Am I a Share Trader or Share Investor?

Am I A Share Trader or Share Investor?

This question am I a share trader or share investor, is one that has always been a contentious one.  Considering the use of the terms “investing” and “trading” are often interchangeably used but when it comes to how each of these are seen under the Taxation Laws, they are very different.

Let us first go through what is a share trader and a share investor, to highlight how they differ, and the different way income, expenses, profits and losses are dealt with under the Taxation Laws.

SHARE INVESTOR

A share investor is a person whom purchases shares to be held for the long term looking for either capital growth, dividend payments or both.

Treatment of income, expenses, profits and losses are as follows:

Dividends – Treated separately from share purchases and sales as assessable income in the financial year that the dividend is paid.

Profits – Calculated as net capital gain after deducting the cost of the share from the amount received from the sale.  This is captured under Capital Gains Tax which is separate from your normal assessable income.  For individuals who have held shares for longer than 12 months will receive a 50% discount on the gross capital gain, which is then included in your Tax Return as income in the year in which the share was sold.

Losses – As previously stated, the sale of shares fall under Capital Gains Tax, therefore a loss incurred on the sale of the shares become Capital Losses.  These are only available to offset current year gains or carried forward to future years if the year in which the loss occurred hasn’t been offset.

Expenses – Brokerage fees that are incurred upon purchasing or selling shares are not deductible against your other assessable income.  They form a part of the cost base of the share when purchasing and are subtracted against the proceeds from sale of a share.  Other expenses like interest on loans used to purchase shares or subscriptions can be deducted against your normal assessable income in the year in which they are incurred.

SHARE TRADER

A share trader is a person whom operates in the business of purchasing and selling shares for a profit, this is with a view of only holding shares for the short term.

Treatment of income, expenses, profits and losses are as follows:

Dividends – If a trader happens to hold a particular share for the required time frame and is paid a dividend, it is treated the same way as a share investor.  The dividend income will be separated and included in assessable income in the financial year that it is paid.

PROFITS

  • There are two elements to calculating profits, the purchase of shares and the sale of shares:
  • Purchase of Shares is seen as the purchase of trading stock as a share trader.  This means that if the share trader is still holding the stock at the end of the year, it needs to be accounted for as trading stock on hand and therefore no deduction of the cost is claimed.  Depending on how the trading stock is valued, a deduction can be possible for the unrealised loss of share where the market value at year-end is lower than purchased cost.
  • Sale of shares are included in assessable income in the year in which they are sold, the gross sale receipt is included.  The cost of the shares will be claimed as a deduction in the same year, if a share has been carried over from the previous year then the cost or value of the share as per the inventory method chosen will be deducted.

LOSSES

If a loss is made on the sale of a share unlike the share investor who can only offset it against other capital gains, a trader can possibly offset their other ordinary assessable income with the loss.  This is subject to the Non-Commercial Losses Rules.

EXPENSES

Brokerage, whether purchasing or selling shares can be claimed as a deduction in the year in which it is incurred.  As for other expenses such as Interest on Loans or Subscriptions, these can be deducted in the year in which they are incurred as well.

INVESTOR OR TRADER?

The key here is the intention of the person conducting the activities, if you are purchasing shares for the long term for capital growth and/or dividend income – it is clear that you are an investor.  To classify as a Trader is not quite as simple, here we need to establish if you are operating a business of buying and selling shares for a profit.

To assist in making this determination, we look to the indicators presented in Tax Ruling 97/11 which states:

● Whether the activity has a significant commercial purpose or character,

● Whether the taxpayer has more than an intention to engage in business,

● Whether a taxpayer has a purpose of profit as well as a prospect of profit from the activity,

● Whether there is repetition and regularity of the activity,

● Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

● Whether the activity is planned, organised and carried out in a business-like manner,

● The size, scale and permanency of the activity,

● Can the activity be better described as a hobby, a form of recreation or sporting activity?

To be classified as operating a business, a number of these indicators must be present as only relying on one will not be enough to satisfy the criteria.

A final note to be made is that it is also possible for you to be a Share Trader and Share Investor at the same time.  This is where a Share Trader purchases some shares for the long term for capital growth and/or dividends.  The person is required to determine by the end of the financial year as to whether the share should be classified as Trading Stock or as an Investment, this should then be reflected in the records of the business.

If you are unsure of how your activities are classified, please contact us for a consultation.

Christopher Coco – Director & Founder

Please note: due to the nature of the topic of this article where there is not a simple rule applied and the classification relies on the circumstances of each individuals case, this article does not provide advice for your specific situation.

Summary and Details of the Government Coronavirus Covid-19 Stimulus

Summary and Details of the Government Coronavirus COVID-19 Stimulus

Updated: 24/04/2020

With the government announcing so many stimulus measures over the past couple of weeks, we thought it was best to hold off releasing any of the information until now.  In this article we will provide a summary of the stimulus measures as they apply to individuals and business, and have detail of each of the measures beyond the summary. All of these measures have now been legislated through the parliament.

SUMMARY

Individuals

The Coronavirus Supplement – New six month supplement of $550 per fortnight paid to eligible Jobseeker (Newstart), Youth Allowance and Parenting Payment recipients with expansion of eligibility to works stood down or lose their employment.

Tax-free payments of $750 – Two payments of $750 tax-free payments to social security, veteran and other income support recipients and to eligible concession card holders. To be paid from 31 March 2020 for the first payment and from 13 July 2020 for the second payment.

Early access to superannuation benefits – New compassionate ground of release to access superannuation entitlements of up to $20,000 (up to $10,000 per release – before 1 July 2020 and after 1 July 2020.)  Available to the unemployed, those receiving payments from Centrelink and individuals who were made redundant or working hours reduced by at least 20% on or after 1 January 2020.

