Now is the time to start planning and reviewing your records to maximise your tax deductions for the 2023/2024 financial year.
1. Pay Quarterly Super early
Super Guarantee (SG) contributions must be paid before 30 June to qualify for a tax deduction in the 2023/2024 financial year. Consider bringing forward your June quarter SG payments to increase the benefit.
2. Write-off bad debts
Review your debtor list to identify those who owe you money but are unlikely to pay. Write-off bad debts before 30 June - the debt must not be merely doubtful and must have been previously included as assessable income.
3. Prepaid Expenses
Small business entities may bring forward deductible expenses such as rent, repairs and office supplies, that cover a period of no more than 12 months.
4. Stocktake
Trading stock should be reviewed before 30 June to identify any obsolete, slow moving or damaged stock. Obsolete stock must be physically disposed of for income purposes to receive a deduction.
5. Take advantage of the instant asset write off
In the 2023/2024 budget released on the 9th of May 2023, the government temporarily increased the instant asset write off threshold to $20,000. This means that a small business, turnover less than $10 million, will be able to immediately deduct the full purchase value of assets less than $20,000
6. Review and postpone some of your invoicing for the current tax year, if appropriate.
7. Contribute to your Super
Top up your voluntary superannuation contributions. You can contribute up to $27,500 in deductible super contributions each year.
If you have a super balance of less than $500,000 at the 30th June then consider using the carry forward rules to claim a deduction for any unused super contribution caps from previous years.
8. Undertake strategic tax planning with your accountant
Great accountants look at two types of tax planning: short-term and long-term tax planning. Short-term planning looks at what you can do before 30 June to minimise your tax this financial year. Long-term tax planning looks at how you can utilise your business structure and the type of investments you can make to minimise tax over the long term
From 1 July 2024, the amount you can contribute to super will increase. We show you how to take advantage of the change.
The amount you can contribute to superannuation will increase on 1 July 2024 from $27,500 to $30,000 for concessional super contributions and from $110,000 to $120,000 for non-concessional contributions.
The contribution caps are indexed to wages growth based on the prior year December quarter’s average weekly ordinary times earnings (AWOTE). Growth in wages was large enough to trigger the first increase in the contribution caps in 3 years.
Other areas impacted by indexation include:
For those with the disposable income to contribute, superannuation can be very attractive with a 15% tax rate on concessional super contributions and potentially tax-free withdrawals when you retire. For business owners who might have had an exceptional year or sold their business, it's an opportunity to get more into super. However, the timing of contributions will be important to maximise outcomes.
If you know you will have a capital gains tax liability in a particular year, you may be able to use ‘catch up’ contributions to make a larger than usual contribution and use the tax deduction to help offset your capital gain tax bill. But, this strategy will only work if you meet the eligibility criteria to make catch up contributions and you lodge a Notice of intent to claim or vary a deduction for personal super contributions, with your super fund.
The bring forward rule enables you to bring forward up to 2 years’ worth of future non-concessional contributions into the year you make the contribution – this is assuming your total superannuation balance enables you to make the contribution and you are under age 75.
If you utilise the bring forward rule before 30 June, the maximum that can be contributed is $330,000. However, if you wait to trigger the bring forward until on or after 1 July, then the maximum that can be contributed under this rule is $360,000.
If your super balance is below $500,000 on the prior 30 June, and you want to quickly increase the amount you hold in super, you can utilise any unused concessional super contributions amounts from the last 5 years.
Let’s look at the example of Gary who has only been using $15,000 of his concessional super cap for the last few years. Gary’s super balance at 30 June 2023 was $300,000, so he is well within the limit to make catch up contributions.
| Concessional Cap | Used | Unused | |
| 2018-19 | $25,000 | $15,000 | $10,000 |
| 2019-20 | $25,000 | $15,000 | $10,000 |
| 2020-21 | $25,000 | $15,000 | $10,000 |
| 2021-22 | $27,500 | $15,000 | $12,500 |
| 2022-23 | $27,500 | $15,000 | $12,500 |
| 2023-24 | $27,500 | ? | ? |
Gary could access his $27,500 concessional cap for 2023-24 plus the unused $55,000 from the prior 5 financial years.
