1 The Ultimate Tradies & Construction Tax Compliance Guide 2 Contents Lodgement Options 4 Declaration of Income and Expenses 5 Tax Obligations for your Business 6 Maximising Valuable Deductions 9 Essential Evidence to Prepare 11 Lodgement Deadlines 11 3 Each year, as tax season approaches, owners of construction businesses both large and small need to begin preparations for a successful tax return. Submitting a full considered return can be the difference between getting tax back or owing the ATO an undesirable fee. Completing an annual tax return can be overwhelming, particularly if you’re a new sole trader or owner of a fast-growing building company. With an aim to simplify tax time, Linc Accountants have created a detailed guide to lodging a tax return covering all key areas and vital information, from deductions to deadlines. 4 Lodgement Options There are two main options for lodging your company’s annual tax return in Australia; through a registered tax agent who submits it, or self-lodging online through the ATO. Self-lodged Using myTax, the ATO’s free online system, any individual or sole trader is able to prepare and submit their tax return as long as they have a linked myGov account. For certain sole traders this process is relatively straightforward, with detailed information from employers, banks, and health funds loaded directly into their tax return, usually by late July. For those managing larger companies, self-lodging becomes overly complicated. Having to collate, analyse, and organise each document required for a correct tax return can be overwhelming, and ensuring each section is correctly filled in quickly gets confusing for those with complicated business structures. The tax return is in a downloada ble paper format and must be mailed to the ATO. If you are set on self-lodging your return, but require some advice, tax experts at Linc Accountants provide review services to check your tax return is accurate, and all possible deductions are claimed to ensure a maximum return. Registered tax agent The majority of construction business owners and trades people here in Australia use a tax agent, choosing to pay a tax-deductible fee in order to guarantee a high-quality, accurate return. Operating a large company with multiple employees and a complex inner structure of operations can quickly transform your annual tax return into a convoluted process best left to professionals. Choosing to work with a tax agent ensures complicated areas and key deductions are correctly prepared. While you’re responsible for your own return, including accurate claims, an experienced agent reduces tax-related stress while maximising your return. Tax agents have different lodgement schedules and are able to lodge tax returns for clients after the deadline on the 31st of October. Should you run into any issues delaying your return, a tax agent can be a lifeline to ensure your required return is submitted for the year. 5 Declaration of Income and Expenses Preparation is key when submitting your businesses annual tax return, as every Australian company, regardless of size, is required to supply key documents to the ATO showing details of all income and expenses. Income Full details of any income received over the past financial year forms the basis of any tax return, whether you’re a sole trader or owner of a large construction company. Sole- traders or self-employed operators. Forms of income can include, but are not limited to: • Summaries of payments from every job held over the financial year • Business income • Self-employment or freelance income • Bank interest • Government payments • Work share schemes • Shareholder dividends • Insurance payouts or compensation Tax-free threshold Only sole traders qualify for the tax-free threshold, as your business is taxed as part of your personal income. In 2020-21 this is $18,200, and you pay tax at the individual income rate. There is no tax-free threshold for companies, and the full tax rate is 30%. If your business qualifies as a base rate entity this is reduced to 26% for 2020-21, with key stipulations in place; the aggregated turnover is less than the aggregated turnover threshold, or 80% or less of assessable income is passive income. Expenses Full details of all business expenses from the past year are highly important, as they impact taxable income and potentially entitle you to valuable deductions. Keep all receipts and invoices, but remember they must have been paid out of pocket and not reimbursed. 6 Potential expenses to include are: • Tools and equipment • Travel • Home office expenses, such as computer and internet • Work wear • Self-education, such as training seminars or conferences • Income protection insurance • Any expense related to income earned • Tax management • Work assets purchased • Expenses pertaining to investments, such as bank or borrowing fees • Charitable donations or gifts over $2 Tax Obligations for your Business A clear overview of all tax obligations for your business is essential to guarantee a correct tax return and avoid penalties, whether you run a nationwide building company or operate as a local sole trader. Requirements vary depending on the size and model of your company, number of employees, employee benefits, and more. Key forms of business tax are detailed below, but speak to the experts at Linc Accountants for clarification around your specific obligations. Income Tax Your taxable income (assessable income minus deductions) determines the amount of income tax to be paid. Once income surpasses a certain amount, income tax is paid in quarterly instalments, to avoid a large tax bill. Small businesses with a turnover of under $10 million typically qualify for certain ATO small business concessions. Assessable income is all income earned; gross income before tax (e.g. sales or supply of services) plus any other income (e.g. capital gains), not including GST payable. Deductions are qualifying expenses incurred that directly relate to income earned. Financial Statements Financial statements (Profit & Loss and Balance Sheet) are essential for any business owner to run their operation successfully. The Profit & Loss statement provides the turnover, expenses and net profit at a glance and can be compared to the previous year. This is helpful in determining the forecasted Profit or Loss, assisting with preparation of a Budget and Cashflow. In essence it is a snapshot of the business success, alerting the business owner to any potential shortfalls or issues that may arise. 