Tax Return Tips & News

Choosing the Right Business Structure

Choosing the Right Business Structure

Having the Right Business Structure can save your business time, stress and money. But what is the Right Business Structure for your business? The ATO has some good information on this, but here are a few more things to think about.

5 commonly used business structures in Australia are:

  • Sole traders
  • Partnerships
  • Companies
  • Unit trusts
  • Family trusts

The Right Business Structure

But to get the Right Business Structure it is important you understand these advantages and responsibilities as they may affect:

  • The way tax applies to your business
  • Protection of your assets
  • Your operating costs
  • How other businesses deal with you.

Sole traders

If you want to keep it simple trading as a sole trader may be the Right Business Structure for your business. If you operate your business as a sole trader, although you may decide to have employees, you trade, control and manage all aspects of your business. A sole trader is simple a person that does business, not a separate legal entity like for example a company.

Advantages

  • There are very few legal and tax formalities involved in setting up the business.
  • The structure is inexpensive to set up.
  • You have full control of the business.
  • You receive the full benefit of profits made by the business.
  • You keep all the after-tax gains if the business is sold.

Things to consider

  • Your access to finances is usually limited to your own resources.
  • If you have no employees, you usually have to do all the work.
  • You are fully liable for your business debts, so you risk losing personal assets (home, vehicles, etc.) if you cannot repay your debts. Similarly, any intellectual property may be at risk if the business fails.
  • You may be limited in how long you can stay away from the business (i.e. less holidays). Similarly, if you become sick or have an accident your business may stop operating.
  • You pay tax on profits at your marginal tax rate, which may be higher than the company tax rate.
  • You need to put money aside to pay tax; otherwise, you may have cashflow problems at tax time.
  • Few tax concessions are available.
  • The business structure limits opportunities for expansion.

 

Reporting and paying income tax

As a sole trader, you need to report the business income you earn (after expenses) on your personal income tax return, along with any other income you earn.

You pay the same tax as any other individual and you’re also entitled to the tax-free threshold if you are an Australian resident.

Paying super

You are responsible for your own super arrangements and may be able to claim a deduction for personal super contributions you make. You must also make super contributions for any eligible workers you employ.

Partnerships

A Partnership may be the Right Business Structure for your business. A partnership is when 2 or more people operate a business as co-owners and share income. All co­owners (i.e. partners) act on behalf of each other in the business. Like the sole trader structure, a partnership entity is not separate from its operators.

Advantages

  • Partnerships are easier and less expensive than companies to set up.
  • Partners may carry on business under a trading (business) name.
  • Partnerships combine the resources and expertise of a number of people.
  • Partnerships are simple to administer. Profits and losses are shared between partners according to his/her share (as specified in the ‘partnership agreement’).
  • Unlike the sole trader structure, partnerships allow for greater flexibility in holidays and sick leave.
  • Unlike companies, partnerships do not have to disclose their profits to the public (i.e. greater privacy).
  • Changing the legal structure is relatively simple (i.e. changing from a partnership into a company at a later stage).

 

 

Disadvantages

  • All partners together are personally responsible for business debts. Each partner is Individually liable for debts incurred by the other partners. This is known as being ‘jointly and severally’ liable (i.e. unlimited liability).
  • All partners have a right to participate in the management of the partnership (unless otherwise agreed).
  • Tax is charged at the personal tax rate. As business earnings increase, so does the tax rate.
  • Partners cannot transfer their ownership to someone outside the partnership unless the other partner(s) agree.
  • Personal differences may interfere with business.

 

Reporting and paying income tax

Although your business does not pay tax, you need to lodge an annual partnership income tax return on behalf of the business to show the total income earned and deductions claimed by the business. The tax return also shows each partner’s share of net partnership income.

As a partner you need to pay tax on your share of the partnership income (less expenses) you earn. Under a partnership, each partner is personally liable for the tax debts of the partnership.

Paying super

As a member of the partnership, you are responsible for your own  super  arrangements as  you  are not an employee of the business. You may be able to claim a deduction for any personal super contributions you make, and the partnership must make super contributions for any eligible workers they employ.

 

Companies

A company may be the Right Business Structure for your business. If you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities and Investment Commission.

A company is a more complex business structure. Usually, the set-up and administrative costs for a company are higher than for other business structures.

Our estimated setup fee for a company including ABN application is $1,375 including GST.

