Robert Goodman Accountants Blog

Getting around to your taxes soon? The ATO has revealed the most common mistakes taxpayers tend to make at tax time, with thousands of lodgers caught out every year. Don't be one of them! Stay ahead of the ATO by knowing the traps and seeking expert help when you're in doubt.

It's tax time, and as with every year the ATO is warning individuals to take care with their returns. But did you know that the ATO is using increasingly sophisticated data analytics to detect problem claims? It's more important than ever to get it right. Here are the top four mistakes the ATO says you should be avoiding:

1. Lodging before you have all of your income data

Have you confirmed your income from all sources? The ATO says taxpayers who lodge early are more likely to submit incomplete data that requires correction later – and a tax bill – when the ATO eventually uncovers this.

The ATO matches data with a wide range of third parties including banks, sharing economy platforms, rental property managers, cryptocurrency exchanges and share registries. This may take place several months after you've lodged your return.

If you do realise you've made a mistake or omitted income, you should tell the ATO promptly. In cases where penalties might apply, it will generally work in your favour if you voluntarily came forward about the undisclosed income. The ATO recommends waiting for your original return to be processed and your notice of assessment to be issued before lodging your amendment. This can be lodged by you or your tax agent.

2. Getting work-related deductions wrong

Work-related expenses are some of the most popular deductions claimed, but the rules can be tricky. While there are some general principles that apply – such as only claiming for the work-related portion of an expense and not for any portion relating to personal use – the ATO has specific guidelines in place for all the different categories of expenses.

Clothing, self-education, home office expenses and travel all have detailed rules about what you can claim, how to calculate your claim and what records you must keep. For this reason, the ATO cautions against relying on advice from friends and colleagues as to what you can claim. Getting help from a professional tax adviser is the best way to ensure you not only get your work-related claims right and avoid trouble with the ATO, but also obtain the maximum deductions you're entitled to.

3. Not keeping receipts

Generally, you must keep adequate records to support your claims, including receipts. In some cases, you're exempted from having to keep receipts (eg for clothing claims under $150). However, the ATO can still ask you to explain how you calculated your claim.

The ATO's "myDeductions" app helps taxpayers to track their expenses, record their work-related car trips and store photos of receipts. When it's time to lodge your return, you can export and email the data (to your tax agent or to yourself) and you can also upload the data to prefill your tax return, which your tax agent can also access through their online portal.

4. Claiming expenses you never incurred

In order to claim a deduction, you must have spent the money. Even though the ATO has some relaxed rules where you aren't required to keep receipts up to a certain threshold, the ATO can still ask questions to verify whether you actually incurred the expense. As the ATO stresses, there's no such thing as an "automatic" deduction.

You also can't claim expenses that your employer has reimbursed you for. If you receive a specific allowance (eg for clothing) you must generally declare that allowance in your tax return, and you can then deduct the expenses you actually incurred.

Need help?

Don't risk headaches with the ATO – get the tax professionals on side. Talk to us today for expert assistance and keep your tax time as stress-free as possible.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Is your farm a hobby or a business?

Hankering for a hobby farm? Have a penchant for a few shimmering vines, or maybe a cluster of Angus cows on green pastures? Maybe you're already "farming". You might see your rural acres as a hobby but your idyllic vision may not be one shared by the ATO if it morphs into a business. Which may not be such a bad thing! Find out whether or not your farm is a business and why it matters.

As you sip a drop from the latest vintage you've crushed with the toes of your family and friends, is it possible that turning these vines into wine has ventured into primary production, and this happy hobby has become a business?

What's the difference between a hobby and a business and how can you tell? Defining "primary production" and "business" is no problem. But just as it's hard to conclusively identify why one wine is better than another, so is figuring out whether or not a business of primary production is being carried on in your particular case.

Are you carrying on a primary production business?

First, let's look at the definitions. "Business" is clearly defined to include any profession, trade, employment, vocation or calling (other than an occupation as an employee), and "primary production" broadly refers to the following areas of activity:

  • plant or animal cultivation (or both)
  • fishing or pearling (or both)
  • tree farming or felling (or both).

