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Deducting gifts and donations: getting it right at tax time. 

Have you made charitable gifts or donations in the past financial year? The good news is these items are often deductible, giving many Australians a welcome boost to their tax refund. Make sure you know the rules this tax time.

When gathering your donation receipts, it’s important to understand what can and can’t be claimed as a deduction. The first general rule is that a donation of money of $2 or more may be deducted if the donation was made to a “deductible gift recipient” (DGR). A DGR is an entity that has registered with the ATO as being eligible to receive deductible gifts and donations.

Some charities may not have DGR status, so check if you’re unsure. Many online crowdfunding platforms are also not DGRs, which means you typically won’t be able to claim your donation towards fundraising for individual causes, such as someone’s funeral or medical costs.

The second general rule is that a donation is only deductible if you didn’t receive a benefit in return. This means you can’t make a claim if you received things like raffle tickets or items that have an advertised price, such as toys and food items. However, you may receive a “token” promotional item such as a sticker or lapel pin and still qualify for a deduction. Note that donations to a school’s building fund won’t be deductible if you received benefits such as reduced school fees or a certain placement on a waiting list in return for the donation.

Small cash donations totalling up to $10 don’t require a receipt. However, beyond that you must be able to provide evidence of your claim. You aren’t required to keep an original paper receipt, provided you keep an electronic copy that is a true and clear reproduction. If you don’t have a receipt, you may be able to substantiate the claim with other documentation such as a bank statement evidencing the donation.

If you make donations through a “workplace giving program” operated by your employer, you can simply claim the amount of donations shown in your income statement or payment summary. You can claim this deduction in your tax return regardless of whether your employer has reduced the tax withheld each pay period. In both cases, your gross salary or wages and deductible donations for the year will be the same, but any difference in the tax withheld during the year will factor into your eventual tax refund. Workplace giving programs aren’t the same as salary-sacrifice, as they don’t lower your gross salary or wages.

Scams to watch out for at tax time

1. SCAMMERS IMPERSONATING THE ATO 

As tax season approaches, it’s important to beware of multiple scams circulating through websites, email, SMS and social media. Despite efforts by the ATO and the National Anti-Scam Centre (NASC) to eliminate these scams they continue to increase around the taxation period. 

These scammers may contact you to:

• Offer a refund
• Help with tax issues
• Alert you to suspicious activity on your account

What you should do: 

• Do not respond to these contacts 
• Verify the authenticity of any communication you receive by checking the ATO’s official contact numbers

What the ATO is doing:

To combat these scams, the ATO is implementing new measures to help you identify legitimate ATO SMS messages. These include:

• Removing hyperlinks from all unsolicited SMS messages: Scammers often use these links in phishing schemes, directing victims to sophisticated fake websites, like a fraudulent myGov login page, to steal personal information or install malware. 
• Creating a support team to monitor scams
• Creating a service to assist victims providing comprehensive information about email, SMS, phone, and social media scams on its website. 
• Created a service to report ATO impersonation scams.

2. SCAMMERS IMPERSONATING ASIC

ASIC has also issued a warning about an increase in the use of its logo in social media scams. There are 3 key tactics they are using:

• Promoting fake stock market trading courses. This involves using social media ads to promote a “Stock Trading Master Class” that links to a private WhatsApp group called “Lonton Wealth Management Center,” which ASIC listed on its Investor Alert List in May 2024.
• Cold calling: Posing as ASIC representatives making repeated cold calls and offering help with investment refunds. ASIC does not engage in cold calling about investments.
• Fake Telegram accounts: A fraudulent Telegram account is impersonating ASIC, asking investors for money to release funds held in Australia. ASIC does not use Telegram and will never request upfront payments or taxes for releasing investments.

ASIC is also working with the NASC and social media platforms to actively remove this fraudulent content and reminds consumers that it does not endorse or promote investment training or platforms, does not cold call consumers, and is not affiliated with any investment offers.a

1. Five methods to value your business 

We know that putting a price on a business can be challenging and there’s no single formula for to calculate it. Which model is best for you depends on the nature of your business, its size and the size and concerned risk factors. Today we’re going to give you a few basic guidelines to get you started. 

A great starting point for valuation is its profitability, balanced by the risks involved, but if you’d like to take it a step further there are several industry rules of thumb that you can consider to give you a more robust estimate. Today we’re covering the five most common methods we see:

1. Capitalised future earnings method:

The most common method for valuing small businesses is capitalized future earnings.. When you buy a business, you’re buying its assets and the right to all future profits it might generate, known as future earnings. The future earnings are capitalised or given an expected value. The capitalisation rate can be an expected return on investment (ROI), shown as a percentage or ratio. A higher ROI is a better result for the buyer. This method lets the buyer compare different businesses to determine which would give them the best ROI.

To calculate value based on the capitalised future earnings method, first, calculate the business’s average net profit for the past three years, considering whether any conditions might make this figure difficult to repeat. Then, divide the business’s average profit by using an expected ROI considering the sector and the business.

