Archive for 'Tax'

Understanding Fringe Benefits Tax (FBT) And What It Covers

Posted on 14 April '24 by , under Tax. No Comments.

For businesses in Australia, providing fringe benefits to employees can be a valuable way to attract and retain talent, as well as incentivise performance.

However, employers need to understand their obligations regarding Fringe Benefits Tax (FBT). The Australian Taxation Office (ATO) administers FBT, a tax on certain non-cash benefits provided to employees in connection with their employment.

Let’s explore the types of fringe benefits subject to FBT to help businesses navigate this complex area of taxation.

  1. Car Fringe Benefits

One common type of fringe benefit is the provision of a car for the private use of employees. This includes company cars, cars leased by the employer, or even reimbursing employees for the costs of using their own cars for work-related travel.

  1. Housing Fringe Benefits

Employers may provide housing or accommodation to employees as part of their employment package. This can include providing rent-free or discounted accommodation, paying for utilities or maintenance, or providing housing allowances.

  1. Expense Payment Fringe Benefits

Expense payment fringe benefits arise when an employer reimburses or pays for expenses incurred by an employee, such as entertainment expenses, travel expenses, or professional association fees.

  1. Loan Fringe Benefits

If an employer provides loans to employees at low or no interest rates, the difference between the interest rate charged and the official rate set by the ATO may be considered a fringe benefit and subject to FBT.

  1. Property Fringe Benefits

Providing employees with property, such as goods or assets, can also result in fringe benefits. This can include items such as computers, phones, or other equipment provided for personal use.

  1. Living Away From Home Allowance (LAFHA)

When employers provide allowances to employees who need to live away from their usual residence for work purposes, such as for temporary work assignments or relocations, these allowances may be subject to FBT.

  1. Entertainment Fringe Benefits

Entertainment fringe benefits arise when employers provide entertainment or recreation to employees or their associates. This can include meals, tickets to events, holidays, or other leisure activities.

  1. Residual Fringe Benefits

Residual fringe benefits encompass any employee benefits that do not fall into one of the categories outlined above. This can include many miscellaneous benefits, such as gym memberships, childcare assistance, or gift vouchers.

Compliance With FBT Obligations

Employers must understand their FBT obligations and ensure compliance with relevant legislation and regulations. This includes accurately identifying and valuing fringe benefits, keeping detailed records, lodging FBT returns on time, and paying any FBT liability by the due date.

Fringe Benefits Tax (FBT) is an essential consideration for businesses that provide non-cash benefits to employees.

By understanding the types of fringe benefits subject to FBT, employers can ensure compliance with tax obligations and avoid potential penalties or liabilities.

Seeking professional advice from tax experts or consultants can also help businesses navigate the complexities of FBT and develop strategies to minimise tax exposure while maximising the value of employee benefits. Why not start a conversation with one of our trusted tax advisers today?

No More Shortcuts: The Methods You Can Use To Claim WFH Expenses

Posted on 25 March '24 by , under Tax. No Comments.

Ensure you’re up to date on how to claim your working-from-home expenses!

As the business landscape shifts back and forth between office, hybrid and home-based work opportunities, it’s important to remember what methods are available to you when it comes to claiming. If part of your role allows you to work from home, you may be able to claim certain expenses on your tax return this year using one of the following methods.

The Revised Fixed Rate Method:

Under the revised fixed rate method, individuals can claim 67 cents per hour worked from home during the relevant income year. This rate includes additional running expenses, such as home and mobile internet or data, phone usage, and electricity and gas for heating, cooling, and lighting. Importantly, using this method, you cannot claim separate deductions for these expenses.

To use this method, taxpayers must maintain records of the total number of hours worked from home and the expenses incurred while working at home. Additionally, they must keep records of expenses not covered by the fixed rate per work hour, demonstrating the work-related portion of those expenses.

What Records Do You Need?

Previously, taxpayers required a dedicated workspace at home. From 1st March 2023 onwards, the record-keeping requirement has shifted again, necessitating the recording of all hours worked from home as they occur.

How Does The Fixed Rate Method Work?