 

Advantages

  • Generally, shareholders are not liable for the debts of the business.
  • A company has far greater access to capital for the running of the business.
  • Legal arrangements are in the company’s name, not in the name of its directors and managers.
  • The business structure ensures continuity of management and ownership in the event of the death or disability of key people (because company shares may be transferred).
  • The tax rate for companies is less than the highest rate for individuals.

Disadvantages

  • A company is more expensive to establish.
  • Companies are more regulated than other business structures.
  • The rules for establishing and running a company are more complex and costly than other business structures.
  • Lessors, suppliers and lenders are reluctant to lend money or enter into contracts or leases with proprietary limited companies unless directors or shareholders provide personal guarantees.
  • If directors fail to meet their legal obligations, they may be held personally liable for the company’s debts.

 

Reporting and paying income tax

Your company must lodge an annual company tax return to report its income and deductions, and the income tax it is liable to pay. All companies pay their own income tax.

Your company pays tax on its net profit at a flat rate of 30%, which may be an advantage for businesses with high profit levels.

If you receive wages or director’s fees from your company, you need to include them in your individual tax return and pay tax on them at the individual tax rates.

Paying super

Your company must make super contributions for any eligible workers it employs, including you as a company director.

 

Trusts

A trust may be the Right Business Structure for your business. A trust is a relationship where a trustee (an individual or a company) carries on business for the benefit of other people (the beneficiaries). For instance, a trustee may carry on a business for the benefit of a particular family and distribute the yearly profit to them.

 

A trust is not a separate legal entity. A trust may be discretionary (i.e. the trustee decides how profit will be distributed among beneficiaries) or have fixed interests (i.e. it will benefit certain people in predetermined proportions). The trustee can be a company (a corporate trustee).

 

Two popular types of trust arrangements used by small businesses or for investment purposes are unit trusts and family trusts.

 

Our estimated setup fee for a trust including ABN application is $835 including GST.

 

Unit Trusts

These are trusts where the interests of beneficiaries are denominated by units, which can often be bought and sold in a way similar to trading in shares in a company. Unit trusts are used in many commercial arrangements, including managed investment schemes.

Family Trusts

Many family trusts are discretionary trusts due to the flexibility they offer – income can be allocated to beneficiaries at the trustee’s discretion.

Trusts that qualify as a family trust for the purposes of the trust loss provisions may benefit from concessional tax treatment.

 

Advantages of a trust

  • A trust provides asset protection and limits liability in relation to the business.
  • Trusts separate the control of an asset from the owner of the asset and so may be useful for protecting the income or assets of a young person or a family unit.
  • Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the

distribution of income and capital gains among beneficiaries.

  • Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or partnerships.
  • Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates.
  • Trusts receive a discount on the amount of capital gains tax payable on capital assets held for more than 12 months.

Disadvantages of a trust

  • Establishing a trust costs significantly more than establishing sole traders and partnerships.
  • A trust is a complex legal structure, which must be set up by a solicitor or accountant.
  • The trustee has a strict obligation to hold and manage the property for the exclusive benefit of the beneficiaries.
  • Operation of the business is limited to the conditions outlined in the trust deed.
  • As with companies, there are extensive regulations that trusts must comply with.
  • Losses derived in a trust are not distributable and cannot be offset by beneficiaries against other income they may have.
  • Unlike a company, a trust cannot retain profits for expansion without being subject to penalty rates of tax.

Reporting and paying income tax

Your discretionary trust does not have to pay tax. Instead, the trust beneficiaries pay tax on their share of the trust’s net income.

As a trustee, you can use your discretion each year to decide which beneficiaries will receive income. Trusts can pay very high rates of tax on any profits that are not distributed.

Paying super

Your trust must make super contributions for any eligible workers it employs. This includes you if you are employed by the trust.

If you’d like to discuss the Right Business Structure for you, please give us a call on +61 410 184 596 or us our contact form.

Tax Deductions Without Receipts

Can’t be bothered going through all your receipts to find your tax deductions or business expenses, then entering them into a spread sheet or email for your accountant?

This Video will show you how to grab your deductions or expenses the fast way.

Unless you’re spending a lot of physical cash most if not all your deductions are already sitting in your bank account or credit card transaction history. But how do we get these tax deductions out of our bank and send them to our accountants quickly?

Exporting your transactions to a spread sheet then deleting the personal transactions!

This is easily done with all banks websites now offering exportable reports in spreadsheet format.

