Tag: TAx Compliance

SHARES VERSUS 

PROPERTY

 

VERSUS CASH

INTRODUCTION

The end of the year is traditionally a time 

when investors review their portfolios, and 

specifically the mix of their investments 

between shares, property and cash. While 

factors such as liquidity, ongoing expenses, 

income streams and entry and exit costs, play 

a role in your choice between these three 

investment types, so does taxation. 

SHARES

While most people will hold shares in their 

own name, thought should be given to other 

investment vehicles. By investing through 

a trust for instance, under the current trust 

streaming laws you can distribute franked 

dividends and capital gains on shares to the 

most tax-advantaged beneficiaries (which will 

typically be those on the lowest tax rate). It’s 

also worth considering having your SMSF 

as the shareholder. With dividends taxed at 

just 15% and capital gains at 10% (provided 

the shares have been held for more than 12 

months), the tax advantages of SMSF share 

ownership are significant. What’s more, if the 

SMSF account is in pension mode, then any 

dividends or capital gains are tax-free. On 

the downside, the dividends are locked away 

inside superannuation – unable to be accessed 

by members of the fund – until you meet a 

condition of release, such as turning 65.  

All share owners also need to be aware of 

two important holding period timeframes. In 

terms of minimising capital gains tax upon 

sale, where you hold shares for 12 months or 

more you, your trust, or your superannuation 

fund are entitled to a 50% discount on any 

capital gain (companies however are not 

eligible, while for superannuation funds the 

discount is 33%). If you are contemplating 

selling, but are nearing the 12-month mark, 

then you may wish to consider delaying the 

sale until this ownership period is satisfied.  
The other holding period that large 

shareholders and share traders need to be 

aware of is the ’45-day rule’. By way of 

background, where you are paid a dividend, 

that amount will generally be assessable. 

However, where the dividend is franked (i.e. 

tax has already been paid by the company on 

the dividend before it was distributed to you) 

you will be entitled to a franking credit of 

at least 27.5% (the current tax rate for most 

companies) which will reduce your overall 

tax liability. However, you are only entitled 

to the franking credit if you have held the 

shares for 45-days or more. It’s important 

to note however that small shareholders (i.e. 

those whose total franking credits for the 

income year are less than $5 000 which is 

the equivalent of receiving a fully franked 

dividend of $11 666) are exempt from this 

holding rule.

WARNING 
The advent of online trading has opened 

up the ability to acquire foreign shares. 

However, with the exception of New 

Zealand shares, any tax paid by foreign 

companies who distribute a dividend to 

you will not be taken into consideration 

by the ATO (unlike franked Australian 

shares). The upshot is that from a 

taxation standpoint, it pays to invest 

in Australian companies that have a 

history of paying franked (as opposed to 

unfranked) dividends.

Negative gearing is also an attractive aspect 

of share ownership. While most people think 

of negative gearing as applying solely to 

property, it applies equally to shares. Simply 

put, negative gearing refers to the practice 

of accepting a short-term loss from an 

investment with a view to trading that loss off 

at a later date against a greater capital gain. 

The losses you incur – created from expenses 

associated with holding and purchasing the 

shares, such as interest on a loan – are used to 

reduce your tax payable on other income such 

as salary and wages. Shares are negatively 

geared if after taking into consideration the 

expenses associated with holding the shares, 

these exceed the income from the shares (i.e. 

dividends paid).

This article looks at the tax treatment and strategies around the 
three major investment classes – property, shares and cash. 

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My Tax Savers

In this edition, we reveal plans to reintroduce the 
superannuation amnesty legislation to Parliament, 
and look Single Touch Payroll. 

WHAT THE 

TAXMAN IS 

THINKING

SUPERANNUATION AMNESTY 

 – BACK IN PLAY

The superannuation amnesty legislation 

has been reintroduced into Parliament. The 

amnesty was originally announced in May 

2018 to apply from 24 May 2018 until 23 

May 2019, but the legislation to establish the 

amnesty did not pass the last parliament. 
Specifically, an employer that qualifies for the 

amnesty in relation to their SG shortfall for a 

quarter: 
•  Will have the administrative penalty 

waived ($20 per employee, per quarter)

•  Will have Part 7 penalties waived (this 

can be an additional penalty of up to 

200% of the shortfall owed)

•  Will be able to deduct the late shortfall 

contribution (under current law, late 

payments cannot be deducted).

