Make Additional Super Contributions to reduce your tax

How does this strategy work?

You may be aware that superannuation is the best investment vehicle for tax purposes out there.
It’s also easy to put this in the back of your mind for a number of reasons.

You might think:

1) “I can’t touch it now, so why bother…”

2) “There’s hardly anything in there, so I’m going to concentrate on making money in my business.”

3) “The laws change every five minutes, I’d rather not worry about it.”

But while those thoughts may have an element of truth, there are some very effective ways to incorporate your superannuation into a broader wealth creation and tax planning strategy.

For instance, you can:

1) Use your superannuation to purchase your business premises, even if you don’t have the full amount in super

2) Pay 15% tax on earnings on your superannuation if you’re accumulating a balance.

3) Pay 0% tax on earnings if you’re drawing a pension (with conditions, if you’re over 55).

 

So here’s how the numbers would crunch.

The example we’ll use is where your taxable income is $200,000.

 

Option 1 (Without Tax Planning):  Pay in your own name

The tax rate in your own name would be at individual rates, of up to 47%.  

So you’d be up for $67,547 Tax.

Ouch!

 

Option 2 (With Tax Planning):  Contribute $22,000 to Super prior to 30 June.

Your taxable income would reduce to $178,000.

By contributing $22,000 to super prior to 30 June you’d save $7,040 in tax, when compared to paying in your own name.

What do you need to implement this strategy to make additional super contributions?

• A Business.
• Cashflow available put into super.
• A chat with an Inspire Chartered Accountant – www.calendly.com/inspireca.
• To take action prior to 30 June.

 

FAQ’s: Super contributions to reduce tax.

Do I ever get taxed on money in Super?  If so, when?

Yes, you get taxed at 15% in super for everything you contribute and claim a tax deduction for.

This 15% is paid by your super fund when they lodged the tax return (if you own an SMSF); or the tax is taken straight from your balance when you deposit it if you are using a public super fund.

 

Is there a limit as to how much I can put into super?

Yes, there sure is.

The limit is $30,000 if you’re 48 years old or younger.

And $35,000 if you’re 49 years, plus.

The limits are a lot higher (up to $540,000) if you’re making the contributions from after tax money.

What happens if I don’t have the cashflow to put into super?

To get the tax deduction, the super needs to be paid by 30 June of the year.

Make Additional Super Contributions now before your opportunity is missed for another year.

If I have many family members, can we pool our Super limits?

A super limit is per person.

And yes, you can contribute the $30,000 or $35,000 for each person.  It will end up in their own super account, though, so for instance, you cannot ‘borrow’ a super limit from another family member and pay yourself $40,000 instead of $35,000.

 

 

NEXT STEPS:  You can book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.

 

 

Ben Walker of Inspire SMSFS Pty Ltd (1243433) is an authorised representative of Finance Wise Global Securities Pty Ltd ABN 60 146 708 045.  Finance Wise Global Securities Pty Ltd holds an Australian Financial Services License (No. 397877).

Distribute to your Children Under 18 – Tax Planning Strategies to action prior to 30 June

How does this distribute to your children strategy work?

Discretionary Trusts are great for Young Families in Business as they give you… you guessed it, DISCRETION.

In fact they’re more well known as Family Trusts.

They give you discretion about who pays tax, how much they pay and potentially when it’s paid.

So let’s combine the power of discretionary trusts with the fact the you have a bunch of little ones running around the house!

The example we’ll use is where your taxable income is $200,000.

Remember all those dirty nappies, sleepless nights & Saturday morning sports events?  

Well the ATO is about to reward you for being a busy parent juggling a family and a business!

Option 1 (Without Tax Planning):  Pay in your own name

The tax rate in your own name would be at individual rates, of up to 47%.

So you’d be up for $67,547 Tax.

Ouch!

Option 2 (With Tax Planning):  Use your Discretionary or Family Trust to distribute $416 to each of your Children under 18.

Let’s say we you have 3 little ones under 18…  

• That’s $416 to little Johnny.
• Another $416 to baby Sarah.
• And a final $416 to Mikey aka “Wreck It Ralph”.

With 3 kids, you’d reduce your taxable income by $1,248 which would means you’d save $586 in tax, when compared to paying in your own name.