Reducing the minimum drawdown amounts for superannuation pensions – Minimum account-based pensions or similar drawdowns have been halved for the 2020 and 2021 years.

Reducing social security deeming rates – The upper deeming rate will be reduced from 3% to 2.25% and the lower deeming rate will be reduced from 1% to 0.25% from 1 May 2020.

Wages subsidies for apprentices and trainees – Under eligible employers, apprentices and trainees will have their wages subsidised equal to 50% of the wage for 9 months.  Maximum of $21,000 per eligible employee.

JobKeeper $1500 per Fortnight Payment – If you have been laid off by your employer or your employer’s business turnover has dropped by 30% or more (for under $1 billion turnover) or by 50% or more (for over $1 billion turnover) your employer may be eligible for the JobKeeper payment.  This is up to your employer to register for it.

Small Business

Boosting cash flow for employers –  For business with an annual turnover under $50 million and whom employ are eligible for credits against their ATO Account for the PAYG Withholding paid. The credits are split into two,  total minimum is $20,000 and maximum is $100,000.

Wages subsidies for apprentices and trainees – Employers with eligible apprentices and trainees will have their wages subsidised equal to 50% of the wage for 9 months.  Maximum of $21,000 per eligible employee.

Increasing the instant write-off threshold for business assets – Instant Asset Write Off has been increased to $150,000.  This includes small business (Less than $50million turnover) and medium business (less than $500million turnover) – for the period 12 March to 30 June 2020.  It also includes improvements to assets.

Accelerating depreciation deductions for new assets – For Small and Medium business for the time period 12 March 2020 to 30 June 2021, can deduct 50% of the cost of the asset plus the usual amount of depreciation.  This will really come into play post 30 June 2020 when the increased instant asset write off ceases.

JobKeeper Payment – Eligible employers will be able to claim a $1500 per fortnight subsidy per eligible employee where they have been forced to cease business or for businesses with turnover less than $1 Billion, where turnover has decreased by 30% or more or for businesses with turnover more than $1 Billion, where turnover has decreased by 50%.

Sole Traders / Self Employed

The Coronavirus Supplement – Where a sole trader or self employed person has had a decrease in turnover of 20% or more, they will be eligible for the $550 per fortnight coronavirus supplement from Centrelink.

Early access to superannuation benefits – Where a sole trader or self employed person has had a decrease in turnover of 20% or more, they will be eligible for the early access to super.

JobKeeper $1500 per Fortnight Payment – Where a sole trader or self employed person has had a decrease in turnover of 30% or more, they will be eligible for the $1500 per fortnight payment.  Subject to on-going reporting commitments.

Increasing the instant write-off threshold for business assets – Where a sole trader qualifies as a Small Business Entity, they will be eligible for the increased instant asset write off of up to $150,000 from 12 March 2020 to 30 June 2020.

Accelerating depreciation deductions for new assets – Where a sole trader qualifies as a Small Business Entity, they will be eligible for the accelerated depreciation where can deduct 50% of the asset plus the usual depreciation for the period 12 March 2020 to 30 June 2021.

DETAILS

Individuals

The Coronavirus Supplement

A new six-month ‘Coronavirus supplement’ of $550 per fortnight will be paid to individuals who are currently eligible for certain income support payments, including the Jobseeker Payment (Newstart), Youth Allowance and Parenting Payment (Partnered and Single).

This new (additional) supplement will be paid to eligible individuals as part of their existing income support payments (e.g., Jobseeker Payment and Youth Allowance). For the period that the Coronavirus supplement is paid, the Government will also expand access to certain income support payments (e.g.,the Jobseeker Payment, the Youth Allowance

Jobseeker and the Parenting Payment) for eligible individuals.  This will include permanent employees who are stood down or lose their employment, sole traders, self-employed, casual workers, and contract workers who meet the income tests, as a result of the economic downturn due to the Coronavirus. Additionally, asset testing for the Job Seeker Payment, the Youth Allowance Jobseeker and the Parenting Payment will be waived for the period of the Coronavirus supplement.  Income testing will still apply to the person’s other payments, consistent with current arrangements.

Tax-free payments of $750

The Government will be providing two separate $750 tax-free payments to social security, veteran and other income support recipients and to eligible concession card holders.

The first $750 payment will be available to individuals who are residing in Australia and are receiving an eligible Government payment, or are the holders of an eligible concession card, at any time from 12 March 2020 to 13 April 2020 (inclusive). This payment will be made automatically to eligible  individuals from 31 March 2020.

The second $750 payment will be available to individuals who are residing in Australia and are receiving one of the eligible Government payments or are the holders of one of the eligible concession cards on 10 July 2020 This payment will be made automatically to eligible individuals from 13 July 2020.

Each of the $750 payments will be exempt from income tax and will not count as income for the purposes of Social Security, the Farm Household Allowance and Veteran payments.

PLEASE NOTE: For those receiving an income support payment that qualifies them to receive the $550 fortnightly Coronavirus supplement, aren’t eligible to receive the two $750 payments.

Early access to superannuation benefits

The Government has introduced a new compassionate ground of release that will allow individuals to access their superannuation entitlements where those benefits are required to assist them to deal with the adverse economic effects of the Coronavirus, but only where one or more of the following requirements are satisfied:

The individual is unemployed, The individual is eligible to receive the Jobseeker Payment, Youth Allowance for jobseekers, Parenting Payment (which includes the single and partnered payments), Special Benefit or Farm Household Allowance. On or after 1 January 2020 either:

– the individual was made redundant; or

– the individual’s working hours were reduced by at least 20%; or

– if the individual is a sole trader – their business was suspended or there was a reduction in the business’s turnover of at least 20%. 

