Blake’sGOGUIDESe s t o a c o m p l e x w o r l d Simple guid

Your Easy Guide to:
✓ Paying the right amount of tax ✓ Claiming all eligible deductions and rebates ✓ Understanding GST, CGT and FBT ✓ Your tax rights and obligations

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Updated for the 2006–07 tax year


Lyndal Taylor


Ly n d a l Ta y lor


Copyright © Pascal Press 2003 Revised editions 2004, 2005 and 2006 ISBN 1 877085 26 X Pascal Press PO Box 250 Glebe NSW 2037 (02) 8585 4044 Publisher: Vivienne Petris Joannou Editors: Jane Tyrrell and Emma Driver Series editors: Emma Driver and Ian Rohr Page design, layout and cover by d Pty Ltd Photos by Comstock, Ingram Publishing and PhotoDisc Printed in Australia by Printing Creations Apart from any fair dealing for the purposes of study, research, criticism or review, as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission. Inquiries should be made to the publisher. Please note: No person should rely on the information provided in this guide without first obtaining professional advice. This guide has been prepared and is published for the purposes only of providing guidance in relation to the subject area covered and is sold on the understanding that: (i) the authors, the publisher and all other persons involved in the preparation and publication of this guide are not engaged in rendering legal, accounting or other professional services; (ii) the information contained in this guide is current at the time of publication of this guide and is subject to change at any time without notice; (iii) no warranty or representation is made with respect to the information contained in this guide or its accuracy, except those warranties or representations which are not permitted to be excluded under applicable laws, including in relation to the content of any websites referred to in this guide; and (iv) the authors, the publisher and all other persons involved in the preparation and publication of this guide are not responsible or liable to any person (whether or not a purchaser or user of this guide) for any error or omission in this guide, for any consequential loss or damage in connection with the use or reliance on any or all of the information contained in this guide, or otherwise in connection with the use or reliance on any or all of the information contained in this guide.

We make a lot of crucial decisions about our taxation, legal and investment issues with very little comprehensible information at hand. We are often dealing with people like lawyers, accountants and real estate agents who know a lot about these topics. This puts the average person at a big disadvantage, and can lead to you getting the worse end of the deal. That is why I decided to extend the Go Guide series into the areas of tax, law and investment. I wanted to provide people with enough information to be able to at least ask the right questions and to avoid the pitfalls that are so easy to fall into. As readers of the previous Blake’s Go Guides on computer topics will know, our goal is to break through the information overload and provide you with only the really useful material that you will need in every day life. If you have any comments or ideas on how these books could be improved further then please don’t hesitate to email me at Matthew Blake Publisher

Lyndal Taylor BA LLM UQ LLM Bond Grad Cert H Ed UNSW, Solicitor of the Supreme Court of Queensland and High Court of Australia, is a Senior Lecturer in the Faculty of Law at the University of Technology, Sydney, and coordinates the postgraduate Master of Taxation Law and Master of Financial Services Law courses at UTS. She has been a tax and commercial law teacher for over 16 years and has written a number of articles in the area of taxation law and commercial law. She is also a member of the Consumer, Trader and Tenancy Tribunal (NSW).

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Introduction .................................................
What sorts of evidence do small business operators need to satisfy the ATO that they are in business? vi

Are you in business? ....................................... 7

Business income ............................................ 9
Find out what is included in a business’s taxable income and the distinction between capital gains tax and income tax. How will your profit be assessed?

Business deductions ...................................... 11
What expenses are deductible as a business expense?

Types of business entities ..............................
How do the rules relating to your business structure affect you and your business? Are you operating as a sole trader, partnership, trust or company?


Sole traders and partnerships ........................... 16
Discusses the advantages and disadvantages of each structure.

Trusts ......................................................... 19
Fixed trusts and discretionary trusts are explained – and how to choose a trustee.

Companies ................................................... 22
How a corporate structure can protect family assets, and the effect of the new Simplified Imputation System.

Personal services income regime ...................... 27
How do you tell whether your business is a personal services business?

Fringe benefits tax ........................................ 29
Categories of fringe benefits, what’s exempt, when you should pay your FBT and how to calculate your FBT liability.

Capital allowances ........................................ 37
Calculating depreciation on your business assets.


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Trading stock ............................................... 41
What is trading stock? Why do businesses need to stocktake?

Capital gains tax ........................................... 43
What assets are subject to CGT? How much CGT will you have to pay?

Goods and services tax ................................... 47
What is the GST? Tells you about the Australian Business Number (ABN), and how and when to lodge your Business Activity Statement (BAS).

Payroll tax ................................................... 51
Gives you the payroll tax rates for each State.

Superannuation guarantee scheme ..................... 52
Requirements for contributing to the scheme and lodging a superannuation guarantee statement.

Pay As You Go (PAYG) system ............................ 53
How the PAYG system works and making PAYG payments.

Tax planning ................................................ 55
Discusses timing your tax liabilities, what concessions are available for small business and the taxation ruling system.

Checklist of notifications and elections .............. 58
How to lodge your claims and ‘elections’ with the ATO.

Australian Taxation Office contact details ........... 59
Contacting the nearest ATO office in your State or Territory, plus some useful websites to visit.

Glossary ...................................................... 61 Index .......................................................... 63

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Taxation is an area which intimidates and confuses many small businesspeople. Often we’d prefer to leave it to our financial professionals and let them work the magic. But, understanding the basic principles of tax and how they affect your business is invaluable if you want to stay on top of your business’s financial affairs. Of course you can’t do it without a professional, but you can at least understand the terminology and the rules, and by doing so can save yourself money in the long term. This book covers a wide range of tax issues that affect small businesses in Australia. How does the structure of your business affect how much tax you pay? What sort of things are deductible to save you money? How does depreciation work? How do fringe benefits tax, GST and capital gains tax affect your business? It aims to give you basic background knowledge on how taxation issues are affecting your business, and to explain the important terms and concepts you will hear about through your tax adviser or from the Australian Tax Office. Armed with this knowledge, you will be in a better position to make more informed decisions about tax issues in your business, and will save yourself plenty of headaches along the way. With the right knowledge and a qualified financial professional to assist you, there’s no reason to be baffled by taxation again. But, remember that it is essential that you consult a qualified tax professional to give you specific advice for your own situation. Don’t think you can do it alone.


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Accessing the tax system for business
The Australian tax system operates differently for wage earners and business operators. To access the tax system for business, you must satisfy the Australian Taxation Office (ATO) that you are in business. To do this, you will need evidence of the following:

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a profit motive system and organisation record-keeping dedicated office space recurrent and regular activity possibly trading stock possibly employees.

Even if you are a small business or not currently making a profit, it does not mean that you are not in business. You could still be entitled to business deductions.

What is not a business?
You are not in business if you carry on a hobby, even if such activity is done profitably. What defines a hobby is that the prime motivation to undertake the activity is personal enjoyment. However, if the hobby becomes your main form of income or main activity, the ATO will probably consider this a business. To determine this, consider:

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How much time do you spend on your hobby? Do you still have a ‘day job’? Do you have systematic accounting records? Is it a regular activity? How large a sum is gained in relation to the time you spend? What is the main reason for you undertaking this hobby: personal recreation or financial gain?

If you are engaging in your ‘hobby’ with the primary intention of making a profit and are dedicating significant time to the task, it will most likely be seen as a business and any income must be disclosed in your taxation return.

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Winning and one-off profits
Windfall gains are not classed as income. These are unexpected gains, such as lottery winnings. Lottery winnings are also not subject to capital gains tax (see page 43). One-off profits may or may not be business income. This will depend entirely on the circumstances. For example:

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If you sell undeveloped land for a profit, the gain will be dealt with under the capital gains tax (CGT) regime. For small business, it may be better to hold such assets in a trust or individual’s name to take advantage of the CGT discount regime (see page 44). If you develop the land, however, this may be seen as a business activity, even if it is the first time you have engaged in property development. If you buy and sell land regularly, these might also be viewed as business transactions and the profit will be included in the income tax return for the business, rather than be treated as a capital gain.
The ATO can take a strong line on when a hobby becomes a business, such as when a sportsperson crosses the line to become a professional athlete.

You are able to claim different deductions if you are running a business to when you are an employed income earner.

You can continue to claim costs related to a previous business when they arise, even if that business has been wound up.

In a new business, be careful to distinguish between what costs are associated with starting up the business, i.e. establishing the business structure which is not directly tax deductible, and what costs are incurred in running the business, which are tax deductible. Any gain that is not a windfall gain is likely to be subject to tax. The question is whether it is income taxable or capital gains taxable. Generally, you pay less tax when the gain is subject to capital gains tax. You need to be particularly careful with one-off transactions to characterise the gain properly.
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What is business income?
Business income is what you earn in the course of carrying on a business with a view to profit. It will cover one-off profits as well as regular and recurrent earnings. If you sell business assets and make a profit, the capital gain will form part of the business profits. These profits will be assessed under either the capital gains tax (CGT) regime or the income tax regime.

Capital gains tax or income tax?
Whether your profit is assessed under CGT or income tax, the elimination of indexation from 19 September 1999 means that there is likely to be little difference in the amount of tax you pay on the profit. (This is the case for assets acquired after 19 September 1999.) For individuals and trusts, however, discount capital gains may mean lower tax payable for individuals or trusts. There are some important distinctions between income gains and capital gains:

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with income gains, you can claim tax deductions; with capital assets, you can claim depreciation, which has the same effect as a tax deduction; and if you have costs related to improving a business asset, these will form part of the cost base for the asset and cannot be claimed as a tax deduction.

What is included in taxable income?
Taxable income of a business is the amount of assessable income less allowable deductions. Tax is payable on the taxable income at the relevant entity tax rate. Tax rebates or offsets such as dividend rebates, may reduce the tax payable. All income earned in the course of carrying on your business will be included in assessable income. This includes incidental or ancillary income. For instance:

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If you are a butcher and you deposit profits in a cash management account, interest earned on the account will form part of your business profits. If you lent money to your uncle, it would still form part of the business profits as it was generated from business assets with the intent of making a profit.
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If these profits had been paid to you as salary or dividends, the interest earned would form part of your personal income.

One-off transactions
Income earned from one-off transactions in the course of carrying on a business, even if done in an unexpected way, may form part of the business income. If the business is paid a lump sum compensation amount for loss of profit, or as consideration for an income stream, the unexpected lump sum might still be classed as assessable income. So, all trading profits related to the business must be included as business income. One-off profits might need to be. Capital gains will be ultimately included in the income tax return of the business. How much gain is taxed depends on the specific application of the CGT provisions (see pages 43-46).

Lease incentives
A cash incentive paid to you to encourage you to enter into a lease is classed as assessable income. This is seen as a payment that you have received in the course of your business. The same approach applies to lease surrender payments. If you receive a non-cash incentive that could be converted to cash, such as a car, the value of the car will be brought to account as assessable income. Even where the item is not convertible to cash, an estimate of its value will be made and brought to account as income. However, some lease arrangements will be tax effective, including rentfree periods, interest-free loans for business purposes, free fit-out paid by the landlord or a free holiday.


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What is a business deduction?
A business deduction is a loss or amount that you spend in the course of carrying on your business.

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Costs incurred to start up a business (such as plant and equipment, shop fittings, franchise fees, initial building costs and costs of trademarks or patents) are not income tax deductible. These are capital costs. Costs incurred to wind up a business might not be tax deductible.

From 1 July 2005 ‘blackhole expenditure’, which is business-related expenditure that is not tax deductible or claimable in the CGT cost base, can be written off on a prime cost basis (see page 37) over five years. This does not mean, however, that you cannot claim tax deductions in later financial years for liabilities incurred while you operated a business, if they have come to account much later.

Home office expenses
If you operate your business from home, you can claim the cost of your home office (see Blake’s Go Guide: Tax and You). However, if you sell your home, you will lose your capital gains tax main residence exemption for that proportion of your home (see page 44). This means that you will have to pay some capital gains tax if you sell your home, when usually you would not. Whether you can claim home office expenses depends on what kind of work you do and whether you have an office to do it in. To claim the full costs of a home study (such as a proportion of your rent or mortgage, lighting, electricity, heating and stationery costs), you must be able to show that your home study is a place of business, not just used for convenience. To establish this, it is best to have the study separate to the house, with separate telephone line and electricity meter. If you do not have separate meters, the ATO advises that you should claim home office expenses at 26 cents per hour, not as a proportionate area of your home. It is more difficult to claim a home study if you have another office to go to. Here the ATO could claim that you worked at home for convenience and therefore could not claim the deduction. If you do undertake paid work or business activity in the home study, you can claim the running costs of the study: the separate telephone bill, electricity and depreciation on your equipment (such as computer, books, desk, carpet and curtains in the study). This is often a better option than claiming a proportion of your home mortgage as a home study: if you do this, you will lose the equivalent proportion of capital gains tax exemption for your main residence.
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Other costs
You can also claim all the costs related to the running of your business, such as bank account charges, stationery, telephone expenses, car running expenses used for business purposes, employee wages (subject to the personal services income regime discussed on page 27), superannuation, long service leave and annual leave entitlements. All claims should be documented and accounted for.

