Welcome to: FNSBKG404 Carry Out Business Activity and Instalment Activity Statement Tasks Lisa Genna lisa.genna2@tafensw.edu.au Monday Room H G.09-6:00 pm to 9:00 pm
Lesson 2 Part 1 TFN and ABN Requirements Part 2 Basic Income Tax FNSBKG404 Carry Out Business Activity and Instalment Activity Statement Tasks
Overview 1. Creating a business 2. TFN requirements 3. ABN requirements 4. Operating a business 5. Basic income tax
1. Crea(ng a business
1. Crea(ng a Business Registering a business When a business is created, to begin trading, it must have the following: A Tax File Number (TFN) An Australian Business Number (ABN) 5
2. TFN requirements
Video Clip: TFNs This story features Ishan, an Indian international student working part-time. Ishan explains how to apply for a tax file number (TFN) and keep it safe, how to start keeping good records to help you when you do your tax return, and free help and information available through ATO social media channels. https://www.youtube.com/watch?v=kufl_sqosds
What is a Tax File Number (TFN)? A TFN is a unique number issued by the taxation office (ATO) to each taxpayer including: Individuals Partnerships Companies Superannuation Funds Trusts
What is the purpose of a TFN? Used to identify each taxpayer to whom it is issued It allows the taxation office to: Match information supplied by the taxpayer with details it receives from other sources regarding employment and investment income Detect non-disclosure of income to prevent tax evasion In general a taxpayer is issued with only one tax file number. Exception : Partnerships
Your TFN is given to you for life, so it is a very important number! Make sure that you: keep your TFN information in a safe place properly destroy any TFN information that you no longer need. This will help prevent other people stealing your identity. Don't just throw your old TFN information in the bin report any lost, stolen or unauthorised access of your TFN information to the ATO
Applying for a TFN STEP 1: Fill out an TFN application form (which can be ordered online via the ATO s website or obtained by phoning the ATO or directly from an ATO shopfront or from selected newsagencies) STEP 2: Individual taxpayers must provide documentary evidence of their identity using category A and category B documents: If over 16 must provide 1 category A + 2 category B If under 16 must provide 1 category A + 1 category B Upon application (and provided the correct documentation has been supplied) the ATO provides a TFN within 28 days.
Category A documents Australian Passport Australian Full Birth Certificate with official documentary evidence if name has changed Australian citizenship certificate Overseas passport with evidence of Australian immigration status
Category B documents Include (but not limited to): Australian drivers licence with photo and signature Medicare card Australian bank account statement Tertiary student ID card with photo and signature Secondary student ID card
TFNs and investments As a general rule TFNs need to be quoted for investments Some examples of investments include: Interest bearing accounts or deposits with financial institutions Money invested with a government agency or a company Money deposited in a solicitor s trust account Units in a cash management or property trust
ReporBng obligabons for investment bodies If a non-exempt investor has not supplied the investment body with a TFN or ABN then: The investment body must deduct tax at the maximum marginal rate plus Medicare Levy at the time of crediting the investor with income earned.
3. ABN requirements
Video Clip: ABNs This video clips is about how ABNs are for business (i.e. not everybody needs one). It also reiterates how important it is to keep your ABN details up to date. https://www.youtube.com/watch?v=o7nsnwl_vf8
What is an Australian Business Number (ABN)? An ABN, is a unique 11 digit number used to identify businesses. You use your ABN to interact with other businesses and government departments and agencies, like the ATO. Even if your business has the same name as another business they will not have the same ABN. An ABN does not replace a TFN. Your business will usually need its own TFN (unless you are a sole trader - then you can use your personal TFN).
What is an Australian Business Number (ABN)? You do not have to have an ABN, but if you have one then you won t have amounts withheld from payments to you. It will also make it easier for you to register for the GST and other business tax registrations such as Pay- As-You-Go (PAYG) withholding.
Who is enbtled to an ABN? All companies registered under the Corporations Law in Australia All government departments and agencies All entities carrying on a business in Australia
Ineligibility to receive an ABN An employee. If you are conducting a hobby. An individual or partnership not conducting commercial activities with an expectation of profit.
The ABN and GST It is not mandatory for a business entity to have an ABN. However, an entity must have an ABN to register for GST purposes. If a business does not have an ABN, other businesses may have to withhold tax from payments to them. The withholding is sent to the ATO. The amount withheld is 49% of the invoice amount payable. The entity can claim the amount withheld as a tax credit at the end of the financial year.
The ABN and GST Enterprises with an annual current or projected GST turnover (i.e. gross business income excluding any GST) $75,000 must register for GST and therefore an ABN. Not-for-profit organisations with a yearly turnover $150,000 must register for GST as well. Enterprises may choose to register for GST if they're below these thresholds. Taxi-drivers must register (regardless of turnover).
