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FBT tips to celebrate a tax-free Christmas party with employees

FBT Tips for Christmas

FBT tips to celebrate a tax-free Christmas party with employees

Plan your tax for the holiday season too

Employers know that popping a champagne cork or two to celebrate the festive season lets staff know their efforts are appreciated and the well-prepared business owner will also know that a little tax planning can help ensure that it’s not the business that ends up with the Financial Benefits Tax hangover.

Three benefits generally provided for the festive season, rather than gold, frankincense and myrrh, typically include:

  • Entertainment (that is, a Christmas party)
  • Gifts to employees, (and even their family)
  • Cash bonuses

Entertainment and FBT

Remember there is no separate FBT category that relates to Christmas parties. Any social function may result in FBT, so the provision of “entertainment” at Christmas, therefore, mirrors the tax treatment such benefits will receive at other times of the year.

The ATO says that “meal entertainment’, and therefore an FBT liability, can generally be said to arise when food or drink is provided. There can be exceptions, such as when morning and afternoon tea are supplied on a working day, or finger food is put out at a “working lunch”. Note however that providing any alcohol while not on the business premises automatically slaps a big “entertainment” label on an event.

Implications of the benefits

The implications of certain benefits provided at the year-end Christmas function for an employer may vary depending on:

  • Whether the function is provided at the employer’s premises or provided externally
  • The cost of the function per attendee
  • The basis that the employer is using in working out the taxable value of such benefits

FBT implications

With a Christmas party, FBT applies to an employer when they provide a benefit to an employee or their associate (for example, family members).

Food, drink, entertainment and gifts provided at a Christmas party to employees and their associates may constitute either:

  • An expense payment fringe benefit (eg. reimbursing an employee for expenses incurred or paying an expense on their behalf)
  • A property fringe benefit (eg. provision of property such as meals or gifts by the employer)
  • A residual fringe benefit (eg. provision of any right, privilege, service or facility such as the right to use a venue)

These benefits are generally valued for FBT purposes at their face value – typically referred to as an “actual basis” of valuation. However, an employer may elect to apply special valuation rules by using either the 50/50 split method or 12-week register method.

Ask us about these two valuation methods and if they are suitable for your business. If the employer does not make an election, the taxable value is determined according to actual expenditure.

However “meal entertainment” fringe benefits provided at a Christmas function can be exempt from FBT if it is:

  • A “minor benefit”
  • An exempt property benefit (see below) is provided at the employer’s premises on a workday

Minor benefits

Broadly, a minor benefit is one where it:

  • Has a notional taxable value of less than $300 (inclusive of GST)
  • Is provided on an “infrequent” or “irregular” basis
  • Is not a reward for services, and
  • Satisfies other relevant conditions (ask us for details).

Note that other benefits (such as gifts) provided at a Christmas party may be considered as separate minor benefits in addition to meals provided, so the $300 threshold generally applies separately to each.

Exempt property benefit

A Christmas party held at the employer’s business premises on a working day where food and drink, including alcohol, is provided is generally deemed to be an exempt property benefit and is therefore usually FBT-free.

This is no different from the occasional Friday drinks at work.

Note however that the FBT rules only exempt such property benefits where:

  • The benefit is provided to a current employee in respect of his or her employment
  • It is provided to and consumed by, the employee on a working day and on the business premises of the employer (our emphasis)

This exemption applies only to employees. Where members of the employee’s family (“associates”) also attend a function (such as the Christmas Party), the cost attributable to each associate is subject to FBT unless it is a minor benefit.

If clients are invited to the function, the cost of providing the entertainment to these attendees is excluded from the FBT regime as this is not a “fringe benefit” to staff (and may qualify as a tax deduction – see below under Gifts to Clients).

External Christmas functions

The costs associated with Christmas parties held off business premises (such as food, drink and transport to a restaurant) will give rise to FBT unless these costs are under the minor benefits threshold. Again, FBT will not apply to the extent that the benefit is provided to a client.

It may be the case that to get to the Christmas function, an employer will provide their staff with taxi travel or some other form of transport. Taxi travel provided to an employee will generally attract FBT unless the travel is for a trip that either starts or ends at the employee’s place of work.

