tax on inherited share portfolios

Understanding tax on inherited share portfolios

30 Dec, 2016

If you receive shares from a deceased estate, or if you’re planning ahead for the future of your own assets, it’s important to understand the how tax on inherited share portfolios works.

 

The basics of tax on inherited share portfolios

Any future dividends received by a beneficiary of shares will be treated (and taxed) as normal income. The only exception to this is when a child under 18 receives income via a testamentary trust; this income is taxed at adult rates rather than the usual high rates for minors.

When a beneficiary sells an inherited asset, capital gains tax (CGT) will be applied in the normal way, with slight variations depending on when the shares were inherited and when they were originally purchased by the deceased.

For CGT purposes, shares are considered to be inherited on the day the person dies (not the day they are actually transferred to the name of the beneficiary). If that day was before 20 September 1985, any capital gain or loss from the assets should be disregarded. You won’t have to pay tax on any gain, but you also can’t use any loss as an offset.

 

Calculating your cost base

The ATO’s rules state that if the shares were originally acquired by the deceased before 20 September 1985, the market value on the day the person died (not the day when you received them) is used as your cost base.

For shares acquired on or after 20 September 1985 by the deceased, the cost base applied is the deceased person’s cost base of the shares on the day the person died, i.e. you inherit their cost base along with their shares.

If the deceased person died before 21 September 1999, the indexation method may be used to calculate CGT.

Shares aren’t always inherited when a person dies; family members may give their shares to relatives while they are still alive. In this case, for shares received as a gift, the cost base will be taken as the market value of the shares on the date that you received them.

 

Planning ahead

Although it’s not always possible to anticipate your death, in some cases measures can be taken to minimise tax on inherited share portfolios ahead of time. These include:

  • Crystallising any capital losses and making use of any that have accumulated prior to death, since these cannot be passed on to beneficiaries
  • Distributing share portfolios to beneficiaries with lower taxable incomes to minimise the amount of tax paid on future income and capital gains
  • For substantial estates with beneficiaries aged under 18, establishing a testamentary trust will grant them access to favourable adult marginal tax rates, thus preserving more of the capital

 

To recap:

  • If you inherit shares, any dividends paid will be treated as normal income
  • When you dispose of the shares, CGT will be applied as normal – with a couple of variations depending on when the shares were originally acquired and when you received them
  • Dividends paid from a testamentary trust will be subject to normal adult marginal tax rates – even for minors who usually have to pay higher rates of tax. If you have a valuable estate with beneficiaries under 18, consider establishing a testamentary trust
  • Capital losses can’t be passed on to beneficiaries, so try to utilise these before death

 

minimising tax on bad debts

Minimising tax on bad debts in your business

28 Dec, 2016

One of the downsides of running your own business is having to deal with customers who don’t pay. Some may come up with endless excuses; others intend to pay but are struggling with cash flow; others are just out to take advantage of you and have no intention of ever paying. Find out how to minimise tax on bad debts so your business takes less of a hit.

 

Tax on bad debts: a double hit

If your business records income on an accruals basis for tax purposes, you must include a sale as taxable income even if you haven’t yet received the cash. If the customer never pays, not only do you have to take a hit on the lost revenue but you’ve also paid tax on it to the ATO!

Fortunately, there is a way to claim a deduction for tax on bad debts so you’re not losing more than you have to.

The ATO will allow an income tax deduction for your business for a bad debt if:

  • there was a debt in existence
  • the debt was physically written off prior to 30 June
  • the debt was genuinely bad by the terms of agreement or other reasonable criteria
  • the debt was originally recorded as income in the current or a previous financial year

 

Getting the timing right

The debt must be physically written off before 30 June in order to be claimed in that financial year. To improve cash flow, businesses should conduct a review of all debts before 30 June each year.

This is part of the broader process of getting your business records in order as the end of each financial year approaches.

 

To sum up:

  • Business owners will inevitably have to deal with non-paying customers occasionally
  • If you’re reporting income on an accruals basis, you may have to pay tax on the income before you actually receive the cash
  • If you end up in this situation and then your debtor doesn’t pay, you can claim the debt as a tax deduction in the same or subsequent financial years
  • The debt must be written off before 30 June to be claimed in that financial year, and you must satisfy the ATO’s criteria that the debt was genuinely bad

 

declare overseas income Australia

Do I need to declare overseas income for tax purposes?

