The hidden cost of House Flipping

Anyone who has watched a renovation reality TV show knows that a run down real estate nightmare could be a cash cow in disguise. It seems simple enough. Buy a fixer-upper, spend a bit of money on cosmetic changes, style the property and sell it for a huge profit! Many savvy investors with the energy and money to dedicate to such an enterprise, as well as the design flair to pull it off, have done this successfully for years.

But there are some pitfalls, and if you’re not careful, you can also end up paying a lot of tax. In this article, I will talk about the practical considerations you need to make before taking on a house flipping project, as well as explain how the ATO looks at property renovations and what constitutes a business. There may be significant income tax and GST considerations that have not been taken into account in a keen renovator’s budget, which may tip the scale in favour of long-term investment.

While the renovation shows on TV make house flipping look like an overnight success, the truth is, renovating properties does take a considerable amount of physical work and mental stress. Some renovation projects can drag on for months or even years, go over budget, and be met with resistance from neighbours (particularly in strata schemes) which can land you in NCAT proceedings and council disputes. In the worst case scenario, you may even be required to reverse the renovation.

Have a Plan

It is imperative that you have a business plan (whether you are in the business of property renovation, or just renovating your first property as a one-off project) before you even start looking for properties to buy.

• The plan should include your cost budget, a time line for each phase of the project, and some property market research (specifically, who your target market is in that suburb, and determining the ceiling price for renovated properties of similar size and location to yours).

• You do not want to over-capitalise on a renovation in an area where certain improvements will not necessarily add significant value for buyers (for example, splashing out on heated floor tiles in a suburb that has average year round temperatures of 30 degrees Celsius).

• It is also a good idea to ask for advice from, or partner up with someone who has experience in renovations or property investment and development.

• You will need to check council restrictions, zoning, heritage listing if applicable, and if the property is in a strata scheme or company title, that there are no by-laws that will prevent you from carrying out your plans (even minor renovations in a strata scheme may require a by-law to be approved at an owners corporation meeting).

• You want to make sure you have deep enough pockets (i.e. cash or access to finance) to complete the renovation, in case unexpected circumstances arise which make you go over budget.

• Lastly, is this something you think you have the skills and time to do? House flipping is a serious business and not usually something people do as a side-hustle. Consider the opportunity cost of earning a salary in a conventional job with all the benefits that entails.

In addition to all of the above, you then need to think about the tax consequences. The tax implications may significantly reduce your profit. Having the right entity structure from the start could potentially save you a lot of tax as well.

Personal Property Investor

This refers to home owners who renovate their own home or investment property and sell it for a profit.

If the property was your primary place of residence (PPR), then any gain you make is exempt from Capital Gains tax (you can treat the property as your PPR for up to 4 years prior to moving in, under certain circumstances).

If the property was held for more than 12 months, the owner may be eligible to a 50% Capital Gains Tax (CGT) discount on any gains (depending on tax residency status). However, beware of knocking down investment properties and re-building, or significantly changing the structure (substantial renovations), as this could create a CGT event in itself and attract Goods & Services Tax (GST) on the sale.

This sort of renovation is not generally considered “Property Flipping”, but worth noting because of the potential tax savings.

Property Flipping

Property Flipping is a term used to describe purchasing property and selling it quickly for profit. It usually involves renovating the property to add value, and a successful ‘flip’ will involve adding significantly higher value proportionate to the time and cost of the renovation.

ATO has 2 distinct categories for “property flipping”, but they are essentially treated the same way for tax purposes. The first is where you are conducting an activity for the purpose of making a profit, and the second is where you are running a renovation (or property development) business.

In both scenarios, the profit you make is treated as your income and must be reported in your tax return (or the return of whatever entity is conducting the business activity, e.g. a company or a trading trust).

Under this scenario, you will not be eligible for a CGT discount, even if the renovation took more than 12 months to complete. You cannot claim the profit against carried forward capital losses. You also will need to register for and pay GST on the sale value (you will be able to claim input tax on certain purchases, and may also be eligible for the margin scheme).

It is important to know the following before conducting any property flipping activity:

1. Does your activity have the nature of a business or carried out for the purpose of profit-making?

2. Are you required to register for GST? If so, this should be done ASAP so that you can claim GST credits on your costs.

3. Are you eligible for the margin scheme? If so, you must have made a written agreement with the purchaser before the settlement date (claiming the margin scheme means that you only include GST on a proportion of the sale price, not the whole amount).

4. How long do you intend to hold the property for after renovation or construction has been completed? If the property is a residential premises and you hold and rent the property for a continuous period of 5 years after construction has been completed, it is no longer considered “new residential premises” and will not be subject to GST (if you have claimed GST credits during the renovation or construction phase, you will need to amend prior Activity Statements and pay back the GST credits).

5. Lastly, but probably most importantly, what business structure will you use to purchase and renovate? Will you run the business through a trust or company? What kind of trust should you establish? Is it wise to use your super, or even possible? What are the benefits of one structure over another? These are the sort of questions that you need to sit down with a professional adviser and discuss.

