non-commercial loss claim

Claiming for a non-commercial loss

27 Feb, 2017

Not all businesses are a huge hit straight away; it’s common for losses to occur, particularly in the early years. If you operate your business as an individual or a partnership, you can apply the non-commercial loss rules to determine whether you’re eligible to offset your business loss against income from other sources (salary, interest, dividends, etc.) to minimise your tax bill.

 

How does non-commercial loss work?

In any year that your business makes a net loss you must work out whether you can claim the loss in the current year on your tax return or whether it should be deferred and offset against future profits.

This legislation originally came about as an effort to stop ‘Pitt Street farmers’ (Sydney CBD’s main street) from using their farms mainly as holiday homes and then claiming massive losses on them against income from their salary, wages and other sources.

 

ATO rules

The ATO requires you to meet one of the following criteria if you wish to offset your business loss against other assessable income:

  • you run a primary production or professional arts business and certain exceptions apply
  • you earn less than $250,000 and pass one of the four non-commercial losses tests (see below)
  • the Commissioner of Taxation allows the claim at their discretion (don’t count on this)

The four non-commercial losses rules mean taxpayers may only offset business losses against other sources of assessable income if they meet at least one of the following criteria:

  • the business generates at least $20,000 of assessable income (assessable income test)
  • the business has recorded a profit for at least three out of the past five years (profits test)
  • the business has property or an interest in real property worth at least $500,000 on a continuing basis (real property test)
  • the business has other assets of at least $100,000 being used on a continuing basis (other assets test)

Basically, the ATO wants to see that you are operating a genuine business and don’t have another substantial source of income.

The $250,000 threshold is calculated as your taxable income minus investment losses plus any reportable fringe benefits and superannuation contributions. If you exceed this threshold, the ATO will not allow any claim for business losses, even if you satisfy the other criteria.

 

Let’s recap:

  • If you record a business loss in any given tax year and you operate as an individual or a partnership, you may be able to offset your business loss against income from other assessable sources
  • The non-commercial loss rules are in place to stop individuals from setting up a ‘business’ that operates at a loss just to minimise their taxes elsewhere
  • Unless you run a primary production or professional arts business you will only be eligible if you earn under $250,000 and satisfy at least one of the four non-commercial losses rules

 

monefly establishing a franchise

Establishing a franchise: the basics

24 Feb, 2017

As your business goes from strength to strength you may toy with the idea of franchising it so you can make a ton of cash from others using your concept. This can be a great source of income, but don’t expect the money to suddenly come rolling in with minimal work on your part. Setting up a franchise system properly will take time, patience, and a fair amount of capital.

If you don’t comply properly with franchising laws you leave yourself open to be sued by franchisees, so it’s advisable to hire an expert franchising consultant to make sure everything is done correctly. 

 

The cost of establishing a franchise

You can expect to pay as much as $250,000 to set up a proper franchising structure and reach compliance with all of the requirements laid out in the Franchising Code of Conduct administered through the Australian Competition and Consumer Commission (ACCC).

You’ll also face extra administration fees (accounting, tax, audit and Australian Securities and Investments Commission annual return fees) for each company within the franchise structure as they must each maintain their own separate financial records.

You should set up a new company to hold the intellectual property (IP) and another to house the head franchisor – both separate from your original trading company. This way, if you do find yourself in trouble, your assets will be better protected.

 

Tax on franchises

As a franchisor, any payments you receive from the franchisee (including advertising costs, the initial franchise fee, service fees, royalties and training fees) must be reported as assessable income for tax purposes. If these payments exceed $75,000 a year (which they hopefully will), you’ll need to register for GST and apply it accordingly. You’ll then need to report and remit the GST to the ATO on a quarterly basis.

Any franchisees that are GST registered may claim a GST credit in their business activity statement for any GST paid to the franchisor.