The beneficial treatment provided by the 

amnesty is available for a quarter that 

ends at least 28 days before the start of 

the amnesty period. This means that the 

beneficial treatment provided by the amnesty 

is available in relation to the quarter starting 

on 1 July 1992 (which is the day that 

Superannuation Guarantee commenced) and 

all subsequent quarters until and including 

the quarter starting on 1 January 2018. An 

employer will not be able to benefit from 

the amnesty for SG shortfall relating to the 

quarter starting on 1 April 2018 or subsequent 

quarters. 
To qualify for the amnesty, a disclosure of a 

superannuation amount owing must be made 

during the amnesty period. The amnesty 

period is the period that started on 24 May 

2018 and ends 6 months after the day the 

legislation is passed (therefore, beyond March 

next year).

Irrespective of the Amnesty however, all 

employers should strongly consider coming 

forward to disclose and pay past shortfalls to 

get their Superannuation Guarantee affairs 

in order. 'Since the one-off amnesty was 

announced, over 7,000 employers have come 

forward to voluntarily disclose historical 

unpaid super.' Upon releasing the new 

Amnesty legislation, the Assistant Treasurer 

said. 'The ATO estimates an additional 7,000 

employers will come forward due to the 

extension of the amnesty. This means around 

$160 million of superannuation will be paid 

to employees who would otherwise have 

missed out.'

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My Tax Savers

Other advantages of property ownership 

include a potential for higher returns than 

shares and cash, and a regular income stream 

(via rent).
On the downside however there are a range 

of disadvantages in property investment 

including:
•  High entry and exit costs – even where 

you borrow to buy, the costs of buying 

average about 6% of the purchase price. 

Selling costs can be as much as 2% of the 

price of the property. 

•  Illiquidity – In a barren market, if you 

have trouble selling your property it 

can mean that your money is tied up for 

long periods. Even where the market 

is buoyant, it can be months between 

needing the cash from the sale, to actually 

making the sale. 

•  Long investment timeframe – Property 

ownership requires a long-term commit-

ment. Particularly if you are negatively 

gearing, it can take 20 to 30 years to 

service your debt, and eventually make a 

profit from your investment. Even if you 

are not negatively gearing, you need to 

hold onto your property long enough for it 

to appreciate in value. 

•  Rising interest rates – Perhaps the 

greatest risk facing an investor is the 

risk of rising interest rates, particularly 

where the property is highly geared with 

borrowed funds. Indeed, with interest 

rates currently at historic lows, a prudent 

investor needs to factor rising rates into 

any purchase decision.

TAKE HOME MESSAGE 

While nobody can confidently predict the 

future performance of shares versus cash 

versus property, ultimately your investment 

choice should be informed by a range of 

factors, remembering that prudent investors 

will diversify. Having made your choice, by 

then canvassing some of the above taxation 

strategies, you can maximise the value of your 

investment. 

TIP
If your property is negatively geared it 

may pay to have the ownership in the 

name of a high-income earner in your 

family (e.g. your spouse). This way the 

revenue losses made on the property can 

be maximised. 

TIP
Aside from interest, one of the main 

deductions available is for capital works 

(building depreciation). All properties 

constructed in the last 40 years should 

be eligible for this big-ticket deduction, 

regardless of whether you are not the 

original owner. 

The tax system is heavily geared towards 

property ownership. For instance, the six-

year rule, combined with the main residence 

exemption can be used to great tax effect. 

That is if you:
•  Acquire a property
•  Move in as soon as practicable
•  Then move out while renting out the 

property for a period of less than six-

years…

…you can then sell the property CGT-free at 

a future. (provided you do not treat another 

property as your main residence during the 

six-year period)…all the while enjoying the 

benefits of negative gearing during the period 

of rental.

Whilst all taxpayers can negatively gear 

a share investment, it is typically more 

appealing to taxpayers with higher marginal 

rates of income tax. This is because the ATO 

allows an offset of the loss from the holding 

of a negatively geared investment against 

other income. Therefore, the higher your 

marginal tax rate, the greater the benefit from 

a gearing strategy.