To utilise the revised fixed rate method:

  • Additional running expenses are incurred due to working from home.
  • Keep records of total work-from-home hours and incurred expenses.
  • Maintain records for expenses not covered by the fixed rate.

The Actual Cost Method:

Alternatively, taxpayers can opt for the actual cost method, where deductions are calculated based on actual additional expenses incurred while working from home. This includes expenses for depreciating assets, energy expenses, phone and internet, stationery, computer consumables, and cleaning dedicated home offices.

What Records Do You Need?

To claim work-from-home expenses using actual costs, you must maintain records showing:

  • The actual hours worked from home during the entire income year or a continuous 4-week period represents your usual working pattern at home.
  • Additional running expenses incurred while working from home.
  • How you calculated the deduction amount.
How Does The Actual Cost Method Work?

To claim actual expenses:

  • Incur additional running expenses due to working from home.
  • Keep records showing expenses incurred and the work-related portion of those expenses.

Australians need to understand their entitlements and tax deductions while working remotely.

Consulting with a tax advisor can provide valuable insights into available concessions, deductions, and offsets for your tax return.

By staying informed and adhering to ATO guidelines, taxpayers can ensure compliance and make the most of available deductions in the evolving landscape of remote work. Why not start a conversation with us today?

Fringe Benefits Tax Considerations For Australian Businesses

Posted on 3 March '24 by , under Tax. No Comments.

For businesses operating in Australia, navigating the intricacies of the Fringe Benefits Tax (FBT) is essential to ensure compliance with tax regulations and minimise financial liabilities. FBT is a tax paid on certain employee benefits in addition to their salary or wages.

From understanding what constitutes a fringe benefit to managing FBT reporting requirements, here are the important considerations for Australian businesses.

What Constitutes a Fringe Benefit?

Businesses must understand what qualifies as a fringe benefit under Australian tax law. Fringe benefits can include perks such as company cars, health insurance, housing allowances, entertainment expenses, and more. Even seemingly minor benefits provided to employees may be subject to FBT, so it’s essential to review all employee benefits carefully to determine their tax implications.

Types of Fringe Benefits

Fringe benefits can be categorised into various types, each subject to specific tax treatment. Common types of fringe benefits include:

  • Car fringe benefits: These are provided when employers make cars available for private use by employees.
  • Expense payment fringe benefits: Reimbursements of expenses employees incur, such as entertainment or travel expenses.
  • Residual fringe benefits: Any benefits that don’t fall into the other categories, such as providing property or services.

Exemptions and Concessions

While many benefits provided to employees are subject to FBT, certain exemptions and concessions may apply. Small businesses with an annual turnover below a certain threshold may be eligible for FBT concessions. In contrast, certain benefits, such as work-related items or exempt vehicles, may be exempt from FBT altogether. Businesses must familiarise themselves with the available exemptions and concessions to minimise their FBT liability.

Record-Keeping Requirements

Accurate record-keeping is crucial for FBT compliance. Businesses must maintain detailed records of all fringe benefits provided to employees, including the type of benefit, its value, and the recipient’s details. These records are essential for calculating FBT liability and completing FBT returns accurately.

Calculating FBT Liability

Calculating FBT liability can be complex, as it involves determining the taxable value of each fringe benefit provided to employees. The taxable value is generally based on the cost of providing the benefit or the taxable value determined by specific valuation rules. Businesses must accurately calculate their FBT liability based on the applicable rates and thresholds set by the Australian Taxation Office (ATO).

FBT Reporting and Lodgment

Businesses are required to report and pay FBT annually to the ATO. FBT returns must be lodged by the due date, typically 21 May each year, and any FBT liability must be paid by this deadline. Failure to lodge FBT returns or pay FBT on time may result in penalties and interest charges, so businesses need to meet their reporting and lodgment obligations.

Seek Professional Advice

Given the complexities of FBT legislation and regulations, seeking professional advice from a qualified tax adviser or accountant is highly recommended. A tax adviser can provide tailored guidance on FBT compliance, help businesses identify potential FBT liabilities and exemptions, and assist with FBT reporting and lodgment.