Although determining whether a business of primary production is being carried on requires both these definitions to be satisfied, neither definition provides a simple test for when the nature and extent of your activities amounts to the carrying on of a business. Fortunately, there are a number of indicators, courtesy of case law, that give some direction.

Business indicators

The ATO emphasises that no one indicator will nail whether a business is being carried on, but it's a matter of weighing up all the relevant indicators in each individual case. It may look and smell like a business but when all the chips are counted it may not stack up.

So, this is not an exact science, but more a forensic approach, in which the individual pieces of evidence are examined, weighed and fitted together to build a case for a hobby or a business.

The indicators explore:

  • the nature of the activity – has it started, does it have a "significant commercial purpose or character", what is its scale (large enough to make a profit?), does it have repetition and regularity, is it organised in a businesslike manner, will it be profitable, does it match the way the activity is ordinarily carried out in that industry, and is it better described as a hobby?
  • the intention of the taxpayer – does the taxpayer have more than a mere intention to engage in business, does the taxpayer intend to make a profit, has the taxpayer carried out research and analysis, has the taxpayer kept records and created a business plan, and has the taxpayer sought the advice of professionals in the development of this activity?

So many questions! Here's another one: why does it matter?

Weighing up the tax considerations

Defining whether you are carrying on a hobby or a primary production business matters because there are tax considerations for both activities, such as the following.

If it's a hobby:

  • You can enjoy the activity in your own time with no reporting obligations.
  • You don't need to declare any money you make from the activity, but you also can't claim any losses from it.
  • Also, as a hobbyist you're not entitled to have an ABN, so to transact with (supply) another business you will need to complete a special form and provide a written statement to the payer, otherwise tax will be withheld at the highest rate.

If your hobby becomes a primary production business:

  • You will need to declare your income to the ATO, get an ABN and keep tax records.
  • You can claim general business deductions for your expenses (unless you're offsetting a loss against other income, in which case you need to satisfy the ATO's "non-commercial loss" tests or defer your loss until you make a profit). You can also claim the new instant asset write-off for SMEs of up to $30,000.
  • You can take advantage of tax concessions available to primary producers, eg tax offsets such as tax averaging, and tax deductions, eg for the depreciation of grapevines and immediate deductions for fencing and water facilities.

Don't hear it on the grapevine

If it's all enough to turn you to drink, come and see us for some expert advice and guidance on the most tax-effective way forward for your farm!

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

There's nothing as certain as death and taxes, but tax on death is not so clear. The good news is that when an asset passes to a beneficiary, capital gains tax (CGT) generally does not apply. But down the track when the beneficiary decides to sell that asset, there are many forks in the path.

There is enough pain and anguish when someone dies, so fortunately there is, in most cases at least, no duty on assets that form part of the deceased's estate and are passed to a beneficiary, or their legal personal representative (LPR). But as with life, the rules regarding death and CGT are not meant to be easy, particularly when that asset is a "dwelling".

This article will explore the CGT consequences for the deceased estate and the beneficiary of:

  • the transmission on death, of an asset, specifically a dwelling
  • the subsequent sale of that dwelling.

CGT on the inheritance of a dwelling

Generally, the law says that there is no CGT liability for the deceased on the transmission of an asset to a beneficiary.

The beneficiary is considered to be the new owner of the inherited asset on the day the deceased person died and CGT does not apply to that asset.

This applies to all assets, including a dwelling.

The exception is where the beneficiary is a "tax advantaged entity" (TAE), such as a charity, foreign resident or complying superannuation entity. In this case the deceased estate (not the TAE) is liable for any capital gain or loss attached to the asset. This will need to be taken into account in the deceased's final tax return in the year in which he or she died.

CGT on the sale of an inherited dwelling

If the beneficiary subsequently sells the bequeathed asset, this may create a CGT "event", depending on the status of the property, when it was purchased, when the deceased died and whether the sale qualifies for the CGT "main residence" exemption.