If Gary doesn’t access the unused amounts from 2018-19 by 30 June 2024, the $10,000 will no longer be available.
The general rate for the transfer balance cap (TBC), that limits how much money you can transfer into a tax-free retirement account, will remain at $1.9 million for 2024-25. The TBC is indexed by the December consumer price index (CPI) each year.
Australians love property and the lure of a 15% preferential tax rate on income during the accumulation phase, and potentially no tax during retirement, is a strong incentive for many SMSF trustees to dream of large returns from property development. We look at the pros, cons, and problems that often occur.
An SMSF can invest in property development if trustees ensure the investment complies with the rules. And, there are a lot of rules. A key is the sole purpose test. Trustees need to ensure the fund is maintained to provide benefits for retirement, ill health or death. Breaches of this fundamental tenet are serious and include the loss of the fund’s concessional tax treatment and civil and criminal penalties.
By its nature property development is high risk and fund trustees need to ensure that the SMSF is not simply a handy cash-cow for a pipe dream, particularly when the developers are related parties.
There are multiple ways an SMSF can invest in property development if the investment strategy of the fund allows:
An SMSF can purchase land from an unrelated party and develop the property in its own right. Common issues that often arise include:
Acquiring the land from a related party - An SMSF cannot purchase land from a related party (unless it is business real property used wholly and exclusively in a business). This means that the lovely block of land inherited by one of the members, or owned by a family trust, that is perfect for development cannot be purchased by the SMSF.
An SMSF cannot borrow to develop property – An SMSF can borrow money to purchase land using a limited recourse borrowing arrangement but it cannot use a loan to improve the asset. That is, borrowings cannot be used to develop the land. And, where the SMSF has borrowed to purchase land, it cannot change the nature of that asset until the loan has been repaid. That is, no development.
Who will develop the property? - Problems often occur when the property developers are related to the fund members. Whilst it is possible to engage a related party builder to undertake the work, there are strict rules that mean that the work and materials must be acquired at market value. That is, there is no advantage from “mates rates”. If you are using a related party builder, ensure that the paperwork is pristine, any transactions are at market value, and all interactions are documented.
GST might apply - Goods and services tax might apply to the development and the sale of any developed property. If the ATO considers that an SMSF is in the business of developing property or is undertaking a one-off development in a commercial manner then GST could potentially apply.
If your SMSF is not undertaking a property development project in its own right, there are a few ways for an SMSF to invest in property development projects:
An ungeared company or trust is often used (under SIS Regulation, section 13.22C) when related parties want to invest in a property development together. The SMSF can invest in a company or trust that is undertaking a property development as long as the company or trust:
See section 13.22C for full details.
Profits from the company or trust are then distributed to the SMSF according to its share.
Using the provisions of 13.22C means that the SMSF can invest in property development with a related party without the development being considered an in-house asset. However, if the criteria are not met (at any point), the in-house asset rules apply, and the SMSF might have to sell the units in the trust or shares in the company to return to the maximum 5% in-house asset limit. Generally, this means the sale of the underlying property or a significant restructure.
Problems arise with 13.22C arrangements where the trust or company:
One of the criteria for the exemption in 13.22C to apply is that the trust or company cannot be conducting a business. This requirement may prevent short-term property developments that are built and sold for profit.
Typically, 13.22C arrangements are used for long term investments where the development enables the creation of an asset that is then leased by the trust or company. This could be commercial premises leased to a related or unrelated party (e.g., premises for a child care centre or manufacturing), or residential premises leased to unrelated parties (e.g., townhouses or small developments).
Investing in unrelated entities for a property development is attractive as there is no limit to how much of the fund’s assets can be invested (subject to the investment strategy and trust deed allowing the investment), and unlike ungeared entities, the entity is able to borrow money/place charge over the assets.