CASH 

Investing your cash in interest-bearing 

bank accounts, including term deposits, is 

a largely risk-free option as your capital is 

protected. While investing in shares and 

property can see the value of your investment 

fall below your outlay, your original cash 

sum is protected even where only minimal 

interest is earned. The flip side of this low-risk 

environment is that cash investments such as 

term deposits do not have the same potential 

for high growth which property does when 

the market is booming, or shares do when 

a company “takes off” or when the ASX is 

performing well. Indeed, in the current low 

interest rate environment, returns on cash 

investments are not particularly fruitful.     
By its very nature cash is a liquid investment 

that you can instantly draw upon should you 

need to. This is in stark contrast to property 

and to a lesser extent shares which must first 

be sold before you can access the cash. In a 

flat property market, your investment can 

prove very illiquid with your cash effectively 

tied up until you find a suitable buyer, at 

a suitable price. That said, if you wish to 

make higher returns on your cash investment 

by investing in a term deposit (the longer 

the term, the higher the rate of interest), 

significant penalties can apply if you draw 

your money out before the term expires. This 

effectively renders your investment illiquid 

if you don’t wish to incur this penalty. Term 

deposits are therefore very much for serious 

investors and not for those who experience 

cash flow problems. 
From a tax planning perspective, there is 

generally less opportunity to minimise 

tax than there is with share and property 

investments. However, the following 

strategies should be considered:

1. ACCOUNT HOLDER

Interest income from your investment will be 

added to the rest of your income and taxed at 

your marginal rate. Interest income will be 

assessed to the account holder (i.e. the person 

whose name the account is in). Therefore, it 

pays to have your interest bearing account or 

term deposit investment in the name of a low 

income earner (e.g. non-working spouse) or at 

least in joint names. 

2. DEFERRAL 

Interest income is assessed in the year it is 

received. For this reason, some investors like 

to defer the maturity of their term deposit to 

the following financial year, if they anticipate 

that their other income is going to be lower in 

that subsequent year.   

PROPERTY  

One of the principal advantages of property 

ownership is negative gearing. Negatively 

gearing property can be more tax effective 

than shares, as there are usually higher 

costs involved in owning a property. Where 

the costs of owning your rental property 

(advertising, agent’s commission, interest 

on loans, electricity and gas, insurance, land 

tax, legal expenses, maintenance such as 

gardening and pest control, repairs, servicing 

expenses, tax advice etc.), exceed the rental 

income, the loss effectively reduces the 

tax payable on your other income such as 

salary and wages. The property has to be at 

least available for rent or being rented for 

deductions to be claimed. Be aware though 

that negative gearing by definition involves 

making losses. Before you adopt a heavy 

negative gearing strategy, you need to ensure 

that you can sustain those losses, and that they 

don’t adversely impact your cash flow or your 

lifestyle. 

MY TAX SAVERS

November/December 2019

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“The amnesty reinforces recent changes 

to the superannuation system to improve 

the visibility employees have over their 

superannuation. We have given the ATO 

greater powers to ensure employers meet 

their obligations, and to help ensure 

employees receive their superannuation 

entitlements. The Government's legislated 

package of integrity measures - part of the 

Treasury Laws Amendment (2018 Measures 

No. 4) Act 2019 - includes up to 12 months 

jail for employers who continue to do the 

wrong thing by their workers, and gives 

the ATO near real-time visibility of how 

much SG employees are owed and the 

contributions they actually receive.
'This is a practical measure that is all 

about reuniting hardworking Australians 

with their super. My message to employers 

who owe super is: come forward now. Do 

not delay. This is a one-off opportunity to 

set things right, and going forward the ATO 

has the tools to spot unpaid super.

Moving forward, with Single Touch Payroll 

having been introduced, each time employees 

are paid, employers must report year to date 

employee earnings and superannuation. 

Therefore, the actual superannuation liability, 

not the payment itself, is reported by the 

employer. This is because the payment 

information is now being captured and 

reported to the ATO via the Member Account 

Transaction Service (MATS) report (these 

reports are lodged with the ATO by APRA-

regulated superannuation funds when they 

receive employer contributions). Under STP, 

superannuation funds are now also required 

to report member information. The upshot is 

that there is now real time, and more granular 

reporting of superannuation liabilities and 

payments – down to the employee level. The 

ATO will now know in close to real time if 

an employer is not paying superannuation in 

respect of any employee. Therefore, it will be 

in a position to immediately follow up late 

payers. Says ATO Deputy Commissioner, 

James O”Halloran: 

•  no penalties will be imposed for incorrect 

reporting in the first 12 months for 

smaller employers (until 1 July 2020)

•  for businesses with five or more 

employees, their reporting solution 

will generally be in the form of payroll 

software

•  micro employers (one to four employees) 

can adopt low-cost, simple solutions. 