What do you need to implement this strategy?

• A Business.
• A Discretionary or Family Trust.
• Kids under the age of 18.
• A chat with an Inspire Chartered Accountant – www.calendly.com/inspireca.
• To take action prior to 30 June.

FAQ’s: Distributing income to your Children.

Why $416?  Seems low…

Many years ago, this used to be a few thousand dollars for each child.

The ATO has reduced the limit over the years, and it now sits at $416 per child.

What about Children OVER the age of 18?  Can I distribute to them too?

In most cases, yes – which (depending on their circumstances) massively increases the tax savings! #FistPump

My wife is pregnant and baby is due after 30 June, can I still flick $416 to the bun in the oven?

Nice try… but no.

They have to be born before 30 June to count.

Do step kids count?

Yes.  

Most trust deeds will allow this if you’re married or in a de facto relationship with their mother or father.

We have adopted children, do they count?

Yes – so long as they legally your children.

Do I have to actually give them the $416?  They  already cost me more than that a week!

The fact that you’re already supporting them more than $416 in the year, means that you have already given the money to them (or paid for expenses on their behalf worth more than $416).

So you don’t need to give them $416 in pocket money! Phew!…

So you’re telling me, if I have 15 children, I could bring my taxable income down by 15 x $416?

Yes, that’s right.

Tax free income of $6,240.  (A saving of $2,933 in the example above!)

 

NEXT STEPS:  You can book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.

 

Write Off Bad Debts

How does this strategy work?

Let’s say you are a plumber, and builders are your clients.

You send them invoices regularly for your work.

Sometimes they pay.

Sometimes they don’t.

There always seems to be a dispute.

Let’s say for a $1,000 invoice you send, the builder pays $800 but refuses to pay the last $200.

He claims your guy never showed up on that day (even though he did!)

So you chase up the $200.  You ring, you sms, you email, you knock on doors, you send ‘the boys’ around.

Nothing.  Zip. Zilch. Nada.

The $200 sits on your Debtors Ledger aka “Your list of people who owe you money!”.

The $200 becomes BAD…

No, the debt didn’t grow a beard, nor did it start wearing a black leather jacket and start smoking.

It’s BAD because it’s likely you’ll never get it back!

You’ll probably spend more than $200 just chasing the damn thing.

Same principle applies if the builder went bust.

It’s bad.

While $200 doesn’t sound like a lot, this scenario is pretty common in the Building Industry.

This scenario needs to happen just a few times over a couple of years and you’ve built up a WHOPPING $12,000 in Bad Debt.

So here’s how the numbers would crunch.

The example we’ll use is where your taxable income is $200,000.

Option 1 (Without Tax Planning):  Pay in your own name

The tax rate in your own name would be at individual rates, of up to 47%.

So you’d be up for $67,547 Tax.

Ouch!

Option 2 (With Tax Planning):  Write off $12,000 worth of bad debt.

Your taxable income would reduce to $188,000.

By writing off $12,000 of Bad Debt, you’d save $5,640 in tax, when compared to paying in your own name.

What do you need to implement this strategy?

• A Business.
• Bad Debt
• Evidence of your attempts to recover – emails, phone calls, death threat letters (complete with cut out magazine letters)
• Evidence of your decision to write the Bad Debt off – a meeting minute will do.
• A chat with an Inspire Chartered Accountant – www.calendly.com/inspireca.
• To take action prior to 30 June.

FAQ’s: Write Off Bad Debts.

What happens if I write off a Bad Debt and then it gets paid back?

While this situation should be rare if you’ve written off the bad debt, you’ll need to add it to your profit in the year that it was paid to you.

How do I avoid Bad Debt in the first place?

Change your business model, so you receive the cash before you carry out the work!

Have a read of the article we wrote on this called  “How to get paid faster – step 2 of 5 ways to make your business work for YOU!”

Is there a limit on the Bad Debt that I can write off?

No.

If a debt is bad, it’s bad!

Let’s write off bad debts and move on.

When does a Bad Debt become Bad?

While it isn’t definitive, here’s some considerations:

• Must not have a chance of receiving the money
• Must have proof of following up and doing what you can to recover the amount, even though unsuccessfully
• You MUST have considered the debt Bad, before 30 June of the year you write it off

Bad Debt and Debtors are affecting my cashflow, what advice would you give?