Where related parties are investing in the same entity, there are rules governing the percentage of ownership the SMSF and their related parties can hold. To meet the definition of unrelated entity for in-house asset purposes, the SMSF and their related parties must not own more than 50% of the units available. This is because the SMSF cannot control or hold sufficient influence over the entity and remain an unrelated entity. If the ATO considers the entity is related to the SMSF, then it would become a related party and the investment an in-house asset.
An SMSF can potentially invest in a joint venture (JV) property development, but the criteria are necessarily strict and there are a range of issues that need to be considered carefully. One of the issues that needs to be considered up-front is determining the substance of the arrangement between the parties, because the term JV can be used to describe a variety of arrangements. The ATO confirms that care must be taken to ensure that arrangements with related parties are true JVs.
Under a JV, the SMSF invests in and has a share of the property being developed (not the entity undertaking the development). Each party bears the costs (time and/or money) of the JV and receives this same proportionate contribution from the returns. If the arrangement is not structured properly then the SMSF’s stake in the JV could be treated as an investment in or loan to a related party and be treated as an in-house asset. For example, this could be the case if the SMSF only provides a capital outlay for the arrangement and has no rights other than a contractual right to a return on the final investment.
It is also necessary to consider whether the arrangement between the parties could be treated as a partnership for tax, GST and legal purposes. For example, this could be the case if the arrangement involves the sharing of income, sale proceeds or profits, rather than sharing the output from the project.
It's essential to get advice well in advance – tax, legal and financial - before pursuing a JV.
Trustees need to carefully consider any investment decisions and have a sound rationale for the investment.
Any advice on a property development needs to be from a licenced financial adviser. A lawyer should be used for any contracts or agreements between parties. And, compliance assistance from a qualified accountant.
The Australian Taxation Office have released a new draft ruling on self-education expenses. We revisit the deductibility of self-education expenses and what you can and can’t claim.
If you undertake study that is connected to your work you can normally claim your costs of that study as a tax deduction - assuming your employer has not already picked up your expenses. There is also no limit to the value of the deduction you can claim. While this all sounds great and very encouraging there are still issues to consider before claiming your Harvard graduate degree, accommodation, and flights as a self-education expense.
Clients are often surprised by what cannot be claimed. Self-education expenses are not deductible if you are undertaking the education to obtain a new job or something not connected to how you earn your income now. Take the example of a nurse’s aide who attendees university to qualify as a registered nurse. The university degree and the expenses associated with degree are not deductible as the nursing degree is not sufficiently connected to their current role as a nurse’s aide.
The ATO have recently released a new draft ruling on self-education expenses. While the ruling does not introduce new rules, it does reinforce what the ATO will accept…and what they won’t.
While not always the case, one of the key challenges in claiming deductions for self-development or personal development courses is that the knowledge or skills gained are often too general. Take the example of a manager who is having difficulty coping with work because of a stressful family situation. She pays for and attends a 4-week stress management course.
In that case, the stress management course is not deductible because the course was not designed to maintain or increase the skills or specific knowledge required in her current position.
If your employment (or your income earning activity) ends part the way through completing a course, your expenses are only deductible up to the point that you stopped work. Anything from that point forward is not deductible (that is until you obtain a new role and assuming the course remains relevant).
Overseas study tours are deductible in limited circumstances. If you are travelling overseas, you need to prove that the dominant purpose of the trip is related to how you earn your income. Factors that help demonstrate this include the time devoted to the advancement of your work related knowledge, the trip not being merely recreational, and that the trip was requested by or supported by your employer. The ATO are strict on this. Take the example of a senior lecturer in history at a University. He takes a trip to China with his wife while on leave over the Christmas break to update his knowledge on his area of academic interest. While his job does not require him to undertake research, he incorporated some of the 600 photos he took and some of the learnings from the tour into the courses he teaches. Despite having a relationship to work, the trip is not deductible as, while relevant in some ways to his field of activity, it is incidental to the overall private and recreational nature of the trip.
We’ve all had them. Conferences where you spend a few days in sessions and then a day (or more) of touring or golf. When the dominant purpose of the trip is related directly to your work, then the ATO are more accommodating. If the leisure time, for example an afternoon tour organised by the conference, is incidental to the conference itself, then you can claim the full conference expenses.