Premiums paid for certain forms of insurance are deductible, such as workers’ compensation premiums paid by an employer. As an employer, you are also generally entitled to claim the cost to insure against the death or disablement of your employees. An employee or self-employed person can also take out disability insurance and claim the premiums as a tax deduction. You can do this if the insurance is to replace the worker’s income should he or she be disabled. However, you cannot claim the cost of premiums if the benefit is a lump sum, say for the loss of a limb. Premiums for trauma policies, where a lump sum payment is made for specified illnesses, are also unlikely to be deductible. The reason for this is that lump sum payments are viewed as capital. Deductions can only be claimed for insurance to protect your income stream. Key-person life policies are considered non-deductible unless the payment is used to ensure continuing revenue. Costs of other general insurances taken out in the course of your business, such as for fire, burglary, public liability, loss of profits and motor vehicle insurance, are generally deductible. Premiums for professional liability insurance to cover acts occurring in the course of carrying on the business are also deductible. Similarly, if loss of money by theft or embezzlement is not covered by insurance, it can be claimed as a tax deduction.

Tax-related expenses
You can claim costs that you incur in dealing with your taxation affairs, for example, costs associated with:

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having your tax return prepared fees for professional tax advice lodging your tax return electronically attending an ATO audit objecting to the Commissioner’s assessment appealing an assessment through the AAT or the Federal Court.

You can only claim the cost of professional tax advice from a recognised adviser such as a tax agent/solicitor. For Simplified Tax System (STS) taxpayers, this cost is deducted when the expense is actually paid.
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Are you a small business?
A new Simplified Tax System (STS) was introduced from 1 July 2001 for small businesses. Special rules apply to small business in relation to accounting arrangements, depreciation and trading stock rules. To be a small business your business and related businesses must have a turnover of less than $1 million net of GST credits ($2 m from 1 July 2007) and have less than $3 million in depreciating assets at the end of the tax year (not applicable from 1 July 2007). If you satisfy the small business criteria and wish to use the STS, you must notify the Commissioner on the approved form. You can then choose to opt out of the system, but in this event you cannot re-enter the system for five (5) years. If you fail to meet the eligibility criteria, you will also leave the system. STS taxpayers will use the cash accounting method. Under this method, income comes to account as soon as it is received, and you can claim deductions when they are actually paid. This does not extend to specific provisions such as the capital gains tax regime.

Structuring a small business
A small business can be structured in a number of ways. You could be a sole trader, a partnership, a trust or a company. The table below briefly summarises some of the considerations when deciding which entity to use. Be careful that you do not divert personal services income in a manner that is considered to be tax avoidance (see page 27).
Income split? No Possibly Possibly Possibly Fringe benefits tax? No Not for partners Not for beneficiaries Yes for employees Deduct wage to trader? No No Yes Yes

Entity Sole trader Partnership Trust Company

Pass on losses? Qualified yes Qualified yes No Not to shareholders

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Entity Sole trader

Dividend imputation credits on profits? No

GST? Yes, if turnover over $50 000 Yes, as above Yes, as above Yes, as above

Capital gains tax discount? Yes

Limited personal liability? No

Partnership Trust Company

No Possibly Yes

Yes Yes No

No Yes, for beneficiaries Yes, for shareholders

The type of entity you use affects the manner in which tax is collected and important issues such as protection of assets. You should speak to your financial adviser to decide which structure is best for you.

Superannuation contributions
There are particular provisions for superannuation contributions for small business. Eligible persons (those who are self-employed or without employersponsored superannuation for the whole of the year) are also entitled to tax deductions for personal superannuation contributions if they contribute to a complying superannuation fund. Substantially self-employed people are those who receive less than 10% of their total adjusted income from employment on which employer-sponsored superannuation contributions has been paid. There are limits on how much you can deduct for superannuation contributions. From 1 July 2002 you can claim the first $5000, plus 75% of the excess amount contributed over $5000, subject to a maximum level of deductions based on age. For example, the greatest amount eligible persons could claim as a tax deduction for personal superannuation contributions in the 2006/2007 tax year are:
Age Under 35 years 35–49 years 50 years and over Limit of deduction $15 260 $42 385 $105 113

These deduction thresholds alter each tax year. There are also specific regulations for the spouse of the taxpayer. From 1 July 2007 you can claim 100% of your superannuation contributions, up to a limit of $50 000 p.a. or $100 000 if you are over 50 years of age (until 2012).
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Limits on losses from non-commercial business activities
Special measures have been introduced to prevent losses from noncommercial business activities from being deductible against the income of an individual taxpayer (whether alone or in partnership). The ‘business’ loss can only be deducted against other income if it satisfies one of the following four tests: The assessable income from the activity is at least $20 000. The value of the real property used in the activity is $500 000 or more. 3 The total value of other assets (other than motor vehicles) used on a continuing basis is at least $100 000. 4 The particular activity resulted in a taxable income (profit) for at least three out of the last five income years.
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The Commissioner may also choose to allow the deduction, even if none of the tests is satisfied. The limit does not apply if:

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the individual is carrying on primary production or is a professional artist whose income from other sources does not exceed $40 000; or the activities (such as negative gearing of a property or shares) do not constitute a business.

This means that if you earn $2000 income from an olive farm but have $15 000 worth of costs, either on your own or in partnership, you cannot deduct those costs from other income you have earned (Test 1, above) – unless the real property costs more than $500 000 (Test 2). In effect, these limits mean that any ‘hobby’ will have to earn in excess of $20 000 a year to entitle you to claim any costs associated with earning it. Again, this is subject to the other tests relating to the value of the real estate or active assets that are used for income production. However, if you own shares in a company that carries on the business of olive farming, or have units in a unit trust, the business entity can still claim the losses against the entity’s other earned income. A company or a trust cannot pass on losses to its individual shareholders or beneficiaries (see below). You can, however, negatively gear an investment in capital assets (such as real property or shares). If you borrow to buy the shares, and the company cannot make a distribution of profits, the interest you pay to hold the shares will be tax deductible against your other income.

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Sole traders
If you are a sole trader, this means that you carry on business on your own. You might employ other staff, but do not have any partners. You might be working from home, and in this case, you should consider claiming home office expense deductions (see Blake’s Go Guide: Tax and You). You will probably also use a car for work purposes. As it is legally impossible to employ yourself, fringe benefits tax is not an issue. However, to claim the work-related expenses relating to the car you must keep appropriate records, including a log book. In other words, you need to substantiate all your business expenses. If you have tools of trade, you can depreciate these items. The cost of employees’ wages is claimed as a tax deduction against the income that you earn. If you are a sole trader, you cannot split your earnings with your partner or spouse. To do this, you must be in partnership.

What else should a sole trader consider? Even though fringe benefits tax will not apply to benefits provided to the individual sole trader, similar allowances, compensations or benefits could still be included in the sole trader’s assessable income if they relate directly to the services rendered, such as a client giving you a watch to thank you for good service. If you are a small business that earns less than $20 000 per year, it might be argued that the non-commercial losses provisions apply to you (see page 15). If this is the case, you will not be entitled to deduct costs incurred in carrying on your enterprise. If you are a consultant, you should carefully consider the personal services income regime to determine whether this applies to you (see page 27).

The main tax advantage in having a partnership structure is the capacity to split the income earned between partners. There are, however, a number of considerations for this. A partnership can be structured so that one controlling partner has the ability to control the disposal of the partnership’s income. If this is the case, the income is classed as uncontrolled partnership income and an extra tax is payable on it. Essentially, this means that the top tax rate is applied to this income.
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Another important consideration is the style of the partnership. If two or more persons earn income together, they are classed as a partnership for tax purposes. However, they are not classed as a business partnership under usual legal principles. For this reason, you can only split the income according to the proportionate interest that each person holds in the property that earns the income, even if one of the partners has contributed more money to the partnership. For instance, if you and your spouse own a rental property, you will each be deemed to own 50% of the property, and hence each person will be assessed to 50% of the income and claim 50% of the deductions in relation to the property. If you are in a business partnership, it is likely that you will have a partnership agreement. In this case, the sharing of profits (income) and losses (deductions) will be outlined in the partnership agreement and you will be assessed according to this arrangement. You can determine the proportion of income that you should each earn. For instance, you may choose a 30/70 split instead of 50/50.

Calculating income To determine how much income is included in the personal tax return of each partner, you need to determine the net income of the partnership. To do this, a calculation is done of all the income and deductible outgoings of the partnership. There are a few issues of which you need to be aware:

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The partnership is treated as a resident taxpayer in calculating the net income of the partnership. A partnership cannot deduct the salary of a partner. This is because a partnership is a group of individuals carrying on business in common with a view to profit. It is common for partners to take drawings throughout the year, but remember that these amounts are drawings against anticipated profit. They are not salaries and cannot be deducted to calculate the net income of the partnership. On the same basis, any payment made on the behalf of the partner for superannuation contributions is not deductible to the partnership. Similarly, any payment made to a partner as return on his/her contribution to capital is not separate income, but classed as partnership income. For instance, if one person in a partnership contributed $50 000 to buy tools, and the other partner undertook plumbing work, the partners might agree that the plumber gets 80% of the profits of the business and the other partner gets 20%. However, the partner who contributed the tools (the capital) might also get 5% interest each year on the $50 000 he contributed for the
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tools. This $2500 is classed as partnership income in the hands of the partner. If, however, the partner had genuinely lent the partnership $50 000, the interest on the loan would be the separate income of the partner, and the interest paid by the partnership would be deductible from the net income of the partnership. Any payment made to a relative or related entity must be a reasonable amount for the services rendered or otherwise the Commissioner of Taxation may disallow a deduction for the cost.

At the partner level, the partner will declare any share of the net income of the partnership in his/her tax return. If the partnership has made a loss, the partner can claim the loss against any other earned income (subject to the non-commercial losses rules on page 15). If his/her income in the year is insufficient to absorb the loss, it can be carried forward to the next year.

Changing the partnership A partner can assign or transfer his/her interest in the partnership to another person. The right to a partnership interest is an asset that can be sold and transferred. To do this successfully, all rights related to the partnership interest must be transferred. To be effective, the assignment must occur before the declaration of the net income of the partnership (usually as at 30 June). If this is done, it is effective for all the income earned in that tax year. If the partnership is dissolved, or a partner is added or resigns, the partnership accounts must be struck. Partners are liable for the profits or losses determined at this point as well as at the end of the tax year. Additionally, a partnership may be required to notify its partners of its instalment income under the Pay As You Go provisions, so that a partner can make an instalment payment (see page 54). This is only an instalment of tax, which is an estimate of the tax payable. At the end of the tax year, when the net income of the partnership is finally determined, the balance of tax payable or a refund will be calculated.
Structuring your business as a partnership can be tax effective as you can share the income so that each person can access lower tax rates and direct more income to the lower income earner. However, where the partnership involves life partners, the ATO is concerned to check that it is in fact a business arrangement.


B l a k e ’s G O G U I D E S

Types of trusts
There are a variety of different trusts. Each trust must have a trustee who is the legal owner of the all the assets of the trust, and one or more beneficiaries who are entitled to the benefit of what the trusts owns. Originally, trusts were set up to protect those unable to deal with their own affairs, such as children or the mentally ill. The trustee would manage the trust estate for their benefit. Trusts fall into two main categories – fixed trusts or discretionary trusts.

