Taxation of your unused leave when leaving a job

When your job ends, whether there has been a termination of employment or redundancy you will receive a payment for unused leave. This payment will be taxed differently from your normal income.

The taxation will vary depending on the reason why you left the job and any unused entitlements that have been accrued over your employment (long service leave or sick leave).

Lump sum payments that you receive for unused annual leave or unused long service leave are taxed at a lower rate than other income. These lump sum payments will appear on your income statement or payment summary as either ‘lump sum A’ or ‘lump sum B’.

These payments may also be taxed differently if you lost your job as a result of Covid-19.

Fuel tax credits for businesses

The government provides fuel tax credits for businesses with a credit for the fuel tax (excise or customs) that is included in the price of fuel used in machinery, plant, equipment, heavy vehicles, and light vehicles travelling off public roads or on private roads.

Fuel tax credits a business receives depend on when the fuel was acquired, which fuel you used, and what it was used for. Since fuel credits change regularly, it is necessary to check rates each time the business activity statement (BAS) is filled out.

Eligibility

• Certain fuels and activities are not eligible
• Must be registered for GST when fuel was acquired
• Must be registered for fuel tax credits when you lodge the claim

Lodging your business activity statement

Businesses that are registered for GST are required to lodge a business activity statement (BAS). These assist in the reporting and payment of:

• Goods and services tax (GST)
• Pay as you go (PAYG) instalments
• PAYG withholding tax
• Other tax obligations

ATO will automatically send businesses who are registered for an ABN and GST a BAS when it is due for lodgement.

Businesses are given various options to lodge their BAS:

• Online services for individuals and sole traders – which may be accessed through myGov
• Business Portal – which is a secure website created by the ATO to assist businesses in managing their tax online
• SBR-enabled software – which allows access to lodgement from different financial, accounting and payroll software and can be integrated to industry-specific business software.

What do tax audits involve?

Tax audits are conducted when the ATO deems that a more extensive examination of an issue is necessary. These audits can be conducted on a fairly basic level or they can be much more in-depth and analytical.

In most cases, there will be a review which then leads to an audit, but this isn’t always necessary. A review may not be deemed necessary in cases where fraud or evasion is suspected or there is a high risk associated with the transaction.

The ATO states that they will be transparent about the following aspects of an Audit:

• Scope, periods under audit and expected completion date
• ATO’s risk hypothesis and information required to assess the hypothesis
• Choice of channel to provide information to ATO
• How audit will be conducted (key milestones and relevant guidelines)
• Advantages of, and procedures for, making voluntary disclosures
• Expectations from individuals/businesses when information has been requested for records
• Circumstances in which ATO can be expected to use their formal powers

Cooperating with the ATO’s requests is the ideal response. If there is a lack of cooperation, then the ATO can use their formal powers to access the information they are seeking:

• Notice powers: Require you to give information, attend and give evidence or produce documents
• Access powers: Give free access to the ATO to all places, books and documents and require that assistance be given to ATO’s officers to exercise their powers.

Cooperation makes this process much easier for both parties as a lack of cooperation can not only create a bad image but can be easily overcome by the ATO’s powers.

How to reduce the tax you pay

There are various potential ways you can reduce the tax you pay. You may be entitled to tax deductions, offsets or you may choose to opt for salary packaging.

Tax deductions will reduce your taxable income amount. For example, potential tax deductions are work-related expenses, self-education expenses, charitable donations, the cost of managing your taxes. These deductions will reduce the amount of income on which tax is calculated.

Tax offsets apply after tax has been calculated, alternatively known as rebates. These will reduce the amount of tax payable. For example, some offsets you could claim are low/middle-income earners, taxpayers with an invalid relative, pensioners and senior Australians, the taxable portion of a superannuation income stream.

Salary packaging allows you to ‘package’ your income into salary and benefits. There are many potential ways you can package your salary. For example, you could arrange to earn less salary in exchange for higher superannuation payments. By reducing your salary this way, you are reducing your taxable income.

What record-keeping requirements does the ATO have in place?

Record-keeping, if done well, can help running a business much easier. It gives you an overview of the business’ financial progress so that owners can assess their strengths and weaknesses and make decisions accordingly. Record keeping also enables owners to meet their tax and superannuation obligations easily – all the data and information required is readily available. Finally, record-keeping provides owners with a profile, of sorts, which demonstrates the financial position of the business to banks or other lenders.

Record-keeping requirements related to tax and superannuation need to be met. The specifics will depend on the unique tax and superannuation and obligations your business may have and the structure of your business (sole trader, partnership, company or trust).

The Australian Taxation Office (ATO), requires the following from all businesses:

• The records cannot be changed and further, the information should be kept so that it cannot be changed or damaged.
• The records must be kept for 5 years from the date they were prepared, obtained or a transaction was completed – or the latest act they relate to. The records might need to be kept for longer periods in certain circumstances.
• The business must be able to show the ATO their records if requested.
• The records must be in English or easily translated into English.