Search “STP low cost solutions” on the 

ATO website for a list of providers and 

their products

•  micro employers may be eligible to report 

quarterly through their BAS Agent or Tax 

Agent until 30 June 2021

•  smaller employers (less than 20 

employees) of closely-held payees (e.g. 

family members of a family-owned 

business, directors or shareholders of a 

company, or trustees or beneficiaries of a 

trust) may be exempt from reporting these 

payees until 2020-2021. Other payees 

must however be reported  

•  employers may be totally exempt from 

STP reporting if they have no or low 

digital capability, no or unreliable 

internet, irregular employment patterns, 

or “other extenuating circumstances”  

(not defined). 

We can now see patterns, volumes and 

contribution flows which, for the most part, 

confirm what we expect but also allow 

us to identify potential discrepancies or 

issues and to follow these up in a timely 

way. As we gain increased assurance in 

the data and the conclusions we can draw 

from it, we’ll use it to move sensibly into 

proactive ‘nudges’ and warnings to clients; 

for example, directly notifying or nudging 

employers we’ve identified as not having 

paid superannuation guarantee (SG) to 

their employees per quarter as required. 

In fact, we recently piloted this approach 

with a small sample of 85 employers who 

we contacted regarding their late payment 

of SG. After our contact, some 50 per 

cent of these employers then lodged and 

paid the outstanding SG to the ATO for 

their employees. We intend to expand this 

approach to those employers who haven’t 

paid SG to their employees within 30 days 

after the end of the reporting quarter. 

In its own words the ATO is now undertaking 

matching exercises right down to the 

employee level whereby they: “compare the 

amounts you report with information we 

receive from super funds. If we identify your 

contributions vary significantly from the 

liability reported, we will contact you”.

SINGLE TOUCH PAYROLL 

– DON’T DELAY

With the three-month grace period to 30 

September for smaller employers (those with 

less than 20 employees) now having passed, 

most employers are now required to be Single 

Touch Payroll (STP) compliant.  Points to note 

include:

MY TAX SAVERS

November/December 2019

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Estate Planning - Part 1  

Superannuation Death Benefits

 

Estate planning is the process of arranging for 
the disposal of your estate during your life, and is 
something which should be addressed by all adults. 
In the first two articles, we look at superannuation 
death benefits. 

BACKGROUND     

There are few things more important than having your financial 

affairs in order. Death can strike at any time. We all know this. Why 

is it then that many people do not have their affairs in order? Perhaps 

it’s because the subject matter is so depressing or because we think “it 

will never happen to me”. Take a different view! Peace of mind comes 

from knowing that your estate planning is in proper order, and that 

your wealth will be passed on in the manner that you intended. 
Here are a few short questions to get you started:
•  Do you have a Will?
•  If you do, when was it last updated?
•  Could you (or your spouse) locate your Will if you had to?
•  Do you have Powers of Attorney in place in case you were unable 

to make your own decisions?

•  If you and your spouse leave everything to one another in your 

Wills, have you considered what would happen in the event of 

your simultaneous deaths?

•  Do you realise that superannuation and family trusts don’t form 

part of your Estate and thus other strategies (besides a Will) are 

needed to properly deal with these?

•  Do you know that special, tax-effective trusts known as Testa-

mentary Trusts can be created on your death to safeguard monies 

left to children, but only if they are documented in your Will?

•  Have you properly thought through who should be the Executor 

in the event of your death (as your spouse may be in no fit state to 

play the role)? 

It follows that, contrary to widespread belief, Estate Planning is far 

more than just making a Will. It can involve a range of issues such as:
•  The succession of other entities such as companies or trusts that 

you may control

•  How best to handle your superannuation entitlements upon death
•  Calamity provisions to deal with the death of multiple family 

members

•  Powers of Attorney, should you lack the capacity to make your 

own decisions

•  Testamentary Trusts to provide certainty and tax effectiveness
•  Asset protection strategies to guard against challenges to your 

Estate

•  Strategies to minimise the risks faced by a surviving spouse 

re-partnering in the future and losing control of the wealth

•  Guardianship decisions over minor children
•  Careful consideration of who your Executors should be in the 

event of your death, and

•  Ensuring that any business succession planning objectives are 

consistent with your Estate Planning objectives. 

