Superannuation changes from July 1, 2022

From July 1, 2022 employees can be eligible for Super Guarantee (SG), regardless of how much they earn. This is because the $450 per month eligibility threshold for when SG is paid is being removed. You only need to pay super for workers under 18 when they work more than 30 hours in a week.

The SG rate will also increase from 10% to 10.5% on July 1, 2022. You’ll need to use the new rate to calculate super on payments you make to employees on or after 1 July, even if some or all of the pay period is for work done before 1 July. The SG rate is legislated to increase to 12% by 2025.

Make sure you update your payroll and accounting systems so that you continue to pay the right amount of super for your employees.

What attracts ATO’s attention to high-net-worth individuals

The ATO has updated their website with information about the behaviours, characteristics and tax issues of privately owned and wealthy groups that may attract their attention.

This includes information about:

• taxpayers who avoid or delay paying taxes by not lodging their tax returns when required, or fail to report all of their income. Improved data matching processes better detect undeclared or disguised income (including foreign income)
• taxpayers who provide incomplete information or fail to disclose their interest in foreign entities or incorrectly report foreign income
• incorrectly claimed tax exemptions, treaty relief, transfer pricing benefits or economic stimulus measures
• arrangements that mischaracterise transactions or incorrectly calculate turnover or income to obtain a tax benefit.

Keeping business safe with eInvoicing

Every year Australian businesses fall victim to sophisticated false billing scams and fraud executed via email. According to the ACCC’s Scam Watch, Australian businesses lost nearly $128 million to business email compromise scams in 2020.

Electronic invoicing (eInvoicing) is the new, standardised way to send and receive invoices through your software. Peppol is the common eInvoicing standard in Australia, with the Peppol network providing a more secure channel to exchange invoices.

By shifting to eInvoicing, businesses can reduce the risk posed by emailing invoices and at the same time secure their cash and ability to fulfil their reporting obligations.

eInvoicing can help keep your business safe by:

• using a channel that offers stronger security controls than email, such as encryption
• reducing the risks of fake, unsolicited or compromised invoices and other false billing scams
• exchanging eInvoices through the network of approved service providers, called access points, who implement security controls to prevent, detect and mitigate the risk of invoice fraud
• using your trading partners’ ABNs, which are validated, to ensure invoices are sent to legitimate businesses
• preventing lost or delayed invoices.

The ATO manages the Peppol standard and network in Australia but they have no access or visibility of eInvoices transmitted via the Peppol network.

The security benefits of eInvoicing over traditional printed or PDF email invoices not only help protect your business from external threats but also offer an added layer of security to your internal checks and controls.

With more Australian businesses choosing eInvoicing every day, and businesses in 40 countries around the world also connected to the network, it’s a good time to give eInvoicing a go.

Talk to your trusted business advisers and software providers about how to get started.

COVID-19 tests are not subject to FBT

Following the 2022-23 Federal Budget, the Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022 now allows an income tax deduction for COVID-19 tests undertaken by employees before attending their place of work. This facilitates the removal of FBT for employers providing COVID-19 tests to employees through the ‘otherwise deductible’ rule provided conditions are met, and documentation requirements are satisfied. The new measures will apply with effect from 1.7.2021.

YEAR-END TAX PLANNING TIPS 2021-22 FOR SMALL BUSINESSES

While many of us have struggled due to COVID-19, tax minimisation is still very important.

Overview

The Fringe Benefits Tax (FBT) year ended on 31.3.2022. If you operate through a company or trust, carefully consider whether all FBT matters have been attended to and whether FBT return needs to be lodged. The most common fringe benefit supplied to staff is a motor vehicle benefit. In a small business audit, the two main areas of ATO focus are fringe benefits and Division 7A loans – see below.

Also carefully consider the effect COVID-19 has had on the calculation of the taxable fringe benefits, in particular motor vehicle and car parking fringe benefits. Carefully consider what has transpired over the year and do not pay any more FBT than you need to.

Check eligibility for the small business tax regime

Small businesses (sole traders, partnerships, companies, and/or trusts with a turnover of less than $10 million) may be eligible for a range of tax benefits including the instant asset write-off a 25 per cent company tax rate, simplified depreciation, capital gains tax concessions (turnover less than $2 million) and accounting on a cash basis.

Review salary sacrifice arrangements

Employees can consider salary sacrifice arrangements under which their gross salary may be foregone to obtain either packaged car for FBT purposes, or they can make additional superannuation contributions.

