IN THIS ISSUE
- Changes to the ‘backpacker tax’
- ATO data matching programs
- Can a UPE be written off and claimed as a bad debt?
- Deductibility of expenditure on a commercial website
- Easier GST reporting for new small businesses
- Fit-outs financing from a tax perspective
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Changes to the ‘backpacker tax’
From 1 January 2017, tax rates changed for working holiday makers who are in Australia on a 417 or 462 visa (these rates are known as ‘working holiday maker tax rates').
If a business employs a working holiday maker in Australia on a 417 or 462 visa, from 1 January 2017, they should withhold 15% from every dollar earned up to $37,000, with foreign resident tax rates applying from $37,001.
Businesses must register with the ATO by 31 January 2017 to withhold at the working holiday maker tax rate.
If they don’t register, they will need to withhold at the foreign resident tax rate of 32.5% (and penalties may apply to businesses employing holiday makers that don't register).
Therefore, if this affects you and you haven't registered by the time you read this, please contact us immediately!
Also, note that businesses already employing working holiday makers will need to issue two payment summaries (with different rates) this year – one for the period to 31 December 2016, and a second for any period from 1 January 2017.
ATO data matching programs
Editor: The ATO has announced that it will be undertaking the following two data matching programs.
Ride Sourcing data matching program
The Ride Sourcing data matching program has been developed to address the compliance risk of the registration, lodgement and reporting of businesses offering ride sourcing services as a driver.
'Ride sourcing' = Uber (basically).
It is estimated that up to 74,000 individuals ('ride sourcing drivers') offer, or have offered, this service.
The ATO will request details of all payments made to ride sourcing providers from accounts held by a ride sourcing facilitator's financial institution for the 2016/17 and 2017/18 financial years, and match the data provided against their records.
This will identify ride sourcing drivers that may not be meeting their registration, reporting, lodgement and/or payment obligations.
Where the ATO is unable to match a driver's details against ATO records, it will obtain further information from the financial institution where the driver's account is held.
Credit and debit card and online selling data matching program
The ATO is collecting new data from financial institutions and online selling sites as part of its credit and debit cards and online selling data-matching programs, specifically:
- the total credit and debit card payments received by businesses; and
- information on online sellers who have sold at least $12,000 worth of goods or services.
The ATO will be matching this data with information it has from income tax returns, activity statements and other ATO records to identify businesses that may not be reporting all their income or meeting their registration, lodgement or payment obligations.
Can a UPE be written off and claimed as a bad debt?
A 'UPE' (or 'unpaid present entitlement') arises where a trust makes a beneficiary entitled to an amount of the trust's income (and therefore the beneficiary may have to pay tax on their share of the trust's taxable income that year), but that amount has not been physically paid to the beneficiary.
If the beneficiary never receives payment from the trust, they may want to write their entitlement off as a bad debt, and claim a tax deduction.
The ATO has released a Taxation Determination explaining their view that there is no ability to claim a ‘bad debt’ deduction where a beneficiary of a trust writes off as a bad debt an amount of a UPE.
This is because of the technical wording of the tax legislation regarding claiming deductions for 'bad debts', which requires the debt (e.g., the UPE) to have been previously included in the beneficiary's taxable income – however, a beneficiary is not taxed on the UPE itself. Instead, the amount of the UPE is used to calculate the amount to include in their assessable income (and this may be different to the actual amount of the UPE).
Archie Pty Ltd (‘Archie’) is a beneficiary of the Linus Family Trust (‘Linus’), which rents out a property.
In the 2014 income year, Linus’s trust income (made up of net rent) was $25,000, but its net (taxable) income was actually $20,000 (thanks to a 'capital works deduction' of $5,000).
Archie was made presently entitled to 100% of the trust income (i.e., $25,000). As a result, it was also assessed on 100% of the net (taxable) income of the trust (i.e., $20,000).
The $25,000 was not paid to Archie (i.e., it was recorded as a UPE) and was invested by Linus in a related entity, but during the 2017 income year it was clear the investment had failed and was now worthless.
Archie was now well aware that Linus was no longer in a position to satisfy the UPE and wrote the $25,000 off as a bad debt.
Can Archie claim a deduction for the bad debt?
No. While the debt is clearly bad and has been written off as such, no part of Archie’s UPE (of $25,000) was included in its assessable income. Rather, Archie included its share of Linus’s net (taxable) income of the trust (i.e., the $20,000) in its assessable income.
Deductibility of expenditure on a commercial website
The ATO has released a public taxation ruling covering the ATO’s views on the deductibility of expenditure incurred in acquiring, developing, maintaining or modifying a website for use in the carrying on of a business.
Importantly, if the expenditure is incurred in maintaining a website, it would be considered 'revenue' in nature, and therefore generally deductible upfront.