Fixed trusts Fixed trusts, such as unit trusts, provide for a fixed proportion of interest to each nominated beneficiary. For instance, if there are 100 units in the unit trust, a person who holds ten units will be entitled to 10% of the income of the trust. However, it is possible to have different rights to income from the trust. So it could be that only holders of A class units share in the capital or assets of the trust, plus income flowing from the trust’s investments, while holders of B class units share in income only. Discretionary trusts A discretionary trust works on the basis that a nominated person, usually the trustee, can decide who will gain the benefit from the trust (usually by way of resolution at the end of the tax year). The persons who can benefit are within the class of beneficiaries listed in the trust deed. For family trusts, this often is all the relatives of a certain person. A discretionary trust has the flexibility to have the income of the trust distributed to the lower-earning members of the family who pay less tax. (There are special taxation provisions for minors, discussed on page 21.) Importantly, unlike partnerships, trusts cannot pass on losses to individual beneficiaries. The very purpose of a trust is to protect its beneficiaries, and only benefits can be passed on to the beneficiaries. This means that beneficiaries cannot offset trust trading losses against their other income in the same way as a partner in a partnership can. However, the trust can carry forward the losses to be applied against earnings in future years.

Trustees and settlors
When establishing a trust, it is very important to choose the trustee carefully. Generally, a company is appointed as a trustee, which allows for continuity of the trust and allows for all members of the family to be beneficiaries. If you do not establish a trustee company, the person you
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nominate as trustee must be someone of strong integrity in whom you can place absolute trust. This is because the trustee has legal ownership of the assets of the trust, and can buy and sell them. The other person you need to establish a trust is a settlor. The settlor is the person who sets up the trust with a cash payment, which could be as low as $10. It is very important that the settlor is not a parent of minor (under-18) beneficiaries of the trust. Where this happens, the Commissioner can claim that the trust is a revocable trust. A revocable trust is one in which the terms of the trust deed can be altered to give the settlor a beneficial interest in the trust income or property. If it is deemed to be a revocable trust, the tax payable is equal to the marginal rate of the settlor.

Paying tax
Finding out who is responsible for paying tax on the earnings of the trust depends on a number of interlinking factors.
S t e p 1 : The first step is to determine the net income of the trust as if the trust were a resident taxpayer. This is a calculation of the income earned, less the allowable tax deductions. S t e p 2 : Next, determine how much is payable to which beneficiaries. This will depend on whether it is a fixed trust or a discretionary trust. The trustee will have to pass a resolution as to how the income is to be distributed. S t e p 3 : The next step is to determine who are the beneficiaries. Who pays the tax and the tax rate depend on the qualities of the beneficiaries. There are three issues to consider:

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Are they residents? Are they presently entitled to the money, that is, can they demand immediate payment? Are they under a legal disability, such as being under 18 years of age?

Are they residents? Any resident beneficiary who is able to deal with his or her own affairs (and is not under a legal disability) is responsible for the tax payable on his or her trust distributions. In the case of beneficiaries who are considered unable to deal with their own affairs (such as children, the mentally ill or non-Australian residents at the end of the tax year), the trustee is liable to pay the tax on the trust on their behalf. The trustee is also responsible for the tax payable where a person has a right to income from the trust, but cannot claim it immediately (for instance, where a trust is established so that a child cannot claim the income until he or she is 25 years of age).
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Are they presently entitled? The trustee also must pay the tax owing on the income from the trust where there is no person presently entitled, that is, when not all of the income has been allocated to a beneficiary. It is important to avoid this occurring, as the trustee is then liable to pay tax at the highest marginal rate (the exception to this is trusts established under a will). This is to deter the trust from accumulating income and also ensures that the income is passed on to the ultimate taxpayer. The trustee must also make PAYG instalments. Rates of tax The final step to consider is the rate of tax payable:

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Beneficiaries who pay tax on their own behalf will pay the rate of tax applicable to them. For non-resident beneficiaries, the trustee will pay the rate of tax applicable to non-resident beneficiaries. The beneficiary can then claim a tax credit back for the tax paid by the trustee. The rate of tax payable for minors (in the category of being under a legal disability) is more complex. Children receive a tax-free threshold of only $416. For income earned above $416 and less than $1446, the tax payable is 66%, and for any income over that amount the tax payable is 47%. The trustee must also pay the appropriate Medicare levy.

There are exceptions to this. Certain minors are not caught within the special tax rules such as a child in a full-time occupation, an orphan or an incapacitated child. There are also certain categories of income which are not caught, including income from a deceased estate or income from property transferred to the child as a result of a family breakdown, as well as compensatory damages awards.

Reimbursement agreements
If the trust distributes income to a presently entitled beneficiary on the basis of an agreement that the income would benefit other members of the trust, it is likely to be classed as a reimbursement agreement. For instance, if you pay trust income to your child’s school with the expectation that you will be relieved of school fees, this will be a reimbursement agreement. As the school might be tax-exempt, it may not have to pay tax on the trust distribution, whereas if the income was paid to you and not to the school, you would have to pay tax on the amount. In these circumstances, the beneficiary is deemed not to be presently entitled, with the consequence that the trustee may be liable to penalty tax on behalf of the trust.
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Company structure
One of the primary benefits of a corporate (company) structure is that if the business is not successful, family assets are protected (subject to certain exceptions), because only company assets are sold to pay back the business’s debts. A company structure also allows for a degree of income-splitting. However, note should be taken of the personal services company provisions discussed on page 27. Generally, a company will have two directors (public companies will have up to five) and a number of shareholders who purchase shares in the company. A company must also have a Public Officer who deals with taxation matters.

Different categories of shares can have different rights. Some shares might only give rights to income earned by the company, while others might give rights to the capital or the property of the company. However, the proportion in which the rights to income or capital are allocated is determined according to the number of shares each shareholder owns. This does not allow for the flexibility of the discretionary trust structure. As in a trust, a company cannot pass on its losses to its shareholders. Shareholders cannot then offset any business losses against their own income (although they may have a capital loss if they sell their shares and the value of the company has fallen). A company can employ its directors and claim deductions for the directors’ salaries and superannuation contributions. However, as directors are employees, any benefits may be subject to fringe benefits tax (see pages 2936).

The shareholders of the company will receive the profits of the company in the form of dividends. Individual shareholders can then benefit from dividend imputation credits if they receive franked dividends (see Blake’s Go Guide: Tax and You). If the credits exceed the tax paid by the shareholder, the shareholder can claim a refund for the excess. However, there are two situations in which dividend imputation credits cannot be claimed:


The first is where a private company (a company that is not listed on the stock exchange) makes a loan to a shareholder or an associate

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of a shareholder. If it is not a genuine loan requiring repayment and evidenced by a loan agreement, the loan will be deemed to be a dividend. Such a dividend is not frankable, and therefore dividend imputation credits are not attached to it. The second situation is where a private company pays to an associated person (a past or present director or shareholder or an associate of that person) excessive remuneration for services rendered or a retirement or termination allowance or gratuity. In this case, the excess payment is not deductible to the company and is deemed to be a dividend. Again, this dividend is not frankable and dividend imputation credits are not attached to it.

Receiving dividends Previously, if a company received a dividend from another company it could also claim a rebate of tax on the franked portion of the dividend. Since 1 July 2002, however, with the introduction of the Simplified Imputation System, this rebate has been repealed. Franking dividends For a company to be able to frank its dividends, it must keep a franking account. This account tracks the franking credits and debits. A company can claim franking credits from the previous year, company tax instalments and receipt of franked dividends. The franking account will be debited when paying out franked dividends or when the company receives a refund of tax. Only the franked amount of a dividend can result in a credit in the franking account. For instance, if a company receives a dividend of $10 000 franked to 80%, then it gives rise to an $8000 credit. The amount of franking credits that tax instalments provide is calculated according to a formula. This formula allows for the pre-tax profit to be credited in the franking account, which means that all company profits (subject to some qualifications) can be fully franked. The formula is:
1 – Company tax rate Tax instalment × ____________________ Company tax rate

The company tax rate is 30%. So, for instance, if a tax instalment of $100 000 is paid, the franking credit will be:
70% $100 000 × ____ = $233 333 30%
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A company can decide to frank its dividends to a certain percentage. However, there is a required franking amount. If the franking account surplus is greater than the dividend, the dividend must be fully franked. If a company underfranks its dividends, a franking debit of the same amount arises. This is to encourage companies to pass on franking credits to the shareholders. Conversely, a company should only frank dividends to the extent available as it may be liable to franking deficit tax if it overfranks its dividends.

Simplified Imputation System from 1 July 2002 A Simplified Imputation System was introduced from 1 July 2002. Since then, dividends have been called distributions. The system also simplifies the manner in which companies keep franking accounts. Previously companies claimed a rebate in a different way to individuals. Now companies work out their dividend imputation credits in the same way as individuals. Franking accounts are now to be expressed in dollars of tax paid, rather than by using the calculation to work out the taxable income on which tax was paid. The franking account will have a rolling balance, so that the balance at the end of the entity’s previous financial year will be its balance at the beginning of the next financial year. If the company’s franking account is in deficit at the end of the financial year, it will be liable for franking deficit tax. To convert your franking account, you should speak with your accountant. When a company distributes its after-tax profits to its shareholders, the franking credit is calculated according to the following formula:
Company tax rate Amount of the frankable distribution × ___________________ 1 – Company tax rate

The company tax rate is 30%. So if a company has after-tax profits of $70 000 and it wishes to make a distribution of those monies to its shareholders, the franking credit would be:
30% $70 000 × ____ = $30 000 70%

Companies are also required to conform to the benchmark rule during a franking period (being the lesser of six months or the remainder of the income year). A franking period can straddle different income years. This means that whatever benchmark franking percentage you use for the first distribution is to be applied to the other distributions in the franking period. So, if the distribution above was franked to its maximum extent of $30 000, subsequent distributions must be 100% franked.
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If the company does not do so, it may be liable for over-franking tax or a franking debit. The company must notify the Commissioner of Taxation if its benchmark franking percentage differs significantly from the benchmark franking percentage for the last franking period.

Paying tax
Companies have a different system of lodgement and payment of tax to other entities. A company lodges its tax return according to its lodgement category and the tax return will reflect the income for the previous financial year. For example, the 2002/2003 lodgement season would return the income for the 2001/2002 tax year. The lodgement dates depend on the size of the business’s turnover. The lower the turnover, the earlier the tax return needs to be completed. Companies should pay their tax in instalments over the financial year. Generally, quarterly instalments must be paid. If the company’s income year ends on 30 June, and it pays GST on a quarterly basis, the instalment dates would be:
Quarter ending 30 September 31 December 31 March 30 June Instalment due 28 October 28 February 28 April 28 July

There are different instalment dates for companies that lodge GST on a monthly basis. PAYG instalments must be paid electronically if the taxpayer is required to lodge its GST return electronically. The company rate of tax from 1 July 2001 is 30%.

Passing on losses
A company can carry forward any losses it makes indefinitely. This is subject to the company either being owned by the same persons or carrying on the same business in the loss year as in the year the loss will be absorbed against other assessable income. If either of these two tests are not satisfied, the loss cannot be carried forward to be offset against future income gains.

Continuity of ownership test The first test is the continuity of ownership test. This will be satisfied if more than 50% of voting power of the company, 50% of the rights to dividends, and 50% of the rights to capital of the company
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are beneficially owned by the same persons. This means that if the 60% of the shares of the company are sold, the company cannot carry forward its losses. When this test is not satisfied, the company might still be able to carry forward its losses if it passes the same business test.

Same business test The same business test is satisfied if the company carries on the same business in the claim year as was carried on immediately before the change of ownership. The ‘same’ business means ‘in the nature of the same business’ – it does not have to be identical. For instance, a business of distributing and installing swimming pools is not the same as the manufacturing, selling and installing of pools. Where there is a change in the way business is done, such as different clients and different employees at a different place with a different name, the test might not be satisfied. The same business test also requires that the company does not derive income from a business that it did not carry on before or enter into a transaction of a kind that it has not entered into previously. For instance, you can’t buy the shares in a company that operates clothing stores (and has carry forward losses) and continue to operate the clothing stores but also launch into property development and claim the benefit of the carried forward losses.

Transferring losses within a company group
If the company is a member of the same-wholly owned group, the company can transfer its losses to other companies in the group. This means that there must be 100% common beneficial ownership of the two companies. Both companies must be resident companies and the transferee company must have income against which to offset the transferred loss. The loss can be transferred in whole or in part to one or more companies in the group. These measures have been enhanced with the introduction of consolidation for companies.