Whether you are taking on a one-off renovation project, or starting up a renovation business, it is important to speak to a tax professional to make sure that you are not going to end up with a huge unexpected GST and tax bill at the end of the day. Feel free to reach out to us at any time for advice.

This article was written for My Property Circles.

If you would like to know more about renovating properties, have a look at the School of Renovating which is a great place to start learning the process, and connecting with like-minded individuals and potential equity partners.

Xmas and New Year Office Closure

Our office will be closed from 23rd December 2020 to 23rd January 2021 with a skeleton staff processing mail during this time. Emails will be checked and responded to intermittently, and urgent matters will be attended to as soon as possible.

This year has been a strange and difficult one for many, and we are glad to make it to the end. We wish everyone a happy and safe holiday break and a very happy New Year!

Tax cuts and other changes

The Australian Government released its budget for 2021 in October. The budget included tax rate cuts to business and individuals (which had already been planned but brought forward to boost economic growth), changes to superannuation, and new employer cash incentives. The details of these changes will be summarised in our blog as soon as possible. Please check back for updates.

New Individual Tax Rates

Resident tax brackets have been adjusted as per the table below, effectively cutting individual tax for those earning between $37,000 and $120,000 and above. The change is applied retrospectively from 1st July 2020 so taxpayers can expect a larger refund this year, as they would have initially been taxed under the old tax brackets (from July 2020 til October 2020).

Resident tax rates 2020–21

The above rates do not include the Medicare levy of 2%.

Here is how these changes will affect taxpayers:

Further cuts are planned from 2024 financial year which will see the elimination of one of the middle tax brackets and a tax of 30% + Medicare levy for income earned between $45000 and $200,000.

Company Tax Rates

The government announced in previous budgets, the plan to reduce the company tax rate to 25%. Effective from 1st July 2020, the company tax rate (for base rate entities) has been reduced from 27.5% to 26%. It will be reduced to 25% from 1st July 2021. Companies which do not meet the criteria for base rate entity will continue to pay 30% company tax.

Base rate entity company tax rate

A base rate entity is a company that both:

• has an aggregated turnover less than the aggregated turnover threshold – which is $25 million for the 2017–18 income year and $50 million from the 2018–19 income year

• 80% or less of their assessable income is base rate entity passive income – this replaces the requirement to be carrying on a business.

Base rate entity passive income is:

• corporate distributions and franking credits on these distributions

• royalties and rent

• interest income (some exceptions apply)

• gains on qualifying securities

• a net capital gain

• an amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

Business Depreciation

The accelerated depreciation has effectively been replaced by “full expensing” which allows eligible businesses to claim a deduction for investment in fixed assets in full, during the year that they are purchased and installed for use. There is no limit on the investment value (e.g. an agribusiness purchases equipment valued at $200,000 net of GST on 1st July 2021 and claims a deduction of $200,000 in full, during the 2022 financial year. Full expensing can be utilised until 30th June 2022.

Temporary Loss Carry-Back

Losses incurred in 2019–20, 2020–21 and/or 2021–22 can be carried back against profits made in or after 2018–19. Eligible companies may elect to receive a tax refund when they lodge their 2020–21 and 2021–22 tax returns. This measure will help companies that were profitable and tax-paying but now find themselves in a loss position due to the COVID-19 pandemic.

For example, a company with turnover of less than $5bn reports a taxable profit of $100,000 in 2019 financial year and pays $27,500 tax. In the 2020 financial year, they report a taxable loss of $50,000. They elect to carry back the loss and claim a tax refund of $50,000 x 27.5% i.e. $13750 which will be refundable to the company as cash.

JobMaker Hiring Credit

From 7 October 2020, eligible employers will be able to claim $200 a week for each additional eligible employee they hire aged 16 to 29 years old; and $100 a week for each additional eligible employee aged 30 to 35 years old. New jobs created until 6 October 2021 will attract the JobMaker Hiring Credit for up to 12 months from the date the new position is created. To be eligible, the employee must have received the JobSeeker Payment, Youth Allowance (Other), or Parenting Payment for at least one of the previous three months at the time of hiring.

The JobMaker Hiring Credit will be claimed quarterly in arrears by the employer from the Australian Taxation Office (ATO) from 1 February 2021. Employers will need to report quarterly that they meet the eligibility criteria. The JobMaker Hiring Credit is designed to support new employment. Employers do not need to satisfy a fall in turnover test.

For more information about changes announced in the budget, please visit this website.

STP for closely-held entities

This time last year, we outlined the new requirements for reporting wages to ATO through Single Touch Payroll for all employers (previously it was only mandatory for entities that employed 20+ people). The requirement to report through STP came into effect from 1st July 2019, with an exemption for closely-held entities (which is an entity that only employs closely held payees).

A closely held (related) payee is someone who is directly related to the business, company or trust that pays them, such as:

• family members of a family business

• directors or shareholders of a company

• beneficiaries of a trust.

ATO allowed a 12 month extension of time to start STP reporting for closely-held entities, making the effective date 1st July 2020.

Due to the Covid-19 pandemic, the ATO has recently announced that they are further extending the date to report wages through STP enabled software for closely-held entities, to 1st July 2021. This is a huge relief for many small businesses who would not be able to meet the mandatory reporting requirements in the current economic climate.