This article looks at a tax-effective strategy for dealing with 

superannuation death benefits.

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My Tax Savers

SUPERANNUATION AS AN ASSET

There is currently more than $2.9 trillion inside of superannuation in 

Australia. Indeed, for most Australians, superannuation represents 

their biggest source of individual savings – whether it be as a result 

of voluntary contributions you have made, or from compulsory 

contributions paid by your employer under the Superannuation 

Guarantee (SG) scheme. Given this, it’s of vital importance that 

this aspect of your Estate is in order upon your death – that your 

superannuation savings are bequeathed in the way that you wish, to 

the people who you wish.  

WHAT HAPPENS AT DEATH?

In the event of the death of a superannuation fund member, your fund 

trustee must pay a death benefit to an eligible beneficiary either as a 

lump sum or as an income stream as soon as practical. 
It may come as a surprise to many that superannuation is an asset 

that is excluded from your Will. Instead, unless a binding death 

benefit nomination is in place, benefits payable upon your death 

are distributed by the trustee of your superannuation fund in 

accordance with the fund’s deed. Typically, this will give the trustee 

the discretion to decide who should receive your superannuation 

savings. Eligible beneficiaries that they can select from are set out 

in the superannuation legislation (see below table). This is the same 

class of people to whom you can choose under your binding death 

benefit nomination (you cannot nominate a person outside this 

group). Additionally, you can also nominate your legal personal 

representative (on behalf of your Estate). 
If your fund accepts binding death benefit nominations, there are 

several advantages in making such a nomination as follows: 

TAX TREATMENT

The tax treatment of a lump sum payment made from your 

superannuation fund upon your death can be markedly different 

depending on whether your benefits are paid to a dependent for 

income tax purposes or a non-dependent for income tax purposes, as 

set out in the following table:

Where the death benefit amount is large (as is often the case), the 

difference in the after-tax amount paid to the beneficiary can be 

quite significant depending on whether it is tax-free (in the case of a 

dependent) or taxed up to 32% (in the case of a non-dependent). 
As stated, if you do not provide for how your superannuation is 

to be distributed upon death (which many people do not as it is 

excluded from your Will), the Trustee of your fund can distribute it 

to any of your dependents as set out in the Superannuation Industry 

Supervision Act (although they must have regard to any non-binding 

nominations and also your relationship with each dependent). The 

problem is that for tax purposes, the definition of a dependent (as 

set out in Section 302-195 of the Income Tax Assessment Act 1997) 

differs from that of a dependent for superannuation purposes as 

illustrated in the following table: 

TAXATION OF SUPER DEATH BENEFIT

- WHEN PAID AS A LUMP SUM

Superannuation 

Component

Received by a 

Dependent

Received 

by Other 

Recipients

Tax-Free

Tax-Free

Tax-Free

Taxable (Taxed)

Tax-Free

Taxed at marginal 

tax rate or 17%, 

whichever is lower 

Taxable (Untaxed)

Tax-Free

Taxed at marginal 

tax rate or 32%, 

whichever is lower

DEATH BENEFITS DEPENDANT?

Person

Super?

Income 

Tax?

Spouse (including same sex  

and de facto)

Yes

Yes

Former spouse

No

Yes

Child under 18 (including ex-nuptial, 

adopted, and step child 

of the person or their spouse)

Yes

Yes

Child over 18 (financially independent)

Yes

No

Person with whom an 

interdependent relationship  

existed*

Yes

Yes

Financially dependent person 

at the time of death

Yes

Yes

Other person who is not a financial 

dependent at the time of death

No

No

*such a relationship exists if there is a close personal relationship between 
two persons and (a) they live together and (b) one or each of them provides 
the other with financial support, domestic support and personal care.  

By making a binding death benefit nomination (if your fund allows 

for it) you can ensure the most favourable income tax treatment 

is given to your superannuation savings – ensuring that the entire 

amount is bequeathed tax-free. Without a binding death benefit 

nomination, the Trustee may determine, having regard to the status 

of your relationships with your various dependents before your 

death, for example that the amount should be paid to your financially 

independent adult children (in which case 32% tax could apply). By 

taking charge of your affairs and making a binding death benefit 

nomination, you can ensure your superannuation death benefits are 

bequeathed tax-free upon your death. 

