The Koustas ORAcle | Melbourne Accountants

ISSUE #132 - Individual (sole trader) Year end 2020 - What you need to know ...

Written by Koustas + Co | Jun 9, 2020 5:57:35 AM

Here we outline the key issues for an individual (Sole Trader): -

 

In brief

 

What’s new

 

2020-21 Federal Budget delayed until October

The release of the 2020-21 Federal Budget has been postponed from its traditional date in May until 6 October 2020. We expect there will be a number of reforms and measures to tighten spending, recover revenue, and range of productivity measures. We will keep you up to date with any significant changes that might impact on you.

 

Working from home? What you can claim

From 1 March 2020 until at least 30 June 2020, special arrangements are in place to make it easier for individuals to claim expenses they have incurred while working from home during the COVID-19 pandemic. 

If you have incurred work-related expenses and you have not been reimbursed by your employer, you can claim these expenses at a rate of 80 cents for each hour you work. To use this method, you will need a record of the hours you have worked, such as a diary or timesheet. 

The claim covers all of your additional running expenses such as:

  • Electricity and gas
  • Decline in value and repair of capital items such as office furniture
  • Cleaning expenses
  • Phone and internet expenses
  • Stationery
  • Decline in value of computers and devices

 

For example, if you worked from home for 7 hours a day on the weekdays between 1 March and 30 June 2020, that’s 84 working days in NSW, 83 days in SA, NT & Vic and 82 days in ACT / Tas and WA.

The rate covers all of your expenses and you cannot claim individual items separately, such as office furniture or a computer. 

The COVID-hourly rate can be claimed per individual (it is not limited by household). That is, if you have multiple people working from home in your household, each person can claim the 80 cents per hour rate for the hours they have worked from home. 

Using the COVID-hourly rate is optional and aimed at people who do not normally work from home. For some, their expenses will be higher, such as those with a dedicated home office, or for those that normally operate their business from home. In these circumstances the normal rules will apply. 

The ATO appears to be taking the view that occupancy costs such as mortgage interest payments and rent cannot generally be claimed by those who are temporarily working from home as a result of COVID-19.

 

Home based businesses

In general, if your business is a home-based business, you should be able to claim both occupancy and running expenses.

 

Living with JobKeeper 

The JobKeeper $1,500 per fortnight per employee subsidy is paid in arrears to businesses that have experienced a downturn of 30% or more (50% for businesses with turnover of $1bn or more). A 15% threshold is used for ACNC-registered charities. The purpose of the scheme is to keep workers employed and ensure there is a viable workforce on the other side of the pandemic.

At present, JobKeeper is set to continue until 27 September 2020. And for businesses, JobKeeper’s decline in turnover is a once only test. If the eligibility criteria were met at the time of applying for JobKeeper, a business can continue claiming the subsidy assuming the other eligibility criteria for them and the individual employees, are met.

However, we expect continuing eligibility to the subsidy will change over time as the regulators gain a clearer insight into the impact of the pandemic. Much of this data is likely to come from the actual and estimated GST turnover that forms part of the compulsory monthly JobKeeper reporting requirements in tandem with the volume of applications to Jobseeker. That is, are the right businesses receiving JobKeeper and is the subsidy keeping workers employed?

If your business did not initially qualify for JobKeeper, you can apply to start JobKeeper payments when you meet the eligibility criteria. Not every industry will experience the economic impact of the pandemic in the same way. Some will experience a greater decline in later months.

One of our most asked questions about the decline in turnover test is ‘what if I got it wrong?’ Eligibility is generally based on an estimate of the negative impact of the pandemic on an individual business’s turnover. Some will experience a greater decline than estimated while others will fall short of the required 30%, 50% or 15%. There is no clawback if you got it wrong as long as you can prove the basis for your eligibility going into the scheme. For those that, in hindsight, did not meet the decline in turnover test, you need to ensure you have your paperwork ready to prove your position if the ATO requests it. You will need to show how you calculated the decline in turnover test and how you came to your assessment of your expected decline, for example, a trend of cancelled orders or trade conditions at that time.