Please note that there is no need to apply for an exemption, as this is automatically given to closely-held entities.

If you have any other employees (also known as arm's length employees) they must be reported through Single Touch Payroll on or before each payday unless you are eligible for a micro employer (those with one to four employees) reporting concession.

If you need advice or assistance in meeting employer obligations, particularly in relation to STP, please get in touch with us as soon as possible.

JobKeeper Payment - Enrolment Process

ATO has published comprehensive details about the JobKeeper payment (previously only available on the Treasury website as fact sheets) and also some guidance relating to the enrolment and application process. Please note, this page was last updated on 30th April in relation to step 2.

Enrol for the JobKeeper payment (from 20 April onwards)

Here is how to enrol for the JobKeeper payment:

• Step 1 – Check you and your employees meet the eligibility requirements.

• Step 2 – Continue to pay at least $1,500 to each eligible employee per JobKeeper fortnight (the first JobKeeper fortnight is the period from 30 March to 12 April). ATO has extended the due date to make the first 2 fortnights of JobKeeper payments to employees, to 8th May.

• Step 3 – Notify your eligible employees that you are intending to claim the JobKeeper payment on their behalf and check they aren’t claiming JobKeeper payment through another employer or have nominated through another business.

• Step 4 – Send the JobKeeper employee nomination notice to your nominated employees to complete and return to you by the end of April if you plan to claim JobKeeper payment for April. Keep it on file and provide a copy to your registered tax agent if you are using one.

• Step 5 – From 20 April 2020, you can enrol with ATO for the JobKeeper payment using the Business Portal and authenticate with myGovID. You must do this by the end of April to claim JobKeeper payments for April (this date has been extended to 31st May 2020).

• Step 6 – In the online form, provide your bank details and indicate if you are claiming an entitlement based on business participation, for example if you are a sole trader.

• Step 7 – Specify the estimated number of employees who will be eligible for the first JobKeeper fortnight (30 March – 12 April) and the second JobKeeper fortnight (13 April – 26 April).

Confirmation of eligible employees you will claim JobKeeper Payment for (available from 4 May 2020 onwards)

Here is how to apply for the JobKeeper payment for your eligible employees:

• Step 1 – Apply to claim the JobKeeper payment by logging in to the ATO Business Portal

• Step 2 – Ensure you have paid each eligible employee a minimum of $1,500 per JobKeeper fortnight before tax.

• Step 3 – Identify your eligible employees in the application form by

  • selecting employee details that are prefilled from your STP pay reports if you report payroll information through an STP enabled payroll solution, or

  • manually entering employee details in ATO online services or the Business Portal if you do not use an STP enabled payroll solution, or

  • using a registered tax agent who will submit a report on your behalf through Online services for agents (note: this form is not yet available and we do not have any information regarding this process - for the time being, we advise clients to log on to the business portal themselves and complete the claim themselves for their business).

• Step 4 – Submit the confirmation of your eligible employees online and wait for your confirmation email or SMS showing it has been received.

• Step 5 – Notify your eligible employees you have nominated them

• Step 6 – ATO will pay you the JobKeeper payment for all eligible employees after receiving your application.

• Step 7 – Each month, you will need to reconfirm that your reported eligible employees have not changed through ATO online services, the Business Portal or via your registered tax agent. This will ensure you will continue to receive the JobKeeper payments from the ATO. You do not need to retest your reported fall in turnover, but you will need to provide some information as to your current and projected turnover. This will be done in your monthly JobKeeper Declaration report.

• Step 8 – If your eligible employees change or leave your employment, you will need to notify ATO through your monthly JobKeeper Declaration report.

If you use the ATO Business Portal, you will need a myGovID linked to your ABN in relationship Authorisation Manager (RAM). You can find out how to set this up at ato.gov.au/mygovid

What do you need to do for your employees

You need to identify which employees you intend to claim the JobKeeper payment for and tell them you intend to claim the JobKeeper payment for them.

You need to provide these employees with the JobKeeper employee nomination notice and ask them to return it to you by the end of April if you want to claim JobKeeper payment for April.

If your employees have multiple employers, they can usually choose which employer they want to nominate through. However, if your employees are long-term casuals and have other permanent employment, they cannot nominate you. They cannot receive the JobKeeper payment from more than one employer.

If an employee is currently receiving an income support payment, they must notify Services Australia of their new income to avoid incurring a debt that they will have to repay.

Working From Home Deductions

ATO has released details of a new method to claim working from home deductions for employees who have been affected by Covid-19 restrictions.

If you have been forced to work from home due to the current pandemic, you will be able to claim a deduction for the additional running expenses that you incur. The new rules make claiming these expenses much easier.

Expenses you can claim

• electricity expenses associated with heating, cooling and lighting the area from which you are working and running items you are using for work

• cleaning costs for a dedicated work area

• phone and internet expenses

• computer consumables (for example, printer paper and ink) and stationery

• home office equipment, including computers, printers, phones, furniture and furnishings - you can claim either the:

  • full cost of items up to $300

  • decline in value for items over $300.