Under this new compassionate ground of release, eligible individuals will be able to access (as a lump sum) up to $10,000 of their superannuation entitlements before 1 July 2020, and a further $10,000 from 1 July 2020 (subject to a six-month time frame).

Eligible individuals who are looking to access their superannuation entitlements under the above new ground of release will be able to apply directly to the ATO through the myGov website (at www.my.gov.au) and certify that the relevant eligibility criteria is satisfied.

Please Note: The lump sum withdrawal/s from superannuation under this ground of release will not be taxable, so it is a tax-free payment/s.  It will also not affect other payments being received under Centrelink or Veteran’s Affairs.

Reducing the minimum drawdown amounts for superannuation pensions

The Government will be temporarily reducing the superannuation minimum drawdown amounts for account-based pensions and similar products by 50% for the 2020 and 2021 income years.

Reducing social security deeming rates

From 1 May 2020, the Government will be reducing both the upper and lower social security deeming rates by a further 0.25 percentage points. This is in addition to the recent 0.5 percentage point reduction, resulting in an overall reduction to the social security deeming rates of 0.75 percentage points. On this basis, as of 1 May 2020, the upper deeming rate will be reduced from 3% to 2.25%, and the lower deeming rate will be reduced from 1% to 0.25%.

JobKeeper $1500 per Fortnight Payment

Employees of eligible employers and eligible sole traders/self employed may be eligible to receive the JobKeeper payment of $1500 per fortnight for 6 months.  As it is the employer, sole trader or self employed individual who is required to register for this, please see the Small Business section of this article.

Small Business (Including Sole Traders & Self Employed)

Boosting cash flow for employers

Small and medium-sized businesses and not-for-profit entities, with an aggregated annual turnover of less than $50 million (usually based on their prior year’s turnover) that employ people, are eligible to receive a total payment (in the form of a refundable credit) of up to $100,000 (with a minimum total payment of $20,000), based on their PAYG withholding obligations in two stages:

Stage 1 payment (credit)

Commencing with the lodgement of activity statements from 28 April 2020, eligible employers that withhold PAYG tax on their employees’ salary and wages will receive a tax-free payment equal to 100% of the amount withheld, up to a maximum of $50,000.  Eligible employers that pay salary and wages will receive a minimum (tax-free) payment of $10,000, even if they are not required to withhold PAYG tax.

The tax-free payment will broadly be calculated and paid by the ATO as an automatic credit to an employer, upon the lodgement of activity statements from 28 April 2020, with any resulting refund being paid to the employer.  This means that:

  • quarterly lodgers will be eligible to receive the payment for the quarters ending March 2020 and June 2020; and
  • monthly lodgers will be eligible to receive the payment for the March 2020, April 2020, May 2020 and June 2020 lodgements. 

Note that, the minimum payment of $10,000 will be applied to an entity’s first activity statement lodgement (whether for the month of March or the March quarter) from 28 April 2020.

Stage 2 payment (credit)

For employers that continue to be active, an additional (tax-free) payment will be available in respect of the June to October 2020 period, basically as follows:

  • Quarterly lodgers will be eligible to receive the additional payment for the quarters ending  June 2020 and September 2020, with each payment being equal to 50% of their total initial (or Stage 1) payment (up to a maximum of $50,000). 
  • Monthly lodgers will be eligible to receive the additional payment for the June 2020, July 2020, August 2020 and September 2020 activity statement lodgements, with each additional payment being equal to a quarter of their total initial (or Stage 1) payment (up to a maximum of $50,000).

Again, the ATO will automatically calculate and pay the additional (tax-free) payment as a credit to an employer upon the lodgement of their activity statements from July 2020, with any resulting refund being paid to the employer.

Wages subsidies for apprentices and trainees

Employers with less than 20 full-time employees, who retain an apprentice or trainee (who was in training with the employer as of 1 March 2020) are entitled to Government funded wage subsidies.

These will be equal to 50% of the apprentice’s or trainee’s wage paid during the nine months from 1 January 2020 to 30 September 2020.  The maximum wage subsidy over the nine-month period will be $21,000 per eligible apprentice or trainee.  

Employers can register for the subsidy from early April 2020.

Increasing the instant write-off threshold for business assets

Broadly, the depreciating asset instant asset write off threshold will be increased from $30,000 (for Businesses with an aggregated turnover of less than $50 million) to $150,000 (for businesses with an aggregated turnover of less than $500 million) until 30 June 2020. 

The measure applies to both new and secondhand assets first used or installed ready for use in the period beginning on 12 March 2020 and ending on 30 June 2020.

Small Business Entities (‘SBEs’)

SBEs will be able to claim an immediate deduction for depreciating assets that cost less than $150,000 provided the relevant asset is first acquired at or after 7.30 pm on 12 May 2015, by legal time in the ACT, and first used or installed ready for use on or after 12 March 2020, but before 1 July 2020.

Additionally, SBEs will also be able to claim an immediate deduction for the following:

  • Improvements to a depreciating asset that was first used or installed ready for use in a previous income year.  The amount of the improvement cost must be less than $150,000 and the cost must be incurred on or after 12 March 2020, but before 1 July 2020.
  • If the balance of an entity’s general small business pool (excluding current year depreciation) is less than $150,000 at the end of the 2020 income year, a deduction can be claimed for this balance.

Medium Business Entities (‘MBEs’)

MBEs can immediately deduct the cost of an asset in an income year if the asset has a cost of less than $150,000 and it was first acquired in the period beginning at 7:30 pm, by legal time in the ACT, on 2 April 2019 and ending on 30 June 2020, and the taxpayer starts to use or have the asset installed ready for use for a taxable purpose in the period beginning on 12 March 2020 and ending on 30 June 2020.