We note that the option for employees to make tax-deductible superannuation contributions themselves became law on 29.11.2016 and took effect from 1.7.2017.

Make trust resolutions by June 30

Trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2021-2022 financial year by 30 June.

In the event, a valid distribution is not made then a default beneficiary may be assessable. If there are no default beneficiaries, then the trustee will be assessable at the highest marginal rate.

Seeking professional advice when starting a business

Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the year those expenses are incurred rather than deducted over a five-year period as was the case prior to 1.7.2015.

Small business restructure rollover relief

Since 1.7.2016, small businesses have been able to change the legal structure of their business without incurring any income tax liability when active assets are transferred from one entity to another. This rollover applies to active assets and depreciating assets used or held ready for use, in the course of carrying on a business. Seek professional advice. 

Stream trust capital gains and franked dividends

Trustees of discretionary trusts may be able to stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts, the trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

It may be necessary to make a family trust election for this to be effective.

Private company loans

Income Tax law can potentially treat a payment or loan by a private company to a shareholder or an associate as an unfranked deemed dividend unless an exemption applies.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.

Prior to 30 June, you should carefully review such debit loans on the company’s balance sheet.

Prevent deemed dividends in respect of unpaid trust distributions

An unpaid distribution owed by a trust to a related private company beneficiary that arises from 1.7.2017 will be treated as a loan by the company if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution in 2019-2020 and prior.

However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2021-2022 income tax return needs to be lodged. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied. These rules are complex and professional advice should be sought.

Write-off bad debts

Businesses can only obtain income tax deductions for bad debts, if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as a bad debt in the accounts no deduction will be available. The debt must also be unrecoverable and written off in the accounts as bad prior to 30 June. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business.

This is particularly relevant for small business entities that use cash accounting (not accruals) when reporting revenue for taxation purposes.

Year-End “Tax Effective” Investment Products

Proceed with caution and make sure you get independent professional advice.

Other business deductions

Defer Income

• Cash or accruals reporting – recognition of income on a receipt’s basis will generally defer the point of derivation.
• Review service contacts – do the terms of the contract mean income can be recognised periodically when the services are performed?

Bonuses

Ensure all bonuses are determined and properly documented before year-end.

Depreciation

• Scrap obsolete items of plant and equipment.
• Utilise depreciation pools to their full extent; and

From 7.30 pm AEDT on 6.10.2020 until 30.6.2023, temporary full expensing allows a deduction for:

• The business portion of the cost of new eligible depreciation assets for businesses with an aggregated turnover under $5 billion or for corporate tax entities that satisfy the alternative test.
• The business portion of the cost of eligible second-hand assets for businesses with an aggregated turnover under $50 million.
• The balance of a small business pool at end of each income year in this period for businesses with an aggregated turnover under $10 million.

Trading Stock

Consider obsolete stock to write off and note closing stock can be valued at year end at a lesser cost, market value, or the replacement value.

Generally, an entity must perform a stock take to determine the physical quantity and value of each item at year-end.

Prepayment of Expenses

In some circumstances, small businesses (with a turnover of less than $10 million) should consider prepaying expenses prior to 30 June 2022. A tax deduction can be brought forward into this financial year for expenses like insurance premiums, subscriptions and memberships, travel advertising, and interest. A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2021 for services to be rendered within a 12-month period.

YEAR-END TAX PLANNING TIPS 2021-22 FOR INDIVIDUALS

In general, individual income is derived and deductions are incurred on a receipt basis. The following suggestions may reduce your current tax year liability.

Prepayment of deductible expenses

An individual can claim a deduction for prepaid expenditure for a period not exceeding 12 months. The most common types of prepayment include:

• Income protection insurance
• Interest on investment loans
• Interest on share portfolio loans
• Membership and subscriptions
• Investment property expenses
• Corporate Body levies
• Insurance
• Repairs and maintenance
• Rates

Before year-end, an individual should review the gains and losses on each asset within their investment portfolio. There may be opportunities to:

• Make sure assets have been held greater than 12 months before sale so the 50% discount can be applied to the gross capital gain – remember this is from “contract” to “contract” not a settlement.
• Realise capital losses to offset any capital gains that were made earlier in the income year.
• Defer realisation of capital gains until July.

Salary packaging arrangements

An effective salary sacrifice arrangement will reduce an individual’s marginal rate of tax.

