COMPANY NEWSLETTER | February 2023 issue
In this edition:
A guide to the tax implications surrounding divorce settlements
ATO cracks down on international money moves into Australia How to avoid the costly pitfall of payroll errors
Employers beware: ATO update on employees vs contractors
A guide to the tax implications surrounding divorce settlements
Divorces often lead to a number of tax implications, particularly when transferring real property from one party to another. If you are recently divorced or contemplating getting a divorce, then it is important to understand the tax implications this will have.
Accountants and family lawyers often work together to advise clients of their financial rights and obligations. One of the most commonly asked questions is whether a family law property settlement (of any size) will result in tax consequences.
1. Capital Gains Tax:
Where two people are separating or divorcing and transfer assets between them, this will usually qualify for a relationship breakdown rollover. Relationship rollover of CGT usually applies when the ownership of an asset changes, but where the parties enter into court orders or another formal agreement.
The rollover relief can also be applied to assets transferred from a couple’s former company or trust. It is important that accountants pay close attention to Division 7A of the Income Tax Assessment Act 1935 when dealing with complex asset transfers and tax consequences arising from deemed dividends.
With the lengthy list of exemptions and complexity of capital gains tax law, sometimes decisions will need to be made about which dwelling will be considered the main residence, or whether or not an investment property should be sold or retained by one of the parties.
2. Child support:
One area that is not affected by tax implications is child support; this means that any money received from child support payments are not considered as taxable income, and any money paid for child support is not considered an income that is tax deductible. Child support payments may affect Family Tax Benefits (from the ATO) received by the individual receiving child support.
Family Tax Benefits (FTB) provide a two-part payment available to eligible families to assist with the cost of raising children:
a) A payment is made for each eligible child, and this is determined by the family’s financial circumstances; and,
b) An additional payment is provided to families who require extra financial support.
If a parent’s child support payments increase or decrease, this will affect the amount of Family Tax Benefits they will be eligible to receive.
3. Spousal maintenance:
Spousal maintenance is a form of financial support which is paid from a party to a marriage (or de facto relationship) to their former partner/spouse in circumstances where that person is unable to financially support themselves.
When considering an application for spousal maintenance the Court will consider the needs and living costs of the applicant, and the capacity for the other party to pay. It is normally used in cases where one person has a low income and the other person has a significantly higher income.
Much like child support, spousal maintenance is also not considered as taxable income, or permitted to be claimed as a tax deduction by the individual paying it. It is important to note that this exemption does not apply to situations where the payer makes the spousal maintenance payments in an attempt to divest him/herself of an income-producing asset, or to dispose of income that would otherwise be taxable.
4. Other considerations:
It is important to note that there are other tax implications surrounding divorce that can arise in relation to stamp duty, deemed dividends, GST and your client’s legal costs. The effects of these are not as considerable as CGT but should also be considered when advising your clients.
When a couple decides to separate it’s in both their best interests to be instructing not only skilled divorce lawyers, but also to have engaged competent accountants who understand some of the legal mechanisms involved in finalising a divorce. Most of the times, clients will want to know how much they will get in a divorce, and that is when it is best to instruct a competent lawyer.
If you would like to book in a brief complimentary & confidential chat about a particular matter, please get in touch with us.
ATO cracks down on international money moves into Australia
Taxpayers should plan carefully when bringing funds into the country to avoid suspicion.
The ATO has “drawn a line in the sand” when it comes to overseas money transfers into Australia and taxpayers need to tread carefully or raise suspicions.
The ATO has made it clear it is aware some people are migrating funds here to mask it as something it’s not, in an attempt to avoid paying tax.
People seeking to transfer funds into Australia therefore need to ensure their tax structuring is appropriate well before they physically transfer the funds, or risk interrogation from the ATO and other authorities.
Individuals claiming transferred funds - in amounts from $2 million and $50 million - were a loan from an unrelated party should be aware that this would raise an alert at the tax office.
If taxpayers are saying it’s a loan, then the ATO will speak with the person providing the money as a loan.
There are provisions in Australian law which can be applied unexpectedly that can treat a loan from overseas as income; if shareholders take money from the company as a loan but it’s not documented properly, for example, it can be treated as income.
The ATO’s powers are far reaching and intended to also put advisers on notice and encourage them to dig deeper with clients and their financial affairs, otherwise advisers could be unwillingly supporting mischaracterised amounts coming in, which carries the risk of prosecution.”
It reinforces the need for an appropriate level of tax planning before any transactions are undertaken - it’s also an educational opportunity for many new entrants as it can set them up with building and structuring tax advice overtime.
A voluntary disclosure can mitigate against substantial penalties, time, cost and angst of a protracted ATO review or audit.
How to avoid the costly pitfall of payroll errors
With myriad awards and entitlements, calculating wages is complex and mistakes can add up to millions in backpay and fines.
As the Fair Work Ombudsman (FWO) cracks down on businesses underpaying staff, accidentally or otherwise, it’s essential that employers update their payroll systems this year rather than risk millions in fines and back pay.