Where you are extending your stay beyond the conference dates and this isn’t considered incidental, then you apportion the expenses and only claim the portion related to the conference. Let’s say you attend a conference for four days, then spend another four days on holiday. Assuming the conference is directly related to your work, you can claim your expenses related to the conference (assuming they were not picked up by your employer), and half of your airfare (as it’s a 50/50 split on how you spent your time between the conference and recreation).
If a particular course is not entirely deductible, a deduction may still be available for some of the course fees where there are particular subjects or modules in that course that are sufficiently related to your employment or income earning activities. In these cases, the course fees would be apportioned. Take the example of a civil engineer who is completing her MBA. While the MBA itself may not have a sufficient connection to her engineering role to be fully deductible, her expenses related to the project management subject she took as part of the degree could qualify.
If your course is a Commonwealth supported place, you cannot claim the course fees. But, the deductibility of course fees are not impacted merely because you borrow money to pay for those fees, for example a full-fee paying student using a government FEE-HELP loan to pay for course fees.
There is no limit on the amount you can claim as a self-education expense but the ATO is more likely to target large self-education expenses. For anyone who has completed post graduate study you know that these expenses can ratchet up very quickly, particularly when you add in any other expenses such as books or travel. It’s important to ensure that there is a clear connection between your current job or business activity and the self-education expenses before you claim them.
Airfares incurred to participate in self-education, provided you are not living at the location of the self-education activity, are deductible. Airfares are part of the cost of undertaking the self-education activities.
Electricity is the new black. Gas and other fossil fuels are out. A new, limited incentive nudges business towards energy efficiency. We show you how to maximise the deduction!
The small business energy incentive is the latest measure providing a bonus tax deduction to nudge the investment behaviour of small and medium businesses, this time towards more efficient energy use and electrification. Fossil fuels are out, gas is out, electricity is the name of the game.
Legislation before Parliament will see SMEs with an aggregated turnover of less than $50 million able to claim a bonus 20% tax deduction on up to $100,000 of their costs to improve energy efficiency in the business. But, the tax deduction is time limited. Assuming the legislation passes Parliament, you only have until 30 June 2024 to invest in new, or upgrade existing assets.
Your business can invest up to $100,000 in total, with a maximum bonus tax deduction of $20,000 per business entity. The energy incentive is not provided as a cash refund, it either reduces your taxable income or increases the tax loss for the 2024 income year.
The energy incentive applies to both new assets and expenditure on upgrading existing assets. There is no specific list of assets that can qualify. Instead, the rules provide a series of eligibility criteria that need to be satisfied.
First, the expenditure incurred in relation to the asset must qualify for a deduction under another provision of the tax law.
If your business is acquiring a new depreciating asset, it must be first used or installed for any purpose, and a taxable purpose, between 1 July 2023 and 30 June 2024. If you are improving an existing asset, the expenditure must be incurred between 1 July 2023 and 30 June 2024.
If your business is acquiring a new depreciating asset the following additional conditions need to be satisfied:
If you are improving an existing asset the expenditure needs to satisfy at least one of the following conditions:
Certain kinds of assets and improvements are not eligible for the bonus deduction, including where the asset or improvement uses a fossil fuel. So, hybrids are out. Solar panels and motor vehicles are also excluded.
In addition, the following assets are specifically excluded from the rules:
The legislation contains a few examples of what would qualify:
The legislation to implement the energy incentive is before Parliament. We’ll keep you updated on its progress. If you intend to make a major outlay to take advantage of the bonus deduction, talk to us first just to make sure it qualifies.
You’ve got a block of land that’s perfect for a subdivision. The details have all been worked out with Council, the builders, and the bank. But, one important aspect has been left out; the tax implications.
Many small-scale developers often assume that their tax exposure is minimal – but this is not always the case and the tax treatment of a subdivision project can significantly impact on cashflow and the financial viability of the project.
New guidance from the Australian Taxation Office (ATO) walks through the tax impact of small-scale subdivision projects. We look at some of the leading issues:
Tax treatment of the subdivision
Subdividing land
The tax treatment of even a small subdivision can become complex very quickly and tax applies according to the circumstances. You cannot simply assume that just because it’s a small development, any profit from the eventual sale will be taxed as a capital gain and qualify for CGT concessions.