Understanding FBT and its implications is essential for Australian businesses to ensure compliance with tax laws and minimise financial risks.

By familiarising themselves with the types of fringe benefits, exemptions, record-keeping requirements, calculating FBT liability, and seeking professional advice when needed, businesses can navigate the complexities of FBT with confidence and peace of mind.

Compliance with FBT regulations avoids penalties and fosters trust and transparency with employees and regulatory authorities.

Explaining The New Reporting Regime For The Sharing Economy

Posted on 12 February '24 by , under Tax. No Comments.

The Sharing Economy Reporting Regime (SERR) represents a significant development in Australia’s tax landscape, requiring certain businesses operating in the sharing economy to report specific transactions to the Australian Taxation Office (ATO).

Commencing from 1 July 2023 for selected industries and expanding further from 1 July 2024, SERR aims to enhance tax compliance, increase transparency, and gather valuable insights into sharing economy activities. Let’s dive into the key aspects of SERR and outline what small businesses need to know to ensure compliance.

Scope and Purpose of SERR:

SERR applies to transactions facilitated through Electronic Distribution Platforms (EDPs), encompassing activities such as ride-sourcing, short-term accommodation, and the hiring of assets or services. The regime aims to collect information on transactions connected with Australia to enhance tax integrity, identify non-compliant participants, and inform compliance strategies.

What Is An Electronic Distribution Platform  (EDPs)

Under SERR, an EDP refers to a service that enables sellers to offer supplies to buyers through electronic communication channels. This encompasses various online platforms such as websites, internet portals, applications, and marketplaces. EDPs play a crucial role in facilitating transactions within the sharing economy and are central to the reporting requirements under SERR.

Reporting Obligations for EDP Operators

EDP operators are mandated to report details of transactions made through their platforms to the ATO. This includes transactions involving taxi travel, ride-sourcing, short-term accommodation, and other reportable supplies. EDP operators must submit reports for each reporting period, with deadlines set for 31 January and 31 July of the following year, depending on the reporting period.

Determining Reportable Transactions

Reportable transactions under SERR include supplies made through EDPs that are connected with Australia. This encompasses various activities, including ride-sourcing, short-term accommodation, asset rentals, and various services. However, certain transactions are exempt from reporting, such as those not connected with Australia or subject to specific withholding requirements.

Timing and Periods of Reporting

EDP operators must submit reports for each reporting period, covering transactions made within specific timeframes. Reporting periods run from 1 July to 31 December and from 1 January to 30 June, with corresponding deadlines for submission. The timing of reporting depends on when payments are made to suppliers, ensuring accuracy and alignment with transaction timelines.

Transition Period and Compliance Considerations:

The implementation of SERR involves a transition period, with different commencement dates for specific industries and reportable transactions. Small businesses affected by SERR should familiarise themselves with the reporting requirements, assess their obligations under the regime, and implement necessary systems and processes to ensure compliance.

The Sharing Economy Reporting Regime represents a significant regulatory change for small businesses operating in the sharing economy. By understanding the scope, purpose, and reporting obligations under SERR, businesses can navigate the complexities of the regime and ensure compliance with tax laws. With proper planning, small businesses can leverage SERR to enhance tax transparency, mitigate compliance risks, and contribute to a fair and efficient tax system.

Understanding Non-Assessable Non-Exempt (NANE) Income Through Disaster Grants

Posted on 21 January '24 by , under Tax. No Comments.

The recent spate of extreme weather events during the summer in various parts of Australia has presented unprecedented challenges for small businesses. As a result, the pressing concerns they face may not necessarily revolve around their tax obligations.

However, amidst these trying times, business owners must be aware of the tax implications associated with the grants they may have received for support. This may include knowing whether their grants are deemed assessable or non-assessable income and the implications of either for their tax returns.

Non-Assessable Or Assessable Income?

In the wake of challenging times, many businesses have been fortunate enough to receive grants aimed at helping them navigate through financial difficulties. As businesses gear up to file their tax returns, a fundamental question arises – is the received grant considered assessable or non-assessable income?