 

To sum up:

  • It’s time-consuming and expensive to establish a franchise, and you should seek expert advice to ensure it’s done properly and avoid any legal problems further down the line
  • It may cost as much as $250,000 to set up, and there will be ongoing administration fees for each company within the structure. You should house your assets within separate companies to protect them – again, get expert advice on this
  • If your assessable income (including any payments from franchisees) exceeds $75,000 you’ll need to register for GST, charge it accordingly, and report and remit GST payments to the ATO

 

pay your taxes on time

What to do if you can’t pay your taxes on time

22 Feb, 2017

You are required to pay your taxes by the date set by the ATO. However, there may be occasions where, for whatever reason, you struggle to pay your tax and business activity statement (BAS) obligations on time.

 

What to do if you can’t pay your taxes on time

First, don’t put off lodging your tax returns and BAS returns because you’re worried about being able to pay; you could be hit with late lodgement penalties to add to your financial woes.

You should contact the ATO straight away to discuss your circumstances and try to find a solution. If you are honest about your situation and come clean straight away, you should find the ATO officers to be fair and reasonable.

 

Possible solutions

The ATO may offer you a time extension if you can’t pay your taxes on time. A general interest charge (GIC) will apply accruing on your debt until you have completely cleared it. You may claim a tax deduction for any GIC in the financial year in which it is charged.

If you do come to such an agreement with the ATO, you will still be required to lodge any future tax returns and BAS on time and pay any resulting tax as normal. If you fail to do this, the ATO will treat it as a default on your payment arrangement.

Small businesses experiencing cash flow problems may be eligible for a 12-month GIC-free payment arrangement with the ATO, with the additional possibility of deferring activity statement payment due dates.

In some special circumstances, the ATO may release individuals from some or all of their tax debts. If you’re in a situation where paying your tax would cause you ‘serious hardship’ – meaning you couldn’t then pay for basic things like food, shelter, clothing and education for yourself and your family – then you may be eligible for this concession.

 

To recap:

  • Taxes must be paid in full and on time whenever possible
  • If you can pay your taxes and BAS obligations for any reason, you can speak to the ATO about an alternative solution – but don’t delay lodging your returns just because of an inability to pay
  • If the ATO offers you an extension you will need to pay a general interest charge (GIC) until the balance is paid in full (this charge is tax-deductible). In the meantime you must still lodge and pay any future tax returns and BAS on time
  • Small businesses may be able to arrange a GIC-free payment period of 12 months
  • Individuals facing ‘serious hardship’ may apply to have some or all of their tax debt cleared

 

net medical expenses tax offset

Minimising tax with the net medical expenses tax offset

20 Feb, 2017

It’s never fun being sick, and often the endless medical bills just make it worse. To offer some relief – financially at least – the net medical expenses tax offset is available in certain circumstances, although it is in the process of being phased out.

 

Which expenses are eligible for the net medical expenses tax offset?

Up until the 2014-15 financial year the offset covered a wide range of medical expenses, but it has now been reduced to disability aids, attendant care and aged care. The 2018-19 financial year is the last year that the offset can be claimed at all.

Your net medical expenses are calculated as the total cost minus any amount paid by Medicare, the National Disability Insurance Scheme (NDIS) or a private health fund.

 

What tax concessions are available for eligible medical expenses?

The offset allows taxpayers to claim a rebate of 20% on eligible medical expenses for themselves and their dependents on amounts over $2,162 in a single financial year.

If your income exceeds the Medicare levy surcharge thresholds (currently $90,000 for singles and $180,000 for couples or families), the threshold for claiming medical expenses increases to $5,100 (indexed annually) and the rebate available drops to 10% of net expenses.

Say, for example, Peter has expenses for disability aids in the 2016-17 financial year. He receives $450 from Medicare and an additional $550 from a private health fund to help cover this cost. He can claim a rebate of 20% on the remaining amount over $2,126, which works out at $167.60.

