Tax For Small Business E-Book

Max Newnham

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 313

Veröffentlichungsjahr: 2012

Beschreibung

Don't just survive tax time -- discover how your business can thrive through tax time! Operating a small business isn't easy. Each day business owners are challenged with everything from supervising staff and negotiating with suppliers to managing payroll and inventory -- and, ultimately, turning a profit. Thankfully, ensuring that your business is tax-compliant is no longer the ordeal it used to be. Tax for Small Business: A Survival Guide is a must-have reference for Australian small businesses, with all the information you'll need to legally minimise your tax and maximise your business's profits. Topics covered include: * the Simplified Tax System (STS) * income tax * superannuation * capital gains tax * fringe benefits tax * GST, BAS and PAYG * worker's insurance * land tax.

Leseprobe

Contents

Acknowledgements

Chapter 1: Tax Through the Ages

Taxation BC

Taxation in Great Britain and Beyond

Australia’s Taxation Experience

Trusting in History

Chapter 2: Getting Started: Establishing the Correct business structure

When a Business is Not a Business

The Situation Now

What If you Don’t Pass Any of the Tests?

When the Business is a Business, But Making a Loss

Choosing a Business Structure

Chapter 3: The Small Business Entities Simplified Tax System

Do you Qualify as a Small Business Entity?

The Concessions

Chapter 4: Income Tax

Paying More Tax

Just the Facts, Please

Assessable Income

Allowable Deductions

Taxable Income and Financial Statements

Tax Rates

The Tax Principles of Business Borrowing

The Trap of the Black Economy

Chapter 5: Paying Your Employees and Your Income Tax as you Go

The PAYG Withholding System

The Superannuation Guarantee System

Workers’ Insurance

The PAYG Instalments System

Chapter 6: Capital Gains Tax

The Introduction of CGT

Purchasing and Selling Dates

Calculating Capital Gain on a Property

Capital Gains and Your Home

The Taxing Matter of Death

Chapter 7: Fringe Benefits Tax

When is FBT Paid Each Year?

What Benefits are Taxed?

Exempt Fringe Benefits

Chapter 8: GST

Everyone Pays GST

GST is An Exclusive System

When you Must Register for GST

Most Businesses Do Not Effectively Pay GST

There are Three Main Types of GST Goods and Services

It Does not Matter What Business Structure you Use

Who Can Claim GST As a Refund is the Main Difference

How to Register for GST

Accounting for GST

Completing Your BAS

Simplified Reporting for GST

Timing Differences Between GST and Income Tax

The GST Margin System for Property

GST and Cars

GST On tHe sale of a Business

Chapter 9: State and Territory Business Taxes

Payroll Tax

Land Tax

Chapter 10: Tax Planning Tips

End-of-Year Tax Planning

Gearing and Tax

Growing an Investment With Tax Savings

Chapter 11: Cars and Tax

Applying Depreciation Cost Limits to Cars

Maximising Car Tax Deductions

Financing Cars Effectively

Chapter 12: Minimising Tax on Selling a Business

Net Assets Test

Active Assets Tests

Significant Individual Test

The Four Concessions

Chapter 13: Surviving a Tax Audit

What to Do If you Are Selected for An Audit

Penalties and Fines

Employer Obligation Audits

Tax Audit Insurance

Chapter 14: Getting the Right Advice

Tax Compliance and Improving a Business

The Cost/Benefit of Using an Accountant

Poor Service From an Accountant

Accountant or Tax Agent?

Switching Accountants

Chapter 15: Questions and Answers

GST Questions

Superannuation Questions

Capital Gains Questions

Appendix

Glossary

Index

Resources

First published 2008 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

© Max Newnham 2008

The moral rights of the author have been asserted.

National Library of Australia Cataloguing-in-Publication data:

Author: Newnham, Max.

Title: Tax for small business : a survival guide / Max Newnham.

ISBN: 9780731408344 (pbk.)

Notes: Includes index.

Subjects: Small business — Taxation — Australia.

Dewey number: 336.2070994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

The material in this publication is of the nature of general comment only, and neither purports nor intends to be advice. Readers should not act on the basis of any matter in this publication without considering (and if appropriate taking) professional advice with due regard to their own particular circumstances. The author and publisher expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether in whole or in part, upon the whole or any part of the contents of this publication.