CGT liability on the sale will be determined by whether:

  • the deceased died before, on or after 20 September 1985 (when CGT was introduced); and
  • the dwelling was acquired before, on or after 20 September 1985; and if acquired post-CGT, whether the deceased died before, on or after 20 August 1996.

The following table identifies when CGT applies to the sale of an inherited dwelling and the relevant cost base. It refers to these two conditions:

Condition 1: Dwelling was sold (note that this means settlement must have occurred) within two years of the person's death. This exemption applies regardless of whether the beneficiary used the dwelling as their main residence or produced income from it during this period. The two-year period can be extended at the Commissioner's discretion. New safe harbour rules allow executors and beneficiaries to self-assess this discretion provided a number of conditions are met.

Condition 2: From the deceased's death until the sale, the dwelling was not used to produce income, and was the main residence of one or more of the following:

  • the deceased's spouse;
  • an individual who had a right to occupy it under the deceased's will; or
  • the beneficiary.

CGT on the sale of an inherited dwelling

Dwelling acquired by deceased (D)

Date of death

Subsequent disposal by beneficiary (B)

Pre-CGT (ie before 20 September 1985)

Pre-CGT

No CGT. Exception: dwelling subject to major capital improvements post-CGT and used to produce assessable income

Pre-CGT

Post-CGT

No CGT if:Condition 1 or 2 is satisfied

If CGT applies, B's cost base is the dwelling's cost base in D's hands at the date of death

Post-CGT

Before 20 August 1996

No CGT if: Condition 2 is satisfied; and D always used dwelling as main residence (MR) and did not use it to produce assessable income.

If CGT applies, B's cost base is the cost base of the dwelling in D's hands at the date of death

On or after

21 August 1996

No CGT if: Condition 1 or 2 is satisfied; and just before D died dwelling was used as MR and was not being used to produce assessable income

If CGT applies, B's cost base is the market value of the dwelling at the date of death


In calculating the CGT, the beneficiary or the LPR cannot use any of the deceased's unapplied net capital losses against the net capital gains.

Guidance at hand

If you have inherited a dwelling and are in the dark about the CGT impact of hanging onto it or selling it, we can guide you through the minefield and minimise any tax consequences.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Superannuation is an effective investment structure for asset protection, but a questionable contribution into super could jeopardise some of your benefits in the event of bankruptcy. How you access your benefits can also make a big difference. Don't wait until you're in hot water! Know the basic bankruptcy rules in advance to help you plan for long-term asset protection.

Everyone is concerned about asset protection, and understanding how your superannuation is protected in the event of bankruptcy can help you make long-term decisions about the best structures for holding your wealth.

The general rule is that your superannuation balance is protected in the event of bankruptcy – unlike most assets you own personally.

This means your bankruptcy trustee (the person appointed to administer your bankrupt estate) cannot access your superannuation for distribution among your creditors. This asset protection is yet another reason why many Australians seek to hold their wealth in the superannuation environment.

Beware of the claw-back

Despite this general protection, there's one important caveat to be aware of: wealth you've intentionally contributed into superannuation in order to defeat creditors can be taken back by your bankruptcy trustee and used to pay your debts.

Specifically, this "claw-back" applies if your main purpose in making a superannuation contribution was to prevent that wealth from being available to your creditors, or to hinder or delay your creditors. Similarly, where the contribution is made by a third party on your behalf (eg your employer, in a salary sacrifice situation), the claw-back can apply if you, as the beneficiary, had that purpose of hindering creditors when you arranged for the third party to make the contribution.

There are a couple of traps in this area that it pays to be aware of:

  • By law, you're deemed to have had the intention of defeating creditors if it can be shown that at the time of making the contribution you were, or were about to become, insolvent.
  • Additionally, if you didn't keep proper records of your financial position as would be expected for someone in your position, it's automatically assumed you were, or were about to become, insolvent – unless you can actually prove otherwise.