26 Dec, 2016

Do you need to declare overseas income? Well, the short answer is ‘yes’. Australian residents are taxed on all income, no matter where in the world it comes from. It can get quite complicated though, as in some cases tax credits can apply.

As an Australian resident, any foreign income you receive needs to be included as assessable income in your tax return, but you may receive a foreign income tax offset for amounts of foreign tax you have already paid.

Anyone classed as a non-resident will only pay tax on their Australian-sourced income.

 

Am I classed as a resident?

If you meet any of the following criteria the ATO will class you as an Australian resident for tax purposes:

  • you are born and bred in Australia
  • you are living permanently in Australia
  • you have been living in Australia for at least six months and for most of that time you have been working at the same job and living at the same place
  • you have been living in Australia for more than half of the financial year, unless your primary residence is overseas and you intend to return there

In this case you must declare overseas income on your tax return.

 

Exception

Australian residents engaged in foreign service for 91 days or more in a row may be granted an exemption on Australian tax on this employment income. This applies for employers which:

  • provide Australian official development assistance
  • operate and maintain a public fund for disaster relief benefitting people in a developing country
  • are exempt from Australian income tax
  • are Australian Government authorities that deploy individuals outside Australia as members of a disciplined force

 

Other considerations when declaring overseas income

If you hold more than the equivalent of A$250,000 in a foreign currency denominated bank account, you may have to pay Australian tax on any realised foreign currency gains or losses, even if the account is only used to deposit money and make withdrawals.

As of 1 January 2017, pensioners who have lived in Australia for under 35 years will be paid a reduced pension proportional to the amount of time they spent working in Australia. This reduction will only be applied if they are absent from Australia for six weeks or longer.

Don’t be tempted into thinking that the government will never find out about your overseas property or other source of foreign income. The ATO exchanges income and transactions information with 44 countries where treaties are in place. This information is used to check the accuracy of Australian tax returns, so you should still declare overseas income up-front.

In addition, the ATO receives information from the Australian Transaction Reports and Analysis Centre (AUSTRAC), which keeps track of domestic and international transactions exceeding $10,000.

 

To summarise:

  • If you’re an Australian resident and receive income from overseas sources you will need to declare this as assessable income on your tax return
  • You may be eligible for a foreign income tax offset for tax already paid on that income
  • You’ll be classed as a resident for tax purposes if you are living in Australia permanently or if you have been here for at least six months working and living in the same place for most of that time. If you live in another country and intend to return there you may be exempt
  • Those engaged in foreign service for 91 days or more may be exempt
  • Non-residents only have to pay tax on Australian-earned income
  • If you have a foreign bank account with a balance of over A$250,000 you may be liable for tax on capital gains or losses
  • Pensioners who have lived in Australia for less than 35 years may receive a reduced pension if they leave the country for more than six weeks

 

share portfolio tax deductions

Understanding allowable share portfolio tax deductions

23 Dec, 2016

There are many costs you will incur in the course of managing your share portfolio, so it’s good to understand what share portfolio tax deductions the ATO allows.

As long as your portfolio can be reasonably expected to produce income – whether from dividends, capital gains or both – the following expenses may be deductible:

 

Ongoing management fees

You can claim a deduction for any management fees you incur if the advice relates directly to investments that produce assessable income. If the fee covers other matters as well, only a proportion of it will be deductible.

Any costs you incur drawing up an initial investment plan cannot be included in your deduction.

 

Travel expenses

If you incur expenses traveling to visit a stockbroker or attend an annual general meeting, these are fully tax-deductible as long as the sole purpose of the travel is to do with the share investment. If you use the trip for any other private purposes, such as a holiday, you may only claim the proportion of the expenses that relate directly to servicing your portfolio.

 

Journals and publications

The cost of any specialist investment journals and publications, subscriptions or sharemarket information services that aid you in managing your share portfolio can be claimed as a deduction. 

 

Internet access and equipment depreciation

If you use the internet to manage your portfolio, for example by buying and selling shares online, the cost of internet access for the amount of time you use it for this purpose will be deductible. Time you spend using the internet for private purposes (yes, that includes cat videos) must be excluded.