This signals that something isn’t right in your business.

It could be your:

• Pricing strategy
• Quality of your product or service
• Clients you’re choosing to work with
• When you take payment for your services

But something is out of kilter.

NEXT STEPS: 

• Book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.
• Attend our Cash Rich Business Workshop where we will spend 2 hours walking you through the exact step by step process to become a far more profitable business than you currently are. https://inspireca.com/events

Chewing the Fat: When are Meals Tax Deductible to a Business

Taking team members, clients and suppliers out for a meal can be an opportunity to start, or further develop, a great working relationship.

Many small business owners even choose to cover the cost of such an outing. However, how can you be sure this is a legitimate business expense?

You’re building a relationship that will, at least in your opinion, help your business earn more money in the long run. So why wouldn’t the cost of that be tax deductible?

Unfortunately many of these expenses are not deductible and working out which ones are is more complex than most business owners would like.

To help you navigate the minefield and make an informed decision when it comes to claiming meal related expenses, we have developed a simple ‘cheat sheet’ to walk you through the various possibilities.

What meals you CAN claim as a tax deduction

1. You can claim meals when you’re travelling

When employees travel for work and stay overnight in a location that is not their home, they are entitled to claim reasonable amounts for meal expenses.

If an employee has a meal in a restaurant while travelling for work purposes the expense is tax deductible and exempt from fringe benefits tax.

When making your claim you should consider what the ATO determines to be ‘reasonable’ in any given tax year which can be found in their annual update.

For the 2015 financial year, the amount is generally between $102 to $121 per day.

2. You can claim meals supplied as a working lunch

If an employer provides sandwiches and drinks for a working lunch or dinner in the office, the amounts are tax deductible and exempt from FBT.

However, if this meal is more elaborate and includes wine, the meal deduction is likely to err on the side of entertainment and be disallowed by the ATO.

Shouting the team pizza over a training session is A-OK.  Trying to claim the in-house Christmas Party is not.

3. You can claim meals supplied from an in-house café or canteen

If the employer has an in-house café or canteen, and provides meals to employees during the working day, the expenses are tax deductible and exempt from FBT.

Please note that if the employee pays for the meal and is not reimbursed by their employer the amount is not tax deductible to the employee as it is considered to be a private expense.

4. You can claim snacks and refreshments throughout the day

As a business owner, you might often be out and about and stop in for a coffee and a muffin in between client meetings.

Again, should these expenses not be a 7 course degustation, then the ATO are willing to allow the deduction.

 

The “Thick” of it, for those who want a bit more detail

General considerations

Usually when an expense is incurred in running a business, or in the course of earning your income, we assume the amount is deductible unless some special tax rule specifically denies the deduction.

With meal expenses, I would encourage you to approach the situation from the opposite perspective. Assume the amount is not deductible unless, after working through the following list of questions, you can clearly establish that it is a legitimate business expense.

Who consumed the meals?

It is necessary to split meals purchased for staff and meals purchased for customer, suppliers and other business associates.

While the expenses may be deductible if provided to an employee (see later steps) meals and other entertainment provided to non-employees are not deductible.

Who paid for the meal?

As with all tax deductions you need to ‘pay to play’.

The person (or business) that pays for the meal is the one claiming the deduction. If an employee pays for the meal and their employer reimburses them for the expense it is the employer that will seek to claim a deduction for the item.

Have you paid Fringe Benefit Tax?

If you have supplied meals or other entertainment to an employee and subsequently reported these amounts as a fringe benefit AND paid the appropriate amount of fringe benefits tax (FBT) on them, then the amounts can be claimed as a deduction.

It is important to remember that fringe benefits tax is levied at the top marginal tax rate which is much higher than the benefit achieved from the deduction in most cases.

We can look to use the available FBT exemption for some assistance here. For example the Minor and Infrequent FBT exemption, which allows you to provide minor (less than $300 per employee) and is infrequently (not regular) meal benefits to employees without paying FBT while still claiming a tax deduction.