This would be the case where the expenditure relates to the preservation of the website, and does not:
- alter the functionality of the website;
- improve the efficiency or function of the website; or
- extend the useful life of the website.
However, if the expenditure is incurred in acquiring or developing a commercial website for a new or existing business, or even in modifying an existing website, it would generally be considered capital in nature (in which case an outright deduction cannot be claimed).
Please contact us if you want any guidance about the ATO's latest views on this important issue.
Easier GST reporting for new small businesses
The ATO has notified taxpayers that, from 19 January 2017, newly registered small businesses have the option to report less GST information on their business activity statement (BAS).
Therefore, if you plan to register for GST after receiving this update, we can help you access the reporting benefits of the simpler BAS early.
From 1 July 2017, small businesses generally will only need to report GST on sales, GST on purchases, and Total sales on their BAS.
Fit-outs financing from a tax perspective
Opening the doors for business is never easy. On top of other costs such as purchasing stock, arranging insurance, paying staff and (if you don’t own the building) allocating funds to pay rent, there are often costs involved in acquiring, upgrading or replacing fit-outs.
There are different ways to finance office fit-outs and it is often difficult to decide which kind of finance to use.
The type of finance chosen can affect:
- when the legal ownership of the asset changes hands (e.g. when do you become the owner); and
- the amount and type of tax concessions available (e.g. who can claim the depreciation or monthly payment as a tax deduction)
To assist you with making this decision, we have provided a brief overview of three of the most common types of fit-outs financing.
1. Hire Purchase
Under a hire purchase agreement the financier buys the asset and the client hires the asset from the financier for a fixed monthly repayment over a set period of time. During this time, the client may use the asset but is not the owner of the asset. The title to the asset only passes once the goods have been paid for.
Amount financed is the GST inclusive amount of the fit-outs.
1.1 What happens at the end of the hire purchase?
At the end of the hire purchase agreement, the client becomes the owner of the asset when it makes the final payment.
1.2 Income tax treatment
The client may claim tax deductions for:
- depreciation and
- interest paid on the loan
The client may not claim the monthly instalment payments as a tax deduction.
1.3 GST treatment
For hire purchase agreements entered into on or after 1 July 2012, the GST registered client can claim an input tax credit upfront (for the price of the asset) regardless of whether they use the cash or accruals basis of accounting for GST.
2. Chattel mortgage
Under a chattel mortgage agreement, a seller/financier advances funds to the client to purchase the asset. The seller/financier takes out a mortgage over the asset acquired as security for the loan. Unlike a hire purchase agreement, the client will immediately become the legal owner of the asset.
Amount financed is the GST inclusive amount of the assets.
2.1 What happens at the end of the chattel mortgage?
Once the final payment has been made, the security interest over the asset is removed.
2.2 GST treatment
GST is charged on the purchase price of the asset but not on the monthly rental or the residual payment. The GST registered client can claim input tax credits upfront for GST paid on acquiring the asset as soon as they lodge their BAS (and not progressively over the term of the loan).
2.3 Income tax treatment
As with a hire purchase, the client may claim depreciation and interest paid as tax deductible expenses from the start of the chattel mortgage.
3. Operating lease
Under an operating lease, the financier/lessor purchases the asset and leases it out to the client. The client may use the asset for the duration of the agreement in exchange for payment of a fixed monthly lease rental for the term of the lease – but ownership of the asset remains with the financier/lessor. Unlike hire purchase agreements and chattel mortgages, the amount financed under the lease is the GST exclusive price of the asset – resulting in lower monthly payments for the client.
3.1 What happens at the end of the operating lease?
At the end of the lease, the client can either:
pay the residual value (final instalment) of the asset and become the owner;
- trade it in;
- refinance the residual and continue the lease
3.2 GST treatment
GST is charged on the monthly lease rental and the residual value at the end of the lease.
A GST registered client can claim back GST input tax credits contained in:
- the monthly lease rental (claim in each monthly or quarterly BAS over the life of lease term);
- the residual value
3.3 Income tax treatment
Lease payments (less GST input tax credits) are tax deductible. A tax deduction can also be claimed for lease payments made in advance.
Temporary changes to accelerated depreciation for small business assets
Up to 30 June 2017, small business can immediately write off (claim the full value of) depreciating assets that cost less than $20,000 each, as long as those assets are purchased and installed ready for use between 7.30pm (AEST) on 12 May 2015 and 30 June 2017. These simplified depreciation rules work well with hire purchases and chattel mortgages.
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Important: Clients should not act solely on the basis of the material contained in Cents & Sensibility. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Cents & Sensibility is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
Please contact us if you wish to discuss how the points raised in this edition specifically affect you.Yours faithfully,
The knp Team