The contractual arrangements should be documented or amended before year-end as an individual cannot make a retro perspective salary sacrifice arrangement for income already earned. A typical salary sacrifice arrangement may include the following components:

• Motor vehicle expense
• Additional superannuation contributions
• School fees

The top marginal tax rate is applied on income in excess of $180,000. With the “mark-up” factors, fringe benefits tax effectively applies the top marginal rate regardless of your income. However, for taxpayers not on the top marginal rate it is still possible to take advantage of FBT concessions.

2022 Contributions Caps:

• Concessional contributions (employer contributions) $27,500.
• Non-concessional contributions (personal contributions) $110,000 or 3-year limit of $330,000.
• Again, if you want to contribute more than $110,000 in non-concessional contributions contact your accountant as this involves a 3-year average and you need to be certain you are eligible.

Note that there is no tax deduction for the non-concessional contribution.

Salary sacrifice bonus into superannuation

You may be able to optimise your tax position by salary sacrificing any prospective end-of-year bonus into super. Seek advice to ensure it is tax effective and that the contributions caps are not breached.

Superannuation – Income

Individuals aged over 60 and retired are generally not taxed on any payments from a superannuation fund. Individuals aged between 55 and 60 will generally be taxed concessionally.

Superannuation – Rebate

A rebate up to $540 is available for superannuation contributions made during the 2022 year for your spouse where your spouse’s income is less than $37,000 p.a. (this rebate reduces for income amounts up to $40,000 p.a.).

The age limits for spouse contribution were increased from 69 to 75 years from 1.7.2020.

Superannuation – Government co-contributions

The maximum co-contribution amount that you received is $500, based on an after-tax contribution of $1,000 (i.e., for every $1 contribution made, the government contributes $0.50). This is reduced by 3.33 cents for each $1 of income over $41,112 p.a. up to $56,112 p.a. As there are also other qualifying criteria, you should contact your accountant if you wish to access this benefit in 2022.

Eligibility for super concessional contributions

The 2021-2022 financial year is the fourth year when carrying forward provisions come into effect, where you can carry forward unused contributions for five consecutive years.

To be eligible, your Total Superannuation Balance (TSB) must be less than $500,000 at 30 June of the previous year. This is assessed in June of the prior year for each year in the rolling five-year period in which you intend to use the unused cap.

This strategy can be used for taxpayers expecting to have higher taxable income in an income year and would like to reduce the tax liability they have to pay, whether it is for work bonuses, large capital gains, retirement payouts, or large trust distributions.

Individuals aged 65 to 74 who meet the work test (and TSB test) will also be eligible to access the catch-up concessional contributions.

Transition to retirement income streams

If you are 55 or older on 30 June 2022, you may be eligible to commence a “Transition to retirement” pension. Benefits may include:

• Receiving pension income while still working.
• Ability to salary sacrifice to superannuation to access lower tax rates; and
• Concessional tax treatment within your super fund.

Note that up to 30.6.2017, the income from assets supporting a transition to retirement income stream was tax-exempt. Since 1.7.2017 this exemption no longer applies.

Medicare Levy Surcharge (MLS) and Private Health Insurance Rebate (PHIR)

The threshold for the imposition of the MLS (If not covered by private hospital insurance) is broadly as follows:

• Singles (no dependants) – $90,000 pa; and
• Families – $180,000 pa (plus $,500 for each dependent child after the first)

There are a number of income amounts such as reportable fringe benefits, reportable superannuation contributions, and investment losses counted in calculating these thresholds.

Further, there is a “tiered” system for calculating MLS in the 2022 income year. The rate of the rebate will be between 1% and 1.5% depending on the extent to which income exceeds the relevant threshold.

In addition, PHIR is also means-tested in the 2022 income year under a “tiered” system. The rate of the rebate will be between 0% and 30% depending on income levels. This means some taxpayers who have claimed a full 30% rebate from their health insurance provider on their premiums will have an additional liability upon lodgement of their return.

ATO Recovery from Higher Education Loan Program and Trade Support Loan Debt

The Higher Education Loan Program (HELP) and Trade Support Loan (TSL) repayment rules to debtors who reside overseas have been extended by assessing their repayment obligations on their worldwide income. Repayment obligations commenced from July 2017.

Since January 2016, HELP and TSL debtors who are going overseas for more than 6 months were required to register with the ATO. Debtors already living overseas are expected to register.

Incur expenses before year-end

Expenses that are incurred before year-end can reduce taxable income. Consider forthcoming liabilities and the value in incurring them before year-end.

If you have rental property, consider whether you are maximising claims for capital works deductions on the property. A report from a quantity surveyor or suitably qualified specialist will maximise your entitlements.