Expenses you can’t claim

If you are working from home only due to COVID-19, you:

• cannot claim occupancy expenses such as mortgage interest, rent and rates

• cannot claim the cost of coffee, tea, milk and other general household items your employer may otherwise have provided you with at work.

Calculating running expenses

There are three ways you can choose to calculate your additional running expenses:

• shortcut method ─ claim a rate of 80 cents per work hour for all additional running expenses

• fixed rate method ─ claim all of these:

  • a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture,

  • the work-related portion of your actual costs of phone and internet expenses, computer consumables, stationery, and

  • the work-related portion of the decline in value of a computer, laptop or similar device.

• actual cost method ─ claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis.

Shortcut method

You can claim a deduction of 80 cents for each hour you work from home due to COVID-19 as long as you are:

• working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls,

• incurring additional deductible running expenses as a result of working from home.

You do not have to have a separate or dedicated area of your home set aside for working, such as a private study.

The shortcut method rate covers all deductible running expenses, including:

• electricity for lighting, cooling or heating and running electronic items used for work (for example your computer), and gas heating expenses

• the decline in value and repair of capital items, such as home office furniture and furnishings

• cleaning expenses

• your phone costs, including the decline in value of the handset

• your internet costs

• computer consumables, such as printer ink

• stationery

• the decline in value of a computer, laptop or similar device.

You do not have to incur all of these expenses, but you must have incurred additional expenses in some of those categories as a result of working from home due to COVID-19.

If you use the shortcut method to claim a deduction for your additional running expenses, you cannot claim a further deduction for any of the expenses listed above.

You must keep a record of the number of hours you have worked from home as a result of COVID-19. Examples are timesheets, diary notes or rosters. CLICK HERE FOR OUR TEMPLATE

If you use the shortcut method to claim a deduction and you lodge your 2019-20 tax return through myGov or a tax agent, you must include the note ‘COVID-hourly rate’ in your tax return.

Records you must keep

If you use the shortcut method, you only need to keep a record of the hours you worked at home, for example timesheets or diary notes.

If you use the other methods, you must also keep a record of the number of hours you worked from home along with records of your expenses. For more information on what those records are see Home office expenses.

For more information, please visit the ATO website

JobKeeper Payment

In the week starting 30th March, the Government announced the third economic stimulus package which includes a JobKeeper payment for eligible businesses that have been significantly impacted by the Coronavirus.

The information fact sheets for this payment are available here. Latest update as at 14th April.

Please note: Legislation for the JobKeeper payment passed on 8th April and ATO has released comprehensive information regarding the application process on 14th April.

Once you have done this, you will receive further instructions from ATO via email

The JobKeeper Payment is intended to subsidise some of the wages that employers pay their existing workers, whether they are still working or have been stood down. Stood down employees ordinarily do not have to be paid, but under this package, the stood down employees will be eligible for the payment.

Below is the latest information available by the Treasury, including our commentary and additional advice where relevant.

Which employers are eligible?

Employers will be eligible for the subsidy if:

• their business has a turnover of less than $1 billion and their turnover will be reduced by more than 30 per cent relative to a comparable period a year ago (of at least a month); or

• their business has a turnover of $1 billion or more and their turnover will be reduced by more than 50 per cent relative to a comparable period a year ago (of at least a month); and

• the business is not subject to the Major Bank Levy.

The employer must have been in an employment relationship with eligible employees as at 1 March 2020, and confirm that each eligible employee is currently engaged in order to receive JobKeeper Payments. Not-for-profit entities (including charities) and self-employed individuals (businesses without employees) that meet the turnover tests that apply for businesses are eligible to apply for JobKeeper Payments.

How to prove a reduction in turnover?

To establish that a business has faced a 30% (or 50%) fall in their turnover, most businesses would be expected to establish that their turnover has fallen in the relevant month or three months (depending on the natural activity statement reporting period of that business) relative to their turnover a year earlier.

Where a business was not in operation a year earlier, or where their turnover a year earlier was not representative of their usual or average turnover, (e.g. because there was a large interim acquisition, they were newly established or their turnover is typically highly variable), the Tax Commissioner will have discretion to consider additional information that the business can provide to establish that they have been adversely affected by the impacts of the Coronavirus.

The Tax Commissioner will also have discretion to set out alternative tests that would establish eligibility in specific circumstances (e.g. eligibility may be established as soon as a business ceases or significantly curtails its operations). There will be some tolerance where employers, in good faith, estimate a greater than 30% (or 50%) fall in turnover but actually experience a slightly smaller fall.

How much is the payment?

The amount per employee is $1500 per fortnight (before tax). Tax should be withheld at marginal rates. The payment is up to a period of 6 months (13 fortnightly payments, totalling $19500 gross, per employee).

There is no limit to the number of employees (according to current available data). However, for Partnerships, only 1 partner can be nominated; for Company directors, only 1 director can be nominated in their capacity as a director earning directors’ fees. If the employee is receiving a salary and also happens to be a director in the company, their eligibility would be assessed in the same way as other non-associate employees)

When will the payment be received?