Several businesses have made headlines over the past few years for failing to pay staff what they were owed. In response, several states have updated their laws to officially recognise wage theft, targeting employers which deliberately withhold wages and other worker entitlements.
In Victoria, for example, wage theft is punishable by fines of up to $218,088 or up to 10 years’ jail time for individuals, as well as fines of up to $1,090,440 for companies.
While some instances of wage theft are deliberate attempts to steal from employees, it’s also easy for honest businesses to fall foul of the law because calculating payroll and leave entitlements can quickly become complicated.
When paying an employee on or above the award, frequent rule changes can make this a difficult and time-consuming process — especially when calculating overtime rates. This becomes even more complicated if you manually pay your employees individually each pay run, rather than managing them in bulk.
Sometimes it’s not until a business completely overhauls its payroll system that the magnitude of the problem is fully realised.
Automation is key
Each financial year, the Fair Work Commission conducts an annual wage review to reassess modern award minimum wages. Adopting a payroll platform that automatically makes these adjustments — along with other relevant changes to legislation — can go a long way to ensuring that employees receive accurate entitlements.
Features such as pre-validation warnings in payroll can alert the user to potential underpayments before they even occur. This ensures both compliance and employee satisfaction, meaning no costly litigation and an increase in staff retention.
When it comes to adding employees and businesses to payroll systems, using strong cloud payroll software helps to improve efficiency via automation. By syncing with the ATO and superannuation providers, as well as allowing self-service for employees, payroll software can dramatically decrease the time it takes for payroll professionals to onboard staff and process pay, all while minimising errors.
Processing payroll has become increasingly complex and the penalties for getting it wrong are harsher than ever. There’s never been a better time for businesses to revisit their payroll system to ensure it all adds up.
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Employers beware: ATO update on employees vs contractors
Whether a worker is an employee or contractor for tax purposes is an area the ATO has placed significant focus due to recent landmark High Court Decisions providing further judicial guidance requiring the ATO to update its public guidance on these matters. In addition, there is greater community sentiment that unpaid superannuation is effectively amounting to “wage theft” which impacts retirement outcomes.
On 15 December 2022, the ATO issued a Draft Tax Ruling 2022/D3 and Draft Practical Guidance 2022/D5 to provide updated and new guidance on what constitutes an employee and the ATO’s compliance approach to assess the level of risk when reviewing such arrangements.
From our experience, there are instances where a worker lodges an unpaid super claim directly with the ATO against an engaging party and this often comes with surprise and angst to the engaging entity / purported employer due to, for example, the arrangement being documented as a “contractor” relationship and the worker engaging through their own entity. It is clear from the ATO updated guidance these factors are only given minor weighting and the key issues relate to the broader contractual terms of the worker relationship and whether the worker is working “in the business” of the engaging party.
Whilst ultimately whether a worker is an employee or contractor for PAYG and superannuation purposes requires identifying the ‘totality of the relationship’ between the worker and the engaging entity, some of the key points that can be taken away from the updated ATO guidance are as follows:
The central question is whether the worker “is working in the business” of the engaging entity.
Where a clearly written contract exists between the worker and the engaging party, the legal rights and obligations of the written contract will form the basis of determining the relationship unless there are expressed variation / discharge or waivers of the contract, or the contract is considered a sham.
The fact that a worker may be conducting their own business, including having an Australian Business Number, is not determinative. A person conducting their own business may separately be an employee in the business of another.
The ‘label’ which parties choose to describe their relationship, whether within a written contract or otherwise, is not determinative of, or even relevant to, the correct characterisation.
The level of control the engaging party will have over the worker is a key indicator.
Where a worker has the ability to delegate their duties, this will indicate an independent contractor relationship.
Results based contracts (e.g. paid a fixed sum for a specific outcome) is a strong indicator of an independent contractor relationship rather than being paid for hours worked.
The provision of tools and equipment by the worker is a factor to be considered but this needs to be considered in context of the work provided / industry.
Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee.
If an independent contractor performs services in the course of their own business, it would be common for the contractor to be able to generate goodwill for that business.
The ATO has continued its approach to provide a publicly available compliance framework that ATO Case Officers will use when reviewing these arrangements to allow taxpayers to assess their situation against the ATO risk framework. These risk areas are classed as “risk zones” and each category will determine the level of ATO review that will be undertaken.
Draft Tax Ruling 2022/D3 and Draft Practical Guidance 2022/D5 are currently in draft form for public comments and feedback by 17 February 2023.
As community expectations regarding unpaid superannuation as wage theft increases and the ATO is under pressure to increase recovery in this area, it is prudent for employers where applicable to revisit their current independent contractor relationships to determine the level of risk that may arise from incorrect classifications for tax purposes.
Whilst there may be time and costs involved, a review can provide assurance to the Board / owners on these matters and to quantify any necessary corrections which should be lower than if otherwise reviewed by the ATO and further penalties and interest are applied.