MY TAX SAVERS

November/December 2019

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CONSISTENCY

Binding death benefit nominations give you the ability to bequeath 

your superannuation benefits in a way that is consistent with your 

wider estate planning strategies as illustrated in the following 

example:

EXPEDITIOUS

Binding death benefit nominations also ensure that your death benefit 

payment is paid expeditiously; something which the recipients will 

appreciate particularly if they were financially dependent on you. 

Having made a binding nomination, the Trustee of your fund is not 

required to undertake a claims staking process in order to determine 

who should receive your superannuation benefits. 
Binding nominations you may also save your estate from costly 

litigation instituted by dependents making competing claims on your 

superannuation benefits. 

HOW?

In essence, a binding death benefit nomination is a notice you give to 

the trustee of your superannuation fund. Generally speaking, for it to 

be binding, the following conditions must be met:
•  The rules of your superannuation fund must allow for binding 

death benefit nominations

•  Each nominated beneficiary must be eligible under superan-

nuation law (see earlier table) or must be your legal personal 

representative (e.g. your estate)

•  Your notice must be in writing, must be signed and dated, and 

must be witnessed by two people over the age of 18

•  No more than three years must have passed since you last made 

or amended the nomination (thus nominations will need to be 

reviewed every three years). 

EXAMPLE
Margaret is a 55-year old executive with a superannuation 

balance of $400,000. Her only surviving relative is her adult 

son, Brad, who is financially independent. 
Margaret has always harboured concerns about Brad’s ability 

to manage money. In view of this, she wishes to structure 

her estate in such a way that Brad will continue to receive 

income for many years to come, rather than a large one-off 

lump sum. 
Consequently, Margaret makes a binding death benefit 

nomination for her estate to receive any lump sum death 

benefit payment from her superannuation fund upon 

her death. In her Will, she has already provided for the 

establishment of a discretionary trust with a company to act 

as Trustee, and for Brad to be the sole beneficiary. 
Sadly, Margaret passes away. Because she has made 

a binding death benefit nomination, the trustee of her 

superannuation fund has no discretion as to who the 

$400,000 will be paid to. Rather than it likely being paid 

directly to her only surviving relative Brad in a lump sum, it 

is instead paid to Margaret’s estate. 
The corporate trustee is then able to deal with the $400,000 

in accordance with Margaret’s wider estate planning strategy 

which is to distribute amounts incrementally to Brad in the 

years ahead – so as to provide him with an ongoing income 

stream, which addresses her concerns about his ability to 

manage money.  

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My Tax Savers

This article contains a range of tax tips 

relating to self-education expenses, 

FBT, SMSFs, and more. . .

TAX 

TIPS

LEAVE 

MAKING PROVISION IN YOUR 

ACCOUNTS
To better understand your business’s net 

equity, your business should report employee 

entitlements (amounts of leave owing) in 

dollar value on your Balance Sheet. Typically, 

the annual and long service leave provisions 

are reported on the Balance Sheet, but 

personal leave is generally excluded from 

the financial statements altogether unless 

in the unlikely event that an Award or other 

employment agreement requires accrued 

personal leave to be paid on termination. 

Superannuation Guarantee liabilities (the 

compulsory 9.5% payable to employees and 

some contractors) should also be included on 

top of the annual leave and long service leave 

expense. While Superannuation Guarantee is 

not payable on unused leave entitlements in 

the event of a termination, it is payable when 

an employee takes leave whilst employed. 
BONUSES
It’s quite common in certain industries 

particularly at Christmas time to provide staff 

with a little something in recognition of their 

loyal service throughout the year. Where this 

is a non-cash benefit, such as a gift, it may 

attract FBT. In view of this, you may wish to 

consider instead providing employees with 

a leave bonus. This is where employees are 

granted extra annual leave days which are 

not deducted from their leave balance when 

taken. This works particularly well over 

quieter periods such as Christmas where your 

business may be closed down anyway. Such 

a bonus does not attract income tax or FBT 

for either party, and has no immediate cash or 

other impact on your business.

SELF EDUCATION – WHO 

SHOULD PAY?

