It’s December – the month that always seem to race by as we approach the end of the year and all the festivities it brings. We hope you all have a lovely, happy, and safe festive season.
It is the time of year for giving and, for those with plenty to spare who are interested in a more strategic approach, we take a look at some of the options for ‘structured giving’.
And in tax news, the ATO is taking a tougher approach with small businesses to make sure they pay on time. In our quarterly tax update, you’ll find news of the ATO’s new focus on small businesses and employers as well as a reminder about the late lodgment amnesty.
Our final article this month looks at some common errors made when claiming tax deductions, particularly when it comes to declaring personal use of business assets such as home offices, phones, cars, and holiday homes.
How to give back
Australia is a giving country, but we often give in kind rather than financially.
Whenever there is a disaster here or overseas, Australians rush to donate their time, household goods and cash. However, we still lag other countries when it comes to giving money.
According to Philanthropy Australia, our total financial giving as a percentage of Gross Domestic Product is just 0.81 per cent, compared with 0.96 per cent for the UK, 1 per cent for Canada, 1.84 per cent for New Zealand and 2.1 per cent for the US.i
Currently the number of Australians making tax deductible contributions is at its lowest levels since the 1970s.ii Despite this, the Australian Tax Office reports that deductible donations claimed by individuals rose from $0.74 billion in 1999-2000 to $3.85 billion in 2019-20.iii
Considering an estimated $2.6 trillion will pass between generations over the next 20 years, the opportunities for increasing our financial giving abound. Philanthropy Australia wants to double structured giving from $2.5 billion in 2020 to $5 billion by 2030.iv
Many ways to give
There are many ways of being philanthropic such as small one-off donations, regular small amounts to say, sponsor a child, donating to a crowd funding platform or joining a giving circle.
For those with much larger sums to distribute, a structured giving plan can be one approach.
You can choose a number of ways to establish a structured giving plan including through a public or private ancillary fund (PAF), a private testamentary charitable trust or giving circles.
Whichever way you choose, there are attractive tax incentives to encourage the practice.
The type of vehicle will depend on:
- the timeframe of your giving
- the level of engagement you want
- whether you want to raise donations from the public
- whether you want to give in your lifetime or as a bequest
- whether you want to involve your family to create a family legacy.
Private ancillary fund
A private ancillary fund is a standalone charitable trust for business, families and individuals. It requires a corporate trustee and a specific investment strategy. Once you have donated, contributions are irrevocable and cannot be returned. To be tax deductible, the cause you are supporting must be a body identified as a Deductible Gift Recipient by the Australian Tax Office.
The benefits of a PAF are that contributions are fully deductible, and the deductions can be spread over five years. The assets of the fund are exempt from income tax.
The minimum initial contribution to a PAF is at least $20,000. The costs of setting up a PAF are minimal and ongoing costs are usually about 1-2 per cent of the value of the fund.
Each year you must distribute 5 per cent of the net value of the fund to the designated charity.v
Testamentary charitable trust
An alternative to a PAF is a testamentary charitable trust, which usually comes into being after the death of the founder. The governing document is either a trust deed or the Will.
With a testamentary charitable trust, trustees control all the governance, compliance, investment and giving strategies of the trust. The assets of the trust are income tax exempt. The minimum initial contribution for such a fund is usually $500,000 to $2 million.vi
Philanthropy through structured giving still has a long way to go in Australia. The latest figures for total giving in Australia is $13.1 billion, of which $2.4 billion is structured giving. Currently the number of structured giving entities stands at just over 5400.vii
As the baby boomers pass on their wealth to their families, there is a wide opening for some of this money to find their way into charities and causes through structured giving.
If you want to know more about structured giving and what is the right vehicle for you to help the Australian community at large, then give us a call to discuss.
i, iii https://www.philanthropy.org.au/wp-content/uploads/2022/11/7480-PHA-Giving-Trends-and-Opportunities-2023-1.2.pdf
v, vi https://www.philanthropy.org.au/guidance-and-tools/ways-to-give/choosing-the-right-philanthropic-structure/
vii A Blueprint to Grow Structured Giving 2021 – Philanthropy Australia
Tax Alert December 2023
The ATO is getting back to business
The lenient approach taken by the ATO during the pandemic is over, with its focus now returning to traditional debt collection. With several key areas under the spotlight, some small businesses should consider taking advantage of the current amnesty to get their reporting in order. Here’s some of the latest developments in the world of tax.
Reminder on late lodgment amnesty
If your small business is not up-to-date with its tax lodgments, it’s worth noting the government’s current Lodgment Penalty Amnesty ends on 31 December 2023.
The amnesty allows small businesses to lodge any outstanding income tax and FBT returns or business activity statements (BAS) due between 1 December 2019 and 28 February 2022 without lodgment penalties being applied (general interest charges still apply).
Businesses with an annual turnover under $10 million when the original lodgment was due are eligible for the amnesty.
Warning on ATO’s ‘back to business’ focus
In recent speeches, the ATO has put small business on notice that its lenient attitude during the pandemic is being replaced with a much tougher approach designed to re‑establish its traditional culture of ensuring taxpayers pay on time.