Similarly, you can claim depreciation on your computer and printer if your usage relates to managing your investments. Again, only the percentage of your usage actually related to this purpose should be included.

 

Other share portfolio tax deductions

Other expenses directly related to maintaining your portfolio – including bookkeeping expenses, telephone charges and postage – can also be added to your tax deduction.

 

Exclusions

The ATO’s rules state that unless you are considered to be a share trader, brokerage fees and stamp duty on the acquisition of shares cannot be claimed as a deduction. However you should add these costs to your cost base when calculating this for CGT purposes.

 

record-keeping for business

Getting your business record-keeping in order

21 Dec, 2016

When it comes to record-keeping for your business, there are certain requirements set by the ATO that you must adhere to. If you fail to keep proper records, you may be fined up to $2,200.

But there’s no reason to stop at the ATO’s minimum requirements. Keeping excellent records will help you know how your business is doing and will allow you to plan ahead better to minimise the amount of tax you have to pay.

 

What records should I keep for my business?

The following record-keeping practices should stand you in good stead when it comes to reporting and planning:

  • maintaining a manual or electronic cashbook to record all bank transactions
  • keeping sufficient employment records, including
    • PAYG payment summaries
    • employment termination payments
    • reportable fringe benefits
  • keeping all documents in a safe and secure place (or scanned electronically and backed up) for at least five years
  • fulfilling tax obligations such as:
    • withholding PAYG tax
    • recording all GST obligations
    • paying superannuation contributions to complying superannuation funds

 

 

Business record-keeping checklists

You can use the following checklist to make sure you’re meeting all of the ATO’s record-keeping requirements:

Employee payment records:

  • employee payment records
  • employee termination payment summaries
  • employee fringe benefits
  • PAYG payment summaries
  • superannuation records
  • TFN declarations
  • withholding variation notices

 

Income tax and GST records:

  • sales records:
    • bank statements
    • cash register tapes
    • credit card statements
    • deposit books
    • tax invoices
  • purchase and expense records:
    • bank statements
    • chequebook butts
    • credit card statements
    • logbooks showing any private use
    • tax invoices
  • year-end income tax records:
    • capital gains tax records
    • depreciation schedules
    • list of debtors
    • list of creditors
    • stocktake records

 

PAYG withholding records:

  • amounts withheld from payments where no ABN was quoted
  • PAYG withholding voluntary agreements

 

Research shows that around 20% of Australian businesses still do their accounting via a manual system. If you’re one of them, consider moving to a computerised system as this makes it much easier to maintain good records, manage your cash flow and meet tax obligations. A computerised system can also save you space, time and money in the long run.

Just ensure that any records you hold electronically are securely backed up, as even the best of computers go wrong from time to time.

The ATO’s publication Record keeping for small business (NAT 3029) has more information on this topic.

 

To sum up:

  • The ATO has set out various requirements relating to record-keeping for businesses, in the main categories of employee payments, income tax & GST and PAYG withholdings
  • It’s still a good idea to go above and beyond this level of record-keeping as this will help with your reporting and planning, especially tax planning
  • Keep all your documents safe and secure for at least five years. If you store them electronically, ensure they are backed up
  • Moving to a computerised record-keeping system, if you haven’t already, offers more flexibility and greater savings in both time and money

 

school building fund tax deduction

Understanding school building fund tax deduction rules

19 Dec, 2016

Over the years that your child attends school you may well make payments to school building funds. School building fund tax deduction rules allow for some – but not all – of these contributions to be claimed as a tax deduction.

 

When is a school building fund tax deduction allowed?

The following characteristics must apply to a payment to a school building fund for it to qualify for tax deduction:

  • made voluntarily
  • amounts to $2 or more
  • made to a school building fund that is endorsed as a deductible gift recipient (DGR)
  • made to a school building fund that is maintained solely for providing money for acquiring, constructing or maintaining the school or college buildings
  • put towards a building, or group of buildings, used for a purpose that is connected with the curriculum of a school or college by a non-profit organisation
  • does not provide a material benefit to the donor (such as a reduction in school fees, tickets to functions or the grant of scholarship-nominated students)
  • essentially arises from benefaction

If the payment is compulsory, it won’t be eligible for a school building fund tax deduction, as it is essentially just a part of the total school fees.