Additionally, MBEs can also claim a deduction for improvements to a depreciating asset, where the amount of the improvement cost is less than $150,000 and is incurred on or after 12 March 2020 but before 1 July 2020.

Please Note: The threshold will generally be applied to the GST exclusive cost of an eligible asset (i.e., assuming the relevant business is entitled to an input tax credit for any GST included in the acquisition cost). Importantly, this increased threshold also continues to operate on a ‘per asset’ basis, which means that eligible businesses can immediately write-off multiple assets (as long as each of the assets individually satisfy the relevant eligibility criteria).

Accelerating depreciation deductions for new assets

Broadly, a new time-limited 15-month investment incentive (available for eligible assets acquired from 12 March 2020 up until 30 June 2021) will also be introduced to accelerate certain depreciation deductions for businesses with an aggregated turnover below $500 million.

The amount that an eligible entity can deduct in the income year in which an eligible depreciating asset is first used or installed ready for use is

  • 50% of the cost (or adjustable value where applicable) of the asset; and
  • the amount of the usual depreciation deduction that would otherwise apply (if it were calculated on the remaining cost of the asset).

Different rules will apply where an SBE is using the general small business pool (i.e., for assets not qualifying for the instant asset write-off).  In this case, an SBE may deduct an amount equal to 57.5% (rather than 15%) of the business-use portion of the cost of an eligible depreciating asset in the year is it allocated to the pool. 

Unless specifically excluded, an eligible asset is a new asset that can be depreciated under Division 40 of the ITAA 1997 (i.e., plant and equipment and specified intangible assets, such as patents), where the asset satisfies all of the following conditions:

  • The asset is new and has not previously been held (and used or installed ready for use) by another entity (other than as trading stock or for testing and trialing purposes).
  • No entity has claimed depreciation deductions (including under the instant asset write-off) in respect of the asset.
  • The asset is first held, and first used or installed ready for use, for a taxable purpose, between 12 March 2020 and 30 June 2021 (inclusive).

Note that a depreciating asset is not an eligible asset where a commitment to acquire or construct the asset was entered into before 12 March 2020.

JobKeeper Payment

The JobKeeper payment is a subsidy that will be paid through the tax system (i.e., by applying to the ATO) to eligible employers (and self-employed individuals) impacted by the Coronavirus.  

Eligible employers will be able to claim a subsidy of $1,500 per fortnight, per eligible employee, from 30 March 2020 (with payments commencing from the first week of May 2020), for a maximum period of six months. This subsidy will be paid by the ATO monthly in arrears and will ensure that an eligible employee receives a gross payment (i.e., before tax) of at least $1,500 per fortnight.

Self-employed individuals (i.e., businesses without employees) can also qualify to receive the JobKeeper Payment.

Employers will be eligible for the JobKeeper subsidy where:

• for a business with a turnover of less than $1 billion – its turnover will be reduced by more than 30% relative to a comparable period a year ago (of at least a month); or

• for a business with a turnover of $1 billion or more – its turnover will be reduced by more than 50% relative to a comparable period a year ago (of at least a month); and

• the business is not subject to the Major Bank Levy.

Self-employed individuals (i.e., businesses without employees) and not-for-profit entities (including charities) that satisfy the above requirements will be eligible to apply for the JobKeeper Payment.

Before an eligible employer can claim the JobKeeper payment in respect of an employee (‘eligible employee’), the employee must satisfy the following requirements:

• The employee is currently employed by the employer (which includes an employee who has been stood down or re-hired after they had already lost their job).

• The employee was employed by the employer as at 1 March 2020. 

• The employee is a full-time or part-time employee, or a long-term casual employee who has been employed by the employer on a regular basis for longer than 12 months at 1 March 2020.

• The employee is at least 16 years of age.

• The employee is an Australian citizen, or the holder of a permanent visa, a Protected Special Category Visa Holder, a non-protected Special Category Visa Holder who has been residing continually in Australia for 10 years or more, or a Special Category (Subclass 444) Visa Holder

• The employee is not in receipt of a JobKeeper Payment from another employer.

Note: Employees who have multiple employers will need to notify their primary employer to claim the JobKeeper Payment on their behalf, as only one employer will be eligible to receive the payment. In most cases, the claiming of the tax-free threshold will be sufficient notification that an employer is the employee’s primary employer. 

Initially, businesses can start to register their interest in applying for the JobKeeper payment from 30 March 2020, on the ATO’s website at www.ato.gov.au.  The first payments under this measure are expected to be made to an eligible business from the first week of May 2020. 

Eligible employers that apply for the JobKeeper Payment (i.e., via an online application) will need to provide supporting information demonstrating a downturn in their business, and must report the number of eligible employees employed by the business on a monthly basis.

Businesses without employees (e.g., self-employed individuals) will need to provide an ABN for the business, nominate an individual to receive the JobKeeper payment and provide that individual’s Tax File Number, as well as provide a declaration on the recent business activity (presumably, to demonstrate the downturn in the business).  These businesses will also need to provide a monthly update to the ATO in order to declare their continued eligibility for the JobKeeper Payment.

The underlying purpose of the JobKeeper Payment is to ensure that eligible workers (including eligible employees) are paid a gross minimum amount of $1,500 per fortnight.  In particular, for eligible employers who receive the JobKeeper Payment for an eligible employee, the employee will receive this payment basically as follows:

(a) If the employee ordinarily receives at least $1,500 in gross salary income per fortnight, they will continue to receive their regular income according to their prevailing workplace arrangements.  In this case, the JobKeeper Payment will effectively subsidise part or all of the employee’s gross fortnightly salary income. 