Acknowledgements

To write a book like this that deals with a highly technical subject such as tax requires a lot of research and help. Several people helped to ensure that I did not wander too far from the letter of the law in search of the vibe:

Max Warlow from Max Warlow and Associates Pty Ltd was invaluable when it came to help with GST and the taxes levied by the states and territories.John Sesto and Sasho Slaveski from J P Sesto and Associates, being lawyers, kept me on the right side of the law when it came to income tax generally, and more particularly the small business capital gains tax concessions.Andrew Pugsley from TaxBiz Australia Pty Ltd read over the chapter on FBT and made sure that it was not only technically correct but also had all of the commas in the right places.Kristen Hammond from John Wiley & Sons Australia Ltd made sure that some of the more technical chapters made sense and did not become a good cure for insomnia.Lastly my wife Liz once again shouldered more than her fair share of the domestic duties while I wrote the book.

CHAPTER 1

Tax through the ages

Business owners who ignore their tax obligations can end up suffering in different ways. They can end up paying too much tax due to not organising their affairs properly, or even worse, be audited by the Australian Taxation Office (ATO) and discover too late that they have made mistakes that result in large fines and penalties.

In trying to understand how tax affects a business, it helps to have an understanding of how tax has been imposed over the years, and how people in the past have tried to find ways of minimising the impact of one of the inevitabilities of life. When you look at the history of taxation, you realise, in fact, that with its first imposition came tax minimisation and avoidance. Tax avoidance is effectively cheating a government of its tax revenue by, for example, not declaring cash sales. Tax minimisation, on the other hand, is a person or business organising their affairs, within the law, to pay the lowest amount of tax possible. This principle was first backed by an eminent British judge in the 1800s, who ruled that ‘it was everyone’s right to organise their affairs so that they did not pay the maximum amount of tax’.

Taxation BC

Income tax as we know it today is a relatively new innovation, but tax has been around in other forms for thousands of years. One of the earliest examples was a tax on the consumption of cooking oil in the time of the Egyptian pharaohs. The scribes charged with collecting the tax visited households to ensure the occupants were not using lard or other forms of fat instead of oil — and thus paying less tax.

The Romans also levied taxes, including customs duties at ports, on both imports and exports, and an inheritance tax that was used to provide funds for retired soldiers. Julius Caesar imposed a 1 per cent tax on the sale of slaves that was eventually increased to 4 per cent.

Taxation in Great Britain and beyond

The earliest forms of tax in Great Britain were imposed on products and land. The land taxes took many forms: one was based on the land area a house occupied, another on the number of windows a house had. This last tax led to an early form of tax minimisation by homeowners — they bricked up windows. It may have meant less light for the house, but at least they were minimising tax!

Even a feature of the distinctive Tudor-style houses was prompted by a desire to minimise tax. These houses are famed for their use of painted white panels with wood, but many also have a ground floor smaller than the upper storeys, which creates a wide overhang over the street. Evidently, this was done because the less land the ground floor occupied, the lower the property taxes were.

The earliest form of income tax was first introduced in Great Britain to finance the war against Napoleon in 1799. There was an annual tax-free threshold of £60, with a tax rate of 10 per cent on incomes above that. Not surprisingly, it was an unpopular tax that many people found ways to avoid, and instead of collecting the expected £10 million in the first year, the British government only got £6 million.

When a peace treaty was signed with France the tax was repealed, but then reintroduced when war broke out again. It is this second tax act that is the model for most modern tax systems. In addition to imposing tax on different classes of income, such as property, farming, retirement annuities, self-employed and wages, there was also a withholding tax on interest income paid by the Bank of England.

This second version of income tax was, again, extremely unpopular, and after the victory at Waterloo it was not only repealed, but all records associated with it destroyed. Although unpopular, its design had been shown to be one of the fairest ways to impose income tax, in that those less fortunate paid less tax.

The income tax system currently operating in the UK was introduced in 1842 as another temporary tax, supposedly for only three years. Even today it’s still a temporary tax that expires each year on 5 April, and must be reapplied by an annual finance act.

The history of American income tax is similar to that of the UK. Income-tax legislation based on the original English 1799 tax was drawn up to fund the war of 1812, but never imposed. It wasn’t until the Civil War that a progressive income tax was actually introduced. Again, tax avoidance must have been high, as only 276 661 people filed tax returns in 1870, out of a total population of approximately 38 million!