Building funds for sports grounds, tennis courts, covered play areas, car parks, landscaping, furniture or equipment are not eligible for deductions. However, the ATO does allow deductions on payments that contribute towards the building of an indoor sports complex on school grounds (where it includes a gym, basketball court and an in-ground swimming pool), as this is classed as a permanent structure forming an enclosure providing protection from the elements.

If a building is used by different people or groups, it is classed as being used as a school or college if its primary and principal use is as a school or college – meaning it’s used this way more than 50% of the time.

Imagine there’s a hall which is used by students and teachers from a school every weekday and for community events at weekends. This would qualify as a school or college building as it’s being used as a school over half the time. If it was used only two mornings a week by the school, it wouldn’t meet the criteria.

 

Claiming your tax deduction

If you make a contribution that’s eligible, you need to keep a written account for your tax records. Get a receipt that states the name of the fund, authority or institution to which the gift has been made, the DGR’s Australian business number (if any) and the fact that the receipt is for a gift.

Do be aware that a deduction for a donation to a school building fund cannot add to or create a tax loss for a taxpayer.

More information, including for any organisations wishing to establish a school building fund, can be found in the ATO’s Taxation Ruling TR 2013/2 Income tax: school or college building funds.

 

To summarise:

  • For a gift to a school building fund to be tax deductible, it must meet certain criteria, including being voluntary and with no material benefit to the donor
  • The building fund must be registered as a deductible gift recipient (DGR) and it must be used specifically for school or college buildings
  • Any mixed-use buildings used by a school or college over 50% of the time may be eligible
  • As a donor, you should get a receipt for your contribution which details the transaction and confirms that the payment was a gift
  • This kind of deduction cannot add to or create a loss on your tax return

 

minimising tax on dividends

Minimising tax on dividends for lower-income earners

16 Dec, 2016

Minimising tax on dividends can be as simple as a name change.

Before you and your spouse purchase any shares you should think carefully about whose name to hold them in. If one of you is on a significantly lower income than the other, consider putting the shares in the name of the lower-income earner so any dividends and capital gains will be taxed at a lower rate.

 

How are dividend payments taxed?

Dividend payments will be added to an individual’s income from other sources for the year and taxed at the normal marginal tax rates.

 

Tax rates for individuals excluding levies (2015–16)

 

Taxable income Tax on this income
0–$18 200 Nil
$18 201–$37 000 19c for each $1 over $18 200
$37 001–$80 000 $3572 plus 32.5c for each $1 over $37 000
$80 001–$180 000 $17 547 plus 37c for each $1 over $80 000
$180 001 and over $54 547 plus 45c for each $1 over $180 000

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

This means that if you earn less than $80,000 a year, franked dividends are effectively tax-free since you receive a credit for the 30% company tax already paid —on a par with the marginal rate at that level (you can read more here about franked dividends and franking credits).

If you’re on a lower marginal tax rate (i.e. earning less than $37,000), you can use any excess franking tax offsets to reduce your tax liability from other income streams, including net taxable capital gains. If the value of your franking credits is greater than your tax liability, you can receive a refund for the excess amount.

Let’s look at an example. Imagine Stuart earns $310,000 while his wife Anthea earns $20,000. They have some spare cash are thinking about investing in a share portfolio. As Anthea’s marginal tax rate is 21% (including the 2% Medicare levy), the couple will pay less tax by having the shares in her name than in Stuart’s name, where they would be taxed at the highest rate of 49%.

If the share portfolio delivers an annual income of $20,000 from franked dividends, this strategy of minimising tax on dividends could save as much as $6,437 for the couple.

 

Downsides of having shares in your name

Do note that if the low-income-earning spouse takes on a share portfolio it may affect their eligibility for any government benefits they receive, since dividend income, capital gains, and the value of the portfolio itself are included in Centrelink’s income and assets tests.

Upon disposal of the shares, capital gains tax will be applied. If the portfolio has grown significantly in value this may push the low-income earner into a higher tax bracket, cancelling out any potential tax benefits. In this scenario, the couple could consider disposing of the shares over the course of a few income years to keep any assessable income below the higher tax threshold.

This is a long-term strategy and couples should also consider any plans for the future which may shift the balance of their income (hope you have your crystal ball handy).