In general, if you own a property personally, it has been held and used for private purposes over an extended period, you subdivide it and sell the newly created block, then capital gains tax is likely to apply to any gain you make. The gain is recognised from the point you first acquired the land, although you will ned to apportion the amount paid for the property between the subdivided lots. If you are subdividing a property that contains your home – the main residence exemption will not generally beavailable if you sell a subdivided block separately from the block containing your home, even if the land has only ever been used for private purposes in connection with your home.
If a property is initially owned jointly but the property is subdivided and the lots split between the owners, then this will normally trigger upfront tax implications even though the land hasn’t been sold to an unrelated party yet. Arrangements like this (referred to as partitioning) can be complex to deal with from a tax perspective.
Developing a property
But what happens if you develop the land? It’s not uncommon for people to decide to subdivide and develop their block by building a house or duplex and then selling the new dwelling.
When someone develops a property with the intention of selling the finished product at a profit in the short term, there is a risk that this will be taxed as income rather than under the capital gains tax rules. This limits the availability of CGT concessions (such as the 50% CGT discount) and will often expose the owners to GST liabilities as well. This can be the case even for one-off property developments.
Let’s look at an example. Claude purchased his home on 1 July 2001 for $300,000. In July 2020, Claude began investigating the idea of subdividing his block and building a new house, then selling it. A registered valuers report on the subdivision says that the original house and land is now worth $360,000, and the subdivided lot is worth $240,000 (the valuation is an important step before commencement to prevent any debates with the ATO). Claude decides to go ahead and build a dwelling on the newly subdivided block and takes out a loan of $400,000 for the development. He intends to pay off the loan as soon as the house sells.
In July 2021, Claude sells the subdivided block and new home for $1,210,000 (GST-inclusive).
Here is how the tax works for Claude’s scenario:
If Claude is not carrying on a business, he cannot claim a deduction for the development expenses as they are incurred. They will be taken into account in determining the net profit on sale.
If Claude finished the development but decided not to sell the property then this would complicate the income tax and GST treatment. We would need to explore what Claude plans to do with the property.
Do I need to register for GST?
If you are an individual who is subdividing land that has been held and used for private purposes then you might not need to GST, although this will depend on the situation. However, if you are engaged in a property development business or a one-off project that is undertaken in a business-like manner, then it is more likely that you would need to register for GST.
In Claude’s scenario, because the projected sale price of the developed land was above the GST threshold of $75,000, he will probably need to register for GST. This will mean that he:
The tax consequences of subdivision and other property projects can be complex. If you are contemplating undertaking a subdivision and any property development activities, please contact us and we can help walk you through the scenarios and tax impact of the project.
What is the end game for your business? Succession is not just a topic for a TV series or billionaire families, it’s about successfully transitioning your business and maximising its capital value for you, the owners.
When it comes to generational succession of a family business, there are a few important aspects:
For generational succession to succeed, even if that succession is the sale of the business and the management of the sale proceeds for the benefit of the family, communication is essential. Where generational succession fails, it is often because succession has not been formalised until a catalyst event or retirement planning requires it.
“One-third of Australian family businesses expect that the next generation will become the majority shareholders within 5 years time. Yet only 25% of Australian family businesses have a robust, documented and communicated succession plan in place.”
PWC Family Business Survey
A concept of ‘legacy’ is not enough. Successful succession occurs when the guiding principles of governance, family rules, aligning values, dispute resolution, succession and estate planning are managed well before discontent tears it apart.
Generational succession usually involves the transfer of an interest in a business to another generation of a family (usually younger). It is often a family in business rather than simply a family business.
The options for how a movement of an interest may occur are many and varied but usually focus on the transfer of some or all of the equity held in the business over a period or at a defined point in time and the payment of some form of consideration for the equity transferred. Alternatively, a part of the equity transfer may ultimately be dealt with through the estate.