 

To recap:

  • The net medical expenses tax offset is being phased out but is still available until the 2018-19 financial year for costs associated with disability aids, attendant care and aged care
  • Eligible taxpayers will receive a discount of 20% on their expenses over $2,126 once any payments from Medicare or a private health fund have been subtracted
  • For income earners over the Medicare levy surcharge thresholds, this decreases to a 10% rebate on any expenses over $5,100

 

zone tax offset

Minimising tax with an overseas forces or zone tax offset

17 Feb, 2017

The zone tax offset is available to eligible taxpayers who have lived and worked in a remote area during the financial year. For those who have completed overseas service in the forces, the overseas forces tax offset may apply.

 

Zone tax offset

If your normal place of residence is in a remote or isolated part of Australia (not including an offshore oil or gas rig) you may be able to claim the zone tax offset.

The ATO defines remote areas according to two zones – zone A and zone B. To find out whether your area is covered, check the Australian zone list on the ATO’s website.

Up to the 2014/15 financial year the zone tax offset applied to anyone who had lived or worked in a zone for at least 183 days of the year, but it has since been updated to exclude fly-in-fly-out workers who don’t actually live in a zone the rest of the time.

If you use a tax agent who lives in a capital city this offset may slip their mind as they are not used to applying it. If you live in a zone area you should remind them that you are eligible.

 

Overseas forces tax offset

Members of either the Australian defence forces or the United Nations forces who have served overseas during the financial year and whose income for that service was not specifically exempt from tax may be able to apply for an overseas forces tax offset.

In order to be eligible to claim the full offset you must have spent at least 183 days serving in one or more overseas localities, but this doesn’t have to be continuous service.

You may only claim for either the overseas forces tax offset or the zone tax offset in any given year, even if you meet the criteria for both. Do your sums and apply whichever one gives you the greatest tax relief.

 

To summarise:

  • If your normal place of residence is in a zone you may be eligible to claim the zone tax offset (it is no longer available if you only work in a zone)
  • The ATO determines which areas are classed as zones (zone A and zone B) on their website
  • Tax agents living in cities may need a gentle reminder that you are eligible for this offset
  • Anyone who has served overseas in the Australian defence forces or the United Nations forces may claim a tax offset on any taxable income relating to that period of service (this must be over 183 days in a year to claim the full offset)
  • You may only claim one of these offsets, so choose whichever will deliver the greatest tax saving

 

tax-effective investments

The pros and cons of tax-effective investments

15 Feb, 2017

As it comes to the end of each financial year, you might notice an increase in the number of accountants and financial planners offering tax-effective investments in agribusiness and forestry products.

 

Benefits of tax-effective investments

What makes these investments so great? Well, investments in agribusiness or forestry products are generally 100% tax deductible in the first year. This makes them a much more attractive option than shares or property, because a $100,000 investment could result in a $100,000 tax deduction.

However, these schemes have been branded ‘aggressive tax planning’ products by the ATO, and not without good reason. There has been plenty of press coverage in recent years of projects that have failed and gone into administration, leaving investors thousands of dollars out of pocket. 

 

Research needed

This kind of tax-effective investment can prove to be a savvy financial strategy, particularly if you’re facing a significant tax bill for capital gains or some other income in the financial year.

But you should always carefully research any such scheme to find out what you’re really getting into. In particular, make sure the ATO has issued a product ruling for the project so you can be clear about any potential tax benefits.

There is a lot of risk involved with these kinds of projects, so try to be objective and decide whether the potential tax savings are worth risking the amount of capital you’re putting on the line. Remember, a $100,000 tax deduction doesn’t mean a $100,000 saving; it means the amount of income you have to pay tax on at your marginal rate is reduced by $100,000. There is still plenty of money to be lost if the project doesn’t achieve the expected returns.

One final tip: if you consult with a good financial adviser they will warn against having any more than 5% of your investment portfolio in tax-effective investments because of the high risk they present. Anyone advising you otherwise is probably not acting in your best interests.