(b) If the employee ordinarily receives less than $1,500 in gross salary income per fortnight, their employer must pay the employee a minimum gross fortnightly salary income of $1,500 under the JobKeeper Payment scheme.

(c) If an employee has been stood down, their employer must pay the employee a minimum gross fortnightly salary income of $1,500 under the JobKeeper Payment scheme.

(d) If an employee was employed on 1 March 2020, has subsequently ceased employment with their employer, and then has been re-engaged by the same employer, the employee will receive a minimum gross fortnightly salary of $1,500 under the JobKeeper payment scheme.

Please Note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Coronavirus Working From Home Shortcut Method from the ATO

Coronavirus Working From Home Shortcut Method from the ATO

The Australian Taxation Office (‘ATO’) has announced a temporary simplified short cut method to make it easier for individual taxpayers to claim deductions for additional running expenses incurred (e.g.,additional heating, cooling and lighting costs), as a result of working from home due to the Coronavirus pandemic.  Refer to the ATO’s Media Release of 7 April 2020.

Based on the announcement, the ATO will allow individuals to claim a deduction for all running expenses incurred during the period 1 March 2020 to 30 June 2020, based on a rate of 80 cents for each hour an individual carries out genuine work duties from home.  This is an alternative method to claiming home running expenses under existing arrangements, which generally require an analysis of specific running expenses incurred and more onerous record-keeping.

ATO’s 80 cents per hour method covers all running costs

The 80 cents per hour method is designed to cover all deductible running expenses associated with working from home and incurred from 1 March 2020 to 30 June 2020, including the following:

• Electricity expenses associated with heating, cooling and lighting the area at home which is being used for work.  

• Cleaning costs for a dedicated work area.

• Phone and internet expenses.

• Computer consumables (e.g., printer paper and ink) and stationery. 

• Depreciation of home office furniture and furnishings (e.g., an office desk and a chair).

• Depreciation of home office equipment (e.g., a computer and a printer).

This means that, under the 80 cents per hour method, separate claims cannot be made for any of the above running expenses (including depreciation of work-related furniture and equipment).  As a result, using the 80 cents per hour method could result in a claim for running expenses being lower than a claim under existing arrangements (including the existing 52 cents per hour method for certain running expenses).

Furthermore, according to the ATO’s announcement, under the 80 cents per hour method:

(a) there is no requirement to have a separate or dedicated area at home set aside for working (e.g.,

a private study);

(b) multiple people living in the same house could claim under this method (e.g., a couple living

together could each individually claim running expenses they have incurred while genuinely working

from home, based on the 80 cents per hour method); and

(c) an individual will only be required to keep a record of the number of hours worked from home

as a result of the Coronavirus, during the above period.  This record can include time sheets, diary

entries/notes or even rosters.

Working from home running expenses that are incurred before 1 March 2020 (and/or incurred from this date where an individual does not use the 80 cents per hour method) must be claimed using existing claim arrangements.  Broadly, these existing claim arrangements require:

• an analysis of specific running expenses incurred as a result of working from home; and

• more onerous record-keeping (e.g., the requirement to provide receipts and similar documents for expenses being claimed, as well as the requirement to maintain a time usage diary or similar record to show how often a home work area was used during the year for work purposes). 

Source: NTAA & ATO

Working From Home – All You Need To Know To Claim Your Maximum Deduction

Working From Home – All You Need To Know To Claim Your Maximum Deduction

Coronavirus has forced a lot of workers whom either never worked from home or only did a few hours of work from home to now be working full time at home.  This does mean increased costs to employees and business owners as a consequence of working from home.  Here’s what you need to know to maximise your tax deduction, we will split it up as it applies to employees and business owners.

Employees

You may be able to claim Running expenses, Occupancy expenses, Phone and internet expenses, Decline in Value of Computer and Tech Items and Decline in Value of Office Furniture.

There are three ways to determine which of these expenses you can claim:

1. Home is your principal place of work and you have a dedicated work area that is unlikely to be suitable for domestic use.

2. Home is not your principal place of work but you have a dedicated work area – for example a study.

3. You work at home but you don’t have a dedicated work area – for example, you use a room with a dual purpose such as a lounge room.

The Table below summarises what expenses you may be able to claim for each of the three situations mentioned above.

Running expenses

If you work from home, you can claim the work-related proportion of your running expenses. These include:

·         heating, cooling, and lighting

·         the costs of repairs to your home office equipment, furniture and furnishings

·         cleaning costs

·         other running expenses including computer consumables (for example, printer paper and ink) and stationery.

·         Only the additional running expenses you incur as a result of working from home are deductible

Calculating running expenses

There are two ways to calculate your running expenses:

1.       you can claim a fixed rate of 52 cents per hour

2.      you can calculate your actual expenses.

1. Fixed rate

You can claim a deduction of 52 cents for each hour you work from home instead of recording all of your actual expenses for heating, cooling, lighting, cleaning and the decline in value of furniture.

This rate is based on average energy costs and the value of common furniture items used in home business areas.

To claim using this method, keep records of either:

–          your actual hours spent working at home for the year

–          a diary for a representative four-week period to show your usual pattern of working at home.

You can then apply the four-week representative period across the remainder of the year to determine your full deduction amount. However, if your work pattern changes you will need to create a new record.

You need to separately work out all other home work area expenses, such as phone and internet expenses, computer consumables and stationery, decline in value on computers or other equipment.

 NOTE: The ATO has announcement a new shortcut method for those who are only working at home due to the coronavirus. Check out our blog article about it here: https://cocomoadvisory.com.au/working-from-home-all-you-need-to-know-to-claim-your-maximum-deduction/

2. Actual expenses

If you have a dedicated work area, you can claim additional running costs and the decline in value of office furniture used in the area for work purposes.