Claiming losses for bad debts
An entity cannot claim a loss for a bad debt unless the income for the debt had previously been brought to account as income for tax purposes and the loss has been officially written off. Additionally, a company cannot claim a deduction for a bad debt unless it satisfies either the continuity of ownership test or the same business test (discussed above).
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What is PSI?
Personal services income (PSI) is income earned through salary or wages, or as a consultant by exercising effort or skill, when the work has been done for a partnership, trust or company (a personal services entity). It does not include income generated through investment in property or the carrying on of a business. The Personal Services Income regime came into effect in the 2000/2001 income year (but its enforcement was deferred to the 2002/2003 income year for people who operated under the old Prescribed Payments System). Its effect is to include personal services income in the assessable income of the person whose work earned the income, regardless of the entity into which the income was channelled. For an entity to fall within the PSI regime, more than half the income received by the entity must be personal services income. The entity must also consider whether one individual has contributed to more than half of its income, or whether the efforts of other employees or the use of intellectual property also contributed to the earnings.

The deductions claimable are limited to those able to be claimed by an employee, rather than a business – subject to a number of exemptions. A personal services entity can still claim deductions for:

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entity maintenance deductions, for example bank accounts for a trust car expenses, for a car that has no private use, or car expenses and related fringe benefits tax, limited to one car per person superannuation contributions – but if a person contributes less than 20% of the personal services income, the entity can only claim the superannuation guarantee scheme contribution (see page 52) salary or wages paid to the person who earns the personal services income.

Personal services business (PSB)
A personal services business (PSB) is not caught by the regime. To be classed as a PSB, you need to satisfy the results test or the 80% rule. To satisfy the results test at least 75% of the PSI must be income for producing a result (such as producing computer software, rather than working as a programmer) where:


the individual supplies his/her own tools of trade
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the individual is liable for the cost of rectifying any defect in the work produced. In other words, the PSI earner is an independent contractor and not an employee. Alternatively, you can satisfy the 80% rule, where no more than 80% of the personal services income is earned from one single client, plus one of the three other tests for qualifying as a PSB. These are the:

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unrelated clients test: the service provider must gain income from two or more entities as a result of public offers (for example, advertising) or employment test: at least 20% of the principal’s work must be performed by employed persons or business premises test: the business must be conducted from premises which are used exclusively for business and which are physically separate from the home or an associate’s premises.

If it is unclear whether you satisfy the above tests, you are best advised to apply to the Commissioner for a Personal Services Business Determination to state that you are a personal services business.
Give careful consideration to choosing the right business structure for you. Tax matters are only one issue to consider when making your final decision.

When you take over a business, negotiate the most tax effective way of buying the business. If you want to take advantage of company losses, think carefully about making major changes to the way the company does business before the losses have been claimed.

Be careful to separate your deductions between your business and your personal affairs. The PSI regime only applies to your business deductions. You might fail the tests in a new business because it is operated from home though this does not mean that you cannot claim other tax deductions such as the interest cover on negatively geared shares.


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F R I N G E B E N E F I T S TA X What is a fringe benefit?
If your business employs staff, it may be liable to pay fringe benefits tax (FBT). A fringe benefit arises where a past, present or future employee or his/her associate receives a benefit from you as their employer, or from an associate of yours. The amount of the FBT will depend on the type of benefit you are providing. There are 12 categories of fringe benefits and the method to determine their taxable value is different in each. Fringe benefits listed in the Fringe Benefits Tax Assessment Act 1986 are:
1 2 3 4 5 6

Car benefits 7 Living-away-from-home allowance benefit Car parking benefits 8 Property benefits Debt waiver benefits 9 Residual benefits Loan benefits 10 Entertainment benefits Expense payment benefits 11 Airline transport benefits Housing benefits 12 Board benefits.

As an employer, the business will pay the fringe benefits tax on the grossed-up taxable value of the fringe benefit at the top marginal rate of tax.

Calculating FBT
The formula for calculating FBT depends on whether the employer is entitled to an input tax credit in relation to the fringe benefit. If this is the case, it will be a Type 1 benefit. If not, it is a Type 2 benefit. As a simple example of how fringe benefits are calculated, take debt waiver fringe benefits (a Type 2 benefit). Let’s say a business lent an employee $10 000 to buy a car, and the business forgave that debt so the employee did not have to repay it. The taxable value of the benefit is $10 000. There are two steps to calculating the FBT payable. S t e p 1 is to work out the grossed-up taxable value of the Type 2 benefit, where the FBT rate is 46.5%:
1 Value of the benefit × ___________ (1 – FBT rate) Using the example of the $10 000 debt waiver, the calculation will be: 1 = $10 000 × __________ 1 – 0.465 = $10 000 × 1.8692 = $18 692
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This equals the cash equivalent for an employee on the top marginal rate of tax to obtain an after tax benefit of $10 000. This calculation differs if it is a GST-creditable benefit (Type 1 benefit), ie. where the provider is entitled to an input tax credit for it. The GST rate is 10%. The formula for the grossed-up taxable value of a GST-creditable benefit is:
FBT rate + GST rate Value of the benefit × ____________________________________ (1 – FBT rate) × (1 + GST rate) × FBT rate

If, say, the $10 000 was timber acquired by the boss for her business, then given to the employee to build a deck, the grossed-up value of the GSTcreditable benefit (Type 1) would be:
0.465 + 0.1 = $10 000 × ______________________________ (1 – 0.465) × (1 + 0.1) × 0.465 0.565 = $10 000 × ______________________ 0.535 × 1.1 × 0.465 = $10 000 × 2.0647 = $20 647

S t e p 2 is to work out the tax payable on the grossed-up taxable value. FBT is charged at 46.5% (the top marginal rate of individual tax plus Medicare levy):

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for timber (Type 1 benefit) it would be $21 290 × 46.5% = $9899.85 FBT for debt waiver (Type 2 benefit) it would be $19 417 × 46.5% = $9028.91 FBT.

(The difference is that the Type 1 formula recoups the benefit of the input tax credit claimed by the employer under the GST scheme.)

There are exemptions. The first $500 (to be increased to $1000 from 1 April 2007) of in-house fringe benefits is exempt from FBT. So, if your business is a biscuit factory, for instance, each employee can be given up to $500 worth of biscuits per FBT tax year (not the same as a financial year, see page 31) without the business incurring FBT. Infrequent minor benefits of $100 or less (to be increased to $200 from 1 April 2007) are also not subject to FBT. There are a range of work-related items that do not attract FBT, such as: w laptop/notebook computers w diaries w mobile phones w computer software w calculators w protective clothing w briefcases w personal digital assistants.
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Other exemptions are provided for professional membership fees and subscriptions, newspapers used for business, relocation expenses, worksite medical facilities and emergency assistance. The costs of these items are still tax-deductible and are important ways to assist your employees in a tax-effective manner. Some benefits are expressly excluded from the FBT regime, namely salary or wages, most superannuation contributions, benefits under an employee share scheme, payments on termination of employment and capital payments for personal injury. Note that if the benefit could be claimed as a tax deduction in the hand of the employee, generally no fringe benefits tax will arise.

Ta x r e t u r n s a n d F B T If your employee receives over $1000 grossed-up value in fringe benefits in a year, an amount of reportable fringe benefits must appear on his/ her payment summary. Employees do not pay tax on reportable fringe benefits. However, this amount is added to their assessable income for threshold purposes, such as the Medicare levy surcharge and the superannuation surcharge. Importantly, not only is the cost of the benefit deductible to you if it is incurred to make your business more efficient, the FBT is also claimable as a tax deduction. The FBT tax year differs to the financial year and runs from 1 April to 31 March each year. The employer’s FBT liability is due and payable on 21 May. If the FBT liability for the previous year was $3000 or more, the employer must pay the tax in quarterly instalments. FBT instalments are reported on your Business Activity Statement (BAS). These instalment dates will match the GST instalments also notified on the BAS. For monthly payers, it is the 21st day of the following month. For quarterly payers (deferred BAS payers) it is the 28th day of the month following the end of the quarter. Final payment is due with the lodgement of the annual FBT return.

Motor vehicle fringe benefits
A popular work-related fringe benefit is the provision of a motor vehicle. An employee is deemed to use the motor vehicle for private use if it is garaged at his/her home, even if it is only driven to and from work and for work purposes. However, there is an exception for utility trucks – if the employee’s only private use is to drive the truck to and from work, then the car is not subject to FBT. From 1 July 2002, the effective life for motor vehicles has been changed to eight years. This will affect residual values for motor vehicles.
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There are two methods for working out the value of a car fringe benefit: the statutory formula method and the operating cost method. Unless the car is used for a significant amount of business use (around 70% or more), generally the statutory formula method results in less FBT being payable. For the 2004/2005 financial year, the limit for depreciation for cars is $57 009.

Statutory formula method
ABC ____ – E D Where: A = the base value of the car B = the statutory fraction C = the number of days during the year on which a car fringe benefit was provided D = number of days in the tax year E = the amount of any recipient’s payment

A : The base value of the car is the cost of the car (including sales tax) other than registration costs and any tax on registration or transfer. If the car is leased, it is the original leased value of the car. B : The statutory fraction is determined by the number of kilometres travelled each year according to the following table:
Distance travelled in the year Less than 15 000 kms 15 000 to 24 999 kms 25 000 to 40 000 kms More than 40 000 kms Statutor y fraction .26 .20 .11 .07

C , D : These will generally be 365 (366 in leap years) if you have a car for the whole of a FBT year (1 April to 31 March) or the number of days you had the car. E : A recipient’s payment is any payment made by the employee to the employer for the use of the car during the year. It also includes any payment for costs related to running the car which the employer does not reimburse, such as oil, petrol, repairs, registration or insurance. The employee needs to keep documentary evidence of these expenses (other than oil and petrol). For instance, if you give your employee the use of a car from 1 April to 31 March, and the car is worth $20 000 and 19 000 km is driven in the car that year, the calculation would be:
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20 000 × .20 × 365 __________________ = $4000 365

The $4000 is the taxable value of the fringe benefit, which is then grossed up, and FBT is charged on that amount. If, however, your employee had bought $50 worth of petrol every week for the year, this would reduce the taxable value by $2600 to make it $1400.

Operating cost method This method requires your employee to keep a logbook for a continuous period of twelve weeks which records each business journey, the date, the odometer reading at the start and finish and the purpose of the travel. The costs related to the car should also be recorded. The amount of business use and private use is then calculated. The value of the car fringe benefit is determined according to the operating cost formula:
[C × (100% – BP)] – R Where: C = the operating cost of the car during the holding period BP = the business percentage of use for the holding period R = the amount of any recipient’s payment

C : The operating cost will be the lease costs or, where the car is owned by the employer, it will include the depreciation and imputed interest cost. The interest rate is the same as the standard variable owner-occupied housing loan rate. (For the year ended 31 March 2007 this rate was 7.3%). B P : The business percentage is the proportion of the kilometres which were used for business purposes in the period. R : See E on the previous page.

Say you used the same $20 000 car for business purposes for 14 000 km and for 5000 km of private use. The calculation would be:
The cost of the car = $20 000 × 18.75% for depreciation $20 000 × 7.3% for interest registration and insurance petrol service and repairs Total cost = = = = = = $3750 $1460 $1500 $2600 $2000 $11 310

14 000 (number of business km) Business percentage = _____________________________ = 74% 19 000 (total number of km)
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Taxable value of the car fringe benefit is then: $11 260 × (100% – 74%) = $2927.60

As discussed earlier, a recipient’s payment is any payment made to the employer for the use of the car during the year. It also includes any payment for costs related to running the car which the employer does not reimburse, such as oil, petrol, repairs, registration, or insurance. You need to keep documentary evidence of these expenses (other than oil and petrol). The figure above could be reduced by paying for the petrol, which makes the cost of the car $10 000 × 26% = $2600. This payment for petrol of $2600 is classed as a recipient’s payment, leaving no FBT liability.

Car parking fringe benefits
If the employer provides on-site car parking for its employees, it may be liable for FBT on the car parking fringe benefits. This will occur where:
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There is a commercial parking station within one kilometre of the business premises. The parking station charges the public more than the car parking threshold of $6.62 (for the year commencing 1 April 2006) for the day. The car is parked for more than four hours between 7am and 7pm. The car is owned by the employee (or his/her associate) or is a car provided by the employer. The car is parked within the vicinity of the employee’s primary place of employment. The car is used to travel between the employee’s home and his/her primary place of employment.