Perhaps the wife is currently the high-income earner but the plan is that in a few years you’ll have a baby and she will stop working. Or maybe returning to work after the kids start school will mean that the low-income earner will then earn the same amount as the other spouse. Such events should be fully considered when working out who should hold the shares to minimise tax on dividends.

Although it is possible to make an off-market transfer to move shares across to the other partner’s name, this would trigger CGT, potentially wiping out any benefit intended from such a switch. Again, it’s important to crunch the numbers before taking this kind of action.

 

Senior shareholders

Senior Australians are entitled to a tax-free income threshold of $33,044 for singles or $29,739 each for couples. There is something to be said, therefore, for an investment strategy for seniors and pensioners which involves a share portfolio that generates fully franked dividends (along with franking credits which are subsequently refunded).

When making any purchase of shares, do first fully research the company or companies you’re investing in and take into account the risks associated with fluctuations in the market.

 

Summary of minimising tax on dividends:

  • Holding shares in the name of the lower-income earning spouse can deliver significant tax savings compared to the higher-income earning spouse holding them
  • Anyone earning less than $80,000 can essentially receive franked dividend payments tax-free because of the franking tax offset
  • The offset can also be used to reduce your tax liability on other types of income, or even to receive a refund
  • Be aware that holding shares in your name may affect your eligibility for some government benefits
  • Share disposal is subject to capital gains tax so should be carefully planned to avoid cancelling out any previous tax benefits
  • A share portfolio can be a particularly tax-efficient way for seniors to invest since they get higher tax-free income thresholds

 

PAYG withholding variation

PAYG withholding variation – distributing your tax deduction benefits

14 Dec, 2016

Negative gearing on an investment (reporting a net loss which is tax deductible) is a strategy that appeals to many property investors, however it comes with one major downside: poor cash flow. You’re basically paying your taxes each month knowing that you’re going to claim some of the money back at the end of the financial year. You could view this as a kind of forced savings scheme, but that’s not much use if you’re struggling to meet your mortgage repayments each month. Plus, you’re not getting any interest on that money. Fortunately, there is a way around this: PAYG withholding.

 

How to spread your tax deduction over the year

To avoid paying tax that you’ll later claim back, you can complete a pay-as-you-go (PAYG) withholding variation application, which lets you reduce the tax withheld from your monthly pay. You’ll need to include all your taxable income on the form so the ATO can approve your application, but this doesn’t replace your annual tax return.

PAYG withholding variations are not just for taxpayers who are negatively gearing rental properties. If your assessable income is considerably reduced through tax-deductible expenses (including a work car or self-education), you may also be able to apply to change the amount of PAYG tax withheld from you.

Let’s consider an example. Bella is on the highest marginal tax rate. She expects to incur a net rental loss of $20,000 in the 2016-17 financial year, which she can claim as a tax deduction, but she could do with that money sooner rather than later. So instead of waiting to submit her 2016–17 tax return in July 2017 and getting a lump sum refund of $9,800, she lodges a PAYG withholding variation application with the ATO in May 2016. The result of this is that Bella gets $816.67 more in her salary each month as it’s not being withheld as PAYG tax.

 

Proceed with caution

This seems like a win-win situation but there are a couple of drawbacks to be aware of.

Firstly, you need to be disciplined enough to use the extra money where it’s really needed. If it’s going to get spent on everyday expenses and unnecessary purchases then you might be better off with the ‘forced saving’ option

Secondly, if you apply for a withholding variation, you need to be pretty confident about your calculations. If your income is lower than expected or your deductible loss is smaller than expected (perhaps due to increased rent payments), you may be left with a tax liability at the end of the year. It will be difficult to make up this shortfall if you’ve already spent all your money, so it’s better to err on the side of caution when working out your expected income and deductions.

If your circumstances do change after your PAYG variation is approved and you know this will affect your deductible amount, you should submit a new PAYG variation straight away to correct the amount of tax being withheld from you.

 

How do I submit a PAYG withholding variation application?

Paper forms are available but you can also apply online. You can expect to see your pay slips change the next payday after your pay office receives notice from the ATO that the withholding variation has been approved.

 

Tax fact

Variations are generally only valid until 30 June each year – they don’t continue indefinitely – so you’ll need to lodge a new application if you wish to continue with your variation into the next tax year. For your variation to apply from 1 July you must apply at least six weeks in advance (by 15 May).