Payments will be made to the employer monthly in arrears by the ATO. The payment will be paid once a month (e.g. $3000 per month per employee), and the first payment will be received by the employer in the first week of May 2020.

For example, for the period 30th March to 30th April, the subsidy will be paid to employers in the first week of May, and will be equal to $1500 x 2 fortnights, i.e. $3000 per employee.

Payments must be made according to the employer's usual pay cycle, and the JobKeeper payment will be given in arrears (after the payment has been made to eligible employees). If an employer does not have the cash available for this arrangement, they might need to speak to their bank about providing emergency credit.

“The banks have said businesses may be able to use the upcoming JobKeeper payment as a basis to seek credit in order to pay their employees until the scheme is making its first payments.” - see FAQ

If the employee is still engaged in the business as usual, then the normal pay cycle and salaries will continue.

You may want to change your business’ pay cycle to allow for monthly salary payments in order for the cash to be available from ATO closer to the pay date. This can be mutually agreed between the employer and employee.

“Where an employer pays their staff monthly, the ATO will be able to reallocate payments between periods. However, overall an employee must have received the equivalent of $1,500 per fortnight” - see FAQ

What if I haven’t paid the full $1500 per fortnight?

For the first two fortnights (30 March – 12 April and 13 April – 26 April), ATO will accept the minimum $1,500 payment before tax has been paid for each fortnight even if it has been paid late, provided it is paid by the end of April. This means that employers can make two fortnightly payments of at least $1,500 per fortnight before the end of April, or a combined payment of at least $3,000 before the end of April.

Which employees are eligible?

Eligible employees are employees who:

• are currently employed by the eligible employer (including those stood down or re-hired);

• were employed by the employer at 1 March 2020;

• are full-time, part-time, or long-term casuals (a casual employed on a regular basis for longer than 12 months as at 1 March 2020);

• are at least 16 years of age;

• are an Australian citizen, the holder of a permanent visa, a Protected Special Category Visa Holder, a non-protected Special Category Visa Holder who has been residing continually in Australia for 10 years or more, or a Special Category (Subclass 444) Visa Holder; and

• are not in receipt of a JobKeeper Payment from another employer.

Associates of the company are also eligible (e.g. directors who were on the payroll at 1st March and meet the other requirements listed above).

New information has recently been released regarding Primary Employers. This makes the eligibility criteria of employees slightly different for employees who have more than one employer.

“Every employee is only able to receive one payment from one employer, their primary employer. The ATO will provide guidance on how to determine your primary employer.” - See FAQ

What about sole traders?

Sole traders who meet the eligibility criteria listed above will also be eligible for the payment. They will need to register their intention to claim the payment and once the application process commences, nominate themselves as the individual to receive the payment.

The information from Treasury is a little ambiguous at this stage, as to whether the Payment will apply to sole traders who also have employees (as it only refers to sole traders without employees), however, it is reasonable to deduce that sole traders who do pay wages will be able to apply for the Payment for their employees as well as for themselves. This is to be confirmed.

Is superannuation payable on the JobKeeper payment?

Superannuation is not required to be paid on the JobKeeper payment (on amounts greater than the ordinary earnings that are required to be paid) but employers may choose to pay if they want to.

Example 1 - for a stood down employee, the required pay for the period is NIL, so if the employee receives $1500 per fortnight, no superannuation applies.

Example 2 - for a full time employee who is still working their usual hours, the required pay for the period is $3000, so the employee receives $3000 per fortnight ($1500 is paid to the employer as a subsidy), and superannuation of 9.5% applies to the full $3000 (i.e. $285).

Example 3 - for a part-time employee who is still working their usual hours, the required pay for the period is $1000, so the employee receives $1500 per fortnight ($1500 is paid to the employer as a subsidy), and superannuation of 9.5% applies to the ordinary earnings of $1000 (i.e. $95).

Other information

There are working examples on the Treasury fact sheets which might assist you in determining how the payment will be implemented. Please read these fact sheets before sending any enquiries to our office about this subsidy.

ATO JOBKEEPER PAYMENT WEBSITE (added 14th April 2020)

JobKeeper Payment — Information for employees

JobKeeper Payment — Information for employers

Supporting businesses to retain jobs

Frequently Asked Questions (added 5th April 2020)

Employee nomination form (added 14th April 2020)

NEWSLETTER - COVID-19 EDITION

For those who are not subscribed to our newsletter, here is a summary of important information in relation to the economic stimulus package and ways to help navigate through the current economic climate.

1. Cash Flow Boost to employers 

The stimulus package that the federal government announced includes withholding tax credits equal to 100% of the reported withholding tax and capped at $50,000 for the period Jan-June 2020, and an additional credit available for wages reported from Jul-Sep 2020, bringing the maximum available credits to $100,000.

What do I need to do to get the credit?

You need to lodge a BAS for the period January-March 2020, April-June 2020, July-October 2020, or any monthly income activity statement where wages are reported over this period. Your BAS will need to include wages (W1) and witholding tax (W2). You will still need to pay GST but you will not need to pay the withholding tax.