With collectable debt rising dramatically over the past four years, the ATO is returning to its normal debt collection stance and is taking firmer action with taxpayers.
Five areas the ATO is particularly focussing on are unpaid Super Guarantee Charge; debt arising from ATO audit adjustments; refund fraud; aged, high-value debts; and employers with new self-assessed debt.
Employer SG compliance under the microscope
The ATO is expanding its use of the information reported by employers through the Single Touch Payroll (STP) system in relation payment of employees’ Super Guarantee (SG).
Employers are required to make SG payments quarterly and the ATO is now using STP and Member Account Transaction Service information to check whether an employer has paid on time.
The new checks will help the ATO follow-up non-compliant employers and prepare for the introduction of the new rules requiring employers to make SG payments at the same time as wages, which commence on 1 July 2026.
Sharing economy reporting expands
Businesses connecting customers with people who provide services or hiring personal assets through a website or app are increasingly being added to the Sharing Economy Reporting Regime (SERR).
Platforms providing taxi services (including ride-sourcing) and short-term accommodation were required to start collecting seller transaction information from 1 July 2023.
From 1 July 2024, all other sharing economy platforms will be required to start collecting and reporting personal and contact details, business information and financial identifiers related to transactions twice a year to the ATO.
Tax residency test updates
A new one-stop shop tax ruling to help people self-assess their residency for tax purposes has been released by the ATO to help people going to work overseas or moving to Australia.
Taxation Ruling TR 2023/1 replaces older tax rulings with more contemporary guidance reflecting modern global work practices and recent court decisions. It also contains information on the 183-day residency test for people arriving on short-term work and holiday visas.
The tax office uses different rules to the Department of Home Affairs, meaning it is possible to be an Australian resident for tax purposes without being a citizen or permanent resident.
SMSF promoter scheme warning
The ATO is once again reminding trustees of self-managed super funds (SMSFs) to be wary of people promoting illegal schemes for early access to super.
Warning signs of an illegal scheme can include claims you can access your super and put it towards anything you want, charging high fees and commissions, and requesting your identity documents.
Anyone approached about these types of schemes should not sign any documents or provide any personal details, and should immediately report the interaction to the ATO.
Keep your ABN details updated
Ensuring your ABN details are up-to-date on the Australian Business Register is an important requirement of being in business.
Without it, you could also miss out on valuable financial assistance or government information.
Emergency services and government agencies also use ABN details to identify businesses in areas affected by emergencies, so it’s important to keep your physical business and postal address current.
Making sure your deductions don’t get personal
It can be easy to overlook your personal use of business assets when it comes to completing your business and self managed super fund tax returns but be warned, the ATO is taking an interest in this area.
The ATO’s Small Business Random Enquiry Program found around 16 per cent of small businesses were either carelessly or deliberately overclaiming expenses in their tax returns.
If business assets are used for a mix of business and private use – such as vehicles and phones – the amount claimed must reflect only the business-related portion of the expense.
Rental properties under the spotlight
Holiday home rentals are also an area where many taxpayers are failing to follow the tax rules.
Deductions for holiday home expenses can only be claimed to the extent they relate to producing rental income, so you need to apportion your expenses if the property is only genuinely available for rent part of the year.
Apportionment is also required if you use the property for private purposes during the year, only use part of it to earn rent, or if it is used by family or friends at various times during the year.
Expenses relating solely to the rental of the property (such as agent commissions and advertising costs), don’t need to be apportioned.
To ensure you don’t invite attention from the ATO, review your treatment of business asset expenses annually, in case your private usage has changed.
New or additional private usage of the asset means you need to recalculate the percentage of business used to determine the correct deduction claim.
Proper business records explaining all relevant transactions (including payment to and receipts from employees, shareholders and associates) need to be kept to support your claims.
Common taxpayer errors
The ATO says there are some common errors when it comes to claiming deductions.
Taxpayers are not permitted to claim any deductions against business income for expenses relating to an asset entirely used for private purposes.
An example is an asset (such as a boat or plane) purchased and used for private purposes.
Deductions can only be claimed for the relevant percentage of business use. For example, if the private use component represents 60 per cent, only 40 per cent of the expense amount can be claimed in your return.
FBT and deemed dividends
Another common mistake is claiming a deduction for an asset giving rise to a deemed dividend. This arises when an asset is purchased through a company and used for private purposes by a company shareholder or their associates.
Under the tax rules, both the company and the dividend recipient must record such dividends in their income tax returns, as the asset is being used for their personal benefit.
Some small businesses also misunderstand the implications of purchasing an asset (such as a motor vehicle), that is used by an employee or the associate of an employee for personal purposes.
When this occurs, the benefit must be reported in the business’s fringe benefit tax (FBT) return and the resulting FBT liability paid.
Fixing lodgement mistakes
To avoid finding your business in the ATO’s spotlight, check you have correctly apportioned all expense claims before lodging your business or SMSF return.
You also need to consider whether the rules for private company benefits and FBT apply to any of your business assets. If you make a mistake with a deduction claim, you will need to amend or lodge an income tax or FBT return to correct your tax position. There are time limits on both business and super amendments.
We can help you to correct any mistakes and to deal with the ATO to ensure your tax reporting is smooth and worry-free.