 

Making JobKeeper payments on time

To be eligible for JobKeeper payments, staff must be paid at least $1,500 during each JobKeeper fortnight. If you pay employees less frequently than fortnightly, the payment can be allocated between fortnights in a reasonable manner. For example, if you pay your employees on a monthly pay cycle, your employees must have received the monthly equivalent of $1,500 per fortnight. 

For the first two JobKeeper fortnights (30 March-12 April, 13 April-26 April), employers had an extension until 8 May to make the JobKeeper payments to eligible employees. For the remaining JobKeeper fortnights, employees will need to receive at least $1,500 by the end of each JobKeeper fortnight or the monthly equivalent of $1,500 per fortnight. Depending on your pay cycle, this may require some adjustments each month.

 

Tax treatment of Government grants and relief

During the pandemic, bushfires and floods, grants and loans have been available to help business and individuals through the crisis. The way these grants and loans are taxed will vary.

If you carry on a business and the payment relates to your continuing business activities, then it is likely to be included in your assessable income for income tax purposes. This position is likely to be different where the payment was made to enable you to commence a new business or cease carrying on a business. 

Grants will generally be assessable income unless a law has been passed to specifically exclude the grant or loan from tax. For example, the special disaster grant for the bushfires was made non‑assessable and non-exempt income. Also, amounts provided under the cash flow boost measure are non-assessable non-exempt income. 

When it comes to GST treatment, the key issue is whether the grant is consideration for a supply. That is, was the business expected to deliver something for the grant? The following government payments are not consideration for a supply and therefore not subject to GST or included in your GST turnover: 

  • JobKeeper payment
  • Cash flow boost payment
  • The Early Childhood Education & Care Relief Package paid to approved child care providers
  • Payment of grants to an entity where the entity has no binding obligations to do anything or does not provide goods and services in return for the monies.

 

Utilising the $150,000 instant asset write-off

The instant asset write-off enables your business to claim an upfront deduction for the full cost of depreciating assets in the year the asset was first used or installed ready for use for a taxable purpose.

The COVID-19 stimulus measures temporarily increased the threshold for the instant asset write-off between 12 March 2020 and 31 December 2020 from $30,000 to $150,000, and expanded the range of businesses that can access the threshold to those with an aggregated turnover of less than $500 million. 

For example, if your turnover is under $500 million and you purchase an eligible asset for $140,000 (GST-exclusive) on 1 June 2020 (and install it ready for use by 30 June 2020), then a deduction of $140,000 can be claimed in the 2019-20 financial year. 

If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a direct short-term benefit to you. However, if this measure is likely to reduce the taxable income of the business for the year then it may be possible to vary upcoming PAYG instalments to improve cash flow.

If the asset is a luxury car then the deduction will be limited to the luxury car limit ($57,581 in 2019-20).

The business use percentage of the asset also needs to be taken into account in calculating the deduction. For example, if a sole trader acquires a car for $40,000 but only expects to use it 80% in the business then the immediate deduction would be $32,000. 

The increase to the instant asset write-off threshold in the stimulus package is the fourth increase or extension and businesses will need to be wary of what they are claiming and when:

 

For assets costing $150,000 or more

For small businesses (aggregated turnover under $10m), assets costing $150,000 or more can often be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. Having said that, depending on when the asset was acquired and first used in the business the rate of deduction in the first year could be higher (see Accelerated depreciation deductions below). 

If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $150,000 at the end of the 2020 income year, then the remaining pool balance can be written-off as well.

Pooling is not available for medium and large businesses, which means that the depreciation rules will apply to assets that don’t qualify for an immediate deduction.

 

Accelerated depreciation deductions

Businesses with a turnover of less than $500 million can access accelerated depreciation deductions for assets that don’t qualify for an immediate deduction for a limited period of time.

This incentive is only available in relation to: 

  • New depreciable assets
  • Acquired on or after 12 March 2020 that are first used or installed ready for use for a taxable purpose by 30 June 2021.

It does not apply to second-hand assets or buildings and other capital works expenditure. The rules also won’t apply if the business entered into a contract to acquire the asset before 12 March 2020. 

Businesses are able to deduct 50% of the cost of a new asset in the first year. They can then also claim a further deduction in that year by applying the normal depreciation rules to the balance of the cost of the asset.

Accelerated depreciation deductions apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years.  