Australia’s taxation experience

Australia’s experience with taxation has been very similar to that of other countries. The original taxes were on goods and services and not income, and, as in the UK and USA, income tax was introduced to fund involvement in a war.

Tax in the colonies

Tax revenue in Australia has mainly been used to fund government facilities and services. The first taxes were introduced by the Colony of New South Wales to help pay for the completion of Sydney’s first gaol, and to provide funds for the care of the colony’s orphans. As the government provided more benefits, taxes were increased to fund them.

Just as there has been controversy in recent years about the imposition of new taxes and the sale of government assets, there was also opposition to taxes in the early days of the colonies.

Often the major reason for opposition to new taxes was their regressive and inequitable nature: the people who had the least tended to pay a much higher proportion than the more wealthy. To avoid this criticism, taxes were initially imposed on goods such as tobacco and alcohol on supposedly moral grounds.

It was when the colonies started taxing non-luxury items like tea, sugar, flour and rice that low-income earners started paying an inequitable share of the total tax take. This prompted some discontent; but it was nothing compared to the trouble caused by a tax imposed during the gold rush. With the amount of wealth being produced from gold, it had been decided to charge all miners a license fee. The fee was incredibly unpopular. It was imposed at a high rate, the miners could not see how they benefited from the revenue raised, it was not linked to gold discoveries and, by comparison, wealthy landowners paid very little tax.

Discontent was expressed by everything from avoidance measures such as hiding from the fee-collectors, to open revolt at the Eureka Stockade. That protest, although extreme, did achieve its aim, with the miner’s fee being scrapped and replaced by an export tax on gold.

Eventually, the colonies imposed their own forms of income tax. Tasmania was the first: in 1880 it introduced a tax on the profits of public companies. This was followed four years later by South Australia imposing a general income tax, and by New South Wales in 1895.

As Australia’s population grew, each of the colonies introduced more taxes. These taxes often differed between the colonies, either by their rate or what they were charged on. With Federation some of this confusion and variation was removed.

Taxation after Federation

The first taxes handed over to the Commonwealth were customs and excise duties. Even though a federal income tax was imposed in 1915, it was not until 1942 that the Commonwealth started collecting all income taxes. Two years later, to help maintain a more regular flow of tax revenue, group tax and provisional tax were introduced. These taxes still exist today, but are called Pay As You Go (PAYG) withholding and instalments tax.

Over the years since Federation, many taxes have been introduced and then withdrawn or changed. In 1917, an entertainment tax was introduced on the admission price of all entertainment, and led to tax auditors setting up camp at race meetings, theatres and cinemas to ensure there was no tax avoidance.

Sales tax was introduced on specified items in 1930, and was an indirect tax paid by wholesalers, as opposed to being paid by the end consumer. Then in 1942, a uniform income tax was introduced across the whole of Australia, collected by the Commonwealth Government and then distributed to the States and Territories. In 1944, the Commonwealth Government brought in the Pay As You Earn (PAYE) system for collecting tax from employees, and the provisional tax system for people who earned investment and business income.

Changes in the 1980s

For almost 40 years, Australia’s tax system did not undergo any major changes. Then, in 1983, the tax system entered a short period of almost constant change. The first was the introduction of the prescribed payments system in 1983. This imposed a tax collection system similar to PAYE on people working as contractors in the building industry.

On 20 September 1985, capital gains tax (CGT) was introduced to stop perceived tax avoidance on the profits made when assets and investments were sold. The unusual start date was when the Commonwealth Budget was handed down. This system of handing down the Budget after the start of each financial year led to many tax changes being introduced part-way through the year — including changes to tax rates, which created an administrative nightmare. Thankfully, someone recognised how crazy this system was, and the Commonwealth Budget began to be handed down in May instead.

With the introduction of fringe benefits tax (FBT) and the Medicare levy, 1986 proved to be a busy year. The Medicare levy was introduced to provide funds for Australia’s health system; the FBT system was introduced to tax employees on benefits taken in a form other than salaries or wages.

Over time, the ATO has used the broad powers given to it under the FBT system to attack almost any benefit it wanted to, including frequent flyer benefits. Some have said the ATO uses the FBT system to attack any benefits that employees of the commercial world get and public servants don’t.

Introducing the GST

For 14 years after the introduction of FBT and the Medicare levy, there was not much in the way of change, apart from alterations to tax rates and the taxing of superannuation (a completely different subject, explained in my book Super Made Simple: A Survival Guide).