The ABN and GST Current GST turnover = turnover for current month + turnover for previous 11 months Projected GST turnover = turnover for current month + turnover for following 11 months
4. Opera(ng a business
4. Opera(ng a Business Once registered with the Australian Business Register (ABR) the business is ready to start trading. A business may then: employ staff issue invoices for sales made and/or services provided receive invoices for expenses incurred If a business is expected to make a NET PROFIT for the year (revenues > expenses), this will generally give rise to an income tax liability. 26
Employing Staff There are three (3) main obligations for an employer when a new employee is hired: 1. The new employee needs to complete a Tax File Number (TFN) declaration form 2. Pay-As-You-Go (PAYG) tax needs to be withheld from the employee s wages and remitted to the ATO using Activity Statements (lesson 3). 3. Superannuation must be paid to the employee s superannuation fund account. 27
TFN DeclaraBons A TFN Declaration is a form you use to declare your TFN. Financial institutions, such as banks, also ask you for your TFN. Employees will be asked to complete a TFN declaration form when they: start work for the first time or with a new employer apply for certain benefits or allowances from Centrelink. Payers (i.e. employers) should provide their employees with a declaration form.
Employees and the TFN Employees beginning a new job have the option of completing a TFN Declaration form to be lodged with their employer. It is not compulsory to quote a Tax File Number (however, there are consequences if not quoted à i.e. you pay more tax).
Employees and the TFN EMPLOYER OBLIGATIONS Employers are required to complete and sign the employer section of the TFN declaration form and lodge the original with the taxation office within 14 days of the employee starting their new job. The employer should keep a duplicate copy of the declaration. The employer is required to abide by the privacy guidelines.
Employees and the TFN EMPLOYER OBLIGATIONS If the employee states that they have made an application for a TFN, the employer should: Deduct tax for 28 days as if the employee has quoted his or her TFN. If the employee does not supply his or her TFN within the 28 days, tax should be withheld at a rate of 49%* for resident employees or 47% for non-resident employees. *This is the highest marginal rate including Temporary Budget Repair Levy plus Medicare Levy
What is superannuabon? The Superannuation Guarantee is a levy placed on all businesses with employees. Superannuation is levied to reduce the future dependence on welfare payments made by the Federal Government in the form of the old-age pension. This regime came into existence through the Superannuation Guarantee (Administration) Act 1992.
How is superannuabon calculated? For the year commencing 1 July 2014, employers must contribute 9.5% of ordinary time earnings (OTE) to a complying superannuation fund of the employee s choice, at least quarterly, which is then invested on behalf of the employee until they reach retirement age. The Superannuation Guarantee rate will gradually increase from 9.5% to 12% by 2025.
Ordinary Time Earnings Ordinary time earnings (OTE) are the salary or wage an employee earns for their ordinary hours of work. The Australian Tax Office (ATO) describes OTE as what your employees earn for their ordinary hours of work, including: over-award payments certain bonuses commissions shift-loading certain allowances An employee s ordinary hours of work are those set out under the relevant award and/or agreement that governs the employee s conditions of employment.
CalculaBng superannuabon
Employee voluntary contribubons (a.k.a. salary sacrificing) Employees are allowed to make further voluntary contributions from their salary up to a prescribed limit (generally $30,000 in 2016-17 or $35,000 for over 49 s) which is taxed at a concessional rate of 15% in the superannuation fund. Any voluntary contributions over this limit will be taxed at 49% in 2016-17.
SuperannuaBon: record keeping and pay slip requirements Employers must record the amount and period of superannuation contributions for their staff, as well as the date contributions were made and the name of the fund they were paid into. Employee pay slips must include the amount of superannuation contributions made during the period and the name of the fund receiving the contribution.
5. Basic income tax
The Income Tax Year The Australian income tax year is from 1 July 30 June An individual has until 31 October to lodge their tax return unless registered with a Tax Agent
For individual taxpayers the taxation process in a year of income is as follows: PART 1 PART 2
PART 1: Calcula(ng taxable income
Key components Assessable income All income that needs to be declared for tax purposes. Less: Allowable deductions Reduces assessable income for costs incurred in earning that income. = Taxable income Used to calculate the prime tax.
What is ASSESSABLE INCOME? The tax act does not define income If it is not income it can't be subject to income tax. To determine if a receipt is income à rely on case law
What is ASSESSABLE INCOME? A receipt (usually of money) is likely to be included as assessable income if: It resulted from your personal exertion (i.e. you worked for it) There is an element of regularity about it It results from an investment (i.e. you put your money to work for you)
Assessable income Examples Salary or wages Allowances, earnings, tips, director s fees etc. Lump sum payments Employment termination payments Commonwealth government pensions, allowances and payments Superannuation pensions and annuities Attributed personal services income Gross interest / dividends Partnership and trust income distributions Net income or loss from business Capital gains Foreign source income Rent Bonuses from life insurance companies and friendly societies Other income such as royalties, and foreign exchange gains
EXEMPT income Not all income is assessable (subject to taxation). The taxation law specifies categories of income that are exempt. Examples of exempt income are: Family Tax Benefit Exempt Commonwealth of Australia government pensions, allowances and payments. Exempt Defence Force and United Nations payments.
What are ALLOWABLE DEDUCTIONS? The legislation permits us to claim any expense if it is paid/incurred in the process of generating assessable income or carrying on a business (unless it is of a capital or private nature). Generally similar to (but not the same as) accounting expenses.