For example, let’s assume that a business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2020-21 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation on the balance of the cost. If the business is a small business entity and using the simplified depreciation rules, this would mean an additional deduction of $18,750 (i.e., 15% x $125,000). The total deduction in the 2020-21 tax return would be $143,750. Without the introduction of accelerated depreciation the business would have claimed a deduction of $37,500 (i.e., 15% x $250,000).

 

Reporting payments to contractors

The taxable payments reporting system requires businesses in certain industries to report payments they make to contractors (individual and total for the year) to the ATO. ‘Payment’ means any form of consideration including non-cash benefits and constructive payments. Almost every year a new industry or sector is drawn into the taxable payments reporting net.

Taxable payments reporting is required for: 

  • Building and construction services
  • Cleaning services
  • Courier services
  • Road freight services
  • Information technology (IT) services
  • Security, investigation or surveillance services
  • Mixed services (providing one or more of the services listed above) 

 

The annual report is due by 28 August 2020. This will be the first report for those businesses providing road freight, information technology, and security, investigation or surveillance services.

 

Cents per kms change for work-related car expenses

The rate at which work-related car expenses can be claimed using the cents per kilometre method will increase from 1 July 2020 from 68 cents to 72 cents per kilometre 

Using this method a maximum of 5,000 business kilometres can be claimed per year per car.

 

Superannuation guarantee amnesty

7 September 2020 is the last day for employers to take advantage of the superannuation guarantee (SG)  amnesty. The amnesty provides a one-off opportunity to disclose historical non-compliance with the superannuation guarantee rules and pay outstanding superannuation guarantee charge amounts. 

To qualify for the amnesty, employers must disclose the outstanding SG to the Tax Commissioner. You either pay the full amount owing, or if the business cannot pay the full amount, enter into a payment plan with the ATO. If you agree to a payment plan and do not meet the payments, the amnesty will no longer apply.

Keep in mind that the amnesty only applies to “voluntary” disclosures. The ATO will continue its compliance activities during the amnesty period so if they discover the underpayment first, full penalties apply. The amnesty also does not apply to amounts that have already been identified as owing or where the employer is subject to an ATO audit. 

Even if you do not believe that your business has an SG underpayment issue, it is worth undertaking a payroll audit to ensure that your payroll calculations are correct, and employees are being paid at a rate that is consistent with their entitlements under workplace laws and awards. 

If your business has engaged any contractors during the period covered by the amnesty, then the arrangements will need to be reviewed as it is common for workers to be classified as employees under the SG provisions even if the parties have agreed that the worker should be treated as a contractor. You cannot contract out of SG obligations.

 

1 January 2020 changes to Super Guarantee calculation

From 1 January 2020, new rules came into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the employer. 

Previously, some employers were paying SG on the salary less any salary sacrificed contributions of the employee. Now, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and they choose whether or not to include the salary sacrificed amounts in OTE.

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE plus any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.

The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base.

 

30 June deadline for foreign residential property owners

Legislative changes made earlier this year prevent foreign residents from accessing a capital gains tax (CGT) exemption on their Australian family home (the main residence exemption). 

A transitional rule enables foreign residents who have held their property continuously from 9 May 2017 to access the exemption if they sell by 30 June 2020 (or sign a sale contract). 

After 30 June 2020, if you are a non-resident for tax purposes at the time you sell your main residence, you will no longer be able to access the main residence exemption and you will need to pay CGT on any gain you make. These new rules apply regardless of whether you were an Australian resident for part of the time you owned the property and no apportionment applies - the exemption simply does or does not apply depending on your residency status for tax purposes at the time the CGT event is triggered. The CGT event is generally triggered when the contract of sale is signed. 

However, if you are a resident of Australia at the time of the CGT event, then you may be able to access the main residence exemption, even if you have been a non-resident for some or most of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if applicable, access the main residence exemption (the rules contain provisions that will deny the exemption where someone attempts to avoid the new rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party). 

An exclusion also applies where the individual has been a foreign resident for six years or less and a ‘life event’ occurs such as death or a terminal illness.

 

Deductions no longer available for vacant land

From 1 July 2019, new rules prevent some taxpayers from claiming a deduction for interest and other holding costs for property that they own. Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs. 