In general, grants are treated as assessable income, adding to the taxable revenue of the business. However, a subset of business support grants is formally declared as non-assessable, non-exempt (NANE) income. This distinction is crucial as it determines whether the grant needs to be included in the tax return or can be excluded under specific eligibility criteria.

Understanding Non-Assessable Non-Exempt (NANE) Income

Non-assessable non-exempt income refers to specific grants that are not subject to taxation under certain conditions despite being a financial injection into the business. It is imperative for business owners to identify whether the grants they have received fall under the NANE category.

To ascertain the eligibility of a grant for exclusion, businesses can refer to the list of non-assessable, non-exempt government grants. Natural disaster grants, for instance, are often classified as NANE income, provided the business meets the specified eligibility criteria.

Correcting Mistakes in Tax Returns

If a business owner mistakenly includes a grant categorized as NANE in their tax return, all is not lost. The Australian Taxation Office (ATO) allows amendments to correct such errors. This emphasises the importance of regular checks and reviews of tax returns to ensure accuracy and compliance.

It is recommended to promptly rectify any errors in tax returns, as failing to do so may lead to complications and potential penalties down the line. Being proactive in addressing inaccuracies demonstrates diligence and a commitment to compliance.

Deductions for Non-Assessable Non-Exempt (NANE) Grants

While NANE grants are exempt from taxation, it is crucial to understand the scope of deductible expenses associated with these grants. Businesses can only claim deductions for expenses directly linked to earning assessable income. Common deductible expenses may include wages, rent, and utilities that contribute directly to the revenue-generating activities of the business.

However, it’s essential to note that expenses incurred in obtaining the grant, such as accountant fees or administrative costs directly associated with the application process, cannot be claimed as deductions. Business owners should carefully differentiate between expenses contributing to income generation and those tied to the grant acquisition process.

Navigating Challenging Times

In times of uncertainty, particularly in the aftermath of natural disasters, businesses need support and guidance. It is reassuring for business owners to know that assistance is available.

Beyond understanding the tax implications of grants, seeking professional help can be invaluable.

Business owners are encouraged to engage with registered tax professionals (like us) who can provide personalised advice tailored to the unique circumstances of their businesses. These professionals can offer insights into the specific grants available for their industry and help navigate the complex landscape of tax regulations.

By differentiating between assessable and non-assessable income, rectifying errors in tax returns, and navigating deductible expenses, businesses can ensure compliance with tax regulations and optimize their financial positions during these challenging times.

Seeking professional advice further enhances the ability to make informed decisions and secure support for sustainable business operations. Why not start a conversation with us today?

Unlocking the Secrets of Deductions: A Holiday Home Owners’ Essential Checklist

Posted on 3 December '23 by , under Tax. No Comments.

It’s essential for property owners to understand the intricacies of deductions associated with their cherished holiday retreats. However, as the holiday season approaches, they may find that their holiday retreats become a valuable source of income.

To ensure you make the most of your potential deductions, it’s crucial to navigate the rules surrounding holiday home expenses and be aware of potential pitfalls.

What Do You Need To Know?

The primary rule is simple: you can only claim deductions for holiday home expenses if they are incurred with the aim of generating rental income. This means that any personal use of the property must be carefully considered to avoid discrepancies in deductions.

One key consideration is whether the holiday home is used or reserved by you during peak periods when it could reasonably be rented out. Deductions should be adjusted accordingly during these periods to reflect the reduced potential for rental income.

Likewise, if there are unreasonable conditions placed that hinder the likelihood of their property being rented, deductions should be reevaluated. This might include restrictive terms in advertising or setting rents significantly above market values.

To help determine the validity of your claimed deductions, here are a few essential questions your tax agent might ask:

Usage Duration

How many days during the income year did your client use or block out the property for personal use? Deductions cannot be claimed for periods when the property was exclusively used or blocked out by the owner.

Advertising Practices

How and where is the property advertised for rent, and is the rent in line with market values? Obscure advertising methods or unreasonable restrictions in adverts may impact the eligibility for deductions.

