Boutique Accounting House eNews | August 2018
Clothing deductions hung out to dry.
The Australian Taxation Office is closely examining work-related clothing and laundry expense claims of taxpayers submitting their 2017-18 tax returns. The ATO says that clothing claims are up nearly 20% over the last five years with people either making mistakes or deliberately over-claiming. Common mistakes include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated. “Around a quarter of all clothing and laundry claims were exactly $150, which is the threshold that requires taxpayers to keep detailed records. We are concerned that some taxpayers think they are entitled to claim $150 as a ‘standard deduction’ or a ‘safe amount’, even if they don’t meet the clothing and laundry requirements,” Assistant Commissioner Kath Anderson said. While this particular announcement focuses on clothing related expenses, it has been clear for some time now that the ATO is paying very close attention to work related expenses in general. All claims should be supported by evidence – just in case the ATO decides your claim requires closer scrutiny. We have heard of a number of real life examples in the last year or so where the ATO has queried and challenged very small deduction amounts which could not be supported by appropriate evidence.
What can I claim?
You can only claim a deduction for the cost of buying and cleaning:
Occupation-specific clothing - for example, the checked pants a chef wears.
Protective clothing – fire-resistant and sun-protection clothing, safety-coloured vests, non-slip nurse's shoes, rubber boots for concreters, steel-capped boots,
gloves, overalls, and heavy-duty shirts and trousers, and overalls, smocks and aprons you wear to avoid damage or soiling to your ordinary clothes during your income-earning activities, and
Unique, distinctive uniforms – clothes that are designed and made for the employer and not publicly available - like shirts with the company logo.
If you claim a $150 on clothing and laundry expenses, just be aware that you might be asked to prove these expenses.
Are you holding back your business?
Overcoming the biggest problems in business often comes down to the simple things. Here are a few simple things you can do to capitalise on your opportunities and reduce your risks.
“I didn’t get time…” No more excuses
Most people simply don’t set aside the time to do the forward planning they know they need to do. Here’s a simple test: write down your goals for the business. Now ask yourself, are you doing something to achieve those goals every day or every week? If not, it’s not a goal. It’s just a nice thought.
Set a realistic budget
Financially mapping your business reduces your risk and removes some of the surprises that can occur. Your budget needs to be realistic – not just a percentage increase on last year. Start with an operating budget and assess each line critically. Map your revenue to see where, how and when the money is coming in to create a reliable estimate of your income for the coming year. Once you have your revenue expectations in place, look at what is required to generate that income. For example, what advertising, marketing and resources will be required? Once you are comfortable with your revenue, work up your expenditure budget. Be tough on costs. Don’t forget to allow for growth and the increases that are likely to flow through. Once your budget is complete and you have a good idea of your likely profit margins, do a couple of alternative estimates for your key revenue drivers so you understand the impact of changes to your assumptions. Once you have all this in place, track and measure it throughout the year. Where possible, your management team should be a part of this process and take responsibility for achieving the budget numbers they give you. When people don’t take the steps that they knew were required to achieve the budget the gaps become obvious fairly quickly. Having a budget in place that you need to report on regularly makes you focus on what really needs to be done.
Map your cash
Even some very large businesses have failed because they ran out of cash. Understanding your cashflow needs is vital particularly for high growth business. Understanding your cash position is about understanding the timing differences: How long will it take for your customers to pay you? How much stock will you need to hold? And, what are the payment terms required by your suppliers? With your cash flow, don’t forget to allow for things like tax payments, loan repayments, dividends and any capital purchases that are planned. These can be ‘big ticket’ items and if you don’t allow for them then you will get caught out. As part of your cash flow forecast identify your capital expenditure requirements. Don’t deal with these on a one-off basis as they arise, plan them in advance.