To calculate actual expenses for your dedicated work area, you can:

–          keep a record of the number of actual hours you work from home during the income year

–          keep a diary for a representative four-week period to show your usual pattern of working at home

–          work out the decline in value of depreciating assets and

o   keep receipts showing the amount you spent on the assets

o   work out the percentage of the year you used those depreciating assets exclusively for work  you can claim a deduction for the proportion of the decline in value that reflects your work-related use of the depreciating assets

–          work out the cost of your cleaning expenses by adding together your receipts and multiply it by the floor area of your dedicated work area (floor area of the dedicated work area divided by the whole area of the house as a percentage) – your claim should be apportioned for any

o   private use of your home office

o   use of the home office by other family members

–          work out the cost of your heating, cooling and lighting by working out the following

o   the cost per unit of power used – refer to your utility bill for this information

o   the average units used per hour – this is the power consumption per kilowatt hour for each appliance, equipment or light used

o   the total annual hours used for work-related purposes – refer to your record of hours worked or your diary for this information.

You must also take into account if any other members of your household use the home office and, if so, apportion your expenses accordingly.

If you don’t have a dedicated work area, you should work out the actual cost of your heating, cooling and electricity expenses. You can do this by working out the cost of running each unit you used per hour and multiplying that by the hours you worked from home. The amount of the additional expense is generally small, especially if there are other people using the area at the same time you are working. In those circumstances, there is no additional cost for lighting, heating or cooling.

Decline in Value

home office equipment including computers, printers, telephones and furniture and furnishings. You can claim the

–          full cost for items up to $300

–          decline in value for items over $300

To claim a deduction for an asset that cost $300 or more, you need to calculate the decline in value for both the period you:

–          owned the assets during the income year

–          used the assets for work-related purposes.

You can use the depreciation and capital allowances tool to calculate your deduction for the decline in value of equipment, furniture and furnishings that cost more than $300, use the depreciation and capital allowances tool to work this out.

Occupancy expenses

Employees are generally not able to claim occupancy expenses. Occupancy expenses include:

–          Rent

–          mortgage interest

–          property insurance

–          land taxes

–          rates.

You can only claim the work-related proportion of your occupancy expenses in two very limited circumstances where:

–          the space in the home is a place of business, and not suitable for domestic use – for example, a doctor or dentist surgery or a hairdresser studio in the home

–          no other work location is provided to an employee by an employer and the employee is required to dedicate part of their home to their employer’s business as an office – you can claim the portion of these costs that relate to a clearly identified place of business.

If you claim occupancy expenses, you don’t qualify for the capital gains tax (CGT) main residence exemption for the part of your home that you use for work. If you use your home as a place of business there may be CGT implications when you sell it.

Calculating occupancy expenses

If you are eligible to claim occupancy expenses, you can work them out by calculating the:

Total expenses × floor area × percentage of year that part of your home was used exclusively for work

If the area you use for work takes up 15% of your home and you used it for work for the whole of the year, you can claim 15% of your occupancy expenses.

Phone and internet expenses

You can claim a deduction for the work-related proportion of your phone and internet expenses. You must have paid for these costs and have records to support your claims.

There are two ways to calculate your phone and internet expenses:

1.       you can claim up to $50 with limited documents

2.      you can calculate your actual expenses.

You need to keep records for a four-week representative period in each income year to claim a deduction of more than $50. These records include phone and internet bills.

1. Claim up to $50

If your work use is incidental and you are not claiming a deduction of more than $50 in total, you may make a claim based on the following, without having to analyse your bills. The rates you can use to work out the cost for your work calls are:

–          25 cents for calls made from your landline

–          75 cents for calls made from your mobile

–          10 cents for text messages sent from your mobile.

2. Actual expenses

If you have a phone or internet plan where you received an itemised bill, you need to determine your percentage of work use over a four-week representative period. You can then apply this to the full year.

You need to work out the percentage using a reasonable basis. This could include:

–          the number of work calls made as a percentage of total calls

–          the amount of time spent on work calls as a percentage of your total calls

–          the time you spent, or data used for work purposes compared to your private usage and that of all members of your household.

If you have a bundled plan, you need to:

–          apportion the cost of the plan between the services provided

–          identify your work use for each service over a four-week representative period during the income year, which can then be applied to the whole year.

The same method should be used for non-itemised plans.

Records you must keep

If you’re an employee who works from home, you must keep records such as:

–          diary entries for a representative four-week period to show your usual pattern of working at home that show

you worked from home and made work-related phone calls

how you work out how much you used your equipment, home office and phone for work purposes over a representative four-week period

–          receipts or other written evidence, including for depreciating assets you have purchased

–          diary entries to record your small expenses ($10 or less) totalling no more than $200, or expenses for which you can’t get any kind of evidence

–          itemised phone and internet accounts (paper or electronic) from where you can identify work-related calls and internet use, or other written records, such as diary entries if you don’t get an itemised bill.

If you use the four-week representative period to calculate your usage over the income year and your usual pattern of work changes, you will need to keep separate records to show your usage.

For example, if you usually work from home one day a week and due to an emergency situation such as COVID-19, bush fire or drought you’re required to work from home for an extended period, you will need to keep records for both:

–          the actual hours you’ve worked from home due to the emergency situation

–          your usual working from home arrangements.

Your four-week representative period will no longer be valid in these circumstances.

Business Owners

Running your business from home

The information in this section applies where your home is also your principal place of business – that is, you run your business from home, and a room is set aside exclusively for business activities. Examples include:

–          a small business operator whose main office is in their home

–          a tradesperson or craftsperson who has their workshop at home

–          a doctor or dentist who has their surgery or consulting room at home.