This could be a big problem for someone who later becomes bankrupt but has inadequate financial records from the time of their superannuation contribution! It therefore helps to consistently have good records in place showing your financial position.

Even if you have good records and were clearly solvent at the relevant time, another factor that will be considered is whether the contribution was "out of character" for you. An unusual contribution is not fatal, but will raise suspicions. Therefore, having some evidence showing why you made a large, unusual contribution may help to refute any suggestion you were trying to defeat creditors.

Withdrawals from the fund

The general rule that your superannuation is protected extends to both accumulation accounts and any pension accounts inside your fund. But what happens if you withdraw your benefits? The answer depends on what form the withdrawals take.

Lump sum withdrawals you make after you become bankrupt are protected and cannot be distributed to your creditors. However, pension payments (also known as income stream payments) are only partly protected. Your pension payments are included in your "income" for bankruptcy law purposes, and your total income is only protected up to a certain indexed threshold that depends on how many dependants you have. (As at March 2019, the threshold for a bankrupt with no dependants was $57,866.90, increasing to $78,698.98 for those with five or more dependants.) Above this threshold, 50% of your income can be accessed by your bankruptcy trustee.

Importantly, any benefits you withdraw from superannuation before you become bankrupt are not protected because they simply form part of your personal property.

Safeguard your wealth

A proactive approach to asset protection can minimise risks and give you maximum peace of mind. Talk to us today to begin reviewing asset protection measures for your investment structures.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

SMSFs vs other types of funds: part 2

Insurance and dispute resolution might not be high on your list of things to consider when starting up an SMSF, but these issues do affect SMSFs differently to public offer funds. What will you do if a dispute arises between SMSF members, and what does taking out insurance in an SMSF practically involve? Avoid any rude shocks by ensuring you've planned for these issues before you jump in.

Before setting up an SMSF, it's essential to be fully informed about the pros and cons of an SMSF structure. In this second instalment of our two-part series on the key differences between SMSFs and public offer funds, we look at some important issues relating to insurance and dispute resolution.

Insurance

It's possible to hold various types of insurance through your superannuation fund, including death, total and permanent disablement (TPD) and temporary incapacity.

For many Australians, using superannuation benefits to pay insurance premiums makes insurance more accessible and convenient.

While you can purchase insurance within an SMSF, large funds can generally offer cheaper premiums because of the group discounts these funds can access. Another possible advantage of large funds is that members are automatically accepted for a certain level of coverage without needing a medical exam or detailed personal information, which is more likely to be required for an SMSF-held policy. For these reasons, some SMSF members choose to keep a separate account in a public offer fund just to access the insurance.

If you're an SMSF trustee, you're in charge, so there are a couple of things to keep in mind in relation to insurance:

  • As part of your SMSF's investment strategy, you're required to consider (and regularly review) whether the fund should hold insurance cover for its members.
  • Not every type of insurance can be held in superannuation. For example, trauma policies aren't allowed, and there are restrictions on some types of TPD policies. Seek professional advice before choosing your policies.
  • You should also seek advice about the tax consequences of holding insurance in the fund, including deductibility of premiums and how life insurance proceeds might affect the taxation of your death benefits.

If you're a member of a public offer fund, it's important to check what insurance you're signed up to and assess whether you're getting value for money. Many members are signed up for insurance on a default (opt-out) basis, and may be unaware they're paying for duplicate policies across multiple accounts or unnecessary coverage as part of a bundled arrangement.

Dispute resolution

What happens when you're not happy with the trustee of your fund? Perhaps your claim for benefits has been mishandled, or the trustee has made an error? Members of public offer funds can complain to the Australian Financial Complaints Authority (AFCA), a free dispute resolution service that has the power to make binding decisions in order to resolve your matter.

However, dispute resolution is an entirely different matter for SMSFs. SMSF trustees may complain to AFCA about financial services problems they encounter with third parties (eg an insurance company or bank), but AFCA cannot hear a complaint about the decision or conduct of an SMSF trustee. This means that SMSF members cannot complain to AFCA about decisions that the other trustees have made (and similarly, potential beneficiaries of a deceased member's death benefits cannot complain to AFCA about how the trustees have paid out the benefits).