Pay income protection insurance premiums before year-end.

Motor vehicle expenses

There are now only two methods that can be used to claim a deduction for motor vehicle expenses. There are:

• The cents per km method (for up to 5,000 business kilometres travelled); and
• The logbook method (logbook kept over 12 weeks and updated every 5 years)

For the year ended 30 June 2022, the single rate of deduction determined by the Commissioner is 72 cents per kilometre. Detailed records assist in maximising deductions.

Zone tax offset

Since 1 July 2015, the zone tax offset has been limited to those taxpayers whose usual place of residence is within the designated zones. The zone tax offset is a concessional tax offset available to individuals against their income tax liability in recognition of the isolation, extreme climate, and high cost of living associated with living in designated zones.

This means “fly-in-fly-out” and “drive-in-drive-out” employees, whose usual place of residence is located outside of the zone, are ineligible to claim the zone tax offset for the 2016 income year and later income years.

Claiming Travel Allowance Deductions

An audit focus by the ATO continues on travel allowance expenses being claimed by individual taxpayers. If you intend to use the exception for retaining substantiation of these claims the following must apply:

• You must be receiving a bona fide travel allowance from your employer.
• You must be working away from home (on overnight stays) in the course of performing employment duties.
• You must calculate the claim correctly for your salary level and location of work; and
• You must be able to show that you are incurring travel expenses.

ATO Data Matching

The ATO’s extensive data matching capabilities are based on the information it receives from various sources including banks, share registers, employers, government agencies, and via its network of global information exchange agreements.

In terms of focus areas for compliance activities, the ATO continues to closely monitor:

• Claims for work-related expenses are usually high relatively close to others across comparable industries and occupations.
• Excessive rental property expenses.
• Non-commercial rental income received for holiday homes.
• Interest deductions claimed for the private proportions of loans; and
• People who have registered for GST but are not actively carrying on a business.

In 2022 an area of ATO focus is contractors not declaring income detectable under the Taxable Payments Reporting System (TPRS).

ATO DETERMINATIONS

False claims land swimming teacher in hot water – May 2022

A former swimming teacher has been sentenced to three years in jail for obtaining and attempting to obtain more than $250,000 in fraudulent GST refunds.

Ms Sasha Cordes lodged several original and amended business activity statements for her swim school business. In each case, she knowingly overstated the purchase amounts to obtain a financial advantage.

In total, $97,114 worth of fraudulent GST refunds were paid into her bank account. She also tried to obtain an extra $181,947 but the ATO stopped these refunds.

Ms Cordes will be released from jail after 15 months, on entering into a $1,000 recognisance on the requirement that she be of good behaviour for 2 years. She was also ordered to repay the full $97,114.

In sentencing, His Honour noted that the offending involved both deception and dishonesty and had been committed over an extended period.

As this case highlights, people who deliberately cheat the tax system will be caught and held to account.

XGPH v Commissioner of taxation [2022] AATA 567

In XGPH v Commissioner of Taxation [2022], AATA 567 expenses claimed by a therapeutic care worker and aspiring actor were only partially allowable as deductions. These expenses were:

• work-related car expenses. The taxpayer didn’t maintain documentation required under the logbook method and was therefore only entitled to the maximum allowable deduction of AUD 3,400 under the cents per kilometre method
• rental expenses for an office space. Here the AAT found the office space was used equally for both work and non-work-related purposes meaning the taxpayer could reasonably deduct 50 per cent of the rental expense of the office space that he incurred in gaining or producing his assessable income
• phone expenses and internet expenses for which the AAT accepted the amount allowed as a deduction by the ATO in the absence of evidence from the taxpayer, and
• an audiobook and physical training expenses to prepare for a paid ballet role which the AAT accepted was an allowable deduction.

LONDON V Commissioner of taxation [2022] AATA 644

In this AAT case, the taxpayer claimed work-related deductions for his employment by Correctional Services as a dog handler (he was responsible for training and caring for the dogs after work hours) and as a member of the Emergency Response Group. Initially, the ATO disallowed the deductions.

It was held that:

• Gym membership fees were deductible as they were incurred to maintain the high fitness level required for his work and there was no evidence of a private purpose. This taxpayer could rely on the TR 95/13 which applies to police officers.
• Expenses directly relating to working and caring for dogs, as well as a waterproof jacket and waterproof boots, were allowed.
• Expenses not allowed included car expenses for trips to the gyms, mobile phone costs for checking emails and other clothing expenses due to a lack of nexus with earning assessable income.