The Budget for 2013/14 was announced last week and here are the key items of interest for our clients:

• Second increase in the tax free-threshold (from $18,200 to $19,400 from 1 July 2015) has been deferred (read: cancelled)
• Medicare levy will increase from 1.5% to 2% from 1 July 2014 - this takes the top marginal rates in Australia to 47%
• Net medical expenses tax offset - this will effectively be phased out from 1 July 1013
• Self-education expenses will be capped at $2,000 from 1 July 2014 (see last week's blog post)
• Concessional superannuation contribution cap for those 60 or over increased to $35,000 from 1 July 2013
• Concessional superannuation contribution cap for those 50 or over increased to $35,000 from 1 July 2014
• Tax exemption for superannuation earnings to be capped at $100,000 per member from 1 July 2014
• Baby bonus will be abolished from 1 March 2014
• Previously announced increases to Family Tax Benefits have been scrapped
• 10% discount for paying HELP up-front will be abolished from 1 January 2014

As always, if you have any questions specific to your situation, please contact your accountant.

The Government has just announced a swathe of budget cuts and one item on the chopping block is self-education tax deductions.

What is that? You are allowed to claim a tax deduction for any costs you incur in relation to your 'self-education' as long as it directly relates to your current income earning activities. Example: an accountant attends accountant training - bingo, tax deduction. Read more here.

The proposed cuts mean that any self-education deductions will now be limited to $2,000 per year. Anything over this threshold will not be an allowable tax deduction. This new measure is proposed to begin 1 July 2014 so it will affect the 2015 tax year and onwards.

Presumably this will hit Masters students the hardest with an average unit of study costing in between $3,000 and $4,000 and an average Masters degree consisting of 8 units. So, for someone on $100,000 doing two units of study at a time (aiming to complete a Masters in 2 years whilst working) they would have been able to claim a tax deduction of around $16,000 which could yield tax savings of around $5,000. Under the new proposal the deduction will be limited to $2,000 and will only result in a tax saving of $600.

Expect to hear a lot of arguments against this new budget cut from the higher education and training institutions.

You can read more here and here.

You will have no doubt heard the advertisements talking about the benefits of the recently legislated increases to the superannuation guarantee - from 9% to 9.25% - on 1 July 2013. The government has set plans in motion to increase the superannuation guarantee from 9% all the way up to 12% by 1 July 2019 (see here) with this 0.25% increase being the first step.

What is the superannuation guarantee? This is the rate at which employers must contribute on behalf of their employees. The rate refers to a percentage of gross salary (i.e. cash plus tax withheld).

Current advertisements talk about the government enabling people to be better provided for in retirement and this legislation will make this so, however, it conveniently side-steps an important question, where does this extra money come from?

Where these extra superannuation contributions will come from will depend on your relevant employment contract. A standard employment contract remuneration clause might look something like this:

We use the total remuneration approach for packaging salaries and benefits. Your initial total remuneration of $XX,XXX will include the following mandatory components: cash remuneration, and the required level of superannuation contributions under the current Government Superannuation Guarantee Charge (SGC) legislation.

If it is like this one, or mentions 'total package', you will probably find that the extra superannuation being paid will come out of your total salary package. What does that mean? It means your salary (i.e. cash plus tax withheld) will be reduced by the increase in superannuation contributions.

If, however, your salary is not discussed in terms of package, rather it is '$XX,XXX plus superannuation', then you shouldn't notice any difference in your pay as the additional amount is being funded by the employer and has, in effect, increased your overall salary package. That said, I would not be surprised if employment contracts around the country are currently being reviewed so that employers can avoid this very issue.

So, whilst the Government's claims are true - you will have more in retirement - they conveniently ignore who is funding it. I'm sure if the ad said "We are taking some of your wages and forcing you to put it into super" it wouldn't have quite the same appeal.

What is a company? A company is a legal entity distinct from those who may own or run it. It has it's affairs managed by directors and is owned by shareholders. A shareholder's liability is limited to any amounts that may be unpaid for their shares. Without considering misconduct, a director's liability will generally be limited to any unpaid employee entitlements (i.e. superannuation and PAYG withholding) there may be.