GENERAL deducbons Examples Work-related car expenses Work-related travel expenses Work-related uniform and protective clothing laundry and dry cleaning expenses Work-related self-education expenses Other work-related expenses Interest and dividend deductions Office rent, telephone and electricity Other deductions including election expenses, foreign exchange losses, sickness and accident insurance premiums
SPECIFIC deducbons Examples Expenses which might be deductible under the general provisions are not deductible under specific exclusions in the legislation e.g. entertainment expenses, club fees and fines.
SPECIFIC deducbons Examples Expenses which appear to be non-deductible under the general provisions may be allowable under specific provisions. e.g. Gifts to approved charities Some legal expenses Decline in value (depreciation) on depreciable assets Personal superannuation Cost of managing tax affairs (e.g. getting tax advice)
SubstanBaBon of work- related expenses i.e. providing proof Income tax law requires a taxpayer to have receipts or other documentary evidence to support work-related expenses where the total claim is above $300. A taxpayer who does not have the relevant documentary evidence such as dockets or receipts and claims in excess of $300 could expect to have their deduction reduced to the amount which can be substantiated and penalty tax imposed. This evidence must be kept for 5 years after the tax return has been lodged.
PART 2: Calcula(ng tax payable LESSON 3
TAX on Taxable Income Once you have worked out your TAXABLE INCOME, then you need to work out how much tax you have to pay to the ATO based on this taxable income amount. This is done by using the current rates of personal tax.
Current Tax Rates For the tax year 1 July 2016 to 30 June 2017 the following tax rates apply to resident individual taxpayers
Working out your tax payable L (or refundable J ) Once you have worked out how much how much tax you have to pay to the ATO based on your TAXABLE INCOME amount, then you need to: ADD to this amount: Medicare Levy, HELP debt, Medicare Levy Surcharge (MLS), Budget Repair Levy (not all of these amounts will apply to every taxpayer) à these amounts INCREASE the amount of tax you have to pay to the ATO TAKE AWAY from this amount: Any tax credits and/or tax offsets e.g. LITO (not all of these amounts will apply to every taxpayer) à these amounts DECREASE the amount of tax you have to pay to the ATO The end result is the amount that you have to pay to the ATO (i.e. payable) or the amount that the ATO has to pay to you (i.e. refundable)
What are TAX OFFSETS? They can reduce the amount of tax you have to pay. They are mostly only available to individual taxpayers. Only refundable tax offsets can result in a tax refund. e.g. Net Medical Expenses Tax Offset*; Private Health Insurance Tax Offset *Note; The net medical expenses tax offset is being phased out. From 2015 16 until 2018 19, claims for this offset are restricted to net eligible expenses for disability aids, attendant care or aged care.
What are TAX OFFSETS? Generally fall into one of the following categories to either: 1.Provide tax relief for personal circumstances (e.g. seniors and pensioner tax offset) 2.Give credit for an amount already paid (e.g. credits on franked dividends) 3.Provide an incentive (e.g. mature age worker tax offset abolished 1 July 2014).
Tax Offsets Example Low income tax offset (LITO) The LITO is for lower income earners. It is an offset, which means it is an amount subtracted from your tax payable. If the calculated LITO offset is greater than your tax payable, the excess is not refundable, and it also can t be used to offset the Medicare Levy.
HELP Higher Education Loan Program HELP is a loan scheme that assists eligible Commonwealth supported students to pay their tuition fees. The Australian Government pays the amount of the loan directly to the student s education institution. Loan repayments are made through the Australian taxation system. Voluntary repayments can be made at any time regardless of income. The minimum HRI threshold to make a loan repayment for 2016-17 is $54,869. Where income exceeds this threshold, a compulsory repayment of at least 4% of the HELP repayment income is raised in the individual s income tax assessment.
HELP repayment rates
Medicare Levy The Medicare scheme gives Australian residents access to health care and is partly funded by taxpayers who pay the Medicare Levy. Normally, your Medicare Levy is calculated at 2% of your taxable income, however A reduced Medicare levy or no levy may be available to taxpayers on low incomes.
Medicare Levy Surcharge (MLS) Individuals and families on incomes above the MLS thresholds that do not have private patient hospital cover pay MLS for any period that they did not have this cover. The MLS is in addition to the 2% Medicare Levy. https://www.ato.gov.au/individuals/medicare-levy/ medicare-levy-surcharge/
Medicare Levy Surcharge (MLS)
ATO Audits If the ATO suspects that a taxpayer has not filled out their tax return legitimately it can perform an audit. The ATO has access to bank data and Centrelink to detect any omitted income, interest or social security payments. Taxpayers are required to keep all records for a five-year period or for two years if they: Receive income only from salary and wages, pensions, government benefits or allowances, interest and dividends. Are entitled only to deductions for the cost of managing tax affairs, account keeping fees and gifts or donations.
This week s homework Read the relevant chapter(s) (ref. DELIVERY & ASSESSMENT GUIDE) Complete all assigned activities.
You are now ready to start the next lesson on: PAYG Withholding Tax