Hiring new employees for the festive season
As the festive season approaches, employers may be considering hiring new employees to help with their business. They should remember the following ‘key things’ when it comes to their employer tax and super obligations.
- Employers will need to make sure they are withholding the right amount of tax from payments they make to their employees and other payees. This is an important part of their role, as it will help their employees meet their end-of-year tax liabilities.
- Employers’ accounting or payroll software, the ATO’s tax tables or its online tax withheld calculator will help employers do this.
- Employers must pay super guarantee (‘SG’) to all eligible employee’s super funds in full and on time to avoid paying the super guarantee charge. The ATO’s Super guarantee contributions calculator can help employers work out how much SG they need to pay.
- If employers are still not reporting through single touch payroll (‘STP’) and they do not have an approved exemption, deferral or concession in place, they should start reporting now. If they have just started a business or recently employed staff, they will need to report through STP from their first payday.
Employers should remember that if they report through STP, they do not need to send the ATO their employee’s completed TFN declaration, as the ATO has already received this information through their STP reporting. Employers should however keep their employee’s completed TFN declaration for their own records.
Employers can refer to ‘Obligations when people work for you’ on the ATO’s website (QC 67963) for further information in this regard.
ATO Tax Holiday Now Over
Businesses can start to expect a more unforgiving Australian Tax Office (ATO) when it comes to collecting outstanding debts or historic penalties, which currently total more than $50 billion.
While the ATO had adopted a more lenient approach to debt collections during and immediately following the Covid-19 pandemic, which helped many businesses stay afloat, it is now adopting a more stringent approach.
Historically, Australians have been very good at paying tax on time, whether by design – because tax is withheld from wages – or through the nation’s positive payment culture where paying tax is seen as the right thing to do.
As a result, the ATO usually doesn’t have to enforce debt collection as much as tax offices in other countries. But the ATO is now sending a clear message that businesses can’t continue to ignore their tax debts.
Ultimately managing tax obligations is proof of solvency and the ATO’s crackdown on enforcement should serve as a reminder for businesses of the importance of cashflow, ensuring proper account management and having their own robust debt recovery process. This is critical in the current economic conditions where many businesses are facing pressure on margins, employee costs and expectations given higher interest rates and still high inflation.
The ATO’s approach can also apply to individuals. The ATO has sophisticated systems, including those driven by artificial intelligence, which will flag aggressive claims for deductions such as travel, rental properties or motor vehicle costs.
For late payers, the ATO will automatically add a general interest charge to what is owed. This means the debt will grow each day it remains unpaid. Interest calculates on a daily compounding basis and is added to the account periodically. That means that the sooner you pay any outstanding debts, the better off you will be.
New ATO guidance on gifts from overseas
Receiving a Christmas or birthday gift from an overseas relative might seem like a thoughtful present. However, recent draft guidance from the Australian Taxation Office (ATO) highlights the situation can be more complex than people might think, particularly when receiving from an overseas trust.
The guidance focuses on trust property that hasn’t been previously taxed. It states that such property becomes assessable income for an Australian resident beneficiary if it’s “paid to, or applied for the benefit of” them. While the legislation isn’t limited to foreign income, the ATO is primarily interested in applying it to untaxed foreign income. The potential situations where the ATO can deem an amount as assessable income are extensive. The burden of proof to demonstrate any benefit is exempt falls on the taxpayer. This can be challenging, especially when beneficiaries might be unaware they are receiving property or income from a foreign
trust, such as distributions from a foreign deceased estate.
Genuine gifts and ATO scrutiny Looking at foreign gifts more closely, a genuine gift of money or property from relative living overseas is generally not considered assessable income. However, the ATO focuses on the substance of the transaction, requiring appropriate documentation and evidence of the donor’s capacity to make the gift.
The ATO can access various data sources, including international funds transfer information and tax information exchange agreements with low-tax jurisdictions. It is increasing its scrutiny over undisclosed offshore income, making it crucial to disclose overseas assets as required.