Property Condition

Will any restrictions or the general condition of the property reduce interest from potential holidaymakers? If the property is not tenantable, deductions may be compromised, as it is less likely to generate income.

Personal Use

Have your clients, their family, or friends used the property? Deductions cannot be claimed for periods of private use or when the property is kept vacant for personal reasons.

Tenant Accessibility

Is any part of the property off-limits to tenants? When claiming deductions, ensure to calculate and apportion them based on the part of the property available for rent.

By addressing these questions and ensuring that your claims are reasonable, you not only maximise your potential deductions but also reduce the likelihood of contact from regulatory authorities. Navigating these considerations thoughtfully helps level the playing field for holiday home owners and ensures compliance with tax regulations.

If y​ou are unsure about how to handle your tax obligations when it comes to the holiday home, why not speak with a trusted tax expert? We’re here to help.

Claiming Motor Vehicle Expenses On Your Tax Return

Posted on 13 November '23 by , under Tax. No Comments.

As a business owner, one of the perks is the ability to claim tax deductions for expenses related to motor vehicles used in your business operations. This includes cars and certain other vehicles that play a role in running your business smoothly. The good news is that claiming motor vehicle expenses can help reduce your tax liability. Let’s explore how you can maximise this opportunity, particularly if you’re a sole trader or part of a partnership.

The Logbook Method: A Simple Way to Claim Tax Deductions

Sole traders and those operating in partnerships can claim tax deductions for vehicles used in their businesses using the logbook method. It’s a relatively straightforward approach, but it does require diligent record-keeping of your vehicle-related expenses. The expenses you can claim when using your vehicle for business purposes typically include:

  • Fuel and oil
  • Repairs and servicing
  • Interest on a motor vehicle loan
  • Lease payments
  • Insurance cover premiums
  • Registration
  • Depreciation (decline in value)
  • Calculating Your Claim with the Logbook Method

To make the most of the logbook method and ensure you’re accurately recording your expenses, consider enlisting the help of a registered tax agent. To work out the amount you can claim using this method, follow these steps:

  • Keep a logbook.
  • Calculate your business-use percentage by dividing the distance traveled for business purposes by the total distance traveled and then multiplying by 100.
  • Sum up your total car expenses for the income year.
  • Multiply your total car expenses by your business-use percentage.

It’s vital to provide the Australian Tax Office (ATO) with evidence of the expenses you’re claiming. This means keeping records of:

  • An electronic or pre-printed logbook.
  • Evidence of actual fuel and oil costs or odometer readings used to estimate fuel and oil expenses.
  • Evidence of all other car-related costs.

The Crucial Logbook

The logbook is a critical component of this claims method, and it should contain specific information, such as:

  • The start and end dates of the logbook period.
  • Odometer readings at the beginning and end of the logbook period.
  • The total number of kilometres travelled during the logbook period.
  • The number of kilometres for each journey, which can be recorded as a single journey if you make two or more trips in a row on the same day.
  • Odometer readings at the start and end of each subsequent income year for which your logbook is valid.
  • The business-use percentage for the logbook period.
  • Make, model, engine capacity, and registration number of the car.

If this year marks the first time you’re using a logbook, remember that it should cover at least 12 continuous weeks during the income year and be representative of your travel patterns throughout the year.

If you plan to use the logbook method for multiple vehicles, make sure that the logbook for each vehicle covers the same timeframe. The 12-week period you choose should indicate the business use for all vehicles. This ensures you maintain consistency and don’t alter your driving patterns to fit the logbooks.

Keep in mind that distinguishing between business and personal use is crucial for accurate claims. Generally, travel between your home and your place of business is considered private use unless you operate a home-based business and the trip was for business purposes.

Claiming motor vehicle expenses for your business can be a valuable tax-saving strategy, but it requires careful documentation and adherence to ATO guidelines. With the logbook method, you can maximize your deductions while maintaining the integrity of your business and personal expenses. So, get started on keeping that logbook and consult a tax professional for expert guidance on your journey to tax savings.