Then 1 July 2000 saw the most radical overhaul of Australia’s taxation system ever undertaken. Not only were the GST and PAYG systems introduced and sales tax, PAYE and provisional tax withdrawn, legislation was also introduced to limit who could claim business losses, which defined who was regarded as running a business.

What changes to the taxation system will be made over the coming years is anybody’s guess, especially given the 2007 change of government. All I know for sure is, it won’t be a matter of if tax changes will be made, but when.

Trusting in history

One of the most popular business structures used today is a discretionary family trust. Due to their tax benefits, they are often attacked as the root of all evil when it comes to tax avoidance, and you could be forgiven for thinking they’re a recent invention designed to foil the Australian Taxation Office. In fact, as well as providing tax benefits, they’ve been used for hundreds of years and are a legitimate business and investment structure available to anyone.

Trusts trace their ancestry back to the Middle Ages: they were first embraced by the English in the 12th century to avoid the tax excesses of the king. Instead of lodging a yearly tax return or a quarterly business activity statement (BAS), the farmers of that time had to endure weekly visits from tax collectors.

There was no self-assessment. The peasant farmers would be assessed on the spot: the tax collector decided how much tax was owed, and took with him whatever livestock and money would pay the debt. In those days there was no right of objection, and definitely no administrative appeals board. Taxpayers were faced with weekly, not yearly, increases.

In an effort to protect the rewards of their hard work, some farmers approached the Church with a proposal. They’d give the Church title to their land and property under several conditions: they would retain the right to use the land, to buy and sell the land and property, and to pass the land to their first-born sons. The Church accepted the offer, and thousands of farmers entrusted it with their land — hence the name ‘trust’. The next time the tax collector visited, he was greeted with the news that the farm was now owned by the Church, and since the Church was exempt from paying tax, he left empty-handed.

However, in what can only be described as a salutary lesson for anyone engaged in tax-avoidance schemes, many of these medieval tax dodgers lost out and the Church benefited. When the bubonic plague hit Europe, the Church became very wealthy from the land it inherited under these trusts.

In feudal England, trusts were also used by men who did not have a son. Under the law of the time, if a man died without a son over the age of 21, the right to use and earn income from the property passed to his local lord. In addition, if he had daughters the lord could marry them off to anyone he wanted. For lords with unattractive or idiot sons, this must have proved a valuable non-taxable fringe benefit.

To avoid this, a man would ask some trustworthy friends to hold the land for him until he either had a son who reached the age of 21 or one of his daughters married. It was more an estate-planning scheme than a tax-planning one.

In 1535, the king and his nobles challenged the legality of trusts and attempted to ban them, but the judges of the Chancery Court (the equivalent of our High Court) upheld the validity of the trust concept. In 1536 the Statute of Uses was passed, cementing trusts in English law. Many legal scholars regard this legislation as the greatest achievement of Anglo-Saxon jurisprudence.

Since the Middle Ages, trusts have been used for the twin purposes of reducing income tax and death taxes. Here in Australia, when death duties existed, trusts were a popular way of overcoming probate problems. People transferred assets that increased in value, such as property and shares, into a trust, so that a limit was placed on the value of an individual’s estate and death duties were reduced.

To understand how a trust works, and what the legal terms used by trusts mean, it helps to look at how trusts were used in the time of Charles Dickens. Say a wealthy maiden aunt wanted to help a young nephew who was too young to handle money. She would have a trust deed drawn up, and the aunt (the settlor) would settle or deposit money (the settled sum) with a solicitor. The solicitor (the trustee) would hold that money in trust on behalf of the nephew (the beneficiary), who would benefit from the trust fund after the period of time specified in the trust deed.

Today, discretionary trusts are started by someone, often a family friend, who gives or settles a small sum of money to the trustee to look after. The trustee is given powers in the trust deed to conduct the affairs of the trust and distribute income and capital at his or her discretion to the beneficiaries. This discretionary power to distribute income and capital to the family members who have the lowest rate of tax is what makes a trust such a powerful tax-planning structure.

CHAPTER 2

Getting started: establishing the correct business structure

More mistakes are made at the beginning of a business than at any time in its life. As a result of either not getting advice or receiving the wrong advice, many people end up operating their business through a structure that means they pay too much tax, or that their personal assets are at risk when things go wrong.