Set up procedure

• Incorporate a new company
• Register for ABN
• Register for TFN
• Register for GST (if applicable)
• Register for PAYG–W (if applicable)
• Set up a company bank account and put in place suitable bookkeeping procedures

Advantages

• Limited liability
• Corporate tax rate lower than the top individual marginal rate (30% vs 46.5%)
• Flexible in distribution of income, with some restrictions in case of Personnel Services Income entities
• Tax paid by company is credited to shareholders when profits are paid out via dividends
• Superannuation contributions deductible up to age base limits

Disadvantages

• Cost of establishing and maintaining is higher than that of a sole trader or partnership
• Director’s potential liability in case of negligence or insolvent trading
• Compulsory Workers Compensation on wages drawn
• Superannuation contributions are required on wages drawn
• Losses cannot be distributed to shareholders
• More compliance issues — accounting standards, ATO, and ASIC
• Capital gains are not concessionally taxed

Compliance requirements

• ABN registration — compulsory
• Tax File Number registration — compulsory
• GST registration — compulsory if turnover is over $75,000 (registration is voluntary if less)
• BAS — monthly or quarterly (if GST registered)
• Tax Return — annually
• Financial records — financial accounts (i.e. balance sheet and profit and loss) in required format
• ASIC annual return yearly and other changes (eg. address changes, director changes, etc)

 

General comments

This is a popular structure and a natural progression for people running a business where there are third party contractual arrangements including employees. The structure provides asset protection and allows for effective tax planning, but has strong, and sometimes complex, compliance issues.

One key issue for people in creative, service-based, industries to consider is the interaction of the Personal Services Income provisions with Part IVA (which is the general anti-avoidance provision). What does this mean for me? If you are planning on setting up a company to earn income from the provision of your personal services and then use the company to shelter the tax you pay at the corporate rate, or use the company to 'income split' with your spouse, then you may fall foul of the ATO and end up having the income all taxed in your own name anyway.

The above is a general guide only and pertains to proprietary limited  companies only. If you have any specific questions or concerns regarding your specific circumstances please contact your accountant.

Inertia knows good music. Inertia have opened an online music store. Planet Of Sound. Enough said.

Applying for funding? Unsure of what is involved? Have a look here for some handy advice.

The ATO are tightening up the legislation around who can be legitimately issued with an ABN. They are taking a two pronged approach to this – firstly, by making it more difficult to obtain an ABN in the first place, and secondly, by auditing those with ABNs and cancelling inactive ABNs.

Why would they want to do this? ABN income is difficult for the ATO to track. Businesses who pay contractors simply claim a deduction for what is paid to the contractor and that is, usually, the extent of their reporting requirements. This means the ATO doesn’t know how much a contractor has earned in any given tax year. However, if the contractor were to become an employee, the employer would be required to not only withhold tax and pay superannuation, but they would report all of this to the ATO each year. This means the ATO has a complete record of what the individual earned that year.

Therefore, anyone who the ATO can shift from being a contractor to an employee is one more person the ATO can more accurately track to ensure they are paying the correct amount of tax.

The new ABN application process articulates the ATO’s position on contractors and what deems them to be legitimate and therefore entitled to an ABN. The ATO states that a contractor is an entity (individual, partnership, trust, or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:

• is paid for results achieved
• provides all, or most, of the necessary materials and equipment to complete the work
• is free to delegate or subcontract work to other entities
• has freedom in the way the work is done
• provides services to the general public and other businesses
• is free to accept or refuse work
• is in a position to make a profit or a loss
• bears legal risk in respect of the work
• must remedy any defective work at their own expense
• has their own liability insurance

The ATO then goes on to ask four questions, three of which are of particular importance, because without a positive response to each, you will be denied the ABN as the ATO does not deem you to be a contractor.

1. Will your work agreement allow you to pay another person to perform work on your behalf?
2. Will the payments you receive be based on a quoted price that you provide to persons making use of your services?
3. Will you be responsible for the cost of rectifying any defect in the work you perform?

Now, what if it turns out you are not eligible for an ABN, what then? Well, it would mean that you should really be an employee. What if the business you are dealing with doesn’t want to deal with you as an employee? The onus is on the payer to comply with the relevant legislation and it might be worthwhile reminding them of this. If the ATO finds out that a payer is not complying they may find themselves the subject of an audit covering employees, superannuation, workers compensation insurance, payroll tax, and more.

Please feel free to contact the office if you’d like to discuss this further.

Not simply the domain of hotshot lawyers, a partnership is a simple and effective tax structure to operate a business with one or more other people.

A partnership is not a separate legal entity, rather it is simply an arrangement between people to earn income jointly. The tax legislation defines a partnership as either (a) as an association of persons carrying on a business with a view to profit, or (b) a situation where two or more people are in receipt of income jointly. This second definition would include jointly owned bank accounts, shares, and real property, however there is an ATO concession which means these types of partnerships don't need to lodge a separate tax return, rather the income is directly dealt with at an individual tax return level.