It is useful to understand when self-education 

costs will be tax deductible. Sometimes some 

careful planning will make the difference 

between getting a tax deduction and not. 

The cost of courses and qualifications can 

be met by either the employer or participant 

employee. Indeed, who pays will sometimes 

determine the tax deductibility. As is often 

the case with tax, the answer to the whether 

a self-education expense is deductible 

is dependent on a number of factors – 

principally who is paying for the course. To 

illustrate relevant principles, we’ll use Jake 

who is an employee in a payroll bureau. His 

job is to process the pays for small employer 

clients including Award interpretation, 

HR advice, PAYG withholding and 

Superannuation Guarantee.

PAID FOR BY EMPLOYER 
Where an employer pays for one of its 

employees to undertake a course that is 

in any way relevant to the business, the 

employer is entitled to a tax deduction 

under the second limb of Section 8-1 of the 

Income Tax Act. This limb provides that 

expenses ‘necessarily incurred’ in carrying 

on a business are deductible. The word 

‘necessarily’ does not require that the expense 

be unavoidable or even logically necessary. 

Rather it must only be appropriate for the 

ends of the business. The ATO take the view 

that it is for the business owner to determine 

what outgoings are ‘necessary’, and will 

not step in and instruct a taxpayer on how 

to conduct their business and the expenses 

that should and shouldn’t be incurred. That 

said, if an employer were to pay for an 

employee to complete a course the contents 

of which were in no way relevant at all to the 

tasks undertaken by the business,then the 

expenditure would be deemed to provide a 

personal benefit of value, and a fringe benefit 

may arise. 

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CAUTION FBT
Although the self-education expense may be deductible 

when paid by the employer, FBT may apply unless the 

expense is otherwise deductible to the employee (see next 

section). 
Even where an expense meets one of the following three 

tests, it will still not be deductible if it is the payment 

of HELP/HECS fees by the student, or it is a ‘student 

contribution amount’ – as defined by particular statutory 

rules surrounding education. 
A ‘Student Contribution Amount’ is the balance of 

funding for a university course paid by the student which 

complements the subsidy provided by the government to 

the University. The Australian government makes these 

payments in respect of courses that are commonwealth 

supported places (CSP’s). The courses are usually 

undergraduate courses. Some students are entitled to use 

a HECS-HELP loan to meet their Student Contribution 

Payment requirement by the due date. 
If you pay the Student Contribution Amount upfront and do 

not use HECS_HELP loan support this makes no difference, 

as your expenditure still concerns a Student Contribution 

Amount and is therefore not deductible.

PAID FOR BY EMPLOYEE
The rules around deductibility are much stricter for employees. The 

course will be deductible only where there is a direct link between 

the course undertaken and how an employee earns their income. 

Generally speaking, an employee will need to meet one of the 

following three tests to claim a deduction for their course:

1. The expense has a relevant connection to their current employment 

(e.g. Jake’s course relates to learning about PAYG withholding on 

termination of employment).

2. The course enables the employee to maintain or improve their 

skills necessary to carry out their current role (e.g. enables Jake to 

keep up-to-date with the latest superannuation changes, or learn 

about the latest software technology that is impacting his role).

3. The course leads to, or is likely to lead to, an increase in the em-

ployee’s income from their current field in the future (e.g. the course 

gives you the knowledge to perform more complex work which 

may attract a higher salary in your current field). For instance, Jake 

learning about how to undertake more complex payroll work such 

how to complete all the different types of payment summaries, 

or how to report amounts withheld to the ATO – tasks which are 

likely to lead to promotion or increased salary).

On the other hand, course expenses will generally not be deductible 

where the course of study is designed to:
•  Obtain employment in a new field of endeavor (e.g. Jake decides 

to undertake an accounting degree to pursue a new career as a 

qualified accountant)

•  Obtain employment or a qualification to enable you to enter a 

restricted field of endeavor, or 

•  Open up a new income earning opportunity in the future whether 

in business or in your current employment (e.g. Jake undertakes 

a management skills course with a view to one day becoming 

manager at his firm). 

TAX TIP
As illustrated, the rules surrounding an employee’s ability to 

claim tax deductions for education courses are much stricter 

than for employers. Where an employee wishes to undertake a 

course that is genuinely going to assist your business, employers 

may wish to consider paying for the course on behalf of the 

employee or perhaps working it into their salary package (salary 

sacrifice). FBT issues must however be considered (see earlier). 