Employers have an obligation to withhold tax at marginal rates using ATO-issued tax tables (or software that supports these rates). Employers will not be able to claim disproportionate withholding tax as this will not meet their legal obligations. 

Eligible employers will receive a minimum of $10,000 even if they are not required to withhold tax (due to the reported wages being below the tax-free threshold). 
 
Is my business eligible?

All business (regardless of corporate structure) will be eligible to receive the cash flow boost as long as they held an ABN on 12th March and continue to be active, have an aggregate turnover of less than $50 million, and made eligible payments that are required to have tax withheld on them (even if the withholding tax is NIL). Generally, the business should already have been registered for withholding tax prior to 12th March 2020.  

ATO also requires that your business tax return was lodged by 12th March 2020, in order to determine your assessable income and eligibility. However, if you have not lodged a prior year return, you may still be eligible if ATO are satisfied, based on other information they hold, that you are in business and would have an aggregated annual turnover under $50 million. We may be able to assist you in this regard if ATO is suspending the credit due to a late lodgement of 2019 tax return.

The ATO are frequently updating their Covid-19 related pages with new information, and here is the latest update on the eligibility for the cash boost (the bolded information was not available when we sent out the newsletter).

In addition, you must also have either:

• derived business income in the 2018–19 income year and lodged your 2019 tax return on or before 12 March 2020

• made GST taxable, GST-free or input-taxed sales in a previous tax period (since 1 July 2018) and lodged the relevant activity statement on or before 12 March 2020.

Schemes

ATO is going to be targeting people who start reporting higher salaries in order to take advantage of the cash boost. ATO have specifically outlined what they deem to be a scheme:

"This may include restructuring your business or the way you usually pay your workers to fall within the eligibility criteria, as well as increasing wages paid in a particular month to maximise the cash flow boost amount.

Any sudden changes to the characterisation of payments made may cause us to investigate whether the payments are in fact wages. If the payments are wages, we may consider the characterisation of past payments, including whether they should have been subject to PAYGW and whether super guarantee contributions should have been made. You may also have FBT obligations that have not yet been met."

You can read more about the cash boost here, which provides working examples under "calculating the cash flow boost". 

2. Increasing the instant-asset write-off threshold to $150,000

Assets installed and ready to use from 12th March 2020 until 30th June 2020 will be eligible for an instant write-off if the cost of the asset was up to $150,000 and the business had an aggregate turnover of less than $500 million. 

From 1st July 2020 the instant asset write-off threshold will reduce to $1,000. 

3. Early release of superannuation

The government is allowing individuals affected by COVID-19 to access up to $10,000 of their superannuation in 2019–20 and a further $10,000 in 2020–21. Individuals will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

From mid-April eligible individuals will be able to apply online through myGov to access up to $10,000 of their superannuation before 1 July 2020. They will also be able to access up to a further $10,000 from 1 July 2020 until 24 September 2020.

Who is eligible?

To apply for early release, you must satisfy any one or more of the following requirements:

• You are unemployed.

• You are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance.

• On or after 1 January 2020, either

• you were made redundant

• your working hours were reduced by 20% or more

• if you are a sole trader, your business was suspended or there was a reduction in your turnover of 20% or more. 

Is this something you should be doing?

Our financial planner, Antoinette Mullins advises the following -

"Superannuation is meant to provide for your retirement. For some, being allowed access to $20,000 now when they need it, is certainly a welcome lifeline. But please really consider if withdrawing all of the $20,000 is truly needed.

Leaving just $5,000 or $10,000 extra in super and allowing it to grow over the next 5,10 or 20 years, could make a big difference to whether you can meet expenses in retirement too. This is because of compound interest, where, over time, you earn interest on your interest, on your interest...like a snowball rolling down a hill.

Explore all other options before going this route. But if you do withdraw from super, make a plan to add extra contributions in the future to make up the missing funds. Seek advice from a professional like a certified financial planner and work with your accountant to plan your best way forward & learn how to close the gap in your retirement savings in the most tax effective way."

4. Supporting apprentices and trainees

If your business employs apprentices and trainees, you may be entitled to wage assistance under the government’s economic stimulus package.

Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage paid during the 9 months from 1 January 2020 to 30 September 2020.

Employers will be reimbursed up to a maximum of $21,000 per eligible apprentice or trainee ($7,000 per quarter).

Eligibility

The subsidy will be available to small businesses employing fewer than 20 full-time employees who retain an apprentice or trainee. The apprentice or trainee must have been in training with a small business as at 1 March 2020. Employers of any size and Group Training Organisations that re-engage an eligible out-of-trade apprentice or trainee will be eligible for the subsidy. Employers will be able to access the subsidy after an eligibility assessment is undertaken by an Australian Apprenticeship Support Network (AASN) provider. This measure will support up to 70,000 small businesses, employing around 117,000 apprentices.

Timing

Employers can register for the subsidy from early April 2020. Final claims for payment must be lodged by 31 December 2020. Further information is available at:

• The Department of Education, Skills and Employment website at: www.dese.gov.au

• Australian Apprenticeships website at: www.australianapprenticeships.gov.au

For further information on how to apply for the subsidy, including information on eligibility, contact an Australian Apprenticeship Support Network (AASN) provider.