If you do only some business or work from home, in either a designated work area or another part of your home, refer instead to Working from home.

Deductions you can claim

Where your home is also your place of business, you can claim deductions if you carry out income-producing work at home and incur expenses in using your home for that purpose.

You can claim a deduction for the following:

–          the cost of using a room’s utilities, such as gas and electricity – which must be apportioned between business and private use, based on actual usage

–          business phone costs – if a telephone is used exclusively for business, you can claim for the rental and calls, but not the installation costs. If the telephone is used for both business and private calls, you can claim a deduction for business calls

–          decline in value (depreciation) of office plant and equipment, such as desks, chairs, computers. If equipment such as a computer is also used for non-business purposes, your claim must be apportioned between business and private use

–          decline in value (depreciation) of curtains, carpets and light fittings

–          occupancy expenses (such as rent, mortgage interest, insurance, rates). You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).

If your employer has an office in the city or town where you live, your home office will not be a place of business, even if your work requires you to work outside normal business hours.

If your income includes personal services income (PSI), you may not be able to claim a deduction for occupancy expenses.

Capital gains and the main residence exemption

Generally, you can ignore a capital gain or loss you make when you sell your home or main residence (under the main residence exemption).

However, you don’t get the full main residence exemption if your home is your principal place of business, although you’re probably entitled to a partial exemption.

To work out the capital gain that is not exempt, you need to take into account a number of factors including:

–          proportion of the floor area of your home that is set aside to produce income

–          period you use it for this purpose

–          whether you’re eligible for the ‘absence’ rule (see Treating a dwelling as your main residence after you move out)

–          whether it was first used to produce income after 20 August 1996.

If you first used your home as your place of business after 20 August 1996, the period before you first used your home to produce income is not taken into account in working out the amount of any capital gain or capital loss. Instead, you use the market value of your home at the time you first used it to produce income.

It’s a good idea to get a valuation of your home at the time you first use it as your place of business, so that when you come to sell it you don’t pay more capital gains tax than necessary.

Sources: www.ato.gov.au

The Importance of Business Budgeting

The Importance of Business Budgeting

Does your business have a budget? Does it have plenty of forward planning and research on its side? Because without a budget in place, there’s a good chance it doesn’t. After all, business budgeting is very important to the modern business day and age. A budget does a lot for an organisation in the here and now, and it does a lot for that organisation’s future.  

If you’re a small business owner, a budget is always going to work out in your favour. It’s going to help you outline your goals, and work towards them in a cost-effective and efficient manner. It should be a feature of your initial business plan and should help lay the foundation of your future business operations.

Budgeting is only going to become an increasingly important need as your business gets bigger and bigger, and thus, the groundwork for an efficient and working system should be set right now. If you’re not sure why a budget outline is so crucial, and why you can’t just come up with a budget idea on the spot, hopefully, we can shed a little more light on the subject for you.

All in all, every business should be working with a budget, and there are many reasons why; let’s delve into some of the main details surrounding why below. If you need to put a business budget together, make sure you use these points as a driving force behind your actions.

A Business Budget is a Long Term Plan

As mentioned above, a business budget is very much a plan for the future. It keeps your spending on the straight and narrow in the moment, but it also ensures you’re keeping an eye on the future of your business too. When you set out your business goals, a budget helps to plan expenses for them, including determining the highest priority spending, and where caps should be placed.

A budget needs to be relevant to the business it serves, and the fact that budgets can be versatile and flexible helps to make business budgets so important. A budget is there to help you bolster your yearly efforts, and every single business out there makes a different amount of money at various points of the year. Indeed, depending on the type of business you own, your budget planning needs to be a little different. For a company that offers products all the year round, planning is more relaxed, compared to a company that generates most of their annual revenue via summer or winter sales.

This long term planning ensures you have plenty of savings, and that you don’t overspend on your assets before you have the chance to expand them, and it ensures your business has plenty of value to work with.

A Business Budget Helps with Your Market Research

Market research is one of the main things that needs to be conducted in the run up to establishing a business, and once again, using a budget plan can help your business to put any research it comes up with to good use. It’s hard to apply generalised market research to a business that’s never operated before, or hasn’t come into contact with the very people it aims to serve, and so, the budget acts as both a guideline and a forecast.

Market research is conducted via its own means, but the budget will always be in the background for you to refer to. Why? Because a budget ensures you have the right time frame to work with, in terms of researching the market at the right time of year for your business, and also to ensure you’re never consuming too many resources on a month by month basis whilst doing so – this is where the long term budget works hand in hand with the forecast sheets you can prepare alongside it.

Similarly, it details how, where and when you can put this market research to good use within your business. It details if you’ve got the money to do so, in what departments you would need to obtain more, etc. All in all, the budget is there to back up your market research.

A Business Budget Can Help You to Evaluate

One of the main purposes of an annual or quarterly budget is to help you evaluate just how well you’re working, and for most businesses, this is what the budget will be referred to for the most. Evaluation is a necessary part of running a business, and it could very well be seen as the budget’s most important job.

At the end of each financial year, the budget serves to prove what went well, and what could be done better. It’s why keeping a proper track of both the incoming and outgoings is key – you cannot afford to miss out on creating a system like this, to ensure you’re moving into the next year with the right resources at hand.

And if it turns out you have spare or extra funds to work with, the budget frame will help you to allocate these out as well. Let’s look at a couple of examples: If you have debt, you can take a look at the outstanding balance, and just how long it’ll take to pay the whole amount off. If you’re working with a lack of savings, or there’s no insurance in place in case of illness or disaster, the budget will once again highlight this.

