamentary trust may allow you to pay dividends without further tax.
  • A company does not need to comply with any SIS rules so that you can have in-house assets, loans to members etc.

Any actions taken should be done with consultation with a professional adviser to comply with legislation and regulations.

As these changes to super balances of over $3 million will not take effect until after the next election, there is plenty of time to plan and model out the best path for your situation (if you are one of the few who this will affect). You will need an actuarial certificate to determine what percentage of the fund’s income will be taxed at 0%, 15% and 30%.

While the average Australian super fund may be far below this threshold, that doesn’t mean a fund cannot be increased. Through voluntary contributions, including concessional and non-concessional contributions, you can help to boost your nest egg to a comfortable level.

Do you want to know more about tax breaks, concessions, or ways you could contribute to your superannuation? Speaking with a licensed professional is the best way to start.

Amnesty means that 24,000 businesses own up to underpaying Aussies superannuation

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An amnesty scheme which ended earlier this month has caused around 24,000 businesses to admit to underpayment of their worker’s super. A total of 588 million dollars will be distributed to almost 400,00 individuals.

The scheme, which covered payments from the introduction of super in 1992, gave employers the opportunity to come clean without any consequences as long as they paid the unpaid super as well as 10% interest for every year the money was overdue.

The ATO will be directing its attention at any businesses that did not admit fault and these businesses will face severe penalties.

Many individuals are looking to access their superannuation early in order to have support during these times. Although there is criticism of early access to super, this facility has been helpful to many families to keep afloat.

Amendment to Housing Affordability Measures introduced

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The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 was re-introduced to parliament on 23 October 2019. This comes after it was first announced in the 2017-18 Federal Budget.

The amendment introduces a new system where the government will provide up to an additional 10% capital gains tax (CGT) discount for resident individuals who invest in qualifying affordable housing from 1 January 2018. This increases the maximum CGT discount to 60%.

For the discount to be received, housing investments must meet qualifications and provide proof of eligibility. Tenants must have low to moderate incomes and landowners must charge rent at a discounted rate below the private market rental rate.

A registered community housing provider (CHP) must manage the properties and the investment is to be held for at least three years before the discount applies. The discounts will go through managed investment trusts (MITs). CHPs determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.

Investors who already have invested in affordable housing with the National Rental Affordability Scheme (NRAS) will not receive the additional 10% discount as they already get a yearly financial incentive.

Amending fringe benefits tax return and updated exemptions

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The Government has updated fringe benefits tax (FBT) exemptions to include travel in ride-sourcing vehicles under the existing taxi travel exemption. In the case that your business has been providing employees with such travel options and would like to amend your FBT returns to include the new exemption, the ATO has also updated 2020 FBT return amendment instructions.

New FBT exemption
Ride-sourcing vehicles are now included in the FBT taxi travel exemption. Business owners will be eligible for the exemption for travel provided to their employees in a single trip to or from the workplace:

  • On or after 1 April 2020, and
  • In a licenced taxi or other vehicle involving the transport of passengers for a fare, such as a ride-sourcing vehicle (excluding limousines).

Ride-sourcing FBT exemptions also apply to travel in relation to the sickness or injury of an employee.

Amending your FBT return
In the event that you have already lodged your FBT return but are eligible to be exempt from FBT due to the addition of ride-sourcing vehicles, there are a number of ways you can amend your FBT return.

An amendment to your FBT return can only be made if it is requested within three years from the date the FBT return was lodged. In the case that tax has been avoided, the amendment can be made within six years of lodgement. You can amend your FBT return by:

  • lodging electronically using Standard Business Reporting enabled software,
  • requesting an amendment assessment in writing through the ATO’s Business Portal or by post, or
  • working with a tax accountant to submit your request.