Just repeat this step and download a spreadsheet for each of the bank accounts or credit card accounts you may have used to pay for your deductions.

The more tax deductions we find, the bigger your tax refund.

Please call or email Nick if you need any further help.

Tax Deductions

Tax Deductions

Categories
Asset (e.g. office equipment)
Accounting
Advertising and promotion
Bank fees and charges
Borrowing expenses
Cartage and freight
Cleaning and rubbish removal
Commission
Contract Payments
Donations
Drench, dip
Electricity
Environment protection exp
Fodder
Fuel and oil
Government charges, fees, etc
Hire or rent of plant, equip.
Home office (e.g. electricity or % of rent)
Insurance premiums
Interest (Australian)
Interest (overseas)
Landcare/water conservation
Lease payments
Legal fees
Maintenance
Materials and supplies
Pest and weed control
Postage
Printing and stationery
Protective clothing etc
Rates and land taxes (Rental Properties or Business premises only)
Rent on land and buildings
Repairs
Replacements (tools etc)
Royalties (Australian)
Salaries, wages – ordinary
Salaries, wages – associates
Seed
Subscriptions & publications
Sundry expenses
Superannuation – ordinary
Telephone
Travel & accommodation
Veterinary expenses (only if work or business related)
Superannuation – associates

The ATO provides more excellent information on work tax deductions & business tax expenses.

Bookkeeping without the Expensive Software

Bookkeeping without expensive software is easy if you set it up correctely.

Tips

  1. Only spend on your business bank account.
  2. If you don’t have a business bank account set one up immediately, what were you thinking!?
  3. Make sure you have a VISA or MasterCard facility so you can use it anywhere.Bookkeeping without expensive software
  4. Export your transactions to spreadsheet periodically and enter a category in the first free field.  Suggested categories at the end of the blog.Doing it regularly means you don’t have to wade through receipts to remember what each transaction was.
  5. To speed things up you can select the whole spreadsheet and sort the rows by the description column. This way you have all the suppliers names listed alphabetically which may help with tip 4.

By watching the video and remembering the key tips to Bookkeeping without expensive software, you’ll save yourself a lot of time and stress.

 

Contact us if you have any queries, we’re happy to help.

If your business employs people, is a company or trust, or you are required or wish to producer financial statements, you may need a specialist bookkeeping software such as Xero or Quickbook Intuit

Transaction Categories

Income/Revenue
Drawings – Money taken for Owner
Asset e.g. Laptop, equipment Over $1,000
Asset e.g. Lenses < $1,000
Accounting
Advertising and promotion
Bad debts written off
Bank fees and charges
Borrowing expenses
Cartage and freight
Cleaning and rubbish removal
Commission
Contract Payments
Depreciation
Donations
Drench, dip
Electricity
Environment protection exp
Fodder
Fuel and oil
Government charges, fees, etc
Hire or rent of plant, equip.
Home office
Insurance premiums
Interest (Australian)
Interest (overseas)
Landcare/water conservation
Lease payments
Legal fees
Maintenance
Materials and supplies
Minor Equip < $1,000
Pest and weed control
Personal
Postage
Printing and stationery
Protective clothing etc
Rates and land taxes
Rent on land and buildings
Repairs
Replacements (tools etc)
Royalties (Australian)
Salaries, wages – ordinary
Salaries, wages – associates
Seed
Subscriptions & publications
Sundry expenses
Superannuation – ordinary
Telephone
Travel & accommodation
Veterinary expenses
Superannuation – associates

 

Motor Vehicle Logbook How & Why Tutorial

This motor motor vehicle logbook tutorial video will tell you why keeping a 12 week motor vehicle logbook is worth it and show you how to do it.

This ATO link on Motor Vehicle Logbooks is also very beneficial.

Here is a link to an old fashioned paper logbook to keep in your glove box.

Here’s a link to a list of the best Smartphone Logbook Apps. I plan on doing a review of these later.

Please contact us if you haven any more questions

motor vehicle logbook tutorial Image

Old Fashioned Paper Logbook for your glove box.

When you can claim and can’t claim for car expenses

When you can claim

You can claim a deduction for work-related car expenses if you use your own car in the course of performing your job as an employee, for example, to:

  • carry bulky tools or equipment (such as an extension ladder or cello) which your employer requires you to use for work and cannot leave at work
  • attend conferences or meetings
  • deliver items or collect supplies
  • travel between two separate places of employment, provided one of the places is not your home (for example, when you have a second job)
  • travel from your normal workplace to an alternative workplace that is not a regular workplace back to your normal workplace or directly home
  • from your normal workplace or your home to an alternative workplace that is not a regular workplace (for example, a client’s premises) while you are on duty
  • perform itinerant work.