 

To sum up:

  • Tax-effective investments in agribusiness or forestry products are promoted as such because they are generally 100% tax deductible
  • They carry high levels of risk, so any such investment should be carefully researched
  • Check the ATO’s product ruling for the project to verify any claims of tax concessions
  • As a general rule, don’t hold any more than 5% of your portfolio in this kind of investment

 

financial success

One simple step towards financial success

13 Feb, 2017

You may have heard it said that only 8% of people achieve financial success – that is, they have enough money to live comfortably their whole lives.

This comes from statistics which show that if you take 100 15-year-olds and look at where they will be when they reach 65, you’ll find:

  • Only 62 will still be alive
  • 38 will be struggling financially
  • 16 will still be working
  • 7 will be retired and living comfortably
  • 1 will be wealthy

So it’s only really those last two categories (which account for 8%) who have achieved financial independence. We’d surely all like to make it into that group, but the big question is, how? Is it down to luck and circumstance, or are there things we can do to improve our chances of financial success?

 

What’s the key to financial success?

Well, if it was that simple, we’d all be in that 8%! Experts will come up all kinds of theories and strategies – some of them sound and some of them perhaps not – but there is one important thing that underpins financial success across the board, and that’s a willingness to learn.

You might argue the case that a lot has to do with your background and family situation, but it seems that’s simply not correct.

Two people may inherit $10,000 each and if one takes the time to research the best way to invest it while the other splashes out on a luxury holiday, you can see who’s more likely to be ahead financially in the future.

It simply comes down to the fact that if you’re not interested in learning about finance, investment, tax, etc. then you probably aren’t making the best use of your money. Nobody else can help if you’re not willing to help yourself.

 

Leaving it to luck

Just look at the number of people who buy lottery tickets each week. They clearly have a desire to be wealthy, but would rather leave it to luck than put any kind of effort into a secure financial future. And you do need an awful lot of luck to win big – one of our national lottery games offers less than a 1 in 76 million chance of winning the top prize.

Even then, there’s no shortage of stories about lottery jackpot winners who a few years later find themselves broke because they’ve squandered all their winnings. You’d be surprised how quickly a few million dollars can disappear when you believe it will last forever.

 

The earlier the better

How many of the subjects you studied at school have been of any use to you in the real world? Unless it happens to be your specialist field, being able to tell the difference between an igneous rock and a metamorphic rock probably hasn’t come in handy too many times. And how is your conversational French these days?

Surely there needs to be more of a focus in schools on practical day-to-day financial matters such as how to draw up a budget and how compound interest works. Without this knowledge, how can we expect our children to be in control of their finances?

Anyway, the fact that you’re bothering to read this article now is a pretty good indication that you possess that desire to learn, so you may well already be on the road to financial independence, congratulations! Keep up the good work, and take this valuable piece of 18th century advice from Thomas Fuller: “It is better to have a hen tomorrow than an egg today.”

 

To summarise:

  • Only a small percentage of people end up financially secure in retirement
  • There is no one rule to follow to make sure you achieve financial success, but a desire to learn is the best foundation to build on
  • Understanding financial matters will help you manage your money in the best way possible
  • Teaching children about finances from a young age will enable them to make better choices later in life

 

delay taxable income

Delay taxable income and maximise deductions to reduce your tax bill

10 Feb, 2017

All businesses have an obligation to pay their fair share of taxes, but there’s nothing wrong with taking advantage of various elements of the tax system to keep your tax bill as low as possible each year. There are two main ways to legitimately reduce your business’s tax bill for the year: delay taxable income and bring forward deductions.

Being able to hang on to money for an extra 12 months means it can accrue interest or be put to better use, and you may even benefit from lower tax rates in following years. Let’s go through how these two methods work.

 

Deferring income (delay taxable income)

The best way for you to defer assessable income will depend on how the ATO calculates tax on your business income.

Each business accounts for its income on either a cash basis or an accruals basis, depending on the size and nature of the business.