Claiming The Small Business Technology Investment Boost

Posted on 22 October '23 by , under Tax. No Comments.

Could your small business claim a 20% bonus deduction on technology expenditure that supports their digital operations or the digitisation of their operations?

The small business technology investment boost is a broad measure intended to cover a wide range of business expenses and assets; however, questions may arise when you go to claim.

Can I Claim The Boost? 

To access the small business technology investment boost, your business needs to meet the standard aggregated annual turnover rules (with an increased $50 million threshold).

The expenditure must:

  • already be deductible for your business under taxation law
  • be incurred between 7:30 pm AEDT 29 March 2022 and 30 June 2023.

If the expenditure is on a depreciating asset, the asset must be first used or installed ready for use for a taxable purpose by 30 June 2023.

What Can I Claim With The Boost? 

A good indicator of eligibility is to consider if the small business would have incurred the expense if they didn’t operate digitally. That is if they hadn’t sought to adopt digital technologies in the running of their business. Using this rule of thumb, the costs below are eligible:

  • advice about digitising a business
  • leasing digital equipment
  • repairs and improvements to eligible assets that aren’t capital works.

Eligible expenditure may include, but is not limited to, business expenditure on:

  • digital enabling items – computer and telecommunications hardware and equipment, software, internet costs, systems and services that form and facilitate the use of computer networks
  • digital media and marketing – audio and visual content that can be created, accessed, stored or viewed on digital devices, including web page design
  • e-commerce – goods or services supporting digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services and advice on digital operations or digitising operations, such as advice about digital tools to support business continuity and growth
  • cyber security – cyber security systems, backup management and monitoring services.

Whether some expenditure is eligible for the boost will depend on its purpose and link to digitising the operations of the specific small business. For example, the cost of a multifunction printer would not be eligible if it were intended only to make copies of paper documents. However, it would be claimable if it was being used to convert paper documents for digital use and storage

New and ongoing subscription costs can also qualify as eligible expenditures if related to your client’s digital operations. For example, your ongoing subscription to an accounting software platform for your business would qualify. Likewise, a new subscription for digital content that is used in developing web content to advertise their business would be eligible.

In these cases, you should keep explanations of how the expenses relate to digitising their business, as well as accurate records of all their claims.

Where the expense is partly for private purposes, the bonus deduction can only be applied to the business-related portion.

Special rules apply if claiming the bonus deduction for eligible expenditure on a depreciating asset.

To avoid confusion or complications around applying the small business technology investment boost, it may be best to speak to your trusted tax agent. We’re here to help.

Providing Affordable Housing? You Could Be Eligible For A CGT Discount

Posted on 6 October '23 by , under Tax. No Comments.

An additional 10% capital gains tax (CGT) discount may be available when you sell an Australian residential rental property that you used to provide affordable housing.

This will increase the potential maximum capital gains discount percentage on your sale from 50% to 60%.

What Is Affordable Housing?

For the affordable housing CGT discount purposes, affordable housing is any dwelling (house, unit or apartment) where the following conditions are satisfied:

  • The dwelling is both a taxable Australian real property (TARP) and residential premises that you rent out or genuinely make available for rent. Caravans, mobile homes and houseboats are not residential premises.
  • The dwelling is not a commercial residential premises.
  • Management of the tenancy or its occupancy is done exclusively by a registered community housing provider (CHP).
  • Each entity that holds an ownership interest in the dwelling has a certificate from the provider showing that the dwelling was used to provide affordable housing.
  • No entity that has an ownership interest in the dwelling is in receipt of an incentive from the National Rental Affordability Scheme (NRAS) for the NRAS year.
  • If a managed investment trust (MIT) has an ownership interest in the dwelling, the tenant does not have an interest in the MIT that passes the non-portfolio test.

Eligibility For Affordable Housing CGT Discount

When you sell a rental property used to provide affordable housing, you may make a capital gain on the profit. This may qualify you for an additional (up to 10%) affordable housing capital gain discount if you meet the following eligibility criteria:

The capital gain must have been either

  • made by you as an Australian resident individual, or
  • distributed or attributed to you either
    • directly from a trust or managed investment trust (MIT)
    • indirectly from a trust through an interposed partnership, MIT or other trusts (this does not include public unit trusts or super funds).