In these cases, the parties would need to go through the legal system to resolve the matter. This could mean alternative dispute resolution, or even court, but it must be privately funded. The SMSF's governing rules may outline dispute resolution procedures that bind the trustees, so it's worth giving this some thought in advance to ensure the trustees are as prepared as possible for any disagreement.

Weighing up your super options?

Contact our office to start exploring whether an SMSF can help you achieve your retirement goals.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Planning to claim some clothing or laundry expenses this tax time? These deductions are on the ATO's watch list again this year, and there are many traps for the unwary. For example, did you know that non-branded work uniforms are not deductible? Find out what categories are allowed and what records you need to keep.

Taxpayers who claim deductions for work-related clothing and laundry expenses may find themselves under the ATO's microscope this tax time. Even if your claim is relatively small, penalties can apply for making incorrect claims.

What clothing is eligible?

If your work-related clothing falls into one of the following three categories, you can claim the purchase cost and the costs of laundering that clothing:

  1. Uniforms. To qualify, your uniform must be both unique (designed only for your employer) and distinctive (with your employer's logo attached, and it must not be available to the public). This means you can't make claims for generic, non-branded uniforms. And if your uniform is compulsory, you may also be able to claim shoes, socks and stockings provided they're an essential part of the uniform and their characteristics (such the required colour, style and type) are outlined in your employer's uniform policy. Non-compulsory uniforms have much tighter rules, so check with your adviser before claiming.
  2. Occupation-specific clothing. This is clothing that is unique to your occupation, is not "everyday" in nature and allows the public to identify your occupation. Examples include a chef's checked trousers or a barrister's robes. In contrast, a bartender's black trousers or a swimming instructor's swimwear wouldn't be allowable.
  3. Protective clothing. To be eligible, the clothing must offer a sufficient level of protection against injury or illness in your work setting. Typical examples include high-visibility clothing, steel-capped boots, non-slip shoes, smocks/aprons and fire-resistant clothing.

The ATO is particularly concerned that many taxpayers incorrectly claim for ordinary clothing, like suits or black work trousers. It says the following are not valid reasons for deducting clothing:

  • Your employer requires you to wear a certain colour (eg trousers must be black).
  • You bought formal clothes to wear to work functions such as awards nights where you represented your employer.
  • You bought clothes just to wear to work.

Record-keeping

For total clothing and laundry claims of up to $150, you aren't required to keep detailed records. However, the ATO stresses that taxpayers aren't "automatically" entitled to a $150 deduction – you must have actually incurred the expenses you claim. The ATO can still ask you to substantiate your claim, and can contact your employer to verify its clothing requirements.

If your total claim is under $150, you can calculate your laundry claim using a simple rate of $1 per load where all the clothing is work-related, and 50 cents per load where other clothes are part of the load.

If your total claim for clothing and laundry exceeds $150 (and your total claim for work-related expenses exceeds $300), you'll need to keep receipts.

To prove your laundry costs, you'll need to keep a diary for a representative one-month period. Your adviser can help you ensure you have the correct records in place.

Reimbursements and allowances

To claim a deduction, you must have incurred the expense yourself. So, if your employer reimburses you for an expense, you can't deduct that amount.

On the other hand, if you receive a clothing allowance you must declare that allowance in your tax return. You can then deduct your costs for eligible clothing, but only the amount you actually spent.

Take the stress out of tax time

Talk to us for expert assistance with all of your work-related expense claims. We'll help you claim everything you're entitled to, while keeping the ATO happy.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Recording the market value of your SMSF's assets is an important trustee responsibility. But how do you prove "market value", how often must you value assets and when do you need to hire an expert valuer? Fortunately, with some help from the ATO's guidelines and your professional adviser, asset valuation needn't be a headache for trustees.