The ATO will accept paper and electronic records.

• There has been an inclination towards electronic record-keeping for both tax and super requirements as this makes certain tasks easier and reduces workload after initial set up. There may be some laws which require paper records in addition to electronic ones.
• Businesses may also keep paper records electronically i.e. scan paper documents and store them on an electronic medium (and dispose of papers).
• If records are stored electronically, then they should be on a device which owners have all access to, has been backed up, and allows the owner to have control over the information that is processed, entered or sent from the device.

Tax contributions on your super

How much tax you pay on your super contributions and withdrawals depends on a variety of factors. The process takes into account your total super amount, your age, and the type of contribution or withdrawal you make.

How are super contributions taxed?

The money that you contribute to your super account through your employer is taxed at 15%, and this is the same with salary sacrificed contributions. But there are exceptions to this:

• If you earn $37,000 or less, then the tax will be paid back to the super account due to the low-income super tax offset (LISTO)
• If your income and super contributions add up to more than $250,000, then you are also required to pay an additional 15% Division 293 tax.

Any after-tax super contributions (non-concessional contributions) are not taxed further.

How are super withdrawals taxed?

How much tax you pay on withdrawals depends on whether you withdraw as a super income stream or a lump sum. Since this can be a convoluted process, it may be beneficial to approach an advisor and clarify any questions you may have before you withdraw money.

What about beneficiaries?

If someone dies, then their super money will go to their beneficiary. This is known as a super death benefit. As a beneficiary, the tax you pay on the death benefit is dependent upon:

• The tax-free and taxable components of the super
• Whether you’re a dependant for tax purposes
• Whether you take the benefit as an income stream or a lump sum.

Small business CGT concessions

Businesses receive four different types of concessions on top of CGT exemptions and rollovers which are available to everyone. These allow businesses to disregard or defer some or all of the capital gains from an active asset which is used in the business.

The four additional concessions include:

• 15-year exemption: If the business has owned an asset for 15 consecutive years and you are 55 years or over and are retiring or permanently incapacitated, then the capital gain won’t be assessable when you sell the asset.
• 50% active asset reduction: Being a small business, ATO permits reduction of the capital gain on an active asset by 50%. This is in addition to the 50% CGT discount if ownership of the asset extends over a year.
• Retirement exemption: Capital gains incurred from the sale of active assets are exempt up to a lifetime limit of $500,000. However, you must pay the exempt amount into an appropriate super fund or retirement savings account if you are under 55 years of age.
• Rollover: You may defer all or part of a capital gain for two years upon selling an active asset. Your deferral period can be longer than two years if you acquire a replacement asset or incur expenditure on making capital improvements to an existing asset.

Note that these concessions are only available upon disposal of an active asset and either of the following:

• Small business with an aggregated annual turnover of less than $2 million
• Asset used in closely connected small business
• Net assets have a value of no more than $6 million (this excludes personal assets e.g home, as long as these have not been used to produce income)

There are also other criteria and conditions that the business will need to meet but you can apply to as many concessions that are applicable to you. Importantly, you can only apply to these in a certain order so be wary of this.

How are investments taxed?

Investment income needs to be included when conducting tax returns. This includes any income acquired through interest, dividends, rent, managed funds distributions and capital gains. The income yielded from investments is taxed at a marginal tax rate.

Individuals are able to claim deductions for the cost of buying, managing and selling an investment. However, the Australian Tax Office (ATO) provides rules about what an or cannot be claimed as a tax deduction.

The MoneySmart website has a simple and easy-to-use tax calculator that may give an indication as to what the annual tax will be. However, it is recommended that if an individual has a diverse portfolio that yields income from multiple sources, then should consult an accountant or advisor that can lead them through the process as it can become quite complex.

In order to minimise taxation on investment income, individuals should consider tax-effective investments which provide concessional taxation. These include superannuation and insurance bonds.

PAYG instalments for business and investment income

Pay as you go (PAYG) instalments are payments you can make throughout the year to avoid accumulating a large tax bill to pay at the end of the year. Making these payments is a great way to budget for income tax and keep a healthy cash flow.

To qualify for PAYG instalments, you must earn over a threshold amount from your business or investment income (also known as instalment income).

The amount that you pay in PAYG instalments throughout the year will be offset against any owed tax for the entire year. But it is important to lodge your activity statements and pay all PAYG instalments before lodgment of tax returns if you want these to be included in your tax assessment.

There are two options for calculating and paying PAYG instalments:

• Instalment Amount: Simplest option which involves paying instalment amounts the ATO calculates based on relevant information.
• Instalment Rate: You calculate the instalment amount using instalment rate provided by the ATO and your instalment income. Therefore, dependent on income as you earn it and not predetermined.