If you receive an allowance from your employer for car expenses, it is assessable income and the allowance must be included on your tax return. The amount of the allowance will usually be shown on your payment summary.

When you can’t claim

Most people can’t claim the cost of travel between home and work because this travel is private.

Calculating your deductions

There are some changes to work-related car expense deductions from 1 July 2015. Following is a breakdown of the methods and calculations which applied from and before 1 July 2015.

You cannot claim any expenses relating to motorcycles and vehicles with a carrying capacity of one tonne or more, or nine or more passengers, such as a utility truck and panel van using these methods. You need to use the general deduction provisions to claim for these vehicles.

From 1 July 2015 – two methods

The government has simplified the car expense deductions for 2015–16 and future income years. From 1 July 2015, the one-third of actual expenses method and 12% of original value method have been abolished.

The two methods available from 1 July 2015 are:

  • cents per kilometre method (with some changes)
  • Motor Vehicle logbook method (with no change to its rules).

Cents per kilometre method

The cents per kilometre method is available for use with some changes. Separate rates based on the size of the engine are no longer available from 1 July 2015. Under the revised method, individuals use 68 cents per kilometre for all motor vehicles for the 2018–19 income year. The rate for 2017–18 was 66 cents per kilometre. The Commissioner of Taxation will determine the rate for future income years.

  • Your claim is based on 68 cents per kilometre for 2018–19 income year (or 66 cents per kilometre for the 2017-18 income year).
  • You can claim a maximum of 5,000 business kilometres per car.
  • You don’t need written evidence but you need to be able to show how you worked out your business kilometres (for example, by producing diary records of work-related trips).

Where you and another joint owner use the car for separate income-producing purposes, you can each claim up to a maximum of 5,000 kilometres.

Motor Vehicle Logbook method

  • Your claim is based on the business-use percentage of the expenses for the car.
  • Expenses include running costs and decline in value but not capital costs, such as the purchase price of your car, the principal on any money borrowed to buy it and any improvement costs.
  • To work out your business-use percentage, you need a logbook and the odometer readings for the logbook period. The logbook period is a minimum continuous period of 12 weeks.
  • You can claim fuel and oil costs based on either your actual receipts or you can estimate the expenses based on odometer records that show readings from the start and the end of the period you had the car during the year.
  • You need written evidence for all other expenses for the car.

 

ATO Spotlight on work related Expenses

Here’s a great CPA Australia podcast discussing how the ATO is now focusing on individual’s work related expenses claimed.

https://open.spotify.com/episode/1OkqSu4tBT8TSVvZOoavuL

CPA Australia Image Work Related Expenses

Tax Commissioner Chris Jordan has stated that the over-claiming of work-related expenses is estimated at $2.5 billion.

In this podcast episode, Robert McDowall, partner at Arabon, Trisha Aventurado, Manager Public Practice Support Service at CPA Australia and Gavan Ord, Manager – Business and Investment Policy at CPA Australia, discuss what the ATO is doing about it, whether accountants should be auditing everything, and the ATO’s three golden rules for accountants and self-preparers when putting together work-related expenses.

The important thing to remember is that expenses must have been incurred by the employee. Too many people or their tax agents are claiming because they’re allowed to, not because the expense was:

  1. actually inured/paid by the employee.
  2. have substantiation records
  3. related to the work

High risk areas of concern, where the Australian Taxation Office suspects tax payers are claiming for work related expenses incorrectly are;

  1. Home Office Expenses
  2. Mobile Phone
  3. Internet
  4. Clothing expenses including laundry
  5. Motor Vehicle claims
  6. Rental Deductions

Many people are apportioning the personal v work related deductions incorrectly without proper substantiation, the result being a tax return with over-claimed deductions.  The Australian Taxation Office has arrived at these suspicions as a result of resent random audits of tax payers returns.

In order to substantiate expenses and deductions correctly, keep good records.

There are many ways to process your records, there’s even an ATO Expense tracker app, although the easiest way is to use your EFTPOS card then download the bank statement to a spread sheet.

When apportioning expenses such as rent, mobile phone, or internet,  a 4 week diary must be used to return a work related percentage, the resulting percentage can then be used to apply to your actual expenses.