While the draft guidance is helpful, additional practical guidance on related legislation would be beneficial. People must also consider at least two other pieces of related legislation when they receive trust property from overseas. It also highlights the complexities of dealing with
overseas gifts and trusts. People must know their obligations and have adequate documentation to support their claims.
What makes or breaks Christmas?
The cost of living has eased over the past year but consumers are still under pressure. For business, planning is the key to managing Christmas volatility.
The countdown to Christmas is on and we’re in the midst of a headlong rush to maximise any remaining opportunities before the Christmas lull. Busy period or not, Christmas causes a period of dislocation and volatility for most businesses. The result is that it is not ‘business as usual’ and for many, volatility can create problems.
The discounting trend
Consumers expect a bargain and can generally find one. If you choose to discount stock (or the market forces you to), it’s essential to know your profit margins to determine what you can afford to give away. A business with a 20% gross profit margin that offers a 15% discount, needs a 300% increase in sales volume simply to maintain the same position. Worst case scenario is that a business trades below its breakeven point and generates losses.
Increased sales from discounting can be great if you know your numbers, have excess or older stock that needs to be moved, generate demand, or drive new customers to you.
Trading stock headaches
If business activity spikes over the Christmas period and you sell goods, then there is a temptation to increase stock levels. That makes sense as long as you don’t go too far. Too much stock post the Christmas period and you will either be carrying product that is out of season, or you will have too much cash tied up in trading stock. Try to work with suppliers that can supply on short notice.
Managing your trading stock is not just about managing cost. If your customers are in your store but can’t find what they need, have an online option available in-store to take the sale.
Maximising a pension’s tax-free proportion
Under the proportioning rule, a pension interest will have a tax-free and taxable proportion equal to the tax-free and taxable proportions of the accumulation interest the member used to fund their pension. Therefore, a member of an SMSF should consider maximising the tax-free component of their accumulation entitlements before commencing a pension.
Where a member of an SMSF is able to ‘lock-in’ the highest possible tax-free proportion on the commencement of an account-based pension or a transition to a retirement pension,
this can be tax-effective for the following reasons:
- Benefits for future growth in member’s pension — While a member is in the pension phase, any growth in the member’s pension account balance that is attributable to capital growth and/or investment earnings will effectively form part of the tax-free component of their pension (rather than the taxable component, when in accumulation phase) based on the tax-free proportion established upon the commencement of the pension.
- Estate planning benefits — Maximising the tax-free proportion of a member’s pension interest can be beneficial for estate planning purposes where the member’s superannuation entitlements will be paid out to non-tax dependants (e.g., non-dependant adult children) upon the member’s death, as the tax-free component of a lump sum death benefit is tax-free when paid to a non-tax dependant.
In summary, a pension with the highest possible tax-free proportion offers significant benefits, including reduced taxes on future growth during the pension phase and efficient transfer of funds to non-dependant beneficiaries. SMSF members should plan to maximise these advantages.
How to afford a comfortable retirement with less super
For 20 years now, the Association of Superannuation Funds of Australia (ASFA) has been publishing a breakdown of the annual budget for a ‘comfortable’ or ‘modest’ retirement and the estimated super balance required to achieve it. Super funds widely use this standard as a general guide for their members and by commentators.
The ASFA Retirement Standard estimates the lump sum super balance required at age 67 to maintain a comfortable or modest lifestyle, assuming the retiree puts all their super into an account-based pension (ABP), draws down all their balance over time, and receives a part-age pension.
Account-based pensions do not protect retirees against longevity risk. This means it can be stressful to watch your super balance fall in the way ASFA assumes it does. It’s important to note that your savings will run out sooner if returns are lower than the projected 6% (including the risk of negative returns).
By using lifetime income products, ASFA and super funds can recommend a lower, safer target and, at the same time, help reassure more people that a comfortable retirement may not be out of their reach. In doing so, Australians may achieve the ASFA Comfortable Standard with a significantly lower lump sum super balance than the published standard today or, conversely, a higher income from the same amount. They can also be confident that their savings won’t run out as their ‘longevity risk’ is reduced.