Is it generally a good idea to get a legal document drawn up (known as a partnership agreement) that outlines the relationship you will have with your business partner/s in case of any legal dramas further down the track. With such an agreement in place your partnership would be considered a 'general law partnership' (i.e. a partnership under the relevant state Partnership Act) and you can have a bit of flexibility when it comes to splitting income between the partners, rather than it having to be split equally as with other partnerships.

What are the advantages of using a partnership?

• Free to establish - just need to register with the ATO (TFN, ABN, GST, etc.).
• Simplicity - income and expenses are pooled, the net profit is then passed out to the individuals and they pay their respective taxes.
• Ongoing fees - typically accounting fees for a partnership are less than those for a company or a trust for example.
• Income splitting between the partners.
• Partnership agreement can provide some degree of flexibility with regards to the income splits between the partners.

Sounds great, but what are the negatives?

• Partners are jointly and severally liable - this means that any single partner can enter into a deal or incur debt on behalf of the partnership, and therefore, on behalf of other partners. An example of this sort of situation going bad would be partner A entering into an expensive lease agreement and then going bankrupt, leaving partner B wholly liable to meet the payments.
• A partnership structure, generally speaking, provides no asset protection.
• Tax can be higher than under a company because there is no way of sheltering income - the entire net profit must be distributed to the partners each year which can result in the partners paying tax rates above 30%, something that can be avoided if a company structure is used.
• Partner joins or leaves? This will mean the old/existing partnership ends and a new one forms. So, unless this conveniently occurs on 30 June you will need to prepare (and pay for)  two sets of financial statements and two income tax returns for that year.

What is a joint venture? Be careful not to confuse a partnership with a joint venture, or JV. If you are in a partnership you must share the income jointly, whereas in a JV the income and deductions are accounted for separately by each of the JV partners. There is no useful definition of JV available, but they are typically project and/or output based (e.g. a mining company forms a JV with a farmer who has land they want to mine for a particular mineral for a particular length of time).

 There is some more information on partnerships available in the AMIN Tax Guide For Musicians, which can be found here.

As always, the above is intended as a general guide. Speak with your accountant for advice specific to your situation.

As we've mentioned before, the most recent Budget brought in some great small business friendly measures to help accelerate deductions in relation to the acquisition of new assets. These rules all took affect on 1 July 2012. What were those again?

• Immediate deduction for assets up to $6,500 (up from $1,000)
• Immediate deduction for the first $5,000 on motor vehicles purchased with the balance being subject to the regular SBE rules (i.e. 15% deduction in year one and 30% every year after)
• When the general SBE pool balance gets below $6,500 you can write the whole thing of as an immediate deduction. This will benefit many small businesses during the first year of operation for these new rules (being 2013)

If you have any questions specific to your situation, please contact your accountant.

MusicNSW is excited to announce our first free workshop of 2013, taking place on Wednesday 6 March. With countless accolades and a few pointy trophies between them, four of Australia’s leading producers will share their expertise in a panel titled “In The Studio: Producers Speak”. This workshop will cover everything an artist or audio boffin needs to know about making a record – plus a few juicy anecdotes too.

MusicNSW is the peak industry body for contemporary music in NSW. Each free workshop focuses on a different topic, and is presented by real-world music industry insiders, with the aim to equip emerging artists, managers, and professional hopefuls with valuable info and skills to get a head-start in their career.

Panelists for “In The Studio: Producers Speak” include:

Scott Horscroft: Studio owner, A&R executive, ARIA winner and manager, Scott’s laid down tracks with Birds Of Tokyo, Gold Fields, 360, The Presets, Silverchair + more

Lachlan Mitchell: From PNAU to Nunchukka Superfly: Lachlan landed two ARIA noms for his recording of ARIA’s 2012 Best Independent Release – The Jezabels’ Prisoner

Jean-Paul ‘JP’ Fung: You’ll find him in the studio recording for TV show “The Voice” or laying down bands like Jinja Safari, Last Dinosaurs, Glass Towers and Andy Bull

Owen Penglis: Frontman of Sydney’s Straight Arrows, Owen recently recorded the excellent compilation Nuggets: Antipodean Interpolations of the First Psychedelic Era

Topics include:

• How to get the most from your recording budget
• Pros and cons: doing it DIY style vs the studio
• The nitty gritty: agreements, producer points + more

 

When: Wednesday 6 March, 6.30pm

Where: The Standard – 3/383 Bourke St, Darlinghurst

How much: Free! Simply register by emailing samantha@musicnsw.com