Generational succession comes with its own set of issues that need to be dealt with:
Capability and willingness of the next generation
A realistic assessment of whether the business can continue successfully after the transition. In some cases, the older generation will pursue generational succession either as a means of keeping the business in the family, perpetuating their legacy, or to provide a stable business future for the next generation. While reasonable objectives, they only work where there is capability and willingness. Communication of expectations is essential.
Capital transfer
Consider the capital requirements of the exiting generation. To what extent do you need to extract capital from the business at the time of the transition? The higher the level of capital needed, the greater the pressure on the business and the equity stakeholders.
In many cases, the incoming generation will not have sufficient capital to buy-out the exiting generation. This will require the vendors to maintain a continuing investment in the business or for the business to take on an increased level of debt. Either scenario needs to be assessed for its sustainability at a business and shareholder level. In some scenarios the exiting owners will transition their ownership on an agreed timeframe.
Managing remuneration
In many small and medium businesses, the owners arrange their remuneration from the business to meet their needs rather than being reasonable compensation for the roles undertaken. This can result in the business either paying too much or too little. Under generational succession, there should be an increased level of formality around compensation. Compensation should be matched to roles, and where performance incentives exist, these should be clearly structured.
Who has operational management and control?
Transition of control is often a sensitive area. It is essential to establish and agree in advance how operating and management control will be maintained and transitioned. This is important not only for the generational stakeholders but also for the business. Often the exiting business owners have a firm view on how the business should be run. Uncertainty in the management and decision making of the business can lead to confusion or a vacuum - either will have an adverse impact. Tensions often arise because:
The incoming generation want freedom of decision making and the ability to put their imprint on the business.
Agreeing transition of control in advance, on an agreed timeframe, can significantly reduce tensions.
Transition timeframes and expectations
Generational succession is often a process rather than an event. The extended timeframe for the transition requires active management to ensure that there are mutual expectations and to avoid the process being derailed by frustration.
The established generation may have identified that they want to scale down their business involvement and bring on other family members to succeed them. This does not necessarily mean that they want to withdraw completely. An extended transition period is not uncommon and can often assist the business in managing the change. This can also work well in managing income and capital withdrawal requirements.
The need for greater formality and management structure
A danger for many SMEs is the blurring of the boundaries between the role of the Board, shareholders, and management. With generational succession, this can become even more pronounced. Formality in these structures is important, with clear definitions of the roles and clarification of the expectations. For example, who should be a director and what is their role?
For some, the role of the family is managed by a family constitution – an agreed set of rules. For others there will be an external advisory group that advises the family to ensure that the required independent expertise is brought to bear.
Successfully managing generational change is a process we can help you navigate. Talk to us about how we can help to structure an effective transition path.
The tax refund many Australians expect has dramatically reduced. We show you why:
There is a psychology to tax refunds that successive Governments have been reticent to tamper with. As a nation, Australia relies heavily on personal and corporate income tax, with personal income tax including taxes on capital gains representing 40% of revenue compared to the OECD average of 24%. And, for the amount we pay, we expect a reward.
The reward is in the form of tax deductions that reduce the amount of net income that is assessed for tax purposes and tax offsets that reduce the tax payable, generating a refund for some. And, refunds have a positive impact on tax compliance.
As part of the previous Government’s efforts to flatten out the progressive individual income tax system, a time-limited low and middle income tax offset was introduced. The lifespan of the offset was extended twice, partly as a stimulus measure in response to COVID-19. The offset delivered up to $1,080 from 2018-19 to 2020-21, and up to $1,500 in 2021-22 for those earning up to $126,000. This was a significant boost for many people each tax time and bolstered the tax returns of millions of Australians. For many, the end of this offset has meant that their tax refund has reduced dramatically compared to previous years.
Do we pay more tax than other nations?