Getting there (and getting home)

For taxi travel to or from a Christmas function, employers should be mindful that:

  • Where the employer pays for an employee’s taxi travel home from the Christmas party and the party is held on the business premises, no FBT will apply.
  • Where the party is held off-premises and the employer pays for a taxi to the venue and then also pays for the employee to take a taxi home, only the first trip will be FBT exempt. The second trip may be exempt under the minor benefits exemption if the employer has adopted to value its meal entertainment on an actual basis.
  • The exemption does not apply to taxi travel provided to “associates” of employees (for example family members).

If other forms of transportation are provided to or from the venue, such as bus travel, then such costs will form part of the total meal entertainment expenditure and be subject to FBT. A minor benefits exemption for this benefit may be available if the threshold is not breached.

The giving of gifts

Gifts provided to employees or their associates will typically constitute a property fringe benefit and therefore are subject to FBT unless the minor benefits exemption applies. Gifts, and indeed all benefits associated with the Christmas function, should be considered separately to the Christmas party in light of the minor benefits exemption. For example, the cost of gifts such as bottles of wine and hampers given at the function should be looked at separately to determine if the minor benefits exemption applies to these benefits.

Gifts provided to clients are outside of the FBT rules but may be deductible if they are being made for the purposes of producing future assessable income. Some exceptions apply, and employers should check with this office to make sure.

Cash bonuses

Some generous employers, budget permitting, may choose to provide cash bonuses to staff in their end-of-calendar-year payroll. Bonuses in the form of cash are considered to be a business cost, and therefore deductible under the general deduction provisions.

But while there may be no FBT issues to consider, employers may need to remember PAYG withholding, superannuation guarantee and payroll tax issues. We can help with these decisions.

W Wen & Co provides tax planning and fringe benefits tax consulting services. If you have any questions about potential fringe benefits tax consequence fo your Christmas party, please contact the tax consultants at our Sydney office.

Lodging your Australian tax return from overseas

Lodging Your Australian Tax Return From Overseas

Australian tax return and “worldwide” income

Most people’s “to-do” list when they are planning a trip overseas will likely include items such as travel insurance, phone chargers or taking photos of their passport — but probably the last thing on anyone’s minds will be their likely tax situation before, during or after that trip-of-a-lifetime.

However, a few simple considerations, taken in the context of your personal circumstances, may end up making quite a difference to your final fiscal outcome.

Generally, you will remain an Australian resident for tax purposes if you’re overseas temporarily and you don’t set up a permanent home in another country. There’s usually nothing stopping you from working overseas, but you must lodge an Australian tax return and declare your “worldwide” income, even if tax was taken out in the country where you earned the income (there will most likely be a tax offset to take care of any doubled-up tax).

You can lodge your Australian tax return online from overseas. Note however that it is advisable to log in to your myGov account and turn off the myGov security code feature before you lose access to your Australian mobile number. If you have access to your number overseas, you can keep this feature turned on.

CGT considerations

If you leave your home in Australia temporarily and rent it out, you can continue to treat it as your main residence for up to six years for capital gains tax (CGT) purposes. If you don’t rent out your vacated home, you can treat it as your main residence for an unlimited period.

If you cease to be an Australian resident and decide to sell your home in Australia you may be liable to CGT.

If you cease to be an Australian resident while overseas, the ATO may deem some of your assets (generally those not considered “taxable Australian property”) to have been disposed of for CGT purposes, which may mean you become liable to pay CGT.

You can choose not to have this deemed disposal apply. But if you subsequently dispose of the asset sometime later, the ATO may take into account the whole period of ownership – including any period when you’re not an Australian resident – when it calculates a gain or loss for CGT purposes.

Your superannuation remains the same

If you are an Australian citizen or permanent resident heading overseas, your super remains subject to the same rules, even if you are leaving Australia permanently. This means you cannot access your super until you reach preservation age and retire, or satisfy another condition of release.