On a cash basis income is recognised when cash is received, and this applies to most small businesses. By delaying receipt of income until after 1 July you will be able to hold on to any applicable tax for an extra 12 months before handing it over to the taxman.

If you receive any income via cheque, it is counted as cash as soon as it’s handed over – not on the date you actually bank it. Keeping it in your drawer for a few weeks until June has passed won’t make any difference to your tax bill.

Larger businesses must account for their income using the accruals basis, where income is counted as soon as it is earned rather than when money is actually received. In this case, you can defer your tax liabilities to the following tax year by holding off on invoicing until 1 July.

 

Maximising deductions by prepaying expenses

Annual expenses such as subscriptions and insurance can be paid in advance to bring them into the current tax year, even if they won’t be used until the following year. Small businesses may use the prepayments concession to claim a deduction for the total prepaid expense providing the goods or services are received in full within 12 months.

You should also consider expenses such as bad debts, depreciation on business assets, revaluing your trading stock and making superannuation contributions to see if any can be prepaid before year end and claimed as a deduction in the current tax year.

You may claim for a loss or outgoing you have ‘incurred’ even if you are yet to pay for it. As long as you are definitively committed, or have completely subjected yourself to the expenditure, it can be deducted. This doesn’t apply to provisions such as annual leave which are still to be set in stone.

 

To recap:

  • There are two main ways to reduce your tax bill for the current year and hold on to the money for an extra 12 months: delay taxable income and prepay your expenses
  • If you account for income on a cash basis (this applies to most small businesses) you can delay receipt of payment until after 1 July
  • If you use the accruals basis, you will have to delay sending invoices until the next tax year if you want to defer your tax bill
  • If you pre-pay some expenses for the following tax year you may claim the deduction in the current year

 

 

change your money mindset

Changing your money mindset to grow your wealth

08 Feb, 2017

It’s sometimes the simplest of ideas that can make the biggest difference to your bank balance. Are you in need of a money mindset reset?

A couple of decades ago the mortgage industry was rocked by the revelation that paying every week or fortnight instead of paying every month (but still paying back the same amount over a month) could almost halve the term of a 30-year mortgage, saving tens of thousands of dollars in interest fees – all because of the way the banks calculate interest on your loan.

It took a while for the banks to admit that this was the case (and you can understand why!) but now many offer and even advertise weekly or fortnightly repayments.

Here are three more simple ways that a small change in mindset can drastically transform your bank balance over time:

 

1. The cents add up

Just as it takes billions of individual grains of sand to create a beach, your wealth will build up with each cent you add to it.

Quit saying “I’ll just wait until I have $…” and take action now. You can start saving or investing with any amount, no matter how small. You may also be surprised to see how much of a difference it can make if you start making extra repayments towards your credit card bill, loan or mortgage.

If you’re trying to save, say, $10,000 before you invest in a share portfolio, but you never seem to creep any closer to that total, perhaps it’s time to re-think your strategy.

 

2. Cash seems to disappear

See if this sounds at all familiar:

You go out for dinner with a group of 9 other friends. At the end the bill comes to $800. You offer to put it on your credit card and everyone else gives you cash to cover their part. Seems fair. Six weeks go by, your credit card statement arrives, and… where’s the cash gone? Of course, you’ve spent it. That was a very expensive meal.

We are very good at living within our means, so if we have some extra money lying around we are likely to spend it, whereas if we have less to live on we can still manage perfectly well.

Once you accept this truth, you can take steps to change your spending and saving habits and put your money to better use.

 

3. You won’t miss what you don’t have

Continuing on the theme of living within your means, you’d be surprised how easy it is to live without money that you never had in the first place.

If you want to put aside $100 a month, trying to keep it in your bank account all month long will be a lot harder than simply setting up an automatic transfer to a savings account (or a loan repayment) for just after you get paid.

You may earnestly commit to putting whatever money you have left at the end of the month into savings, but this strategy will more often than not result in next to nothing being transferred.