Car claims are the same as above if you want to use your actual receipts, except the diary is called a logbook and must be used for 12 weeks. The resulting percentage can be used for 5 years or up until you change that car.

If you don’t want to keep a logbook or track your car receipts, then you must accurately estimate your work related kilometers with a limit of 5,000 kilometers. The resulting kms x $0.66 will your allowable deduction.

For any queries on any of the above issues, or any other tax or accounting queries, call Nick Britton on 0410 184 596

Why even use a tax accountant when I can do it myself online?

I get asked “what do you charge”  all the time. The funny thing is they’re not comparing me with another Tax Accountant, although they should I’m fantastic value for money, they’re asking because they’re considering doing it themselves.

tax with a tax accountant

Just because you can doesn’t mean you should.

The online options are pretty convenient, but the online form isn’t going to;

  1. Ask you the right questions specific to your tax return,
  2. Look for extra possible tax deductions or even taxable incomes, given the things you’ve eluded to, given your unique situation.
  3. Comply with the laws for things you’ve forgotten to put in the form.
  4. Comply with the laws for things you remembered but put in to the form, but in the wrong section.
  5. Answer the ATO’s questions when you get an audit.

The real question isn’t “how much do you charge”? You should be asking:

  1. Am I confident my tax return is correct if I do it my self.
  2. How much money do you save in tax payable by using a Tax Accountant?
  3. How much do you increase your refund by using a Tax Accountant?
  4. How much time do you save by using a Tax Accountant?
  5. How much time do I save you if you get audited by using a Tax Accountant?
  6. If you do it yourself, are you getting all your deductions you’re entitled to.
  7. Is prison food any good?

 

vTax has a nice balance of the doing most of the boring stuff online. No postage, no printing, signing then posting back. You don’t even need to scan anything. But once all the stuff you think is relevant has been entered via vTax online process, a real experience tax accountant will call you to enquire on anything that needs attention.

Savings Guide is a great Australian resource for getting ahead, and has also given a good case for when and when not to use a Tax Accountant.

Contact Nick now to see how much better using a professional is when preparing your and lodging your tax return

 

Compliance Activity Audits on Tax Returns to increase says ATO

The ATO will be contacting over one million taxpayers either directly or through their tax agent in the coming months as part of its compliance activity, and have revealed the most common trouble spots for taxpayers at tax time.

Tax return compliance activity audits

With tax time 2018 beginning this weekend, the ATO has continued its ongoing education campaign by publishing the five most common mistakes seen from its audits and reviews from previous years.

According to the tax office, the top five mistakes include taxpayers who are leaving out some of their income, those who claim deductions for personal expenses, those who fail to keep receipts or records, those who claim for something they never paid for, and those who claimed personal expenses for rental properties.

ATO assistant commissioner Kath Anderson said the tax office would be taking a more proactive approach this year in a bid to clamp down on agents and taxpayers who “push the boundaries”.

“We are increasing our investment in education and assistance, as well as reviews and audits. This year we are expecting to make contact with more than 1 million taxpayers either directly or through their agents,” Ms Anderson said.

“This tax time we will be paying close attention to claims for private expenses like home to work travel, plain clothes, and private phone calls. We will also be paying attention to people who are claiming standard deductions for expenses they never paid for.

“Around half of the adjustments we make are because the taxpayer had no records, or they were poor quality. Yet it’s so easy to keep your records, using the myDeductions tool in the ATO app. Just take a photo, record a few details and then at the end of the year upload the information to your agent or to myTax.”

Further, Ms Anderson said the ATO would be taking a close look at income, including capital gains on cryptocurrency.

“A temp job, cash jobs, capital gains on cryptocurrency, or money earned from the sharing economy is all income that must be declared. We are constantly improving our data matching tools and even a one-off payment may be enough to raise a red flag,” she said.

The ATO’s latest warning comes off the back of several public notices, including a case study of incorrect claims in relation to work-related clothing and laundry claims.

Work-related car expenses have also been put on notice, with the ATO’s focus coming as part of a large-scale education campaign in the build up to tax time 2018.

Article sourced at:

www.accountantsdaily.com.au

28 JUNE 2018

By: Jotham Lian

To avoid any undue attention during the ATO’s increased 2018 compliance activity, make sure your tax return is completed by a proficient Tax Accountant.

Call Nick if you’d like to make an appointment and avoid compliance activity.

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