The ATO has not given a clear definition of what they consider to be infrequent or irregular they have gone as far as to say the more often and regularly benefits are provided, the less likely an employer will satisfy this criterion.

What type of meal was purchased and why was it purchased? 

The type of food and drink purchased can be relevant in determining its deductibility.

The more expensive and elaborate the items purchased the less likely they are to be deductible.

We also need to consider why the meal was purchased. Was the intention to provide entertainment or sustenance?

Essentially what this means is that a sandwich and a can of drink provided to an employee as sustenance while working is far more likely to be an allowable deduction than a five course meal at the best restaurant in town on Friday night after work, which is clearly entertainment.

When and where was the meal consumed? 

The final important consideration is where and when was the meal purchased and consumed?

During work hours or after hours? In your place of work/business or elsewhere?

Generally speaking meals on site during work hours are more likely to be deductible than a restaurant meal after work.

What do you do if you purchase a meal for an employee or business associate that you believe is not deductible?

It’s important to clearly separate the deductible and non-deductible meals purchased in your accounting records. This will ensure that deductions are not claimed on these amount in error.

Additionally, ensure that the appropriate GST code is used. Many business owners incorrectly claim GST credits on meal expenses which are not deductible. This results in the need for yearend accounting adjustments and potential amendments to your Business Activity Statements.

Finally, give your accountant as much information as you can about the circumstances surrounding meals you provide to employees and associates as part of running your business.

This will allow them to make an informed decision when working with you and ensure that you do not over claim or under claim deductions.

How Do I Pay Myself From My Company or Trust?

We have been asked three times in the past week, “How do I pay myself?”.

This is a very valid question, and one that has a few complexities.  Let me try to keep it simple…

This Differs Between a Company and a Trust.

While you can draw money out either a Company or a Trust the way we treat that money for tax purposes is very different depending on which structure you are using.

Here’s a few concepts you’ll need a basic understanding of

Loan

If you’re looking to take money out of a Company or Trust (an entity), a loan account can be used to record the amounts taken.

When you draw the money out of a company (but not a trust) there are rules that are commonly referred to as ‘Division 7A’ or ‘Div 7A’.  These rules require that you draw up a loan agreement between you and the company (or between a relative of the shareholder and the company if the funds were not withdrawn for the shareholder directly).

The Division 7A rules are a significant drawback when considering loaning money from a company to a shareholder and make this type of arrangement inappropriate as a long term strategy. In fact it is better to avoid loans from companies to shareholders at all wherever possible.

If you’ve got a trust and you draw money as a loan, this just sits on the balance sheet as money you owe to the trust.  When the distributions are paid for the year, this reduces the balance owed back to the trust and you’re loan account is left at the net amount (cash withdrawn – Distribution).

Drawings

Drawings are simply another word for loans – and with Division 7A, it provides the same problems within a company, just with a different name… As with loans, you’re ok with a trust.

Wages or a Salary

This is a simple way of paying out money from an entity.  You essentially become an employee of your own company or trust.

Paying a wage or salary while simple, also requires that superannuation is paid on the gross figure and also that PAYG withholding tax is taken out.  This can be a disadvantage depending on your age and cash flow requirements.

Directors’ Fees

Like drawings are to loans, Directors’ Fees are to Wages or Salaries.

The superannuation laws had previously allowed Directors fees to be paid without the need to make a superannuation contribution on behalf of the director. This was changed quite a few years ago and now there is little difference between Directors’ Fees and a salary / wage apart from the name.

Dividends

Dividends are payments (or loan movements if not paid in cash) that are made from the balance of retained profits (aka retained earnings) in a company.

You may have also heard of the concept ‘franked dividends’.  These are simply dividends where the company issuing them has paid the tax on them already.  What happens then is that you can claim back these ‘franking credits’ when the dividends are paid to you.

Distributions

Distributions are to a trust what dividends are to a company. They’re the method by which we allocate the entity’s profits to the owners of the business. We can only ‘Distribute’ from a trust.

Distributions are also paid out of current year profits, as opposed to retained profits from prior years (when paid in the form of dividends from companies).

The owners of the business (the trustees) need to make decisions about the distributions for an income year before the 30^th of June. It is important to ensure these decisions are consistent with the clauses in the trust deed.