To keep your SMSF's auditor and the ATO happy, it's essential to take asset valuation seriously. By law, SMSFs must record all of their assets at "market value" – an important requirement that allows funds to accurately report the value of members' benefits. Additionally, there are a number of SMSF investment rules that specifically require a "market value" to be assessed, so failing to correctly value assets could land SMSF trustees in hot water.

For example, SMSFs are generally prohibited from acquiring assets from related parties – with some notable exceptions such as "business real property" (broadly, 100% commercial property) and listed shares. However, these exceptions only apply if the assets in question are acquired at market value. Knowing the market value of fund assets is also essential to complying with the in-house asset rules and certain laws covering the sale of collectables and personal use assets.

What is market value?

Under superannuation law, "market value" is defined as the amount that a willing buyer would reasonably be expected to pay in a hypothetical scenario where all of the following conditions are met:

  • the buyer and seller deal with each other at arm's length;
  • the sale occurs after proper marketing of the asset; and
  • the buyer and the seller act "knowledgeably and prudentially".

How does this work in practice? In an audit, your SMSF's auditor (and ultimately the ATO) will expect you to be able to provide evidence supporting your valuation. This should be based on "objective and supportable" data, and should demonstrate a "fair and reasonable" valuation method.

The ATO says a method is fair and reasonable if it is a good faith, rational process that takes into account all relevant factors and can be explained to a third party.

In general, it's not compulsory to use a qualified external valuer (that is, someone who holds formal valuation qualifications or has specific skills or experience in valuing certain assets). It's the methodology and supporting evidence that makes a valuation sound, not the identity of the person who performs the valuation. However, there are some situations where using a qualified valuer is compulsory or recommended:

  • If your SMSF holds collectables or personal use assets (eg artwork), you must by law use a valuation from a qualified independent valuer before disposing of such assets to related parties.
  • The ATO also recommends that you consider using a qualified independent valuer for any asset that represents a large proportion of your fund's total value, or if the valuation is likely to be complex or difficult given the nature of the asset.

Specific assets

As noted above there are specific requirements for collectables, and the ATO has also developed guidelines for other classes of assets.

The ATO says real estate doesn't need to be valued each year, unless there has been a significant event since the last valuation that may affect the value. This could include market volatility or changes to the property.

Listed shares and managed units are easy to value, and should therefore be valued at the end of each financial year. Unlisted shares and units (eg investments in private companies or trusts) are more difficult to value than listed assets and require consideration of a range of factors. Trustees should seek professional assistance with valuing unlisted investments.

Need help getting it right?

For some assets, determining market value can be a complex process that requires professional input. Don't go it alone – get the right advice and ensure your valuations stand up to ATO scrutiny. Contact our office to discuss the ATO guidelines in more detail or to begin assessing your SMSF's valuation needs.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

You may have heard about the "instant asset write-off", but do you understand exactly how it can benefit your business? If not, you're not alone! Read our case study for insight into how the write-off could work for your small or medium business, and what you need to do by 30 June 2020 to take advantage of this limited-time incentive.

If you're thinking about purchasing some new equipment for your business, it may make sense to bring forward that purchase in order to take advantage of the "instant asset write-off" available until 30 June 2020.

The write-off allows small and medium businesses (with turnover up to $50 million) to claim a full deduction for any depreciating asset costing up to $30,000 in the year they first use it, rather than having to deduct the cost over several years under the usual depreciation rules.

Case study: David runs a distribution business with annual turnover of $1.4 million. He has been thinking about purchasing a computer upgrade (costing $8,000), an extra forklift ($24,000) and a new van ($35,000), which David would use 20% of the time for personal use.

Which assets qualify?

The $30,000 threshold is a per asset threshold, so the business could claim both the $8,000 computer upgrade and $24,000 forklift under the write-off, even though these total $32,000.

The $35,000 vehicle won't qualify. Even though businesses may only claim the write-off for the business use proportion of an asset (in this case 80% or $28,000), the full cost of the asset must still be below the $30,000 threshold. The vehicle would be subject to the usual depreciation rules.