TAX TIP
If a new career direction is envisaged as a consequence of the 

study and can be engineered prior to a participant incurring the 

study cost, then it may become deductible. This is because it 

would then have direct connection to current employment rather 

than to pursue employment in a new field. 

ALLOWANCE INSTEAD OF BENEFIT

One of the more common fringe benefits provided to employees is 

an expense payment fringe benefit. These may arise in either of two 

ways:
•  Where the employer reimburses the employee for expenses that 

they incur, or

•  Where the employer pays the third-party supplier (e.g. shop) 

directly. 

The expenses paid for or reimbursed can consist of basically any good 

or service including work-related items such as laptops or private 

expenses such as health insurance premiums. FBT may however arise 

unless the expense would have been deductible to the employee had 

they incurred it themselves, or unless the employee made an after-tax 

employee contribution to the cost of the benefit, or unless the expense 

is exempt from FBT such as where:
•  The employer pays for or reimburses an employee for Living 

away from home accommodation

•  Reimburses the car expenses of a car held by an employee on a 

cents per kilometer basis

•  Reimburses or pays for car expenses in respect of a car held by 

an employer

•  There is a provision of certain work-related benefits.
Employers should consider whether an item you wish to provide 

to employees (i.e. expense you wish to meet on their behalf) is an 

exempt benefit, or will be deductible to them if they had paid for 

it themselves. If so, employers will reimburse the employee or pay 

directly pay the third-party who provided the goods or services. 

On the other hand, if the benefit is not exempt or would not be 

deductible to the employee had they incurred it themselves, or they 

have not made an after-tax employee contribution to the benefit, then 

employers should consider paying the amount as an allowance to 

the employee or increasing their salary instead. This is because in 

most cases the employee will pay a lower marginal rate of tax on the 

allowance than the 47% FBT rate. 

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My Tax Savers

SMSF INVESTMENT STRATEGY REVIEW

As we come towards the end of the year, it’s traditionally a time when 

investors review their portfolios with a view to making changes where 

appropriate. Those of you who have an SMSF have an obligation 

under the law to formulate and regularly review your fund’s 

investment strategy. In basic terms, investment strategies are plans 

for making, holding and realising assets of your SMSF. A failure to 

regularly review your strategy may result in Trustee fines of up to 

$17,000. The obligation to review applies irrespective of whether you 

invest directly or indirectly through advisors/investment managers. 
Under SIS Regulation 4.09(2) your investment strategy must address 

the following issues:
•  The risk involved in making, holding and realising, and the likely 

return from, the SMSF’s investments having regard to its objec-

tives and its expected cashflow requirements

•  The composition of the SMSF’s investments and the extent to 

which the investments are diverse or involve the SMSF being 

exposed to risks from inadequate diversification

•  The liquidity of the SMSF’s investments having regard to its 

cashflow requirements

•  The ability of the SMSF to discharge its existing and prospective 

liabilities. 

Whilst, under the law, there is no actual requirement to document 

your strategy, it is strongly recommended that you do so, as this will 

enable you to demonstrate (to the ATO if any questions are asked by 

them) that the strategy is being adhered to when making investment 

decisions. 

HAVE YOU CANCELLED YOUR GST REGISTRATION?

When a business cancels its GST registration, often overlooked is the 

potential GST adjustment that may be necessary on existing business 

assets.  The GST Act provides that an increasing adjustment be made 

for anything that forms part of the assets of an entity immediately 

before the cancellation of the GST registration.  The rationale for the 

adjustment is that, on cancellation of registration, the assets of an 

entity are assumed to go into private use.  The increasing adjustment 

recovers amounts claimed as input tax credits on acquisitions, as the 

asset no longer qualifies as a creditable acquisition.  The amount of 

GST payable is calculated by reference to the GST inclusive market 

value of the asset, where the market value is less than the initial 

consideration provided in acquiring the asset.  
Take, for example, a business that has ceased operation and has a 

motor vehicle on hand with a market value of  $11 000.  GST credits 

had been claimed on the acquisition and running costs of the vehicle. 

The increasing adjustment would result in GST payable of $1,000 

(1/11th of $11,000).

MY TAX SAVERS

November/December 2019

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