If you have a small amount saved for retirement that you want to keep with your super fund, contact your super fund and tell them. This will prevent it from being transferred to the ATO as “unclaimed” super.

If you are a trustee of a self-managed super fund (SMSF) and you intend to travel overseas for an extended period, check before you leave that your fund will continue to meet the definition of an Australian super fund. Generally, there are certain residency conditions for an SMSF, which include that:

  • It was established here and at least one asset of the fund is located in Australia
  • Central management and control is ordinarily in Australia
  • Its active members hold at least 50% of the fund’s assets.

If your SMSF fails the residency test, it could be advisable to roll over your funds to a resident regulated super fund and wind up the SMSF — as otherwise, the SMSF will become non-complying. Professional advice in these situations is recommended.

Health insurance

The Medicare levy surcharge applies to Australian residents who have incomes above the surcharge thresholds and do not have an appropriate level of private patient hospital cover. So if you cancel your private health insurance while travelling overseas, you may be liable for the Medicare levy surcharge if your income exceeds the relevant threshold.

A good idea may be to contact your health fund to work out the amount of premium you expect to save by cancelling or suspending your cover, and then compare it to the surcharge you may have to pay.

You and all your family dependants must have private patient hospital cover to avoid paying the surcharge. Cancelling or suspending cover for yourself will mean you and your spouse may each still be liable for the surcharge if your combined income for the purposes of the surcharge exceeds the family surcharge threshold.

Remember, travel insurance is not private patient hospital cover for the purposes of the Medicare levy surcharge. Private patient hospital cover does not include cover provided by an overseas fund.

(Also note that although any foreign employment income may be exempt from Australian tax, the ATO will still take it into account when it determines your taxable income for the purposes of the Medicare levy surcharge.)

Student loans

If you have moved overseas and have a Higher Education Loan Programme (HELP), VET Student Loan (VSL) or Trade Support Loan (TSL) debt, you will have the same repayment obligations as those who live in Australia. This applies even if you already live or intend to move overseas for a total of more than six months in any 12-month period.

You will need to update your contact details using the ATO’s online services via myGov. You will also need to advise the ATO of your worldwide income, and make compulsory repayments or pay an overseas levy towards your debt if you earn over the minimum repayment threshold.

If you have a Student Financial Supplement Scheme (SFSS), Student Start-up Loan (SSL) or ABSTUDY Student Start-up Loan (ABSTUDY SSL) debt and go overseas, the ATO will continue to maintain your loan account. Your debt will not be waived and the amount outstanding will continue to be indexed each year until you have paid off your debt. You can still make voluntary repayments when you are overseas.

If you have any questions about tax complications while living overseas please contact our tax accountants at W Wen & Co.

Property development and tax obligations

Property Development And Tax Obligations

The ATO keeps an eye on property developers

Property development and tax obligations

The ATO seems to be always looking over the shoulder of property developers to make sure they are complying with their tax obligations.

The considerations facing the ATO are many and varied, but can include topics such as whether an agreement to develop and sell land is a “mere realisation” or a disposal either in the course of a business or as part of a profit making undertaking or plan.

What is ‘mere realisation’

A “mere realisation” is a sale on capital account to which the capital gains tax (CGT) rules will generally apply. Landholders will usually seek this treatment if they can access CGT concessions (for example, applying the appropriate CGT discount or the small business CGT concessions) or the property is a pre-CGT asset.

A sale that is more than a mere realisation will be on revenue account and the proceeds will generally be assessable as ordinary income. The two most common scenarios where the proceeds are income are:

  1. where the land is sold in the course of a business or as an incident of business operations, or
  2. where the land has been acquired and sold as part of a profit making undertaking or scheme.

Whether a sale is a mere realisation or something more is determined by examining and weighing the facts and circumstances taken as a whole.

The ATO must consider income and deductions, PDAs and land banking activities

Outside of the capital/revenue discussion (more below), the ATO must also consider timing issues relating to the recognition of income and deductions, property development agreements (PDAs), and land banking activity.