It depends on how you look at the statistics. Australia relies heavily on income tax, collecting 40% of tax revenue from personal income. That makes Australia the fourth highest taxing nation for personal tax in the OECD – but we were second highest in 2019 if that makes you feel better. But, if you are looking at take home pay there is a separate measure for that. The Employee tax on labour income looks at our take home pay once tax is taken out and benefits have been added back in. This shows that the take home pay of an average single worker is 77% of their gross wage compared to the OCED average of 75.4%. For the average worker with a family (one married earner with 2 children), once tax and family benefits are taken into account, the Australian take home pay average is 84.1% compared to the OECD average of 85.9%. All of this means that Australia is a high taxing nation but returns much of that in the form of means tested benefits.
Australia also does not have social security contributions like other nations. These contributions represent an average of 27% of the total tax take for OECD nations.
And, because Australia has a progressive tax system, the pain of taxation is felt more by higher income earners. The top 11.6% of Australian income earners contribute 55.3% of the tax revenue from personal income tax.
With the final round of legislated income tax cuts due to commence on 1 July 2024, this should reduce the overall dependence on personal income tax relative to corporate and other taxes.
So, do we personally pay more tax than other nations? If you are a high-income earner the answer is likely to be yes. If not, the answer is no.
As Benjamin Disraeli reportedly said, “…lies, damn lies, and statistics”. It’s all how you read it.
Is a second job worth it?
In an Uber the other day, the driver revealed that he had become a driver to pay for his second mortgage. He invested in property but with interest rates spiking, the only way he could hold onto the property was to earn additional income. His “day job” starts early and ends at 3pm at which time he heads off to start driving.
He is not alone. The latest stats from the Australian Bureau of Statistics reveal that the number of workers holding multiple jobs has increased by 2.1% since December 2022 – in total, Australia has 947,300 people holding multiple jobs or 6.6% of the working population.
The reason why people take on second jobs is varied. For some, it is to manage increasing costs, for others it is to start up a new venture but with the security of a regular income stream from their primary occupation.
Is it worth it?
From a tax perspective, Australia has a progressive income tax system – the more you earn the more tax you pay, and access to social benefits tapers off. It’s important when looking at a second job to understand your overall position – how much you are likely to earn, your costs of generating income, and what this income level will mean.
The trap for many picking up a ‘gig economy’ second job is that they are often independent contractors. That is, you are responsible for managing your tax affairs. All Uber drivers for example, are required to hold an ABN and be registered for GST. There is a compliance cost to this and from a cashflow perspective, 1/11th of the fee collected needs to be remitted to the Tax Office once a quarter. It’s important to quarantine both the GST owing and income tax to ensure you have the cashflow to pay the tax when it is due. The upside is you can claim the expenses related to your second job.
If you are taking on a second job, ensure that your tax-free threshold applies to your highest paying job from a PAYG withholding perspective.
Almost a year after the 2022-23 Federal Budget announcement, the 120% tax deduction for expenditure by small and medium businesses (SME) on technology, or skills and training for their staff, is finally law.
Who can access the boost?
The 120% skills and training boost is available to small business entities (individual sole traders, partnership, company or trading trust) with an aggregated annual turnover of less than $50 million. Aggregated turnover is the turnover of your business and that of your affiliates and connected entities.
This boost give you a tax deduction for external training courses provided to employees. The aim of this boost is to help SMEs grow their workforce, including taking on less-skilled employees and upskilling them using external training to develop their skills and enhance their productivity.
Sole traders, partners in a partnership, independent contractors and other non-employees do not qualify for the boost as they are not employees. Similarly, associates such as spouses or partners, or trustees of a trust, don’t qualify.
As always, there are a few rules:
Training expenditure can include costs incidental to the training, for example, the cost of books or equipment necessary for the training course but only if the training provider charges the business for these costs.
Let’s look at an example. Animals 4U Pty Ltd is a small entity that operates a veterinary centre. The business recently took on a new employee to assist with jobs across the centre. The employee has some prior experience in animal studies and is keen to upskill to become a veterinary nurse. The business pays $3,500 for the employee to undertake external training in veterinary nursing. The training meets the requirements of a GST-free supply of education. The training is delivered by a registered training provider, registered to deliver veterinary nursing education.
The bonus deduction is calculated as 20% of the amount of expenditure the business could typically deduct. In this case, the full $3,500 is deductible as a business operating expense. Assuming the other eligibility criteria for the boost are satisfied, the bonus deduction is calculated as 20% of $3,500. That is, $700.