Next month, try saving a fixed amount as soon as you receive your salary or wages, and see whether you really miss it.

 

Money mindset changes summary:

  • Little changes in money mindset can sometimes be all we need to make our finances more secure
  • Don’t feel that only large amounts are worth saving. Even the smallest weekly or monthly contributions – especially if you’re making extra debt repayments – will soon add up
  • If you have some spare cash, you’ll probably spend it, even if you don’t need to. Remove temptation by transferring any excess funds to a separate savings fund
  • Save your money or make extra loan repayments as soon as you get paid and you’ll never miss the extra cash. It’s only if you try to keep it aside all month long that you’ll have to exercise that extra willpower

 

 

children's tax

Understanding how children’s tax is applied

08 Feb, 2017

All parents want to teach their children good habits that will set them up well for the future, and that includes encouraging them to save money. But it can be discouraging for them when they see how much of their interest gets sapped by children’s tax.

Malcolm Fraser, during his term as Prime Minister, introduced income tax for minors to close a supposed loophole that was allowing parents to save tax-efficiently by investing in their children’s names. This wasn’t necessarily the case, as the Tax Office has always had the authority to evaluate who is the beneficial owner of any funds and apply interest accordingly. Nevertheless, the rules were passed and now special tax rates apply to ‘unearned income’ of children.

 

How does children’s tax work?

Any unmarried people under 18 years of age will be subject to the children’s tax of up to 45% on any unearned income each financial year.

The first $416 of income is exempt, but a rate of 66% applies to the next $891. When income reaches $1307, the 45% rate applies and is levied on the total amount of income, including the first $416. By applying a rate of 66% to amounts between $417 and $1307, the maximum overall rate a child will pay is 45%. This is the same as the highest-earning adult taxpayers. So there’s no benefit to mum & dad transferring large amounts to their kids, but at the same time it hardly encourages children to save.

These special rates only apply to unearned income – this excludes any income made from personal exertion (for example from doing a paper round or other part-time work), but includes interest on gifts given to children.

Any income earned through work is taxed at normal adult rates, and any interest or dividends received on money earned in this way by the child will also be subject to normal adult tax rules. This means a child could potentially earn money (including interest on any ‘earned savings’) of up to $20,542 a year without having to pay tax, if the low tax offset is also applied.

If a person under 18 is married or in full-time employment, children’s tax rules don’t apply. Children may also be except in some other special cases which include legacies, genuine lottery wins, special funds resulting from a divorce settlement.

It doesn’t help that most fund managers are unwilling to accept direct applications from minors for fear of potential legal ramifications. If, for instance, there was a market crash and the child lost most or all of their initial investment, they could argue that they were unable to fully understand what they were signing up for and could ask for a refund.

When it comes to shares, stockbrokers are usually prepared to buy shares in the names of children, but some companies will not allow ownership by people under 18.

Of course you could always open a bank account for your child, but when the bank pays interest of next to nothing while charging annual fees, you may find your child’s balance being eaten away at rather than added to.

With bank accounts offering no real incentive and nobody else willing to take the money, there are three remaining choices for parents wanting to minimise tax for their children: establish a trust, invest in insurance bonds that won’t necessarily generate an annual taxable income for anybody involved, or simply invest your child’s money in your own name if it will be subject to lower tax rates.

Does anyone else appreciate the irony of this final option?

 

Children’s tax in short:

  • In order to stop parents from investing in their children’s names and avoid paying tax, the government introduced children’s tax laws
  • Tax is applied to any ‘unearned income’ – this includes interest earned on gifts
  • The first $416 of unearned income is tax-free, then a rate of 66% is applied to the next $891. After $1307 a flat rate of 45% is applied to all unearned income
  • Money earned through exertion is taxed at normal adult rates, as is any interest subsequently accrued on that amount
  • Bank accounts, funds and shareholdings all present difficulties for children
  • Parents should consider establishing a trust, investing in insurance bonds or investing their child’s money in their own name