A relevant discussion can be found in the Taxpayer Alert Trusts mischaracterising property development receipts as capital gains. This alert focuses on the recognition of profits from property developer activities as a mere realisation of capital rather than an allocation of ordinary income to trust beneficiaries.

Also note for completeness that Taxation Ruling Income tax: whether profits on isolated transactions are income and Miscellaneous Taxation Ruling The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provide public advice relevant to this issue.

Ask us for links to the above should you want to read more.

Capital vs revenue characterisation

The ATO has stated that it is important to weigh all the facts and indicia together, and not in isolation. The test it applies is whether, on the balance of probabilities, it is more likely than not that the relevant tax provisions apply to the facts of the particular case.

The ATO says it is not simply a matter of tallying how many indicia point in each direction (for example, that a taxpayer acquired land with the requisite profit-making intention or purpose). Some factors will be more influential than others, and some will, because of the particular circumstances, point more strongly to a particular conclusion.

The ATO has provided the following list of indicia, but says this is not exhaustive and may change over time:

  • Whether the landowner has held the land for a considerable period prior to the development and sale
  • Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land
  • Whether the landowner originally acquired the property as a private residence or for recreational purposes
  • Whether the landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income
  • Whether the land has been acquired near the urban fringe of a major city or town
  • Where the property has recently been rezoned, whether the landowner actively sought rezoning
  • A potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement
  • The landowner was unable to find a buyer for the land without subdivision
  • The landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements
  • The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land
  • The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land
  • The landowner has a history of buying and profitably selling developed land or land for development
  • The operations are planned, organised and carried on in a businesslike manner
  • The landowner has changed its use of the land from one activity to another (such as from farming to property development)
  • The scope, scale, duration and degree of complexity of any development
  • Who initiated the proposal to develop the land for resale
  • The sophistication of any development or other pre-sale arrangements
  • The level of active involvement of the landowner in any development activities
  • The level of legal and financial control maintained by the landowner in a development arrangement
  • The level of financial risk borne by the landowner in acquiring, holding and/or developing the land
  • The value of the development or other preparatory costs relative to the value of the land.

If you have any questions about tax obligations on property development, please contact our tax accountants at W Wen & Co.

CGT on inherited properties

CGT On Inherited Properties (What You Need To Know)

No CGT applies when properties are distributed to beneficiaries

CGT on inherited properties

Inheriting a home or a legal interest in one could be the largest windfall gain that many Australians ever experience. From a tax law perspective, when someone dies a capital gain or loss does not apply when property passes:

  • To the deceased person’s beneficiary
  • To the deceased person’s executor or other legal personal representative (LPR), or
  • From the deceased’s LPR to a beneficiary.

While generally, no CGT applies when assets are distributed to beneficiaries, there may be CGT implications when the executor or beneficiary sells the inherited asset to a third party.

Selling an inherited property

There are different factors that influence whether CGT will apply, including whether the asset was a pre-CGT asset or not. Assets acquired before 20 September 1985 (when CGT was introduced) are considered pre-CGT assets.

For the most part, if the beneficiary sells a dwelling within two years of the deceased’s death, then CGT does not apply (more below).

For dwellings acquired after 19 September 1985 to be exempt from CGT, the beneficiary must generally satisfy that the dwelling:

  • Was the deceased’s main residence at the time or just before their death
  • Was not used to produce assessable income at the time of death, and
  • Is sold within two years of the deceased’s death.

Note that there can be exceptions regarding whether the dwelling was a main residence before death. This includes where the owner, say, was in a nursing home before their death and the main residence was rented out. (This is known as the “absence concession”)

The two-year rule

When assessing this two-year period, where the property is sold under contract, the settlement (rather than exchange of the contract) must occur within two years of the date of death.

Note that there are some circumstances that an extension to the two-year rule may be granted. These include (but are not limited to):

  • If the ownership of a dwelling or a will is challenged
  • The complexities of estate delay the completion of its administration
  • A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances, and
  • the settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through due to circumstances outside the beneficiary or trustee’s control.

Further, if the deceased has given someone, such as a spouse or family member, a lifetime right to reside in the property, then the beneficiary may be exempt from the two-year rule. There are other circumstances where a gain can be exempt and the two-year rule has not been satisfied.