What's the advantage of the write-off?

The write-off "accelerates" David's deductions because the business can fully write off qualifying purchases in the first year, rather than gradually claiming deductions for depreciation over several years. This is clearly a benefit, but David's decision about the purchases should also factor in:

  • how profitable the business is, and how a large deduction this year versus gradual depreciation over several years will be applied against the business' assessable income; and
  • the cashflow impact of making the purchase, including whether finance is needed. Does the business genuinely need the new assets, and does the tax benefit of the instant write-off justify the expense involved in this capital expenditure?

What's the deadline?

The $30,000 write-off is a temporary measure.

Unless there are further government announcements, the threshold will return to $1,000 from 1 July 2020.

David must do two things if he wishes to utilise the $30,000 write-off.

First, he must purchase the asset by 30 June 2020.

  • For small businesses like David's (with turnover under $10 million), the purchase can go as far back as 13 May 2015 (subject to the "first use/installation" rule discussed below).
  • If David's business turnover was between $10 million and $50 million, the purchase would need to have been made after 2 April 2019 (because the measure was not available to medium businesses before then).

Be careful about financing asset purchases. If you "lease" an asset you may not qualify because you're not the owner, but if you use a form of finance like a "chattel mortgage" (where the lender takes security over the asset) you can still claim the write-off.

Second, the asset must be first used, or installed ready for use, on or before 30 June 2020. This means David wouldn't qualify if he buys the asset but it's not delivered until after 30 June 2020.

If a small business purchased and also first used or installed an asset on or before 2 April 2019, a lower threshold will apply. Talk to your adviser about the tax treatment of that purchase.

Let's look at your expenditure plans

If you've been considering new equipment for your business, contact us today to explore the optimal timing for that expenditure and whether the write-off can work for you.

Call us at Robert Goodman Accountants on 07 3289 1700 or email us at reception@rgoodman.com.au.  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.

Your business may be required to make superannuation contributions for some independent contractors, even if they have an Australian Business Number (ABN). Contractors hired under a contract "principally for labour" are captured – but what does that mean? Find out what test the ATO applies and check whether your business has its super obligations covered.

Hiring independent contractors can be a flexible staffing solution for many businesses, not only to meet fluctuating workloads but also to help fill gaps with specific skills. But did you know that some workers who are genuinely independent contractors are still entitled to compulsory superannuation contributions?

If a worker is not an employee in the general sense but is hired under "a contract that is wholly or principally for the labour of the person", the worker is deemed an employee for super purposes, even if they have an ABN.

This means the hirer must make superannuation guarantee (SG) contributions of 9.5% (in relation to the part of the contract that is for labour). Hirers can't meet this obligation simply by paying the worker an additional 9.5% – they must actually make contributions to the worker's superannuation fund.

So what sort of contracts are captured? The ATO's view is that a contract is "wholly or principally for labour" when three key requirements are all met.

  • First, the person must be paid "mainly" for their labour (if not entirely), and the ATO interprets this as "more than half the dollar value" of the contract being for labour. Labour includes not only physical work, but also mental and artistic effort.
  • The second requirement is that the person is paid for their labour, not to achieve a result. Being paid by the hour suggests the person is paid for their labour. In contrast, when a person is paid a fixed sum for a specific output, this suggests they're paid for a result.
  • Third, the person must personally perform the work and must not be able to delegate to someone else. The ATO notes that many contractors are often hired based on their personal skills, qualifications and experience, so many contractors will typically be unable to delegate their work.

What types of work can this affect?

All kinds of workers can be captured. Typical examples might include freelancers such as programmers, editors, graphic designers or administrative support workers who are paid by the hour (not for a specific result) and can't delegate the work to someone else. Similarly, labourers and other contractors performing physical work could be captured.

The rule can also extend to individuals in sophisticated business structuring arrangements. In a recent decision (Moffet v Dental Corporation Pty Ltd), the Federal Court found that a dentist who had sold his dental practice to a third party and continued to work as a dentist for that practice was an independent contractor, but had been working under a contract "wholly or principally for labour". The new dental practice owners were therefore required to make minimum SG contributions for him.