 

Remember:

  • Anyone with a negatively geared investment or other form of substantial tax deduction claim may apply for a PAYG withholding variation to essentially spread the claim across the current tax year
  • You’ll be taxed less each month, but you then won’t get a lump sum at the end of the year, so you must be disciplined enough to spend the money appropriately
  • Be cautious in your calculations so as to avoid owing money in tax at the end of the year
  • If your circumstances change during the year you should lodge a new application as soon as possible, especially if you’ll be liable for additional tax
  • You need to submit a new application each financial year – at least six weeks in advance if you want it to apply from 1 July

 

meeting business tax obligations

Meeting your business tax obligations

12 Dec, 2016

It’s hardly anyone’s favourite part of owning a business, but there’s no avoiding your business tax obligations. You’re required to lodge business activity statements (BASs), submit an annual tax return and, depending on the size of your business, register for and collect GST.

In the 2013–14 tax year the ATO carried out almost 20,000 reviews and audits of employer obligations, resulting in over $812 million in liabilities. The ATO plans to spend $26.5 million on GST compliance activities alone over a three-year period, so it’s worth making sure you’re doing things properly and keeping your records in order.

 

GST

The GST rules kick in when your business has a gross business income (GST turnover) of $75,000 or more ($150,000 or more for nonprofit organisations) or provides taxi travel. This means you will need to:

  • register for GST
  • charge 10% GST on any taxable supplies
  • issue customers with tax invoices which include your ABN (for purchases over $75)
  • report and remit GST charged to the ATO in instalments every:
    • month (if turnover is greater than $20 million)
    • quarter (if turnover is less than $20 million)

Small businesses (those who turn over less than $10 million) use the cash method of reporting, whereas all others must use the accrual method.

The calculation for deducting GST from the GST-inclusive price is:

GST = GST-inclusive price ÷ 11

Since your company must collect GST for 1-3 months before having to remit it to the ATO, you must be disciplined enough to keep enough aside. As a general rule, you should set aside at least one third of your income to cover GST and income tax when the time comes.

Note that if a business fails to quote its ABN, a payer has the right to withhold tax from its payment at a rate of 47%.

 

Avoiding GST errors

Be aware of the following mistakes that businesses often make when calculating and reporting GST:

  • trying to claim GST credits on charges such as bank fees and government charges which were not subject to GST in the first place
  • failing to remit GST on government grants and incentives that were paid inclusive of GST
  • mistakenly claiming GST credits on purchases such as basic food items, exports and some health services that are GST-free
  • exceeding the luxury car purchase limit of $57,466 GST-inclusive but claiming GST credit on the whole purchase amount
  • claiming GST credits for expenses related to private usage or activities

 

Activity statements

An activity statement allows businesses to report and pay several of their business tax obligations, including GST, PAYG instalments, PAYG withholding and fringe benefits tax (FBT).

You must complete a FBT return each year (for benefits such as company cars) even if the net amount to pay is zero because of personal contributions made.

The ATO estimates that it takes companies an average of two hours to complete a business activity statement (BAS), whereas a company income tax return takes around seven hours.

If your business is registered for GST you must regularly file a BAS with the ATO on either a monthly (21 days after period end), quarterly (28 October, 28 February, 28 April and 28 July) or annual basis (before your income tax return due date). Any GST the business has paid on purchases will be used to offset the GST collected from customers. The net amount due to the ATO is paid via your BAS.

The ATO is part-way through phasing in monthly (as opposed to quarterly) PAYG income instalments. Companies with a turnover of $20 million or more and all other entities in the PAYG instalment system with a turnover of $1 billion or more have already been moved to monthly payments, and on 1 January 2017 the switch will happen for all other entities in the PAYG instalment system with a turnover of $20 million or more.

 

Managing your business tax affairs online

The ATO’s Business Portal allows you to manage your tax affairs online in a secure environment. In order to register you must first obtain a digital certificate from the ATO. This system lets you view your statement of account, update contact details, and prepare and lodge activity statements.