5. Centrelink Support

You may be eligible for a number of individual and household cash payments that have been announced as part of the stimulus package, including 

• Expanded eligibility for income support payments, including the coronavirus supplement

• Two Household support payment of $750 each ($1500 total) - eligibility criteria applies

• Temporary reduction of mimimum drawdown payments from superannuation funds for pension-based accounts, allowing them to hold onto their super without the need to sell assets to meet minimum pension requirements 

Check the links on this page for more information

6. NSW Government Stimulus Package

The NSW Government will waive payroll tax for all employers on wages reported between now and 30th June. From 1st July, the payroll tax wage threshold will be increased to $1 million. QLD Government has also waived payroll tax for this period. You should check with your relevant state government to see what additional support is available for your business. 

The NSW Government have also announced that they will be waiving a range of fees and charges for small businesses including bars, cafes, restaurants and tradies.

Read more about the stimulus package here, which includes extra funding for NSW health, bringing forward major capital works and expenditure, and millions towards employment of additional cleaners of public infrastructure such as transport assets, schools and other public buildings. 

The NSW Government has also just announced changes to workplace legislation, in particular, changes to long service leave which will create greater flexibility for employers and employees to access leave during the COVID-19 crisis.

If you are an employer and are wondering what your legal obligations are during this period of time, please contact Sean Melbourne who is an employment law specialist from Source Legal. You can also connect with him on LinkedIn as he has been sharing incredibly useful information, particularly for the hospitality industry.

7. Other considerations 

Banks are now offering unsecured loans to eligible businesses of up to $250,000 to help with cash flow. This is part of the government's commitment to support the flow of credit to businesses during the pandemic.

The Coronavirus SME Guarantee Scheme will provide support for these businesses. Under the Scheme, the Government will provide a guarantee of 50 per cent to small and medium enterprise (SME) lenders for new unsecured loans to be used for working capital. This will enhance these lenders’ willingness and ability to provide credit, which will result in SMEs being able to access additional funding to help support them through the upcoming months.

SMEs with a turnover of up to $50 million will be eligible to receive these loans.

The Government will provide eligible lenders with a guarantee for loans with the following terms:

• Maximum total size of loans of $250,000 per borrower.

• The loans will be up to 3 years, with an initial 6 month repayment holiday.

• The loans will be in the form of unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.

Loans will be subject to lenders’ credit assessment processes with the expectation that lenders will look through the cycle to sensibly take into account the uncertainty of the current economic conditions.

As part of the loan products available, the Government will encourage lenders to provide facilities to SMEs that only have to be drawn if needed by the SME. This will mean that the SME will only incur interest on the amount they draw down.  If they do not draw down any funds from the facility, no interest will be charged, but they will retain the flexibility to draw down in the future should they need to.

Financial Assistance for individuals
 
You can apply to your current home lender to postpone loan repayments and/or capitalise interest for 3-6 months. Contact your lender, mortgage broker and/or financial adviser ASAP. If you are renting, speak to your landlord about allowing you to pay a reduced rent for the time being and accumulate arrears to pay at a later time.

Extending Credit Terms

Contact all your utility providers, contractors, suppliers etc to see if they will allow you to postpone bill payments or extend their credit terms. 

If you are a business yourself, consider extending your credit terms (offering longer to make a payment, or facilitating a payment plan) to your customers or business tenants. It is better to help them now with their cash flow rather than lose them as a client/tenant/business partner all together. Remember that this virus will eventually go away, and the economy will go back to normal in time. Retaining business relationships is crucial to long term prosperity.

Make sure any agreements are in writing. Speak to a corporate lawyer if you want to know what your rights and obligations are. 

Lastly..

Remember that we are all in this together. 

Some relief during this difficult time

COVID-19 has created an unprecedented climate of fear and uncertainty all around the world. As well as the tragic deaths that this virus is causing, the economy and our society is suffering. 

Be assured that it will not always be this way. For now, everyone can work together to contain the virus and support one another so that we can persevere through it. 

The most difficult part right now is the interruption to our way of life. Businesses being forced to shut down and people told to socially distance themselves, health professionals fearing the worst, and most of us not knowing how we will be paying the bills in the near future if we are forced to take unpaid leave or lose our jobs. 

There is some relief available, and below is a brief summary of how. 

Federal Government stimulus #1 

The Government announced a relief package targeting employers and welfare recipients. 

This includes a tax-free 100% refund (increased from 50%) of withholding tax that is paid on wages reported for the period January - June 2020, capped at $50,000 (increased from $25,000). The hope is that this cash injection will allow certain businesses to continue paying wages or spend on other business costs to boost the economy. 

Part of this package includes a minimum payment of $10,000 for the period January-June 2020 and an additional $10,000 minimum payment for the period Jul-Oct 2020 (and further maximum payment of $50,000, bringing the total cash boost to $100,000 per employer). This means that if you do not have withholding tax obligations, you will still be entitled to a credit of $10,000 and this credit will be refundable if you do not have to offset it against other tax obligations (such as GST).