In this example, the bonus deduction available is $700. That does not mean the business receives $700 back from the ATO in cash, it means that the business is able to reduce its taxable income by $700. If the company has a positive amount of taxable income for the year and is subject to a 25% tax rate, then the net impact is a reduction in the company’s tax liability of $175. This also means that the company will generate fewer franking credits, which could mean more top-up tax needs to be paid when the company pays out its profits as dividends to the shareholders.
Not all courses provided by training companies will qualify for the boost; only those charged by registered training providers within their registration. Typically, this is vocational training to learn a trade or courses that count towards a qualification rather than professional development.
Qualifying training providers will be registered by:
While some training you might want to have engaged might not be delivered by registered training organisations, there is still a lot out there, particularly the short-courses offered by universities, or the flexible courses designed for upskilling rather than as a degree qualification. If you have recently completed performance reviews for staff and training is part of their development pathway, it might be worth exploring.
As tax time approaches, it's essential to explore smart strategies that can help you maximize your superannuation savings while optimizing your tax benefits.
Tax deductions for topping up super
You can make up to $27,500 in concessional contributions each year assuming your super balance has not reached its limit. If the contributions made by your employer or under a salary sacrifice agreement have not reached this $27,500 limit, you can make a personal contribution and claim a tax deduction for the contribution. It’s a great way to top up your super and reduce your tax.
For those aged between 67 and 74, you will need to meet the ‘work test’ to contribute personal concessional contributions and claim a deduction - you must have worked at least 40 hours within 30 consecutive days in a financial year before your super fund can accept voluntary contributions from you.
To be able to claim the tax deduction for these contributions, the contribution needs to be with the super fund before 30 June (watch out for processing times). You will also need to lodge a Notice of intent to claim or vary a deduction for personal super contributions with your super fund before you lodge your tax return to advise them of the amount you intend to claim as a deduction.
Bringing forward unused super contribution caps
If your total super balance is below $500,000, and you have not reached your cap in the previous four years, you might be able to carry forward any unused contributions and make a larger tax deductible contribution this year. For example, if your total concessional contributions in the 2021-22 financial year were $10,000, you can ‘carry forward’ the unused $17,500 into this financial year, make a higher personal contribution and take the tax deduction. This is a helpful way to reduce your tax liability particularly if you have made a capital gain.
If you have never used your contribution cap, for example you have recently become a resident or have returned from overseas, you can also bolster your superannuation by contributing the five years’ worth of concessional contributions in one year (assuming you have not reached your balance cap).
Doubling the benefit for SMSFs
For self managed superannuation funds, a quirk in the way concessional contributions are reported means that a concessional contribution can be made in June, but not allocated to the member until 28 days later in July. The practical effect is that a member can make a contribution of up to $55,000 this financial year (2 x the $27,500 cap - assuming you have not used your cap) and take the full tax deduction, but the fund recognises the contribution in two amounts; one amount in June and the second allocated to the member from the SMSF’s reserve in July. This strategy is particularly helpful for the self-employed who need to boost their superannuation and reduce their tax liability in a particular year.
Top up your partner's super
With a cap on how much you can transfer into a tax-free retirement account, it makes sense to even out how much super each person holds to maximise the tax savings for a couple.
If your spouse’s assessable income is less than $37,000, make a contribution of $3,000 or more on their behalf and you can take a tax offset of up to $540.
Another way of topping up your spouse super is super splitting. If your spouse has not retired and below their preservation age, you can roll over up to 85% of a financial year’s taxed splitable contributions to their account.
Thinking of retiring? Wait until 1 July
From 1 July 2023, indexation will increase the general transfer balance cap, the amount you can transfer into a tax-free retirement account, by $200,000 to $1.9m.
For those contemplating retiring very soon, by waiting until after 1 July 2023 before starting a retirement income stream, you will have access to this additional $200,000 cap of tax-free superannuation savings.
It's important to speak to your financial adviser before taking any action on superannuation strategies.