 

A summary of business tax obligations:

  • As the owner, your business tax obligations include submitting a business activity statement (BAS) and annual tax return for your business
  • If you turn over $75,000 or more ($150,000 for nonprofits) or provide taxi travel you will need to register for GST, apply it at a rate of 10% to any taxable supplies, and later report and remit these takings to the ATO
  • Remember you can’t claim GST credits on purchases that weren’t subject to GST in the first place, while grants and incentives paid inclusive of GST must have the GST remitted
  • Your BAS allows you to report and pay taxes including GST, PAYG and fringe benefits tax (FBT). These can be lodged online using the ATO’s Business Portal

 

 

living-away-from-home allowance

Understanding tax and the living-away-from-home allowance

09 Dec, 2016

When does the living-away-from-home allowance apply?

The ATO’s definition of a living-away-from-home allowance (LAFHA) is: a taxable allowance that an employer pays to an employee to compensate for additional expenses incurred and any disadvantages suffered because the employee’s duties require them to live away from their usual place of residence.

The ATO will class you as living away from your usual place of residence when:

  • your job changes location (but is still with the same employer)
  • you intend to return to your original location after time away
  • you’re away for more than 21 days

If you’re away for less than 21 days, any allowance will be treated as a travelling allowance rather than an LAFHA.

FBT only applies to the amount that the LAFHA exceeds the exempt accommodation and food components.

 

Who can claim the LAFHA?

To be eligible for the living-away-from-home allowance, you must have a home in Australia which you maintain for your own use and are living away from because of work. In addition, the LAFHA will only apply if you are legitimately maintaining a second home in addition to your actual home. The LAFHA can only be claimed for a maximum period of 12 months for each work location.

 

LAFHA for accommodation

The portion of your LAFHA that covers additional accommodation expenses you could reasonably be expected to incur at the alternative location is exempt from fringe benefit tax (FBT). There are no strict guidelines laid out by the ATO when it comes to defining ‘reasonable accommodation’, so common sense needs to be applied. Your accommodation cost will vary according to:

  • whether you will be accompanied by family members
  • the position you hold
  • the location where you will be living
  • whether the accommodation will be furnished
  • your current living standards. Note that if your employer provides you with more money for accommodation in your LAFHA allowance than you actually spend, the excess is not classed as exempt and will be subject to FBT.

 

LAFHA for food

The other exempt component of your LAFHA is the amount provided for expenses you could reasonably be expected to incur on food and drink as a result of living away from home, minus the statutory food amount of $42 a week for each adult and $21 a week for each child.

As with accommodation, the ATO doesn’t supply any strict guidelines for calculating the ‘reasonable’ amount for food costs. One option would be to use the rates the ATO publishes each year for expatriates, as long as they could reasonably be applied to your situation. The acceptable amounts for the reasonable food component in the 2016–17 financial year of LAFHAs for expatriate employees, per ATO Tax Determination 2016/4, are:

  • one adult $241
  • two adults $362
  • three adults $483
  • one adult + one child $302
  • two adults + one child $423
  • two adults + two children $484
  • two adults + three children $545
  • three adults + one child $544
  • three adults + two children $605
  • four adults $604
  • additional adult $121
  • additional child $61

 

Exceptions and special cases

Since October 2012, 457 visa holders have not been covered by the ATO’s requirements for the LAFHA. Therefore, they cannot claim deductions for accommodation and food but are still required to include any allowance they receive as assessable income.

If you are employed on a ‘fly-in fly-out’ or a ‘drive-in drive-out’ basis (for example in a mine), then the ‘maximum 12 months’ rule doesn’t apply to you. If your food and accommodation expenses exceed the ATO’s reasonable amounts, you will still have to substantiate your claim.

 

To sum up:

  • The living-away-from-home allowance (LAFHA) is compensation paid by an employer to an employee who is required to live away from their usual place of residence because of their work duties
  • The LAFHA applies to stays of more than 21 days and can be claimed for a maximum of 1 year for each work location
  • The portion of your LAFHA that is paid for accommodation and food is exempt from fringe benefit tax (FBA), up to a reasonable amount
  • The ATO doesn’t define what is considered a ‘reasonable amount’ so you should calculate this based on your own circumstances
  • 457 visa holders can’t claim a LAFHA tax exemption
  • ‘Fly-in fly-out’ or ‘drive-in drive-out’ workers are not subject to the 12-month maximum rule but still must substantiate any claim that exceeds reasonable amounts