On an individual level, recipients of government payments such as family tax benefits, Newstart allowance and other income support recipients will receive $750. This will be paid automatically and there is no need to register for this payment. 

Instant asset write off threshold extended to $150,000 (from $30,000) for assets purchased until 30th June 2020. 

Wage support has been announced for employers who hire apprentices and trainees. Eligible employers will be able to apply for payments equal to 50% of apprentice and trainee wages paid between January and June 2020. You must have already been training an apprentice or trainee on 1st March 2020 to be eligible.

Click here for more information about the stimulus package

Federal Government stimulus #2

Just announced - 

* cash payments for small business up to $100,000 (this has been updated in Stimulus #1 above)

* Newstart allowance to double 

* access to up to $10,000 from super 

More info to come 

Click here to read the Treasury’s factsheet on Cash flow assistance for business.

NSW Economic stimulus 

The NSW government announced that they will waive payroll tax for businesses with payrolls up to $10m for wages paid between April and June. They are also increasing the payroll tax threshold from 1st July to $1m. This will save more than $500 million for NSW employers.

Various licence fees and payments will be waived for many small businesses including bars, restaurants and trades.

You can read more about the NSW government stimulus here

Banks and Non-bank Financial Institution support 

If you are worried about how you are going to pay your mortgage because you are forced to go on unpaid leave or you have lost your job, get in touch with your lender as soon as possible. Most of them will have a financial support package available which can allow you to defer your payments by up to 6 months, capitalise your repayments or pay interest-only for a certain period. Being able to defer Loan repayments when your earnings have come to a halt will give a lot of financial and mental relief to individuals and business owners. 

Here are some lenders who can offer support - check your lender website to see how they can assist you in times of crisis. 

https://www.commbank.com.au/latest/coronavirus.html?ei=hp-ban-cvp-default-coronavirus

https://www.nab.com.au/personal/customer-support/covid19-help

https://www.westpac.com.au/business-banking/small-business-relief/.html

https://media.anz.com/posts/2020/03/anz-launches-major-covid-19-support-package

ATO Advice on COVID-19

The following is an extract from ATO

On 12 March 2020, the government announced a package of measures to help the economy withstand and recover from the economic impact of coronavirus. The following measures will be administered by the ATO.

The government intends to introduce legislation in late March 2020 to implement its Economic Response to Coronavirus.

Enhancing the instant asset write-off

The government is increasing the instant asset write-off (IAWO) threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million).

Timing

This proposal applies from 12 March 2020 until 30 June 2020, for new or second-hand assets first used, or installed ready for use in this timeframe.

Enhancing the IAWO will require legislative changes before it can take effect.

Backing business incentive

The government is introducing a time limited 15-month investment incentive to support business investment and economic growth over the short-term, by accelerating depreciation deductions.

A deduction of 50% of the cost of an eligible asset on installation will apply, with existing depreciation rules applying to the balance of the asset’s cost.

Eligibility

Eligible businesses – businesses with aggregated turnover below $500 million.

Eligible assets – new assets that can be depreciated under Division 40 of the Income Tax Assessment Act 1997 (that is, plant, equipment and specified intangible assets, such as patents). Does not apply to second-hand Division 40 assets, or buildings and other capital works depreciable under Division 43.

Timing

Assets acquired after announcement and first used or installed by 30 June 2021.

Boosting Cash Flow for Employers

The Boosting Cash Flow for Employers measure will provide up to $25,000 back to business, with a minimum payment of $2,000 for eligible businesses. The payment will provide temporary cash flow support to small and medium businesses that employ staff during the economic downturn associated with coronavirus. The payment will be tax free.

Eligibility

Small and medium business entities with aggregated annual turnover under $50 million and that employ workers will be eligible. Eligibility will generally be based on prior year turnover.

The payment will be delivered by the ATO as a credit in the activity statement system from 28 April 2020 when eligible businesses lodge (see below) upcoming activity statements.

Eligible businesses that withhold tax to the ATO on their employees’ salary and wages will receive a payment equal to 50% of the amount withheld, up to a maximum payment of $25,000.

Eligible businesses that pay salary and wages will receive a minimum payment of $2,000, even if they are not required to withhold tax.

This measure will benefit around 690,000 businesses employing around 7.8 million people.

Timing

The Boosting Cash Flow will be applied for a limited number of activity statement lodgments. The ATO will deliver the payment as a credit to the business upon lodgment of their activity statements. Where this places the business in a refund position, the ATO will deliver the refund within 14 days.

Quarterly lodgers will be eligible to receive the payment for the quarters ending March 2020 and June 2020.

Monthly lodgers will be eligible to receive the payment for the lodgment months of March 2020, April 2020, May 2020 and June 2020. To provide a similar treatment to quarterly lodgers, the payment will be calculated at three times the rate (150%) in the March 2020 activity statement.

The minimum payment will be applied to the business’ first lodgment.

Further Information

For more information on the Australian Government’s Economic Response to Coronavirus visit treasury.gov.au/coronavirusExternal Link.

Businesses can visit business.gov.auExternal Link to find out more about how the economic response complements the range of support available to small and medium businesses.