For example, if the expected ROI is at least 50% and the average profit is $100,000, the value of the business can be calculated using the formula below.

Value or selling price = (100,000/50) x 100 = $200,000.

2. Multiples of revenue method:

The multiples of revenue method is a simple valuation method for finding a business’s maximum value. Annual revenue can be considered for a set period of time, and then a multiplier can be used to determine value. The multiple varies by industry and other factors; however, it usually varies from less than one to three or four.

Small business valuation often involves finding the lowest price someone would pay for the business, known as the “floor.” This is often the liquidation value of the business’s assets. Then, a ceiling is set. This is the maximum amount that a buyer might pay, such as a multiple of current revenues. However, the growth potential of a specific business can impact the multiplier. For example, the multiplier might be higher if the company or industry is poised for growth and expansion. A high percentage of recurring revenue and good margins can also boost the multiplier. The multiplier might be one if the business is slow-growing or doesn’t show much growth potential. Economic and industrial conditions can also impact the multiplier.

3. Earnings multiple method:

The earnings multiple method is similar to multiples of revenue. This valuation method can be used to value larger businesses. The earnings before interest and tax (EBIT) are multiplied to give a number, the multiplier. The multiplier can be found by dividing the stock price by earnings per share (EPS) to find the P/E ratio.

The simplicity of multiples makes it easy for most to use. However, this simplicity can also be considered a disadvantage because it simplifies complex information into a single value.

4. Asset valuation method:

This method adds assets such as cash, stock, plant, equipment and receivables. Liabilities, like bank debts and payments due, are deducted from this amount, leaving the net asset value. For example, Raymond wants to buy a manufacturing business. It has $300,000 worth of assets and $200,000 of liabilities. With the asset valuation method, its net asset value is $100,000, so this business is worth $100,000.

The asset valuation method may consider the business’s goodwill on top of the net asset value. Goodwill represents features of a business that aren’t easily valued, such as location, reputation and business history. It’s not always transferred when you buy a business since it can come from personal factors like the owner’s reputation or customer relationships. The asset valuation method may not consider goodwill if the business is underperforming.

5. Discount cash flow method:

The discount cash flow (DCF) valuation method does not consider other companies’ results. Instead, it focuses on your company’s projected cash flow. You’ll give your best cash flow forecast for three to five years. Then, using a formula, you will calculate the present value of those cash flows.

Present value is a concept that compares the business’s current value in terms of future cash flows to how much the purchaser would pay now. This method uses a discount rate, which is the likely interest rate the business purchaser could have gotten from saving the money in a bank account. If your company’s present value exceeds the investment amount, it’s a good investment for the business purchaser.

The projection of cash flow sometimes requires assumptions of future business conditions. Hence, it can be complex and prone to error. This valuation method can be used in conjunction with the other methods.s

Joint Tenants and Tenants in Common

When buying a property with another person, you are given the option of how to be registered on the title of the property with them: joint tenants or tenants in common. But what is the difference between the two, and is one better than the other? In this article, we explain everything you need to know.

What is Joint Tenants?

Joint tenants means you own 100% of the property jointly with the people registered as joint tenants with you.

Practically this means:

• When joint tenants die, the surviving owner(s) automatically become entitled to be registered as the sole owner(s) of the whole of the interest in the property. This means that any property owned in joint tenancy do not form part of a deceased’s estate, rather their interest automatically goes to the surviving owner(s). This is called “the right of survivorship”.
• You even split the property’s profits, losses, and risks.
• You cannot have an uneven share of the property. All joint tenants own the property 100% jointly. For tax purposes, the shares are even.

What is Tenants in Common?

Tenants in common means you have a defined ownership share of a property title. This can be 50-50, 60-40, 99-1 or any other combination.

Practically this means:

• On the death of either of the owners, the deceased’s interest in the property passes to his or her beneficiary (not necessarily the surviving owner on the title). The beneficiary is dictated by the deceased’s Will or if they do not have a Will by State law.
• The defined ownership share splits the property’s profits, losses, and risks.

Can you do both Tenants in Common and Joint Tenants at the Same Time?

Yes, you can if you have three or more owners on the title. For example, persons A and B hold a 50% share of the property as tenants in common jointly, while person C holds their 50% share as a tenant in common individually.

Practically this means:

• On the death of either person A or B, who holds their 50% share jointly, the survivor of A or B will get the full interest of the deceased share. Person C will not have any claim to this share as they did not hold that 50% share jointly.
• If Person C passes away, Persons A and B will have no automatic interest in Person C’s share of the property. Rather, person C’s share in the property will go to their beneficiary in accordance with their Will or State law if no Will exists.

Touch base with us if you would like more advice about the ownership structure you should adopt when acquiring property.

Christmas Parties and FBT

With work Christmas parties just around the corner, we look at the tax treatment of such occasions.

Key concepts

To begin with, there are two critical issues to understand.

1. Entertainment

Typically, fringe benefits tax (FBT) will only apply to a party if it involves the provision of ‘entertainment’. This means the provision of (a) entertainment by way of food, drink, or recreation, or (b) accommodation or travel in respect of such entertainment, such as taxis, hotel accommodations, etc.

In this case, recreation includes amusement, sport and similar leisure-time pursuits and provides recreation and entertainment in vehicles, vessels or aircraft (for example, joy flights, sightseeing tours, harbour cruises).

2. Minor Benefits

In simple terms, a minor benefit is provided to an employee/associate (spouse) if done so on an infrequent or irregular basis (typically, no more than twice per year), and the cost is less than $300 inclusive of GST per employee/associate. This is $300 per expense (i.e., $300 per meal and drinks and a separate $300 per accommodation, etc.).

Note that for this piece, we will assume the employer (like most employers) uses the Actual method to calculate FBT, whereby FBT is paid only to employees and their associates (not clients or other outside individuals).

Venue

1. Business premises

Holding your Christmas party on the business premises on a working day (logically, Friday after work) usually gives an employer the most tax-effective outcome. Expenses such as food and drink are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. The reason why FBT does not apply is because there is typically no “recreational” component in play. Thus, the following rules apply to parties on the business premises:

EXAMPLE – Christmas party on business premises

A company holds a Christmas lunch on its business premises on a working day.

• Employees, their partners and clients attend.
• The company provides food and drink and taxi travel home.
• The cost per head is $125.

Entertainment is being provided. A party for employees, associates and clients is entertainment because the purpose of the function is for the people attending to enjoy themselves.

Employees – no FBT; exemption applies.

The employer doesn’t pay FBT for the following:

• food and drink for employees, because it is provided and consumed on a working day on the business premises.
• taxi travel because there is a specific FBT exemption for taxi travel directly to or from the workplace.

Associates – no FBT; exemption applies.

The employer doesn’t pay FBT for the food, drink and taxi travel provided to the employees’ partners (associates) because it is a minor benefit – that is, it has a value of less than $300, and it would be unreasonable to treat it as a fringe benefit.

Clients – no FBT

There is no FBT on benefits provided to clients.

Income tax and GST credits

The employer can’t claim an income tax deduction or GST credits for the food, drink or taxi travel provided for employees, associates, or clients.

2. Offsite (e.g., restaurant)

The party is held offsite, and the tax treatment is slightly different as follows:

Clients

Irrespective of the cost or the party’s location (business premises or offsite) under the Actual method, there is no FBT, nor is there a tax deduction or GST credit available for food and drink or any recreation component provided to clients or suppliers. The reason for this is that FBT applies to employment. As a result, clients and suppliers fall outside the FBT system (except where the employer elects to use the 50/50 method to calculate their FBT liability).

Cryptocurrency

Crypto assets are a digital representation of value that you can transfer, store, or trade electronically.

Crypto assets are a subset of digital assets that use cryptography to protect digital data and distributed ledger technology to record transactions. They may run on their blockchain or use an existing platform such as Ethereum. A blockchain is a secure digital ledger used to store a record of crypto transactions.

Crypto generally operates independently of a central bank, authority, or government. However, crypto asset transactions usually are subject to the same tax rules as assets. There are no special tax rules for crypto assets. The tax treatment will depend on how you acquire, hold, and dispose of the purchase.

For tax purposes, crypto assets are not a form of money.

Taxation

You can acquire or dispose of a crypto asset on a crypto trading platform or directly from a digital or hardware wallet. You can exchange or swap crypto assets for other crypto assets, fiat currency or goods and services.

Using or transacting with crypto assets will determine how you treat them for tax purposes. The most common use of crypto assets is as an investment (investors acquire and hold crypto assets to make a financial profit from holding or disposing of them).

Generally, for investors:

• crypto assets are taxed as CGT assets, including for self-managed super funds (SMSFs) investing in crypto assets.
• rewards for staking crypto are ordinary income for tax purposes.

Businesses transacting in crypto assets may need to account for them as trading stock or ordinary income (that is, on the revenue account rather than as investment capital gains or losses). In these circumstances, the cost of acquiring crypto assets and the proceeds from disposing of them is ordinary income or a deductible expense, depending on the nature of the transaction.

In some circumstances, crypto assets are not kept mainly for investment but for personal use. Where specific conditions are met, crypto assets are not subject to CGT because they are considered personal use assets.

 Tax Calculation

As with other CGT assets, if your crypto assets are held as an investment, you may pay tax on your net capital gains for the year. This is:

• total capital gains.
• less any capital losses.
• less entitlement to any CGT discount on your capital gains.

Before you calculate CGT on your crypto assets, you will need to:

• check you have records for your crypto assets and crypto transactions.
• convert the value of the crypto assets into Australian dollars.

You need to keep details for each crypto asset as they are separate CGT assets. You can work out your CGT using the ATO’s online calculator and record-keeping tool.

This can be a complex area of the taxation law. For this reason, reach out to us if you are still determining your crypto tax position and the records you are required to keep.