September 2023 – Accounting and SMSF Roundup

GST refresher for your business

Most businesses are familiar with how GST works. But here are a few reminders to make sure you’re being compliant and maximising your GST claims.

GST is paid at each step in the supply chain, and businesses charge GST in the price of goods, services or anything else they supply. If an entity is registered for GST, it can claim input tax credits from the ATO for any GST included in the price paid for goods, services or anything else bought for the business. However, GST-registered enterprises’ liability to pay GST rests on the supplier of goods and services, not on the consumer. In other words, even if the business does not include the GST in the price of goods and services supplied, it is still liable to pay it to the ATO.

Coffee or cars, anyone?

As we move into a new financial year, you may be considering rewarding the office with an impressive new coffee machine for the staff room, or perhaps you are thinking a bit bigger, say a new vehicle. Either way, you may want to keep some of these GST issues in mind:

1. Second-hand goods*

Buying second-hand can often be cheaper. However, in most cases, you will not be able to claim GST on the purchase from a non-registered seller (e.g., a friend or privately via Gumtree, eBay, etc.) unless the seller is a reseller of second-hand goods registered for GST. (And if you are registered for GST, don’t forget to charge GST when you sell your business assets, regardless of whether the purchaser is registered for GST or not.)

(*excludes goods containing valuable metals)

2. Deposits

The purchase of a significant asset often requires a deposit to be paid. Suppose you report GST on a cash basis. In that case, you will not be entitled to claim a GST input tax credit on the deposit at the time of paying (you may be entitled to claim it if you have paid an amount in addition to the deposit or if you report GST using the non-cash accounting method and hold a tax invoice). If you haven’t claimed GST when paying the deposit, make sure to claim GST on the total purchase price, including the deposit, when the deposit is later applied towards the asset’s cost (which may occur in a later BAS reporting period).

3. Purchasing a car for more than the car limit

Your GST input tax credit will be limited if you purchase a car with a cost that exceeds the tax car cost limit for depreciation. The car cost depreciation limit is the maximum you can claim as depreciation deductions for income tax purposes ($68,108 in 2023-24). Where the cost of your car exceeds this value, your GST claim is limited to 1/11^th of the car limit, i.e., $6,191 (1/11^th x $68,108). Notably, there are some exceptions to this rule where your GST entitlement will not be limited, including purchasing a commercial vehicle (those not designed to carry passengers) or motor homes and campervans.

Be aware, however, that on the disposal of the car, there is no corresponding reduction or adjustment to the GST on the sale proceeds, i.e., you must pay the ATO 1/11^th of the entire sale proceeds. This is the case even if your GST and depreciation claims were limited on the purchase under these rules.

4. Cancelling your GST registration

A cost often overlooked when considering winding up a business is the potential need to repay GST previously claimed regarding assets you still hold. In most cases (a few exceptions), you must cancel your GST registration within 21 days of selling or closing your business. You can also choose to cancel your GST registration if your GST turnover is below the turnover threshold ($75,000). If you still hold business assets on which you previously claimed GST when you cancel your GST registration, you may need to repay some of those credits, depending on how long you have owned the asset and its original cost. The adjustment will generally be 1/11^th of the GST-inclusive value of the asset at the time of cancelling your registration (where this value is lower than its original cost).

Small but not insignificant

It’s not just on these larger transactions where we can uncover GST issues. Although the dollars involved are usually more significant when buying and selling business assets, it is straightforward to over or under-claim GST on our day-to-day transactions. Over time, these can add up to a sizeable GST adjustment. For example:

• Bank fees – ordinary monthly bank account charges won’t include GST, but merchant fees do, so check your accounting system is set up to capture the GST on those merchant fees.
  
  
• Insurance policies – insurance policies often include a small stamp duty component, which does not attract GST. You may be overclaiming GST if your accounting software is set up to claim a full 10% GST (or 1/11th of the premium cost).
  
  
• Recharge or top-up cards – e.g., for tolls, telephone (and vouchers given as Christmas or other gifts) – GST should only be accounted for when the recharge is used or redeemed for purchases used in your business, not when the cards or vouchers are purchased.
  
  
• Private apportionment – eligible small businesses can make an annual apportionment of GST where purchases are partly for business and partly for private purposes rather than each time you pay an expense. You can make this adjustment in the activity statement that covers the period your income tax return is due, making sure not to reduce your GST claim twice (once when you paid the expense and once as part of the annual adjustment).
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• Software subscriptions – You may not claim GST on software subscriptions because the supplier is overseas. However, from 1 July 2017, the rules changed in this area, so you may be paying GST when you do not have to or not claiming GST when you could be – you will need to check your tax invoices and let your bookkeeper or accountant know if the software subscriptions you are paying include GST (or provide the software supplier your ABN so you are not charged in the first instance).

Remember, the best way to maximise your GST claims is by checking your tax invoices for GST paid (you have four years to claim the GST) and then keeping those and other GST records for five years.

Allowances

Do your employees travel for work?