How We Recommend Getting Money Out of a Company

The easiest way here is to pay a salary to the owners.  If not paid in cash there’s no problems at all – it will simply sit on the balance sheet as owing to the owner.

What we would recommend too is considering a restructure to allow for a better flow of profits and cash from the entity.

It is also important to regularly ’empty out’ the retained earnings in a trading company, so that it does not become a juicy target to be sued by creditors or disgruntled employees.

How We Recommend Getting Money Out of a Trust

As the cash flow of the money coming out of a trust does not necessarily dictate where the tax is paid, you are fine to take money out of a trust and treat it as a loan from the trust.

We would then record the final balance owing to the trust, less any distribution of profits paid throughout the year – which would leave the net loan between yourself as an individual and the trust.

It is also extremely important to work with an adviser who has their finger on the pulse when it comes to distributions.  You must work this out before the financial year ends, or you could be in all sorts of strife with the ATO when it comes tax time.

At the end of the day, you need to know you’re doing it right

Taking money out of entities is a fairly complex area. If done without advice, it could lead to mistakes that can cost tens of thousands in tax.

When talking with your adviser, make sure you understand exactly how you can take money out in your circumstances.  Even play out the practical ‘to do’ as well – whether raising a pay slip, paying PAYG withholding etc.

Oh, and please ask clarifying questions below in the comments section too 🙂

Business Structuring Made Easy! Part 5: Family Trusts

A trust is a structure wherein a Trustee (either an individual or company) carries on the operations of the Trust on behalf of the beneficiaries. The actions of the Trustee are governed by the Trust Deed, which details the rights and obligations of all parties. Trusts are a common structure choice for family businesses as it enables the various family members to become beneficiaries of the Trust that is operating the business. While the trust is not a separate legal entity it is a separate entity for tax purposes. The trustee must apply for a Tax File Number (TFN) for the trust and lodge an annual income tax return.

If a company trustee is used, the trust offers all the same asset protection benefits as using a company structure, along with the additional benefits of using a trust. A trust that has individuals acting as trustees exposes the trustees (the individual, or individuals) to same levels of business risk as a sole trader.

Broadly speaking there are two common types of trusts that you will encounter when making your business structuring decision: Fixed Trusts and Discretionary Trusts.

Click Here to Download our eBook “Business Structures Made Easy”

Discretionary Trusts

A Discretionary Trust is the most flexible form of business structure for a family trust. No single beneficiary has a fixed interest in the trust’s property or the trust’s income. The trustee has complete discretion in the distribution of funds to each beneficiary. This makes the Discretionary Trust (with a corporate trustee) a strong and flexible option for a family business. The family members are protected from business risk and the trustee has the discretion to distribute the income in the most effective way possible.

It is important to remember that all of the benefits offered by a discretionary trust for a family business make it a poor choice for businesses where more than one family or group is involved, as neither group of beneficiaries retains a fixed entitlement to property or income.

Advantages of a Discretionary Trust:

• Flexibility with income and capital distribution;
• Broader Tax planning opportunities;
• Access to Small Business CGT concessions;
• 50% 12 month CGT discount;
• Asset protection (if a corporate trustee is used)
• Can pay salaries and wages as well as superannuation;
• Less regulatory requirements than trading as a company.

Disadvantages of a Discretionary Trust:

• Distributions must be in accordance with the Trust Deed;
• Risk of resettlement if changes are made to trust members or trust property without giving consideration to the rules outlined in the trust deed;
• Losses cannot be distributed;
• More of an investment to establish and maintain when compared to Sole traders or partnerships;
• Trustees can be personally liable for some debts of the trust (if individual trustees are used).

Fixed (Unit) Trusts

Fixed (or sometimes called “Unit”) Trusts are recommended when more than one family or group is involved in the business operation. The interest in the trust is divided into units, similar to shares in a company. The Trustee distributes income to the beneficiaries in accordance with their respective holdings in the trust. This is the key point of difference between Fixed and Discretionary Trusts: The units remove the Trustee’s discretion concerning the distribution of income.