The dentist was earning a percentage commission of the fees collected from patients, but was also contractually required to pay a "shortfall" amount to the dental practice in the event the practice's annual cash flow fell below a set target – a risk not usually born by a worker in an employment-like arrangement. This case illustrates how even individuals like former business owners who agree to perform services under complex contractual arrangements can potentially be entitled to SG contributions.

Not sure about your contractors?

Don't wait for the ATO to come knocking. Contact us today for assistance in reviewing your contractor arrangements and ensure your business is protected.

Call us at Robert Goodman Accountants on 07 3289 1700 or email us at reception@rgoodman.com.au.  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.   

Thinking about a gearing strategy for your SMSF? It's possible to borrow from a related party, but you must structure the loan terms correctly or else face significant tax penalties. Practically, this means there's a limit on the loan-to-value ratio (LVR) you can set up, plus other requirements for the interest rate and other key terms.

When planning a borrowing in your SMSF to buy an asset such as property or shares (known as a "limited recourse borrowing arrangement" or LRBA), you have a choice of borrowing from a commercial lender or a private party. This could even be a related party of the SMSF, such as the SMSF members or the members' family trust.

Bypassing the banks might seem like a convenient option, or a great way to draw on wealth you hold outside the SMSF to build your retirement savings. But you need to be aware that related-party LRBAs that don't reflect "arm's length" or commercial terms will create big tax headaches for the trustees.

What's the problem?

The "non-arm's length income" (NALI) rules essentially penalise uncommercial dealings by an SMSF that favour the fund. This tax penalty applies where the SMSF:

  • enters into an arrangement where it does not deal with the other party at "arm's length"; and
  • earns more income than it might have been expected to earn under an arm's length arrangement.

As a result, the income from the arrangement is taxed at a hefty penalty rate of 45%.

So how does this risk arise for LRBAs? In an audit situation, the ATO would first determine whether the SMSF's LRBA is on "arm's length" terms. For this purpose, the ATO would examine terms like the interest rate, the loan-to-value ratio (LVR) and the term of the loan. The ATO would compare these to the terms that would hypothetically exist under an arm's length (or commercial) arrangement.

If the terms aren't arm's length, the ATO would then consider whether the SMSF has earned more income than it would under an arm's length arrangement.

This is where the law becomes technical, but it's sufficient to say that at least some of the income from the arrangement will be taxed as NALI at 45% and in some cases, all of the income will be considered NALI. For an LRBA to buy property, the relevant income from the arrangement would be the rental income.

In short, if the terms of your related-party LRBA aren't what the ATO considers "arm's length", you're exposing your SMSF to a NALI risk and a potentially complex dispute with the ATO about exactly how much penalty tax you owe.

The safe harbour

Fortunately, the ATO has developed guidelines to provide some certainty. If your LRBA meets these, the ATO considers that the arrangement is on arm's length terms. There are different guidelines for property LRBAs and listed share LRBAs. For property (both residential and commercial), the terms must be as follows:

  • Interest rate: benchmarked to a certain RBA indicator rate, which is 5.94% for 2019–2020. The rate can be either variable or fixed for up to five years.
  • LVR: maximum of 70%.
  • Term: maximum of 15 years.
  • Repayments: principal and interest, payable monthly.
  • Security: registered mortgage over the property.

There must also be a proper written loan agreement in place, and naturally the arrangement must also comply with all laws that apply to LRBAs.

If your arrangement doesn't meet the ATO's guidelines, it doesn't necessarily mean it's not on arm's length terms. However, you won't have certainty that the ATO will accept it. Instead, you would need to demonstrate, using documented evidence, that it reflects an arm's length dealing.

Explore gearing options

If you're interested in using an LRBA to help grow your super, contact us for expert advice. We can help you consider your lending options and ensure your LRBA is structured for compliance certainty.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants.