Practice Update - September 2020

How COVID-19 may affect your return?

The ATO has released a range of new recording methods to make tax time easier for businesses and individuals under COVID-19 circumstances.

Working from home

The ATO has introduced a new "shortcut method", which applies from 1 March 2020 to 30 September 2020.  Under this new method, employees working from home as a result of COVID-19 can claim expenses incurred at a rate of 80 cents for each hour worked from home.

Employees must keep a record of the hours they worked from home as evidence to support their claim.  Deductible running expenses include:

• Utilities such as heating, cooling and lighting.
• Cleaning costs for your work area.
• Mobile or landline phone expenses for work calls.
• Internet connection.
• Computer consumables and stationery.
• Repair costs for home office equipment and furniture.
• Depreciation of home office equipment, computers, furniture and fittings.

Small capital items such as a computer (purchased for the purpose of working from home) can also be claimed if they cost under $300.  If the cost exceeds $300, the decline in value (ie. depreciation) can be deducted.

COVID-19 protective equipment

Occupations that require public interactions may be able to claim personal protective equipment (PPE), including face masks, sanitiser, anti-bacterial spray, and gloves.  This would typically apply to industries such as healthcare, retail and hospitality.  Many workplaces now have this PPE available for employees, however employees who pay for their own COVID-19 PPE without reimbursement will be able to make a claim.

JobKeeper

Sole traders receiving JobKeeper payments on behalf of their business are required to include these payments as assessable business income in their individual tax return.

Businesses that are a partnership, trust or company receiving JobKeeper do not have to include it as assessable income in the business owner's individual tax return.  However, these businesses will need to report JobKeeper payments as business income in their partnership, trust, or company tax return.

Government cash flow support

The support received by employers as part of the Government's COVID-19 boosting cash flow for employers scheme is tax-free as it is considered non-assessable non-exempt (NANE) income.  Cash flow boost amounts should be included in tax returns in the same manner as other NANE income.  Employers under the scheme will still be entitled to a deduction for the PAYG withholding paid.

Accelerated depreciation deductions

ATO increases car expense deduction rate

Small businesses with low annual travel distances will benefit from the ATO's new increased cents per kilometre rate for cars, from 68 cents to 72 cents, effective from 1 July 2020.

What is the cents per kilometre method?

You can claim car deductions using the cents per kilometre method if you are a sole trader or partnership.  The cents per kilometre method is calculated using a set rate for each kilometre travelled for business purposes, and the rate takes all of your vehicle running expenses (including registration, fuel, serving and insurance) and depreciation into account, and is currently 72 cents per kilometre for 2020-21.

Claiming requirements

The ATO allows you to claim a maximum of 5,000 business kilometres per car in a year and does not require written evidence to show the exact distance travelled.  However, the ATO may ask you to show how you worked out your business kilometres, for example, with diary records. 

To make sure your claim is eligible, records you need to keep include:

• Details of the kilometres travelled for business and private use.
• Receipts for fuel, oil, repairs, servicing and insurance over.
• Loan or lease documents.
• Tax invoices.
• Registration papers.
• Details of how you calculated your claim. 

Superannuation guarantee rate increase update

Recently, arguments both for and against increasing the rate of compulsory superannuation guarantee (SG) have continued to be debated.  The SG is the compulsory amount of superannuation an employer must pay into an eligible employee's chosen super fund.

The rate of SG has been frozen at 9.5% of an employee's ordinary wages since July 2014, but from 1 July 2021 it is due to incrementally increase (by 0.5% each financial year) until it ultimately reaches 12% in July 2025.

While the SG rate is currently set to increase to 10% from 1 July 2021, we must note that at this time, despite a lot of media coverage, no formal announcement has been made to change the scheduled SG rate increase.

Superannuation guarantee amnesty ends on 7 September 2020

Also on the topic of the superannuation guarantee, time is quickly running out for employers to apply for the SG amnesty and catch up on past unpaid super without incurring a penalty.

The ATO encourages employers to apply for the amnesty and make payments as early as they can.  Importantly, eligible amnesty amounts paid by 7 September 2020 are tax deductible.

The ATO must receive amnesty applications by 11:59 pm (local time) on 7 September 2020.  Broadly, to be eligible for the SG amnesty:

• the unpaid super must be for a quarter between 1 July 1992 and 31 March 2018;
• the shortfall cannot have already been disclosed to the ATO; and
• the ATO cannot already be examining the shortfall.

If an employer cannot pay in full, the ATO will work with them to set up a flexible payment plan.

Superannuation guarantee payments and PRNs

Applicants will need their payment reference number (PRN) to make SG amnesty payments.  The ATO has been sending employers their PRN within 14 business days of receiving their application, however, if an amnesty application has not been lodged by mid-August, they can get their PRN:

• from a super guarantee charge related statement issued for the same Australian Business Number; or
• by phoning the ATO on 1800 815 886 between 8.00am and 6.00pm from Monday to Friday.

Are you eligible for the small business income tax offset?

The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year.  Also known as the "unincorporated small business tax discount", the offset is worked out on the proportion of tax payable on your business income.

The rate of offset is 13% for the 2020-21 income year and 16% for the 2021-22 income year and onwards.  The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.

The ATO will work out your offset based on your income tax return and uses your:

• net small business income you earned as a sole trader; or
• share of net small business income from a partnership or trust.

Conditions for sole traders

The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions).  Sole traders are not entitled to the offset in the event that their net small business income is a loss.

Income and deductions that you need to include in your net small business income include:

• farm management deposits claimed as a deduction;
• repayments of farm management deposits included as income;
• net foreign business income related to your sole trading business; and
• other income or deductions such as interest or dividends derived in the course of conducting your business.

Conditions for partnership and trust distributions

You may be eligible for the tax offset if:

• you have a share of net small business income distributed from a partnership or trust that is a small business entity;
• you were a partner or beneficiary of that small business partnership or trust;
• the business income was derived by the small business partnership or trust from carrying on its own business activities; or
• your assessable income includes a distribution or share of net income from that partnership or trust.

What can you do when you can not pay your tax on time?

Businesses that can not pay their taxes on time can set up an agreed payment plan with the ATO to avoid late payment penalties.  This may be especially useful for businesses during the post COVID-19 period.

In response to the economic effects of COVID-19 on businesses, the Government has provided cash flow support as part of their stimulus package.  However, some support measures such as the cash flow boosts and the Coronavirus SME Guarantee Scheme are set to end in September 2020.  As a result, businesses relying on Government support may find themselves struggling financially when October arrives.  It is therefore important that businesses are prepared for this period, and one way to do this is by setting up a tax payment plan.

A payment plan allows businesses to pay off their tax debt in instalments when they are not able to make a complete payment by the due date, as follows:

• For debts of $100,000 or less – businesses can propose a payment plan through the ATO's online Business Portal or through their tax agent; and
• For debts over $100,000 – businesses must contact the ATO directly to discuss their options.

Interest will generally continue to accrue on unpaid debts even when a business has made a payment plan.  However, a 12-month payment plan free of interest may be available for small businesses with an activity statement debt.  This will require businesses to pay their debt through direct debit within 12 months.

To be eligible, businesses must:

• Have an annual turnover of less than $2 million.
• Have a recent activity statement debt of $50,000 or under that was paid within 12 months of it being due.
• Have no overdue activity statement lodgements.
• Have had a maximum of one payment plan default within the last 12 months.
• Be unable to obtain finance, such as a loan.
• Meet all of their other tax payment and lodgement obligations.

The ATO may require businesses to demonstrate their viability for a payment plan, to assess the business' ability to meet their ongoing financial commitments by considering factors such as gross margin, cash flow, liquidity, and asset/liability position.  Businesses wishing to go on a payment plan are still required to lodge their activity statements and tax returns on time to avoid penalties.

We note that many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances.

Please do not hesitate to contact your Lowe Lippmann Relationship Partner if you wish to discuss any of these matters further.