Advantages of a Fixed (Unit) Trust:

• Fixed Interests provide protection where more than one family or group in involved in the business;
• Asset protection (where a corporate trustee is used);
• Access to Small Business CGT concessions;
• Access to 50% 12 month CGT discount;
• Easy to raise capital by issuing additional units;
• Can pay salaries and wages as well as superannuation;
• Less regulatory requirements than trading as a company.

Disadvantages of a Fixed (Unit) Trust:

• Sale of units can be a CGT event and attract stamp duty;
• Not as flexible as a Discretionary Trust;
• Trustees can be personally liable for some debts of the trust (if an individual trustee is used).

So should you use a family trust?

Business owners looking to shift their business operations into a trust structure can experience a number of benefits. We strongly recommend anyone interested in setting up a trust seek professional advice before doing so. Given the additional requirements of using a trust, we work closely with all clients that use this structure to ensure all their obligations are satisfied and it is used in the most efficient manner possible.

For more information about trusts or other structuring options please refer to our other articles in this series, or contact us for more a business structure review.

CGT Main Residence Exemption – Tips, Tricks, and Traps

Under ordinary circumstances the sale of a property would attract Capital Gains Tax (CGT). However, you can avoid paying CGT if you sell a dwelling that is considered to be your main place of residence. But what is your ‘Main Residence,’ and how do you know if the exemption applies?

Is the Property I’m Selling my Main Residence?

Generally speaking, your main residence is your home. A few examples of factors the Australian Taxation Office (ATO) considers relevant in identifying your main residency are:

• Whether you and your family live there;
• Whether you have moved your personal belongings into the home;
• The address to which your mail is delivered;
• Your address on the electoral roll
• The connection of services and utilities (for example, phone, gas, or electricity);
• Your intention in occupying the dwelling.

 

Please note there is no minimum time a person has to live in a home before it is considered to be their main residence

 

In order for the Main Residence CGT exemption to apply, the property being sold must include a dwelling. A dwelling is anything that is used wholly or mainly for residential accommodation. Examples of a dwelling are:

• a home or cottage;
• an apartment or flat;
• a strata title unit;
• a unit in a retirement village;
• a caravan, houseboat or other mobile home.

A mere intention to construct or occupy a dwelling as your main residence – without actually doing so – is not sufficient to obtain the exemption. You must physically occupy the dwelling.

Can I Have More Than One Main Residence?

You can only ever have one main residence at any given point in time unless you’re selling your old main residence and buying another. In this case you’re entitled to an overlap period of six months as long as:

1) the new property will be your main residence after the sale of the old property;

2) you lived in the old property for at least three continuous months in the 12 months prior to sale; and

3) it wasn’t used to produce rent in this same 12 month period.

Can I Earn Rental Income from My Main Residence?

While you can only have one main residence at any point in time you do not need to live in the dwelling for the entire holding period for it to continue to qualify for the exemption. If you own a property which is currently your main residence you can move out of the property for up to six years. During that time you can earn rental income on the property and claim a tax deduction for expenditure as you would with a normal investment property. Providing you re-occupy the building before the end of the six period and do not dispose of the property within the same financial year that the property was earning rental income you can still qualify for the full exemption.

Does the Main Residence Apply to Property Renovators?

The simple answer is yes! If you purchase a property, occupy the dwelling while undertaking renovations and then sell the property only to move into another dwelling and repeat the process, any profit you make on the sale of each property is generally tax exempt.

Can I Subdivide My Block of Land and Apply the Main Residence Exemption to the Proceeds from the Sale?

As discussed, the main residence exemption requires a dwelling to exist on the property that is sold. If you have a large block of land and subdivide the land so that you can sell off a part of the unused land, there is typically not a dwelling on this parcel. Therefore, any profit on this sale would attract Capital Gain Tax.

However, it is important to note that if the reverse situation applies and you purchase the neighbouring block of land to obtain a larger back yard, the main residence exemption will apply to the sale of your main residence and the adjoining block provided both properties are sold together and the total area of land does not exceed 2 hectares.

What if I Can No Longer Live in My Main Residence?

The main residence exemption can also apply where the owner is no longer able to reside in the dwelling, because they have lost the ability to live independently and require full time care. This ensures that property owners who spend extended a period in hospital, must  relocate to a residential care facility, or who relocate to live with a care giver can still access the main residence exemption when they sell the property to pay living and medical expenses.