You must have also provided:

  • new or existing affordable housing
  • rental rates below market rent
  • affordable housing to eligible tenants on low to moderate incomes (based on household income thresholds and household consumption)
  • Affordable housing for a minimum period of three years (1,095 days) from 1 January 2018. This can be continuous or an aggregation of three years over a longer period.

The additional discount will be pro-rated for periods where you don’t use the property for affordable housing purposes or were a foreign or temporary resident for part of the time you owned the property.

Investing In Affordable Housing Through a Trust 

You can invest in affordable housing through a trust.

As an individual investor, only you can claim the additional affordable housing CGT discount. The trust cannot claim this discount.

For you to qualify for the affordable housing CGT discount:

  • the trust can be a managed investment trust (MIT), but not a public unit trust or super fund
  • the trust must be entitled to the general CGT discount on the capital gain on the property, either in full or part.

The capital gain can be distributed or attributed to you:

  • directly from the trust or MIT
  • indirectly from the trust or MIT through an interposed partnership, MIT or other trust, but not through a public unit trust or super fund.

Consulting with a tax professional could assist you in determining your eligibility for CGT discounts – why not speak with us today?

Why Are My “Connections” Important To Know During Tax Season?

Posted on 10 September '23 by , under Tax. No Comments.

In the realm of tax law, a critical concept revolves around understanding the notion of “entities connected with you.”

This concept serves as a linchpin in several aspects of taxation, from determining one’s status as a Small Business Entity to ascertaining the value of assets when seeking eligibility for Small Business Capital Gains Tax (CGT) Concessions. Furthermore, it holds significance when an individual has sold an asset and claimed it was used by an ‘entity connected with them.’

In various tax scenarios, having an entity connected to you can either prove beneficial or burdensome. A prime example of the former is when you sell a factory unit, and a company affiliated with you operates a mechanics business within that unit. In this case, you become eligible to claim the Small Business CGT Concessions on the sale of the factory unit, potentially leading to substantial tax benefits.

Conversely, connected entities can have adverse consequences, particularly in specific asset tests. When evaluating certain asset-related criteria, the value of assets connected entities hold is aggregated with your own. Consequently, having entities connected with you in such situations may not be advantageous.

Consider a scenario involving a family trust and a distribution made to the adult daughter. In this instance, her assets may need to be added to the overall asset pool when determining your eligibility for tax concessions. A key threshold for determining connection to a trust is if an individual has received 40% of the income or capital of that trust in the preceding four years.

Entities controlled by the same person or entity are also considered connected with each other. For instance, if you oversee two trusts, those trusts are not only connected to you but also to each other. This interconnectedness has implications for tax planning and assessment.

In the eyes of tax law, spouses are not automatically deemed connected to each other. This is not the default assumption; spouses are typically not considered connected entities. For instance, if you are in control of a company, and your spouse independently manages their own separate company, they would generally not be considered connected to each other. The implications of this can vary depending on the specific tax scenario.

While the concept of entities connected with you may seem intricate, it is a dynamic factor that necessitates ongoing attention and evaluation. Circumstances surrounding the connections can change over time. Returning to the example of the factory unit, the nature of its disposal could alter the connection dynamics. For instance, you may have retained ownership of the factory unit while transferring ownership of the company to your son five years ago. In this case, the company is no longer connected with you, potentially affecting your eligibility for specific tax concessions.

Understanding and managing the relationships between entities and their connections is pivotal in navigating the complexities of tax law. It is not a static concept, but one that requires ongoing consideration, as changes in these connections can have significant implications for an individual’s tax obligations and eligibility for various concessions.

Therefore, individuals and businesses should remain vigilant and seek professional advice when dealing with entities connected with them in the realm of taxation. Keeping us apprised of your future plans for your assets and of changes that could impact your connections means that we can ensure that you do not inadvertently miss out on any of the tax concessions available.