Car parking for disabled employees is exempted. A small business employer is also exempted from paying FBT on the car parking benefit if its income for the previous FBT year is less than $10 million. There are five possible methods for determining the FBT liability. These are: The commercial parking station method, being the lowest public car park fee for six hours by any commercial carparking station within one kilometre. 2 The market value method, being the amount the employee could have been expected to pay. 3 The average cost method, being the average of the lowest fees charged by any commercial car parking station within one kilometre of the business premises.
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The 12-week register method, where a log book is kept of the parking in that period which is representative of the year. 5 The statutory formula method, which provides the following calculation:

number of days in availability period Daily rate × ________________________________ × 288 × employees 366

The daily rate is determined using points 1–3 above. So, for instance, if the daily rate was $10 and there were 20 employees (on average) over the year, the taxable value would be:
366 $10 × ____ × 288 × 20 = $57 600 366

The employer can choose whichever method it wants of calculating car parking FBT for the FBT year (1 April to 31 March).

Loan fringe benefits
The taxable value of a loan fringe benefit depends on three key factors: the interest rate of the loan the benchmark interest for the period 3 whether the loan is used for income-producing purposes.
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If the loan is used by the employee for an income-producing purpose, the taxable value of the loan is reduced. For instance, if you lent an employee $400 000 and the employee used $250 000 of the loan to pay off his/her home loan mortgage, and used $150 000 to buy a rental property, loan fringe benefits tax would only apply to the amount used to pay off his/her home loan. The reason for this is that the employee could have claimed the interest on the loan to acquire the rental property as a tax deduction. Say, for instance, the interest on the loan from the employer was 4% and the benchmark interest rate was 7%. Because the employee has only paid 4% interest (ie. $6000), he or she can only claim that cost as a tax deduction, not the amount of possible interest of $10 500. The next calculation required is to determine the difference between the interest paid and the statutory benchmark interest rate. The benchmark interest is published as at 31 March each year (the FBT year). It represents the average of the bank interest rates for the previous year. In our example, had the loan been given on 1 April 2006 and been in place until the end of the FBT year, the taxable value of the loan would be the difference between the interest rate of 4% and the statutory
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benchmark interest rate, which is 7.3%, multiplied by the loan amount, that is:
$250 000 × (7.3% – 4%) = $8250

Debt waiver fringe benefits
A taxable fringe benefit arises if an employer forgives a loan to an employee. So, in our example, if the employer waives the $250 000 owing, this would result in a debt waiver fringe benefit. The taxable value of the debt waiver fringe benefit is the amount of the debt forgiven.

Expense payments
If an employer pays or reimburses an employee’s expenses, an expense payment fringe benefit arises. If, however, there has been no private benefit to the employee, and the employee signs a No-Private-Use declaration, FBT will not apply. If the employer reimburses accommodation expenses because the employee is required to live away from home, the employer must declare this on an approved living-away-from-home declaration form. The form should include the reason for living away from home, the timespan and the employee’s usual place of residence and actual place of residence. This exemption will apply even if the employee’s spouse and/or children normally live with the employee. The employer can reimburse an employee for car expenses where the employee uses his/her own vehicle for work purposes, without incurring a FBT liability. The reimbursement is calculated on the cents per kilometre rate, published each year. The rates for the 2004/2005 tax year were:
Cars with non-rotary engines up to 1600 cc Cars with non-rotary engines between 1601–2600 cc Cars with non-rotary engines exceeding 2600 cc 52.0 cents per km 62.0 cents per km 63.0 cents per km

If you have travelled over 5000 km during the tax year, you can claim one-third of the actual car expenses. To do this you will need written evidence of the expenses, but not a log book. Alternatively, you can claim 12% of the original value of the car, subject to the car depreciation limit. If the employee could have claimed a once-only tax deduction for the expense, the taxable value of the expense is reduced. For instance, if the employee paid his own conference fees at a cost of $1000, the taxable fringe benefit is reduced by $1000, leaving no FBT liability. The employee cannot claim the tax deduction because he or she has not incurred the expense (it has been paid by the employer).
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Claiming depreciation on your assets
For any depreciating asset you own which is used to produce assessable income, you can claim depreciation (also known as decline in value) on it as a tax deduction. The asset must be used or installed ready for use before you can claim depreciation. You must also be the legal owner of the asset. There is a limit on the amount of depreciation that can be claimed for cars, regardless of their base cost:



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For cars first acquired in the income years of 2000/2001 or 2001/2002 the luxury car depreciation limit is $55 134 and for 2003/2004, 2004/2005 and 2005/2006 the limit is $57 009. This means that even if the car cost $80 000, the owner can only claim depreciation on a value of $55 134. For the 2004/2005 financial year, the limit for depreciation for cars is $57 009. Special rates of accelerated depreciation apply to cars or motorcycles acquired before 21 September 1999 or by a small business taxpayer before 1 July 2001. After that date, the usual rules of depreciation according to the effective life of the asset apply. You can also claim building depreciation on income-producing buildings constructed after 18 July 1985. This has its own depreciation rate. You can claim items that cost less than $100 such as stationery as an immediate write off.

Calculating depreciation
There are two methods for calculating depreciation: the prime cost method and the diminishing value method. If you acquired the plant or equipment before 11.45 am on 21 September 1999, you can use either method and are also entitled to an accelerated rate of depreciation. If the asset was acquired between 21 September 1999 and 1 July 2001, only small business taxpayers can use the accelerated rates of depreciation.
S t e p 1 : You need to determine the cost of the plant or equipment. If you are a small business taxpayer under the Simplified Tax System you can claim an immediate deduction for items costing less than $1000. The cost of the asset includes the price paid and any incidental costs to gain ownership (such as stamp duty). You can also include the costs of installing the asset and transporting it to its working location. This would include any alterations and additions to the plant needed for it to function.
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If you acquire an asset from an associate at above-market value, you are deemed to have acquired the asset at market value and can only depreciate the asset accordingly.
S t e p 2 : The second step is to work out the effective life (the useful life) of the plant or equipment. The ATO provides depreciation tables which provide guidelines as to the effective life of items. For some assets, such as intellectual property and licences, there is a determined statutory effective life (eg. standard patents for 20 years). S t e p 3 : You must also consider the date of the acquisition of the asset. For plant or equipment acquired after 26 February 1992 and before 21 September 1999, either method can be used, and you can use accelerated depreciation rates as listed below:





Diminishing value method 100% 60% 40% 30% 25% 20% 10%

Effective life in years Fewer than 3 years 3 to less than 5 years 5 to less than 6

Prime cost method 100% 40% 27% 20% 17% 13% 7%


6 2/3 to less than 10 years 10 to less than 13 years 13 to less than 30 years 30 or more years

For items acquired on or after 21 September 1999, the depreciation rates are determined according to the effective life of the asset and which method you choose to use. For instance, if you buy curtains for a rental property (effective life of 10 years), you can choose to use the diminishing value depreciation rate of:
Days held 200% _________ × ____________________________ × base value 365 effective life of the item in years

This means that if the curtains cost $1000, you can claim a tax deduction of $200, assuming they were in place for the whole of the tax year. The diminishing value method allows you to claim a higher depreciation rate and hence you will claim the total cost of the curtains as a tax deduction faster. In the second and subsequent years, the amount of the depreciation
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is deducted from the diminished base value. So, in this case, for the second year it would be 20% of $800 (its written down value), allowing a deduction to be claimed of $160, and in the third year it would be 20% of $640, being a deduction of $128, and so on. To use the prime cost method the depreciation rate is:
Days held 100% _________ × ___________________________ × asset cost 365 effective life of the item in years

So, if the effective life is 10 years, the depreciation rate is 100% divided by 10 years, giving a depreciation rate of 10%. This means that after 10 years, the entire cost of the item ($1000) will be written off, ie. claimed as a tax deduction. When the business ceases to hold the asset (eg. stops using it or disposes of a depreciated asset), a balancing adjustment must be calculated. If the termination value (which excludes any GST component) is less than the asset’s adjustable value (its written-down value), then the business can claim an additional tax deduction in the year of income in which the asset was disposed. However, if the asset’s termination value is higher than the adjusted value, then the difference must be included as assessable income. This is because the business has progressively claimed a greater tax loss than has actually occurred.

Taxpayers and depreciation
Taxpayers claiming depreciation must complete depreciation schedules. These schedules are to be included in your tax return and must separate the assets using the diminishing value method and the prime cost method. The original cost and the written-down value are also to be shown. Records of what assets are pooled must also be kept. From 1 July 2001, small business taxpayers who adopt the Simplified Tax System (STS) have particular rules for depreciation of assets, but the information above should give you an idea of how depreciation works in theory. Your financial advisor or accountant will be able to assist you.

Depreciation for computer software
For computer software acquired after 11 May 1998, the effective life is 2.5 years, resulting in a depreciation rate of 40% on a prime cost basis. Depreciation can be claimed for each item of software from when the software is used or installed ready for use.
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Alternatively, from 1 July 2001, the expenditure incurred in developing or commissioning software can be pooled (all costs added together) and is deductible at the rate of 40% for the first two years and 20% in the third year. This pooled deduction is available even if the software is not used. In the case of commercial website development that only involves content being marked up and linked, the ATO considers that no software has been developed. This cost can then be claimed as a general business deduction if done in the course of business. If website development occurs before the commencement of the business, it is a capital cost. However, website development may result in software where it allows interaction with users who have been authenticated and the website underwent a testing and debugging process. The costs of changes to such a website will be classed as software if it alters the functionality of the site. Ongoing maintenance in the course of business, however, will be a deductible expense.

Intellectual property
There are statutory rates for the effective life of intangible assets, as listed below:
Asset Standard patent Innovation patent Petty patent Registered design Copyright Effective life 20 years 8 years 6 years 15 years The shorter of 25 years or when the copyright ends

The costs of annual renewal fees such as for patents are deductible as business expenses.
If you want to claim decline in value (previously known as depreciation) for second-hand goods, you need to have a professional valuation of the asset done. The tax deduction is based on the value and effective life of the asset. The ATO will not accept your estimate of the asset’s depreciated value. You can claim a direct deduction for small cost items such as stationery that cost less than $100 without using the decline in value process.
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What is trading stock?
Trading stock is any item that you manufacture for sale or trade for the purposes of making a profit. There are particular rules relating to the taxation treatment of trading stock. The stock must be on hand to be classed as trading stock. This means that you must have the power to control the disposal of the stock. Obviously, the amount for which you sell your goods is brought to account as income. You are also entitled to a deduction for the cost of goods purchased.

Calculating deductions
You need to determine whether you are entitled to a further deduction or whether you must add back some trading stock value as income. This ensures that business owners cannot purchase large amounts of stock simply to claim an early deduction. On the other hand, if you have used up your stores of stock without replenishing them, you are in fact making a loss. This second calculation is simply deducting the cost of goods sold from receipts. This is worked out by determining the value of the opening and closing stock on hand at the commencement (1 July) and the end (30 June) of the tax year. The opening stock value must be the same as the closing stock value of the previous tax year. To determine this, a stocktake must be undertaken at the close of the tax year.

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If the value of the closing stock exceeds the value of the opening stock, the excess is added to your assessable income. If the value of the closing stock is less than the opening stock, you can claim an additional tax deduction for the difference.

There is no additional deduction for lost or destroyed stock. It will also not form part of the closing stock at the end of the year. Spare parts held for maintenance and repair are not classed as trading stock.

Valuing trading stock
Trading stock can be valued according to the cost method (full absorption cost), market selling value or replacement value. (There are special rules for obsolete items.) The basis of valuation can be different for each class of stock or item of stock. The method can also be changed from year to year, but must remain the same throughout the tax year.
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If you acquire trading stock from an associate (not at arm’s length) at a price above market value, you can only claim a deduction for its market value. Importantly, if you are an STS taxpayer and the difference between the value of the trading stock on hand at the commencement of the tax year and the close of the tax year is less than $5000, you do not have to account for differences in the trading stock value. You can make a reasonable estimate that there is less than $5000 difference. Where this is the case, an STS taxpayer is not required to undertake a stocktake.
The way the trading stock provisions work, there is no advantage to you buying up before the end of the financial year to claim a large tax deduction as you will be caught by the opening stock/closing stock calculation.

There are special valuation provisions in the event that the trading stock has become obsolete.

If trading stock is disposed of outside the ordinary course of your business (such as giving it away or using it for private use) you must include it as assessable income according to its market value.

There are special rules for livestock – check with the ATO.

If the trading stock was paid for in foreign currency, the Australian dollar tax translation is to be brought to account when the trading stock becomes on hand.

The cost method is the full absorption cost of the trading stock, which includes a proportion for costs such as freight, insurance and delivery.