Expect the unexpected
Growing to death is often the result of unplanned growth opportunities. It’s ironic that seizing a major sales contract or big new client can be your business’s ruin but its more common than you think. Many business operators are very good at what they do. Most have an excellent knowledge of the business they conduct and understand their products and services. Most also have an in-depth knowledge of sales performance and revenue. Few however, have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not part of the vocabulary. As a result, there can be a sudden and unintended impact on their financial position. A rush of sales might be a great thing but it is not always counterbalanced by a rush of income and profit. Free cash and liquidity are the victims.
Cryptocurrencies, like Bitcoin, are independent and not regulated by any central authority. Until recently, these digital currencies were not treated in the same way as cash for tax purposes in Australia. New legislation passed by Parliament last month seeks to change all of that by removing GST from currency exchanges.
How are cryptocurrencies taxed?
Under GST law, a 10% GST applies to supplies of goods and services. Money receives special treatment because it’s a medium of exchange and not something for final private consumption. Up until recently, the Australian Taxation Office (ATO) took the view that cryptocurrencies did not meet the definition of ‘money’ because they have an independent value rather than being a debt, credit or promise to make a payment, and they don’t meet the definition of money under GST law. The impact was that when people used digital currencies as payment, this could trigger GST twice; once on the goods or services being purchased, and also on the supply of the digital currency to the other party. So, the Government has changed the definition of money for GST purposes from 1 July 2017. Now, trades of cryptocurrency are disregarded for GST purposes, unless the trade is for a payment of money or digital currency (for example you are in the business of trading cryptocurrencies). Cryptocurrencies are now taxed in a similar way for GST purposes to foreign currency. But it’s not just GST to consider. Income tax and capital gains tax (CGT) issues might also arise in transactions involving cryptocurrency depending on how and why you are using it.
Individuals trading in cryptocurrencies
If you hold cryptocurrency for your own personal use and you paid $10,000 or less to acquire the digital currency, then there is generally no tax impact when you dispose of the currency. However, if the cryptocurrency is not held for your personal use and enjoyment then there are some tax issues that can arise. If the cryptocurrency is held as an investment (i.e., not for personal use and enjoyment) or the cost is more than $10,000 then CGT might apply when you sell or exchange the currency. At the time of writing the price of Bitcoin was just under US$6,000 – up from just under US$1,000 at the beginning of 2017 (and just over $13 at the start of 2013). The taxing point for CGT purposes is normally when a contract is entered into. If there is no contact (which is often the case with digital currencies) the taxing point is when ownership changes. The line between personal use and investment can be very thin. It will be difficult to argue that you hold cryptocurrency for personal use if you use it irregularly to purchase goods and services and you made a large gain from holding and trading it.
Businesses trading in cryptocurrencies
If your business accepts cryptocurrency as payment for goods or services, these payments are treated in the same way as any other. That is, if your business is registered for GST, the price paid by the person paying in the digital currency should include GST. Likewise, if you purchase goods or services for use in your business then you should generally be able to claim GST credits on the transaction in your activity statement, even if you used digital currency to make the purchase. If you are in the business of trading cryptocurrencies and your business is registered for GST, you charge GST on the exchange of the currency and claim the GST credits in your activity statement. The new legislation does not prevent GST from applying to the supply of cryptocurrencies in exchange for a payment of money or digital currency. It is also possible that someone could hold cryptocurrency as trading stock if it is held for the purpose of sale or exchange in the ordinary course of a business. Any gains from the trades are then taxed in the business’s income tax return (or individual tax return for sole traders). CGT concessions and exemptions are not generally available in this case. If you are in the business of trading cryptocurrencies, that is, you approach the trading in a business-like manner, then you can generally claim losses and other business expenses. The tax laws can be complex in this area and it’s important to ensure that you get the right advice.
Documentation to keep the ATO happy
If you are using cryptocurrencies for whatever purpose, it’s important to keep records of the transactions to ensure that if the ATO challenges your tax treatment of the currency, you can prove your position.
If you are thinking about re-financing in order to get a better rate or require any asset/business finance we would love to help out through the Boutique Lending House. Please give us a call on 07 5613 1070.