The ATO has issued new guidance to help employers determine whether to pay employees a travel or living-away-from-home allowance (LAFHA). There are some key differences between the treatment of the two types of payments:

• A travel allowance will generally need to be included in your employee’s assessable income and may require tax withheld. It covers accommodation, food, drink or incidental expenses an employee incurs when they stay away from their home overnight or for a short period to carry out their duties. It’s generally deductible to the employer.
• A LAFHA payment you provide to your employees may be considered a LAFHA fringe benefit. Where this is the case, it must be reported in your annual fringe benefits tax (FBT) return. LAFHAs are paid to compensate employees for additional living expenses they incur if they’re required to live away from home for an extended period for work purposes. In certain circumstances, such payments may be exempt from FBT for the employer and not taxable to the employee!

LAFHAs are paid when an employee has moved and taken up temporary residence away from their usual residence to be able to carry out their job at the new but temporary workplace. The employee has a clear intention/expectation of returning home on the cessation of work at the temporary location (in this sense, the employee is absent for a limited/finite period).

On the other hand, a travel allowance is paid for specific trips because the employee is travelling while performing their duties but has not temporarily relocated as a LAFHA recipient would. The existing work location continues to be the employee’s regular place of work. In travelling away from home, the employee simply takes travel items (such as toiletries and a few changes of clothes). Employees receiving a travel allowance will also typically use temporary accommodation such as hotels.

A travel allowance provided by an employer is not taxed under the FBT regime but may be taxed under the PAYG withholding regime as a supplement to salary and wages. The ATO publishes guidelines yearly on what it considers reasonable amounts for a travelling employee. These guidelines give a reasonable daily travel allowance amount and consider the following factors:

• Destination of travel (broken down into metropolitan cities, country centres within Australia and international countries),
• accommodation,
• meals,
• other incidentals,
• employee annual salary (in ranges), and
• specific rates for truck drivers.

Countries other than Australia are split into “cost groups”, each determining the reasonable daily allowance amount. These are determined based on the cost of living in that country and then numbered between cost groups one to six. Cost group one has the lowest daily allowance, and cost group six has the highest.

The reasonable amounts are intended to apply to each full day of travel covered by the travel allowance, with no apportionment required for the first and last day of travel.

Where the employer has paid the employee less than the ATO-determined reasonable amount, the employer is not obligated to withhold from the allowance, nor does the employer have to include the allowance on the employee’s PAYG income statement.

Some key differences between the two types of payments are captured in the following table:

Ultimately, travel allowances are a handy employee retention tool – helping them cover the costs of work-related expenses they may incur while travelling or relocating for business. Speak with us if you are uncertain about their taxation treatment.

Accommodation Sharing and Tax

The ATO has reminded taxpayers of the sharing economy tax implications when providing accommodation.

The sharing economy provides an excellent opportunity for individuals with spare rooms or spare entire properties to rent out space and earn rental income using facilitators such as Airbnb. Indeed, approximately 2.1 million individuals reported rental revenue of $42 billion in the past financial year. This comes as the ATO announces a new data-matching program specifically targeting around 190,000 taxpayers receiving income from short-term rentals. The ATO said it would examine the information provided by online platforms like Airbnb to identify taxpayers who had left out rental income and over-claimed deductions.

If you are renting out rooms of your home, or indeed entire properties – whether via Airbnb or another facilitator or certainly just privately – there are many tax issues to be aware of:

Rental Income

This will need to be declared in your tax return, irrespective of whether you rent out a room or an entire property or whether this is your primary source of income.

Rental Expenses

Expenses from renting out your property can be a tax deduction. However, there can be several complexities. Expenses directly associated with the rented area are deductible in full. In contrast, expenses that relate to shared areas (i.e., areas that you, as the host, may share with renters) must be apportioned. Expenses that relate to the host’s private room only are not deductible.

Expenses include claims for depreciation and capital works deductions (i.e., depreciation on the building structure). Expert advice should be sought as this is a complex area, with significant beliefs potentially in play.

Capital Gains Tax

Broadly, the sale of your primary residence is free from Capital Gains Tax (CGT) when you sell it, where it was the primary residence for the entire time you owned it, and it was not used to produce income. However, if you are renting out a portion of your home, you will only be eligible for a partial principal residence exemption. If you rent out the entire house, then none of the property will enjoy the principal residence exemption for that period. Exceptions, however, apply, including the ability to rent out your home for six years yet still enjoy the full CGT principal residence exemption. This exemption, however, is subject to several conditions, and advice should be sought on your specific circumstances.

It is important to note that properties purchased before 20 September 1985 are exempt from CGT, irrespective of whether they are rented out.

Goods and Services Tax

Income from renting out part or all of a residential property is typically “input-taxed”. This means you should not charge GST on the rent you earn from guests. Conversely, you cannot claim GST credits for any rental expenses you incur, but you can claim the GST-inclusive amount of any rental payments as a tax deduction. All told, there is no requirement to register for GST because of your rental property alone.

Record Keeping

As your tax agent, we are limited in the claims we can make for you on your property to the records you keep. Retain all expense records (i.e., receipts) to maximise your deductions.

Take-Home Message

The number of people renting out their house or part of their house has exploded recently, mainly due to facilitators such as Airbnb. While this is an excellent avenue for earning essentially passive income, there are a few tax issues that landlords need to be across.

Contact us if you would like to discuss any aspect of tax around accommodation-sharing or rental properties more generally.