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What is capital gains tax?
Capital gains tax (CGT) was introduced from 20 September 1985. It applies to any asset acquired on or after that date. Capital gains are, in general, profits you make when you sell an asset for more than you paid for it. Certain assets are not subject to capital gains tax, such as:

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Your main residence. You can only have one main residence. For more information see below, or Blake’s Go Guide: Tax and You. Decorations (medals) for valour Personal use assets acquired for less than $10 000 (such as furniture) Wins from gambling, such as lotteries Motorcycles and cars designed to carry a load of less than one tonne and less than nine passengers Plant and depreciating assets Damages for personal injury Collectables acquired for less than $500 (such as artwork or jewellery) Trading stock.

If you use part of your home for your business or for an income-producing purpose (such as renting out a room), you lose part of your main residence exemption from capital gains. This part is worked out according to a proportion of floor space used for the income-producing activity and the part used as your dwelling. In determining whether it is used for an income-producing purpose, the main factor is whether the area is set aside exclusively as a place of business which is clearly identifiable and not easily adapted to private use. If this is the case, then you will be entitled to claim a tax deduction against the income earned by the business for a proportion of the rent or mortgage payable for the area. The exemption is not lost if you offered music lessons from home in the lounge room.

Calculating capital gains tax
How much capital gains tax you pay depends on when you bought the asset. If you acquired the asset on or before 19 September 1999, you have a choice beween calculating your CGT liability using the discount method or the indexation method. You should do both calculations. For property bought after the early 1990s, the discount method will generally result in lower taxable capital gains.
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For either method, you need to determine what can be claimed in the cost base of the asset. This includes:

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the cost of the asset any costs of capital improvements or enhancements (eg. a new roof) any cost incurred to defend your title to your property non-capital costs of ownership, which are costs for which you have not claimed a tax deduction, including rates, interest on loans and repairs (for assets acquired after 20 August 1991) incidental costs in relation to acquiring or disposing of the asset, such as the fees of an agent, valuer, solicitor or surveyor, costs of transfer, stamp duty and registration, advertising and valuation costs. You must keep records of all the cost base items you want to claim. The records must be in English (or convertible to English) and show the nature of each transaction affecting the asset. The records must be kept for five years after the last likely CGT event in relation to the asset.

Discount method Using this method, individuals are subject to capital gains tax on only 50% of the total gain – effectively, they are gaining a discount. Trusts are also entitled to a 50% discount on the capital gains made. Superannuation funds are entitled to a one-third discount. Companies must pay CGT on the whole capital gain. For instance, if you signed a contract for a house in Balmain on 7 October 1998 at a cost of $580 000 and sold it on 20 January 2002 for $640 000, you would be obliged to pay CGT on one-half of the gain. The amount of the gain can, however, be reduced by adding other costs into the cost base of your house (ie. its total cost when you bought it):
Stamp duty: Registration fees: Solicitor’s fees: Real estate agent’s fees: Total costs $21 590 $150 $5000 $15 000 ________ $41 740

Adding these costs to the original cost of $580 000 means you essentially paid $621 740 for the house. So to calculate the taxable capital gain: ($640 000 – $621 740) ÷ 2 = $9130

This amount of taxable capital gain is then added to your assessable income for the year, and you are charged the marginal tax rate on the full amount. So, if your assessable income for the year was $50 000, you would add the $9130 to this income ($59 130) and pay tax on this full amount.
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Indexation method If the asset was acquired before 19 September 1999, you could elect to use the indexation method. Indexation ensures that you do not pay capital gains tax on the inflation factor. It is based on the Consumer Price Index (CPI) tables. To be entitled to index or claim discount capital gains, you must have held the asset for more than 12 months. You must work out in which quarter each item in the cost base was incurred. The quarters in each year are: 1 January to 31 March; 1 April to 30 June; 1 July to 30 September; 1 October to 31 December. In the above example, the purchase price, stamp duty, solicitor’s fees and registration fees would have been incurred in the quarter ending 31 December 1998. These costs, totalling $606 740, are inflated by comparing the CPI in the quarter when they were incurred and the CPI in the quarter when the property is sold. Importantly, the indexation factor for disposals has been frozen at the September 1999 figure of 123.4. In other words, any costs incurred after this date cannot be indexed. The CPI figure for the December 1998 quarter was 121.9. The indexed (inflated) cost base of the asset then becomes:
123.4 $606 740 × _____ = $614 206 121.9

The real estate agent’s fees ($15 000) were incurred after September 1999 and thus cannot be indexed. These fees are then added to $614 206 to give a total indexed cost base of $629 206. Capital gains tax is then paid on the difference between this amount and the sale price of $640 000 ($10 794). Where the indexation method is used there is no discount.

Capital losses
If you sell an asset and make a capital loss, you can claim that loss against your other capital gains, but not against your income. If you do not have any other capital gains, you can carry the loss forward to the next year, or until you make a gain. However, you cannot index the cost base items to work out your capital loss regardless of when you purchased the asset.

CGT concessions for small business
There are four CGT concessions for small business which are available for transactions after 21 September 1999. These concessions are in addition to the general discount capital gains provisions for individuals. It is important to apply the exemptions in the correct order to obtain maximum relief from potential capital gains tax. The four conditions to be met to be eligible for these tax concessions are:
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A CGT event happens in relation to an asset you own. The asset must be an active asset of the business (used to operate the business, including goodwill), and have been active for over half the time that the business has owned it (does not include depreciating assets). The event would ordinarily result in a capital gain. The total net value of the assets of the business and its related entities is less than $6 million.

The four available concessions are:
1 5 - y e a r a s s et ex empti on: If you have owned and operated a business for over 15 years, the business can claim a complete exemption from capital gains tax on its active assets. However, any active asset must have been held for over half of the 15 years before sale of the asset. If you are trading as a sole trader or a partnership, to claim the deduction you must also be over 55 years of age and retired or permanently incapacitated. If the business is owned by a company or a trust, any payment to a CGT concession stakeholder (the controlling individual of an entity who has over 50% of the rights to dividends, voting power and capital distributions of a company, or 50% of the rights to income and capital of a trust) within two years of the sale of the asset is also exempt. However, it is exempt in the proportion to which the controlling individual held his/her interest in the entity. 5 0 % a c t iv e as s et ex empti on: This applies to active assets of the business upon disposal. The individual discount capital gains are also available and can be applied to the same transaction, so that only 25% of the gain will be subject to capital gains tax. This can be reduced further by the roll-over provisions or the retirement exemption. R e t ir e m e nt ex empti on: A full exemption from capital gains tax can be claimed if the funds received are used formally for retirement. This is an important decision as there is a lifetime limit of $500 000 for each individual. A controlling individual of a company or a trust can also claim the benefit of this exemption if the entity pays an eligible termination payment (ETP) to its CGT concession stakeholders. The entity must state what percentage of this CGT exempt amount each individual can claim. If this exemption is claimed, the entity cannot claim a deduction for the ETP. R o ll- o v e r rel i ef: Roll-over relief can only can be applied after the application of the 50% active asset exemption and allows the business to defer the capital gains. It means that the business can acquire another asset in replacement of the first one (within certain time limits) without incurring full capital gains tax liability on the disposal of the original asset. The replacement asset must also be an active asset.
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What is the GST?
A goods and services tax (GST) is a consumption tax. In some countries it is called a Value Added Tax (VAT). In Australia the rate of GST is currently 10%. This means that consumers will be charged 10% GST on taxable supplies. For instance, if you have a plumbing business and the value of the work done is $500, you might charge $50 GST, making the bill a total of $550. All accounts should be GST-inclusive and you may be asked for a tax invoice, which a business registered for GST must supply within 28 days of the request. At the same time, you can claim input tax credits for the GST you pay other suppliers. You need a tax invoice from your suppliers to be able to claim these. The tax invoice must state the supplier’s Australian Business Number (ABN), brief description of the goods or services and the GST-inclusive price. There are three kinds of transactions under the GST scheme: taxable supplies, GST-free supplies and input taxed supplies.

Taxable supply
To be making a taxable supply, you must:

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be an entity (including sole traders, partnerships, companies, trusts and unincorporated associations) be carrying on an enterprise in Australia (which is similar to, but wider than carrying on a business) have a turnover of over $50 000 each tax year (which includes all GST-free supplies and taxable supplies, but not input taxed supplies, the GST component of taxable supplies or the transfer of capital assets) be registered for GST or required to be registered not be supplying a GST-free product or service.

Most businesses will fall within this definition and will be required to charge GST and therefore must be registered for GST (see below). To apply for an Australian Business Number (ABN), which is to appear on your tax invoices, visit the ATO website at

Australian Business Number (ABN)
On the same day the GST was introduced, new Pay As You Go rules came into force. The rules require businesses to register for an Australian Business Number. Obtaining an ABN is part of the process for a business to register for GST.
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If you supply services to any person other than as an employee, they will request your ABN.

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If you do not have an ABN, they will be required to withhold tax at the top marginal rate from your payment. This is similar to your employer deducting tax from your salary or wages before you get your pay. Conversely, if a person supplies goods or services to you, his/her ABN should appear on the invoice. If it does not, you should be withholding 48.5% of the invoice amount and sending it to the Australian Taxation Office.

GST-free supply
Some supplies are GST-free. This means that you are not required to charge GST on the transaction. GST-free supplies include:

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fresh food (does not include confectionery, snacks, ice-cream and biscuits) education and child care w health and medical services w international transport and travel w exports w certain council services w certain activities of charities and churches w purchase of a going concern business.

Input taxed supply
If a supply is input taxed, the business supplier cannot charge the consumer GST. However, you as the supplier cannot claim back input tax credits for the GST which you incur in operating the business. Input taxed supplies include:

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residential premises for rent food at school canteens financial supplies, such as loans sales of residential premises (except new residential/commercial premises) fundraising activities of charities.

Lodging a Business Activity Statement
A registered entity is required to lodge a Business Activity Statement (BAS) on either a monthly, quarterly or annual basis. The ATO has announced that a bookkeeper is not qualified to complete BAS returns unless working under the supervision of a qualified registered tax agent.


Mo n t h ly Entities with a turnover in excess of $20 million per year are required to lodge a monthly BAS. The final date for lodgement is the 21st day of the following month.


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Q u a r t e r ly If you choose to make quarterly returns, the BAS must be lodged by the 28th day of the month following each quarter. The quarters end 31 March, 30 June, 30 September and 31 December. Hence, quarterly returns must be lodged by 28 April, 28 July, 28 October and 28 February, respectively. (The February date is later due to the Christmas/January break.) Taxpayers lodging quarterly returns are referred to as deferred BAS payers because they have longer to lodge and pay than monthly payers. A n n u a lly An annual BAS can be lodged by entities with an annual turnover of less than $2 million that elect to pay GST by instalments. The ATO will estimate the amount of those instalments if you elect for them to do so.


In completing the BAS, you can account on either a cash or accruals basis, if the annual turnover of your business is less than $1 million.

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The cash method means that you can claim input tax credits as you incur them, and debit GST collected as it is charged and collected. An entity whose turnover exceeds $1 million should account on an accruals basis. This means that you work out your GST credits and debits on the basis of your entitlement to be paid. If your credits exceed the GST collected or collectable, you will receive a refund. If the GST collected or collectable exceeds your claimable input tax credits, you will have to pay the difference when your BAS is lodged.

Sale of a going concern
If you sell land on which a farming business has been carried on for at least five years before the sale and the buyer intends to continue to farm the land, the transaction will be GST-free. The sale of a going concern business is also GST-free. To claim this concession, there are a number of conditions: The buyer must be registered or be required to be registered. The buyer and seller must have agreed in writing that the sale is the sale of a going concern. 3 The seller must be obliged to carry on the business up to the date of the sale. 4 The seller must supply to the buyer all things necessary for the business to continue.
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If the sale of the business is affected by the sale of the shares in the company which owns the business, this exemption does not apply. Such a sale will be treated as a financial supply and is input taxed.
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Real estate
If you rent residential premises, you will not be required to pay GST on the rent. The transaction is input taxed, which means that the landlord cannot claim input tax credits for any supplies related to the leasing of the premises. However, if you rent commercial premises such as a shop, and the landlord is registered or required to be registered, you will be charged GST on the rent. When you sell residential premises, the transaction will be input taxed. The exception to this is that new residential premises, ie. newly built dwellings or substantially renovated homes, are subject to GST. The sale of commercial premises or commercial residential premises is also subject to GST. Commercial residential premises are dwellings such as boarding houses that are akin to a hotel. When you sell real estate, GST will be imposed on the commission charged to you by the real estate agent.

General insurance, such as home and contents insurance, is subject to GST. Health insurance, however, is GST-free. The supply of life insurance is treated as a financial supply and input taxed.