Mum & Dad developers (individuals, closely held trusts, SMSFs and unit trusts or partnerships where any interests are held by individuals, discretionary trusts or SMSFs) are the focus of these changes. Since the new laws apply retrospectively to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in place, the amendments not only impact those intending to develop vacant land but those who have acquired land to develop. 

The rules seek to ensure that deductions cannot be claimed during periods where a residential dwelling is being constructed or substantially renovated until the work has been completed, an occupancy certificate is issued and the property is either rented out or genuinely available for rent. 

Where holding costs cannot be claimed as a deduction, then they will generally be added to the cost base of the property for CGT purposes. This means that they can potentially reduce a capital gain made when you dispose of the property in the future. However, holding costs cannot be added to the cost base of a property unless it was acquired after 20 August 1991 and these costs cannot increase or create a capital loss on sale of a property.

 

Rental properties, COVID-19 and beyond

Rental properties are always high on the ATO’s agenda and this year will be no different.

If COVID-19 has impacted commercial or residential premises you own and rent out, from a tax perspective there is very little that has changed.

  • If tenants remain in the property or the property remains genuinely available for rent, you can continue to claim expenses as usual, even if the rental rate has been reduced on a temporary basis or tenants have been unable to pay rent for a period of time.
  • If you negotiated with your bank to defer mortgage repayments, you can continue to claim interest as the deferred interest is capitalised.
  • If you received an insurance payment for rent defaults, or your tenant made a back payment of rent they owe, this income is taxable and will need to be declared in your tax return.

Outside of COVID-19 related issues, the ATO continues to find errors in rental property claims made with up to 90% of tax returns containing an error, particularly for ‘other’ deductions and interest. Common issues include: 

  • Claiming deductions for properties that are not genuinely available for rent
  • Claiming deductions for an entire property when only part of the property was available for rent
  • Claiming deductions for loan interest expenses when a portion of the loan was used for private purposes
  • Incorrect categorisation of expenditure incurred in order to repair or improve the property
  • Not having records to substantiate income received and deductions claimed. If you are claiming a rental property expense it is important to substantiate the claim. In the event of an ATO audit, if you cannot produce a tax invoice or other evidence for an expense, it is likely the deduction will be denied. 
  • Incorrectly apportioned claims for interest deductions 

 

Deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim.

If your rental property is outside of Australia, and you are an Australian resident for tax purposes, you must recognise the rental income you received in your tax return (excluding any tax you have paid overseas), unless you are classified as a temporary resident for tax purposes. You can claim expenses related to the property, although there are some special rules that need to be considered when it comes to interest deductions. For example, if you have borrowed money from an overseas lender you might be subject to withholding tax obligations. 

 

Impending changes

Single touch payroll extension for closely held employees

Many small businesses have closely held employees such as family members. Small businesses with 19 or fewer employees were to start reporting these closely held employees through single touch payroll (STP) from 1 July 2020. In response to the COVID-19 pandemic however, the ATO has granted an extension until 1 July 2021.

Your business can start voluntarily reporting these closely held employees, and many may have already done so to access JobKeeper payments, but it is not a requirement until 1 July 2021.  

All other employees should be reported through STP.

 

Superannuation

Early access to superannuation

Individuals in financial distress as a result of the coronavirus pandemic are able to self-certify and apply for early release of up to $10,000 of their superannuation in 2019-20, and again in 2020-21 (up until 24 September 2020). 

To be eligible for early release, you should ensure you meet the eligibility criteria:

  • You are unemployed, or
  • You are eligible for jobseeker, parenting payment or special benefit or farm household allowance, or
  • On or after 1 January 2020, you were made redundant, or
  • Your working hours were reduced by 20% or more, or
  • For sole traders, your income reduced by 20% or more. 

 

The early release of superannuation measure is available to Australian citizens, permanent residents and New Zealand citizens with Australian held super. Eligible temporary visa holders can also apply for a single release of up to $10,000 before 1 July 2020.

We’ve had a number of questions from clients asking if they can access $10,000 of their superannuation in 2019-20 and 2020-21 and then recontribute the amount before the end of the financial year to claim a tax deduction.