The property may be subject to CGT if the two-year rule is not met

Note, if the two-year deadline is not met, it doesn’t necessarily mean that the entire capital gain on the property will be subject to CGT. It may be that only part of the gain is subject to CGT, and this amount may not be significant.

If you have any questions about CGT on inherited properties, please contact our tax consultants at W Wen & Co

10 helpful tips to avoid common tax mistakes for rental property owners

TOP 10 Tips To Avoid Common Tax Mistakes For Rental Property Owners

Best tips to avoid tax stumbles

10 helpful tips to avoid common tax mistakes for rental property owners

The ATO is reminding rental property owners that each year it sees some fairly common mistakes being made with tax claims for investment properties. It has therefore released a list of the top 10 stumbles and how best to avoid them.

1. Apportioning expenses and income and for co-owned properties

If you own a rental property with someone else, you must declare rental income and claim expenses according to your legal ownership of the property. As joint tenants, your legal interest will be an equal split, and as tenants-in-common, you may have different ownership interests.

2. Make sure your property is genuinely available for rent

Your property must be genuinely available for rent to claim a tax deduction. This means:

  • You must be able to show a clear intention to rent the property
  • Advertising the property so that someone is likely to rent it and set the rental amount in line with similar properties in the area
  • Avoiding unreasonable rental conditions

3. Getting initial repairs and capital improvements right

Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property can be claimed in full in the same year you incurred the expense. For example, repairing the hot water system or part of a damaged roof can be deducted immediately.

Cost for initial repair, renovation and improvement

Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floorboards, are not immediately deductible. Instead, these costs are used to work out your capital gain or capital loss when you sell the property.

Replacing an entire structure like a roof when only part of it is damaged or renovating a bathroom is classified as an improvement and not immediately deductible. These are building costs that you can claim at 2.5% each year for 40 years from the date of completion.

If you completely replace a damaged item that is detachable from the house and it costs more than $300 (for example, replacing the entire hot water system) the cost must be depreciated over a number of years.

4. Rental property borrowing expenses

If your borrowing expenses are over $100, the deduction is spread over five years. If they are $100 or less, you can claim the full amount in the same income year you incurred the expense. Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents.

5. Rental property purchase costs

You can’t claim any deductions for the costs of buying your property. These include conveyancing fees and stamp duty (for properties outside the ACT). If you sell your property, these costs are then used when working out whether you need to pay capital gains tax.

6. Claiming interest on your rental property loan

You can claim interest as a deduction if you take out a loan for your rental property. If you use some of the loan money for personal use such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.

7. Getting rental property construction costs right

You can claim certain building costs, including extensions, alterations and structural improvements as capital works deductions. As a general rule, you can claim a capital works deduction at 2.5% of the construction cost for 40 years from the date the construction was completed.

Where your property was owned by someone else previously, and they claimed capital works deductions, ask them to provide you with the details so you can correctly calculate the deduction you’re entitled to claim. If you can’t obtain those details from the previous owner, you can use the services of a qualified professional who can estimate previous construction costs.

8. Claiming the right portion of your rental property expenses

If your rental property is rented out to family or friends below market rate, you can only claim a deduction for that period up to the amount of rent you received. You can’t claim deductions when your family or friends stay free of charge, or for periods of personal use.

9. Keeping the right records

You must have evidence of your income and expenses so you can claim everything you are entitled to. Capital gains tax may apply when you sell your rental property. So keep records over the period you own the property and for five years from the date you sell the property.

10. Getting your capital gains right when selling your rental property

When you sell your rental property, you may make either a capital gain or a capital loss. Generally, this is the difference between what it cost you to buy and improve the property, and what you receive when you sell it. Your costs must not include amounts already claimed as a deduction against rental income earned from the property, including depreciation and capital works.

If you make a capital gain, you will need to include the gain in your tax return for that income year. If you make a capital loss, you can carry the loss forward and deduct it from capital gains in later years.

If you have any questions about the tax implications of your rental properties, please contact the accountants at our Sydney office

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