If an item was acquired by a registered person for a creditable purpose, ie. for the business, you can claim an input tax credit. If the item is later put to personal use, you are required to make an adjustment to repay part of the input tax credit claimed. Where supplies of goods or services are cancelled or goods returned later, an adjustment will also need to be made. If the transaction results in the reduction of your GST liability you must hold an adjustment note. Adjustments will also be made for bad debts, changes in the intended business use, and when the business is transferred or closed down.

GST groups
Groups of related entities can apply to be treated as a single taxpayer for GST purposes. To be able to do this, each member of the GST group must be registered and have the same tax and accounting period for GST. This has a number of advantages. It will reduce the number of returns that are required to be lodged. The representative member is responsible for paying the GST. Supplies and acquisitions within the group are ignored for GST purposes. Joint ventures can seek approval to be grouped for GST purposes.
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Payroll tax is a State tax that is collected by employers. It is paid as a percentage of wages paid to employees. Wages includes any amount payable by way of salary, commission, bonuses or allowances. Wages includes benefits and employer contributions to superannuation (see Blake’s Go Guide: Tax and You). Benefits are those covered by the fringe benefits tax legislation and in most States the amount has to be included in the grossed-up component of taxable fringe benefits. Certain payments to contractors could be classed as wages. Some wages are exempt, namely those paid by organisations such as hospitals, schools, councils, charitable organisations or religious institutions. In most States, employers must register if their wages bill exceeds a threshold. The threshold levels are:
State New South Wales Northern Territory Queensland South Australia Threshold $50 000 monthly $104 167 monthly $83 333 weekly $9500 weekly State Tasmania Victoria Western Australia ACT Threshold $84 167 monthly $45 833 monthly $14 423 weekly $104 167 monthly

NSW has a Payroll Tax Incentive Scheme until 2009 which gives a payroll tax rebate for businesses in high unemployment areas. The rates of payroll tax for each State from 1 July 2005 are:
State Australian Capital Territory New South Wales Northern Territory Queensland South Australia Tasmania Victoria Western Australia Rate 6.85% 6.00% 6.20% 4.75% 5.67% 6.10% 5.25% (5% in 2008) 5.5% Annual wages threshold all all all all all all all all

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Employers are required to contribute a minimum sum on behalf of their employees to a complying superannuation fund. As an employer, if you fail to do so, you will be liable to pay a superannuation guarantee charge equal to the superannuation that should have been paid, plus interest and an administrative fee. This fee is a base payment plus a fee per each employee for which there has been a superannuation contribution shortfall. Employer superannuation guarantee contributions are tax deductible to the employer, but the superannuation guarantee charge is not. The required minimum rate of contributions for 2004/2005 and future years is 9% of the employee’s wages up to a maximum salary of $35 240 per quarter (2006/2007). An employee is a person who receives payment to perform services whether as a member of the executive body or as a worker. It is does not include independent contractors. Salary or wages includes commissions, directors’ fees and payments for services including overtime and bonuses. It does not include payment of a domestic or private nature of not more than 30 hours a week. The superannuation guarantee does not have to be paid in relation to employees who earn less than $450 per month, employees aged 70 years or over, part time employees (working less than 30 hours per week) less than 18 years of age and non-resident employees. If an employee’s superannuation entitlements have reached his or her reasonable benefits limit, he or she can elect not to have the employer pay the superannuation guarantee contributions. The employee must give this election in writing to the employer. The election is irrevocable. Salary sacrifice arrangements, negotiated with the employee, can be used to fund the superannuation guarantee contributions. From 1 July 2003, employers will be required to lodge a Superannuation Guarantee Statement (SGS) on a quarterly basis. Employers will have up until 28th of the month following the end of the quarter to make contributions, with a shortfall statement required to be lodged by 14th of the next month. The superannuation guarantee charge is also due on that date. This relies on self-assessment. The Commissioner can issue default assessments. An employer can object to an assessment. From 1 July 2003, employers will be required to report to their employees how much has been paid on their behalf and to which superannuation fund. This is not required if the employee is in a defined benefit fund. Employers must keep sufficient records to determine their liability. Penalties apply for failure to keep appropriate records and for making false or misleading statements regarding your liability.
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What is PAYG?
From 1 July 2000, all entities are subject to the Pay As You Go (PAYG) system. Previously, employees were PAYE (Pay As You Earn) taxpayers, as employers would deduct tax instalments from each pay packet and forward the group tax to the ATO. The PAYG system requires this tax to be paid in instalments. Entities are required to withhold the tax component of certain payments: salary and wages, remuneration to a company director, pensions or annuities, eligible termination payments, social security payments, compensation, and payments arising from an investment where the investor does not quote a tax file number. Additionally, a taxpayer must withhold tax from payment to a supplier that supplies goods or services without providing a tax invoice showing the supplier’s ABN. The Commissioner has issued withholding schedules to determine how much of the payment is to be withheld. Withholders fall into three categories:

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L a r g e w it h hol ders : in excess of $1 million in PAYE remittances for the previous financial year. Required to submit payment electronically within a week of the withholding. Me d iu m w ithhol ders : remitted to the ATO more than $25 000 and less than $1 million for the previous financial year. For entities which are deferred BAS payers (turnover less than $20 million but with GST obligations), the statement and payment are due by the 28th day of the month following the quarter in which the monies were withheld. For medium withholders who are not deferred BAS payers, statement and payment are due by the 21st day after the end of the month in which the payments were withheld. S m a ll w it h hol ders : remitted less than $25 000 for the previous financial year. Required to submit and pay by the 28th day after the end of the quarter in which the monies were withheld. From 6 June 2003, individuals whose previous income tax assessment was a liability of less than $500 or who return less than $2000 of gross business income are not required to pay PAYG instalments.

An entity required to withhold payments under the PAYG system must register with the Commissioner. There is also an obligation to lodge an annual report. The report is due on 14 August if it relates to withholding payments from salary and wages, and on 31 October if it relates to withholding payments where the ABN has not been quoted or from investment returns. An annual payment summary must be provided to
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those from whom the entity withheld payment. Generally, this is required within 14 days of the end of the financial year. The statement should also include reportable fringe benefits.

Annual payments
For business entities (including partnerships and trusts), PAYG instalments are reported on the BAS. Taxpayers who do not need to be registered for GST, and whose most recent notional tax amount is less than $8000, can choose to make one annual instalment of PAYG. This means that if you receive payments for services rendered from which tax has not been deducted, you may be required to make quarterly PAYG payments. From 1 July 2004, charities and non-profit bodies such as child-care centres are entitled to make annual payments. Annual instalments are due to be paid by 21 October after the end of the previous financial year.

Quarterly payments
Payment dates for quarterly PAYG instalments match the lodgement dates of the quarterly BAS, being on or before the 28th of the month following the end of the quarter. For entities not entitled to be deferred BAS payers, the statement and payment are due by the 21st of the month following the quarter. For a partner in a partnership, the quarterly PAYG instalment will relate to a quarter of his or her share of the net income of the partnership, calculated by the previous year of income. This can be adjusted to reflect a fair and reasonable amount according to the interest the partner had in the partnership in the instalment period. A similar calculation is made for beneficiaries of a trust estate.

Instalment rate notice
The Commissioner issues an instalment rate notice. This instalment rate is applied against the instalment income for the quarter to determine the instalment amount. The taxpayer can choose a different instalment rate, but should document how this figure was arrived at. A taxpayer can vary the amount of notional tax on which the instalment is calculated by providing an estimate of the benchmark tax on or before the due date for the instalment. Penalty tax will be applied if the estimated variation is too low.
Remember the obligation to withhold tax if the person you are dealing with does not provide you with an ABN.
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Planning your business
S t r u c t u r e : The first step in tax planning is to consider the best structure for your business. In making this decision, you should seek expert advice from your lawyer or accountant. 2 Tim in g : The second step is to consider the timing of your tax liabilities. If you can defer payment of tax or bring forward deductions or tax rebates, this will improve your cash flow. 3 S im p lif ie d Tax Sy s tem or not? Thirdly, if you are a small business, you should seriously consider whether it is best to operate under the Simplified Tax System and use a cash accounting method for your financial affairs. This may result in lower compliance costs. But you should think of the way in which your business operates and determine whether you are best to be assessed on an accruals method of accounting.

Taxes and concessions
A business should consider all the taxes which it may be liable to pay, such as income tax, CGT, FBT, and collecting GST. It is important to know and meet the various lodgement dates for these taxes. Calculating anticipated tax liability will assist your management of cash flow.

Penalties relating to statements If you or your agent makes a statement that results in a shortfall in tax being paid, you can be subject to heavy penalties. The level of the penalty depends on the severity of the behaviour. Penalties will apply if a shortfall of tax is paid due to:

w w w w w

a false or misleading statement claiming that an income tax law applies in a way which is not reasonably arguable failing to make a statement such as failing to lodge a tax return disregarding a private ruling entering into a scheme, arrangement or understanding to avoid tax.

Concessions There are a range of concessions for small business, such as deductions for self-employed superannuation contributions, and the capital gains tax small business concessions (see page 45). These should be kept in mind when planning the growth of your business.
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Financial transaction reports All cash dealers (mainly financial institutions) are required to report to the Australian Transaction Reports and Analysis Centre (AUSTRAC) any significant cash transactions, ie. over $10 000. If the cash dealer has reasonable grounds to suspect that the transaction may be an offence against a Commonwealth law such as tax evasion, the dealer must report the transaction to AUSTRAC. Similar provisions apply for international funds transfers. Cash dealers are also obligated to verify the identity of a person who opens an account. If the cash dealer does not have the relevant signatory information, it must block withdrawals from the account to that person. It is an offence to open up an account in a false name.

Powers of the Commissioner of Taxation
You must not enter into an arrangement, scheme or understanding with the dominant purpose of reducing your tax liability. This does not mean that you cannot make sound commercial decisions that result in tax-effective management. However, if the main purpose of the scheme is to reduce your tax liability or gain tax benefits, the Commissioner of Taxation can ignore the scheme or deem an alteration of the arrangement that may result in higher tax liability. There are severe penalties for tax avoidance. The Commissioner of Taxation and officers have extensive powers to audit your records. The Commissioner has power to issue an amended assessment within four years of the original assessment. Where there has been tax avoidance, the Commissioner can issue an amended assessment at any time. The ATO has broad powers to access and search your premises. If an ATO officer arrives seeking access, you should check that they have the appropriate search warrant. The only documentation which you are not obliged to disclose is that covered by legal professional privilege. This is documentation which has been brought into existence for the dominant purpose of litigation or the seeking and giving of legal advice. You must also provide all reasonable assistance, such as providing passwords for computer records or keys for filing cabinets. If you receive a notice seeking access to your records, you should seek immediate professional advice from your lawyer or accountant. The Commissioner can require you to attend to give evidence under oath relating to your taxation affairs. You cannot refuse to answer any question, even on the grounds of self-incrimination. If you receive such a notice, you should again seek immediate professional assistance.
B l a k e ’s G O G U I D E S

The ruling system
The ATO has a system of rulings where it states its opinion on the applicable law. You can access the public rulings on the ATO website (http://law.ato. These rulings bind the ATO if you fall precisely within its terms. You can seek a private ruling on a particular issue. If you do so, you are bound by that ruling unless you successfully object or undertake a different activity. A private ruling may deal with the liability to income tax, withholding tax, Medicare levy, franking deficit tax or FBT. It can relate to a past, current or future year of income. An application for a private ruling must be made on the approved form available on the ATO website. The Commissioner must not make a private ruling if there is an existing private ruling, a tax audit is being carried out, or it would be unreasonable to comply with the application. You cannot apply for a private ruling more than four years after the last day allowable for lodging a return for that tax year. The ATO will endeavour to make the ruling within three months. Rulings are published on the ATO website with identifying information deleted. The ruling can be withdrawn with the rulee’s consent or by the Commissioner if the arrangement has not been commenced. A later inconsistent public ruling will override the private ruling. You can also seek a binding oral ruling (by phoning the ATO) in relation to assessable income, exempt income, deductions and tax offsets. The ruling can only be sought in relation to a past or the current year of income. The Commissioner may refuse to make a ruling for certain reasons because there is already a private ruling on the matter or it would require an assumption to be made about a future matter. The applicant is not entitled to a written record of the ruling and it cannot be appealed or objected to. However, the applicant can make an application for a private ruling on the same matter, and object to the private ruling. The ATO also issues product rulings. These rulings advise investors of the ATO’s view of the tax consequences of the investment scheme. This provides important advice for intending investors. Class rulings apply to persons in the same class, such as all the employees of a particular employer in relation to, say, a redundancy package.