If you have withdrawn more than you need, you can recontribute this amount under normal contribution rules. However, if you are withdrawing superannuation with the intent to recontribute the amounts to maximise your tax deductions, we advise against this as it will attract the ATO’s attention. If you have accessed your superannuation early and recontribute some or all of the amount, ensure that you have the documentation in place to prove that you met the eligibility criteria for early release and were in financial distress. Harsh penalties apply to those who make false declarations.

 

Carry forward unused concessional contributions

If you have unused concessional contributions, that is, you did not contribute the full $25,000 in 2018-19 or 2019-20, then you can carry forward these amounts for five years on a rolling basis if your total superannuation balance is below $500,000 on 30 June (of the year you intend to access the unused amount).

The ability to carry forward concessional contributions applies from 1 July 2018, with 2019-20 financial year being the first year an individual can access their unused carry forward concessional amount.

Concessional contributions include employer contributions (super guarantee and salary sacrifice) and personal contributions where you have claimed a tax deduction.  

For example, if your total concessional contributions in the 2019-20 financial year were $10,000 and you meet the eligibility criteria, then you can carry forward the unused $15,000. You may then be able to make a higher deductible personal contribution in a later financial year. If you are selling an asset and likely to make a taxable capital gain, a higher deductible personal contribution may assist in reducing your tax liability in the year of sale.

Remember:

  • Your total superannuation balance must be below $500,000 on 30 June of the prior year before you utilise any carried forward amount (within the 5 year term); and
  • In some cases, an additional 15% tax can apply (30% total) to concessional contributions made to super where income and concessional contributions exceeds certain thresholds ($250,000 in 2019-20). Your income could be higher than usual in the year when you sell an asset for a capital gain.

 

This is an excellent concession to help you top up your superannuation.

 

Financial housekeeping

Lodgement deferrals

The ATO has automatically deferred 2018-19 individual tax returns lodged through a tax agent until 5 June 2020. Payment of any tax liability will need to be made by this date.

If you are having trouble paying your tax liability, please let us know as soon as possible so we can negotiate a deferral or payment plan with the ATO on your behalf.

 

Before you roll-over your software…

Before rolling over your accounting software for the new financial year, make sure you: 

  • Prepare your financial year-end accounts. This way, any problems can be rectified and you have a ‘clean slate’ for the 2020-21 year.  Once rolled over, the software cannot be amended. 
  • Do not perform a Payroll Year End function until you are sure that your STP finalisation declaration is correct and printed.  Always perform a payroll back-up before you roll over the year.

 

Employee reporting

Single touch payroll

Where payments to employees have been reported to the ATO through single touch payroll, a finalisation declaration generally needs to be made by 14 July 2020 for employers with 20 or more employees and 31 July for those with 19 or fewer employees.

Payment summaries do not have to be provided to employees. Instead, employees will be able to access their Income Statement through myGov. 

 

Reportable Fringe Benefits

Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount.  This is referred to as a `Reportable Fringe Benefit Amount’ (RFBA).

 

Do you need to do a stocktake?

Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business. 

If your business has an aggregated turnover below $10 million you can use the simplified trading stock rules. Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000.  You will need to record how you determined the value of trading stock on hand.

If you do need to complete a stocktake, you can choose one of three methods to value trading stock: 

  • Cost price – all costs connected with the stock including freight, customs duty, and if manufacturing, labour and materials, plus a portion of fixed and variable factory overheads, etc.
  • Market selling value - the current value of the stock you sell in the normal course of business (but not at a reduced value when you are forced to sell it).
  • Replacement value  - the price of a substantially similar replacement item in a normal market on the last day of the income year.

 

A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year; you can choose the most tax effective option each year. The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock. This should give rise to a deduction even though the loss has not yet been incurred.

 

Reduce your risks & minimise your tax

Top tax tips

 

1. Write-off bad debts

To be a bad debt, you need to have brought the income to account as assessable income and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.  

2. Review your asset register and scrap any obsolete plant

Check to see if obsolete plant and equipment is sitting on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June. Small business entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.

3. Bring forward repairs, consumables, trade gifts or donations

To claim a deduction for the 2019-20 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.

4. Pay June quarter employee super contributions now

Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2020.  However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.

Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Your personal or company sponsored contributions need to be received by the fund before 30 June to be deductible.   

5. Realise any capital losses and reduce gains

Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes.

6. Raise management fees between entities by June 30

Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.