A Business Budget Ensures You Have the Manpower

The staffing within a business is going to cost the owner a lot of money on a yearly basis. Payroll is a big deal, but it’s a necessary one, and rarely do people find success on their own merit. So, ensuring that the budget takes into account just how many people you’re going to need to help balance the books, as well as run the day to day operations, is one of the first things to consider when writing one up.

Because a budget ensures that you’re hiring as and when you need to, and that you’re hiring people with the right pay brackets for your business. It ensures you can offer out promotions and pay rises where they’re deserved, and it also helps to indicate whether or not someone on your team is pulling their weight. All in all, your business’ budget not only details the financial wellbeing of your company, but it also shows you where and how you can make it healthier.

Thankfully, reaching out for financial aid is not hard, especially when you’ve got a detailed budget plan to show a professional. Accountants, bookkeepers, and BAS agents can be easily contacted by the government website, or you could visit the ASIC website to find a financial counselor.

A Business Budget Helps You To Cut Expenses

How often do you look back on quarterly reports and wish you had gone into a little more detail on the expenses side of things? Because a budget for your business could be the best way to pad out the cost efficiency reports that keep an eye on just how much money is going out of your business, compared to what’s coming in. A detailed and lengthy budget plan ensures you can make the hard decisions, depending on how much you’re spending on an annual basis, and how you can cut costs or find shortcuts around them.

Not to mention, new businesses often struggle in the face of handling the almighty expenses of trying to set up in the modern-day and age, and they do not help themselves when it comes to impressing a potential source of revenue.

A business budget ensures that anyone interested in your business, either a loan company, buyer, or venture capitalist investor has the details necessary to prove that you are a safe decision in terms of cash flow. Once again, it’s thinking in the long term that helps to prove your business has a future, and that the budget you’re working with has a good track record in the face of potentially overwhelming costs.

The Importance of Business Budgeting

So, how well is your business budget working out for you? If you don’t have one, it’s time to put one together. If you do have one, thank yourself for having the forethought for putting one together as part of your original business plan. Plus, take the time now to take it back to the drawing board, to reevaluate how well it’s working for you, and take the chance to have a look at how it’s forecasting your future.

All in all, a business budget incorporates a lot of elements. It ensures you have the fees in place to pay your bills, and shows you if and where you’re spending too much or too little. A business budget has the distributing power you need in the modern-day and age, especially as a small business that has a lot of competition to run up against. Business budgeting can always help.

Key Opportunities 2021-22 Federal Budget

Key Opportunities 2021-22 Federal Budget

With the End of Financial Year for 2021 approaching and the Federal Budget handed down last month, here are the key points to take away for Business.

Extension of Full Expensing of Assets

Eligible businesses with an aggregated turnover of less than $5 Billion can fully deduct the cost of eligible depreciating assets through to 30 June 2023. This is mainly due to supply chain issues being experienced where orders have been placed by businesses, but they were not going to receive the assets in time for the old cut off.
This usually signals businesses and owners to go out and buy assets such as new Motor Vehicles for the tax deduction. Before we go off and purchase assets we need to see if the business case stacks up. You need to ask:
Can the Business afford it?
Is it going to add revenue or value to the Business?
Generally purchasing a new motor vehicle isn’t going to add revenue or value unless you are replacing old vehicles that were required to be replaced to function fully. Now if there is a piece of equipment that will increase revenue or increase efficient for the business, then that is going to add value. The secondary benefit under the Full Expensing of Assets is being able to deduct the total cost of the asset in full.
For Example:
Our tax planning for the 2021 Financial Year indicates we are going to make a profit of $100,000. There is a piece of equipment that will add value to the business available for $100,000. We determine that the business can afford to purchase it. Under the Full Expensing of Assets, we can deduct the full $100,000 in this financial year, thus reducing our profit to nil. If we assume our tax rate is 25% then we were expecting to pay $25,000 in tax on the $100,000 profit. We can now use the tax saved as a part of financing the new equipment purchase as well.

Carry Loss Back Extension

Eligible Companies with an aggregated turnover of less than $5 Billion can now carry losses back from up to the 2023 Financial Year as far back as the 2019 Financial Year. What this means is we can take a tax loss this year and carry that back against the 2019 Financial Year where we did make a profit and paid tax.
Example:
2019 Financial Year – $100,000 Taxable Profit with $30,000 Tax Paid
2021 Financial Year – $100,000 Taxable Loss
We can carry the $100,000 loss against the 2019 Profit of $100,000 and receive the $30,000 back as a tax refund.
So instead of having to make profit in future years and then offset your losses, you can do this now and get the tax paid as a refund.
This can go hand in hand with the Full Expensing of Assets where purchasing assets and full deducting them to create tax losses in the current year. Then the tax refund from the carry loss back can be used to fund the new asset purchases.
A point to note, if you had paid out Dividends which reduced the Franking Account (Tax Paid) to nil then you cannot get the tax refunded. So you will need to confirm that you will receive the tax refund if you plan on using it to fund the asset purchases.

Personal Income Tax Cuts

The Low and Middle Income Tax Offset that applies to the 2021 Financial Year has now been extended to the 2022 Financial Year.
What this means for Wage Earners, Partnerships, Trusts who is being personally taxed, up to $126,000 you will benefit. The Table below shows what offset you will receive at different income levels:

Taxable incomeOffset
$37,000 or less$255
Between $37,001 and $48,000$255 plus 7.5 cents for every dollar above
$37,000, up to a maximum of $1,080
Between $48,001 and $90,000$1,080
Between $90,001 and $126,000$1,080 minus 3 cents for every dollar of the amount above $90,000

It is now that business owners should be looking into whether their business can benefit from any of these measures for the 2021 Financial Year.
If you have any questions or queries about your Year End Tax Planning please contact us.