Keeping records
You are required to keep records (in English) of your taxation affairs for at least five years and for at least one year after the disposal of a capital item. The ATO now has the power to issue an on-the-spot fine for poor record keeping.
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To claim certain tax concessions, you must formally notify the ATO or make an election. If they are required to be lodged, it is usually with the next relevant tax return. If they are not required to be lodged, the tax return must make it clear that the election is being claimed. Relevant documents must be retained to support the election. Listed below are some of the pertinent notifications and elections.

Elections required to be in writing and lodged with the ATO
¸ Election to adopt the operating cost method to determine the taxable value of car fringe benefits ¸ Request for the Commissioner not to apply penalty rates of tax to trust income for which there is no beneficiary presently entitled

Elections required to be in writing but not lodged
¸ Election where interests in trading stock have changed ¸ Joint election for roll-over relief where there is a disposal of depreciable plant on change of ownership or interest ¸ Records of allocating plant to a depreciation pool or cancelling the allocation ¸ Agreement to transfer losses within a company group ¸ Election that specifies ‘CGT exempt amount’ in relation to a small business retirement disposal ¸ Election for small business asset roll-over relief ¸ Election that the employer not be liable for the superannuation guarantee charge because the employee has reached his/her reasonable benefits limit ¸ Election to adopt the statutory formula method or the log book method to determine the taxable value of car parking fringe benefits


B l a k e ’s G O G U I D E S

Area Accounting enquiries – business taxes Apply to pay tax in instalments (under $25 000) Business Activity Statements completion Business income tax Business Portal Business registrations Business tax reform infoline Capital gains tax – business Companies and superannuation funds Electronic lodgement service Employee benefits arrangements Fringe benefits tax Goods and services tax Low income earners Pay as you go (PAYG) Personal services income Progress of assessment/amendment Share dividend imputation credits Simplified tax system Superannuation helpline Tax file numbers – business Telephone number 13 72 86 13 2550 13 28 66 13 72 86 13 2866 13 72 86 1300 137 619 13 72 86 13 72 86 13 15 50 1800 001 111 13 11 42 13 72 86 13 28 61 13 72 86 13 72 86 13 72 86 13 72 86 13 72 86 13 10 20 13 72 86

Useful websites
Federal Government sites
Australian Tax Office Tax reform and the New Tax System Federal Government Business Entry Point Federal Attorney General Australian Competition and Consumer Commission ATO Business Portal agdHome.nsf

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State Government business sites
New South Wales Attorney General’s Department New South Wales Law Society Legal Database New South Wales Law Society Business Access Victoria Queensland Department of State Development Business Channel South Australia Business Tasmania Western Australian Business and Investment Gateway Territory Business Centre (Northern Territory)

Other sites
Australian Financial Services Directory Business Review Weekly Australian Business News Institute of Chartered Accountants in Australia Australian Financial Review abmagazine


B l a k e ’s G O G U I D E S

Au st r a l i a n Bu s in e s s N u m b e r (A B N ) A number required by businesses who are registering for GST. Bu sin e s s Ac t ivity S ta te m e n t (B A S ) A statement that all GST-registered businesses must lodge with the ATO either monthly, quarterly or annually. Bu sin e s s d e d uc tio n A loss or amount that you spend in the course of carrying on your business which reduces your taxable income. It must have been incurred in the course of carrying on your business and does not include costs for starting up or winding up a business. Bu sin e s s i n c ome The earnings gained in the course of carrying on a business with a view to profit. May include one-off profits, capital gains, cash incentives and the value of non-cash incentives. Ca p it a l c o s t s Costs incurred in starting up a business. Ca p it a l g a i n s ta x (CG T ) Profits made when an asset is sold for more than its original cost. Certain assets are not subject to CGT. Co mp a n y A business structure which includes directors who manage the company, shareholders who buy shares in the company, and a Public Officer who deals with taxation matters. De b t w a i v e r f rin g e b e n e fit A fringe benefit which arises if an employer makes a loan to an employee and then forgives the loan. De p r e c i a t i o n The decline in value that can be reasonably expected of an asset. Depreciation can be claimed as a tax deduction. Disc o u n t me t ho d This is the method used to calculate the capital gain made on an asset acquired after 19 September 1999. Disc r e t i o n a r y tru st A trust which gives a nominated person (usually the trustee) the ability to decide who will gain the benefit from the trust. Dist r i b u t i o n s See Dividends. Divid e n d The payment received by shareholders in a company, representing their share in the company’s profits. Also called distributions. E f f e c t i v e l i f e This is the time frame for which an asset can be reasonably used in a business. The ATO issues tables of effective lives for most assets. E le c t i o n This is where you are required by the tax law to make a choice that must be notified to the ATO, generally in your next tax return. F ixe d t r u s t A trust which gives a fixed proportion of interest to each beneficiary. F r in g e b e n e f i ts ta x (F B T ) Tax paid on the benefits an employee receives from an employer. There are twelve categories of fringe benefits which are subject to tax. Go o d s a n d s e r vic e s ta x (G S T ) A consumption tax which is charged on all taxable supplies. Most Australian businesses with a turnover of more than $50 000 per year are required to charge GST on their goods and services.
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In d e x a t i o n me th o d This is an optional method of calculating the capital gain made on an asset acquired before 19 September 1999. In p u t - t a x e d g o o d s o r se r v ic e s Goods and services on which GST cannot be charged to the consumer. Le a s e i n c en tive An amount paid to encourage a person to enter into a lease, classed as assessable income for tax purposes. Pa r t n e r s h i p A business structure in which more than two or more people become ‘partners’ and split the income earned between them. Each partner can own equal or different percentages of the business. Pa y As Yo u Go (PAY G ) A system for reporting and withholding tax on income. It requires tax to be paid in instalments. Pa y r o l l t a x A State tax paid by employers based on the amount of wages they pay to employees. Pe r s o n a l s e r v ic e s b u s in e s s (P S B ) A business whose income is primarily personal service income (subject to certain ‘tests’). PSBs do not fall under the Personal Services Income Regime. Pe r s o n a l se r v ic e s in c o m e (P S I) Amounts earned through salary or wages, or as a consultant working for a personal services entity (partnership, trust or company). If more than half a person’s or entity’s income is personal services income, they fall into the Personal Services Income Regime. Ro l l o v e r re lie f This allows the taxpayer to carry forward a tax liability to a later date by rolling it over. S e t t l o r The person who sets up a trust with a cash payment. S imp l i f i e d Imp u ta tio n S y s te m This is the system under which distributions (previously known as dividends) are taxed. S imp l i f i e d Ta x S y s te m (S T S ) A taxation system for certain eligible small businesses which was introduced on 1 July 2001. S o l e t r a d e r A businessperson who carries on a business on his or her own. May involve employing other staff, but there will be no partners in the business. S u p e r a n n u a tio n A system where money is placed in a fund to provide for retirement. Employers are required to contribute a minimum sum on behalf of their employees. Ta x a b l e i nc o me The amount of assessable income minus any allowable deductions. Tr a d i n g s t oc k Any item manufactured for the purposes of making a proft. Tr u s t A business structure which has a trustee, who legally owns all the assets, and one or more beneficiaries who receive the benefits of the trust’s assets. Tr u s t e e The person or entity which controls the benefits of a trust. Wi n d f a l l g a in s Unexpected gains that are not generated through your own effort or work.


B l a k e ’s G O G U I D E S


Allowances see Capital allowances Australian Business Number (ABN) 47–48 Australian Tax Office contacts 59

Business Activity Statement (BAS) 48–49 Business, definition of 7 Business deductions definition of 11 home office expenses 11 insurance 12 other costs 11–12 tax-related expenses 12 Business income capital and income gain 9 definition of 9 distinction between lease incentives 10 one-off transactions 10 taxable 9–10

Deductions see Business deductions Depreciation claiming on assets 37 calculation of 37–39 schedules 39 computer software 39–40 intellectual property 40 Dividend franking 23 imputation credits 22–23 receipt of 23 simplified system 24

Capital allowances claiming depreciation on assets 37 calculation of 37–40 schedules 39 computer software 39–40 intellectual property 40 agreements 21 Capital gains tax (CGT) calculation of 43–44 - discount method 44 - indexation method 44–45 capital losses 45 concessions for small business 45–46 definition 43 exemptions 43 profits and 9 Companies dividends - imputation credits 22–23 - simplified system 24 - receipt of 23 - franking 23 losses - passing on 25 - transferring 26 - bad debts 26 payment of tax 24–25 shares 22 structure 22

Fringe benefits tax (FBT) calculation of 29–30 car parking 33–34 debt waiver 35 definition 29 entertainment 36 exemptions 30–31 expense payments 35–36 loans 34–35 motor vehicle benefits 31–32 calculation of 32–33 residual 36 tax returns 31 Fringe Benefits Tax Assessment Act 1986 29

Goods and services tax (GST) adjustments 50 Australian Business Number (ABN) 47–48 Business Activity Statement (BAS) 48–49 definition 47 GST-free supply 48 GST groups 50 input taxed supply 48 insurance 50 real estate 50 sale of going concern 49 taxable supply 47

Hobby, definition of 7

Income, see also Business income definition 8-9 Income tax profits and 9 63

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Intellectual property, claiming depreciation on 40

one-off 8 taxation of 9

Losses capital 45 claiming for bad debts 26 from a non-commercial business 15 in a company 22 in a partnership 18 in a trust 19 passing on a company’s 25 transferring a company’s 26 Notifications and elections 58

Partnerships advantages 16 calculating income 17–18 changes 18 definition 17 income-splitting 17 partnership agreement 17 Pay As You Go system (PAYG) definition 53 instalment rate notices 54 payments 54 withholding schedules 53 Payroll tax definition 51 threshholds and rates 51 wages and benefits 51 Personal Services Income (PSI) deductions claimable 27 definition 27 PSI business 27–28 Profits business 9

Sole traders definition 16 tax considerations 16 Small business CGT concessions for 45–46 superannuation contributions 14 definition 13 structuring of 13–14 Software, claiming depreciation of 39 Superannuation contributions 14 Guarantee Scheme 52

Tax planning general considerations 55 Ruling system 57 Tax Commissioner’s powers 56 taxes and concessions 55 Trading stock calculating 41 definition 41 valuation of 41–42 Trusts payment of tax 20 reimbursement 21 trustees and settlors 19–20 types of 19

Websites 59–60 Windfall gains 8


B l a k e ’s G O G U I D E S

Blake’sGOGUIDESe s t o a c o m p l e x w o r l d Simple guid
A u s tr al ian au th or s – A u str ali an co n te n t
Blake’s Go Guides cut right to the heart of the issues that affect you and explain them in a simple, accessible way. Find out more about tax, law, investment, finance and computers quickly and easily. Blake’s Go Guides give you the knowledge and confidence to ask the right questions, avoid common pitfalls, and get the best results.

This book gives you information on a range of issues including:

✓ ✓ ✓ ✓ ✓ ✓

claiming business deductions different business structures and how they affect your tax fringe benefits tax, capital gains tax and GST paying payroll tax the Pay-As-You-Go scheme tax planning.

About the author
Lyndal Taylor is a qualified solicitor and senior lecturer in the Faculty of Law at the University of Technology, Sydney. She has been a taxation and commercial law teacher for over 16 years.

Titles in the Blake’s Go Guides series
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Tax and You Getting Out and Staying Out of Debt Small Business and Tax Superannuation Made Easy Accounting for non-Accountants General titles Basic Everyday Maths Everyday Spelling and Grammar Speaking Skills for Every Occasion Writing Essays and Reports Quitting Smoking for Life Getting the Job You Want 200+ Overseas Travelling Tips Setting Up and Running a Successful Home Business Top 100 Sales and Marketing Tips Parenting with CARE Better Communication with Family, Friends and Colleagues

Access Excel Internet + Email Internet for Business Internet for Parents Home and Car

Outlook PowerPoint Windows XP Word Your PC

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Buying and Selling Real Estate Buying and Selling New and Used Cars Renovating Your Home Budget Backyard and Garden Makeovers Law The Law and You Small Business and the Law Investment, Finance and Tax Investing in Property Investing in Shares Paying Off Your Mortgage Quickly

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Pascal Press, PO Box 250, Glebe NSW 2037, Ph (02) 8585 4044

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