7 The Balance Sheet shows all the assets and liabilities of the business. To prepare professional financial statements, software such as Xero is required. If you wish to track the profit on a project, there is plenty of software out there to assist you. Linc Accountants can guide you as to your specific software needed. We provide training and support, however if you would prefer us to take care of your financial requirements, we can provide you with a fixed fee package based on your specific needs. If you think you are working hard, chasing your tail, but don’t seem to have money in the bank or getting ahead, Linc Accountants can assist with a “health check” to determine what needs to change. TPAR Pertaining to businesses within the construction industry, TPAR (Taxable Payments Annual Report) requires reporting of all payments made to subcontractors/suppliers who have provided you with services during the financial year. A key annual obligation for all small to medium sized businesses in the industry, TPAR must be lodged by 28 August every year. The ATO uses TPAR to ensure tax compliance for both service providers and your company. GST Obligations If your annual turnover is $75,000 or over, you must register for GST and report it through a BAS (Business Activity Statement). Standing for Goods and Services Tax, GST is currently 10%, and can be accounted for in two ways: • Accruals: accounting for purchases and sales within the period they have been invoiced in (businesses with over $2m turnover must use this method). • Cash basis: accounting for the period in which you are paid. Business Activity Statement GST charges are reported and lodged quarterly via a BAS, and lodged by the 28 th day of the month following the last quarter. Companies turning over more than $20 million are required to submit monthly, with statements due 21 days after the end of each month. Capital Gains Tax Should your construction company sell an asset (typically property or equipment) the business makes a capital gain or loss - the difference between bought and sold price - and CGT is tax paid on any capital gain. 8 Part of your income tax, it’s applicable when a CGT event occurs: • Asset is sold or given away • Asset is lost or destroyed • Own shares that are redeemed, cancelled, or surrendered • Receiving payment from a company (not shareholder dividends) Small business concessions There are certain CGT concessions for small businesses that can reduce capital gain on business assets. Speak to the experienced team at Linc Accountants to discover if your small business meet the conditions, and for assistance applying for these concessions; • Small business 15-year exemption • 50% active asset reduction • Retirement exemption • Small business rollover Payroll tax Calculated from the total amount of gross wages, super, FBT, allowances and bonuses you pay every month, payroll tax is determined by, and paid to, the state in which your employees are located. This is paid once total Australian wages surpass the annual threshold - $1m for WA (2020-21). Super lodgement A key area of tax compliance for business owners is lodging employees quarterly Super payments, as serious penalties apply to late payments. Super Guarantee (SG) is currently calculated at 10% of gross wages. Superstream requirements can be met by utilising one of the following electronic compliance options for standardised reporting: • Payroll system • Super clearing house • Super fund online system • EFT or BPAY direct to the fund • Small Business Superannuation Clearing House 9 Maximising Valuable Deductions Supplying full details of applicable deductions directly related to income earned is vital to reducing your businesses tax bill. Working with construction industry specialists at Linc Accountants means all valuable deductions will be applied for, from maximising deductible super contributions to bringing forward expenses. Prepaying expenses Companies on a high tax rate can prepay interest up to 13 months ahead to reduce taxable income (aka profit), helping to reduce your annual tax bill. Work expenses Claiming deductions via expenses made for work can have a significant impact on your company’s tax bill, particularly as a sole trader. • To make a claim the money must already be spent, and NOT reimbursed. • At present there are several methods for expensing assets. Record proof of payment, even if you’re entitled only to claim part of it. For those with both personal and business expenses to be claimed at tax time, be sure to track them accordingly throughout the year using a cloud based software. Claims typically include: • Travel, incl parking fees • Accommodation • Food • Work clothing • Laundry • Training • Tools and equipment Work vehicles Motor vehicles are integral to the work of both sole traders and companies in the building industry. Claiming vehicle income-related expenses can be a valuable deduction when correct procedures are adhered to. Travel for work generally includes transport required as part of your job, and extends to meeting with clients, moving between work sites, and travelling to and from training, meetings, and conferences. If 100% of expenses are claimed on one vehicle, proof has to be provided of another personal car. Should you use your personal car for work, a portion of travel expenses can be claimed back. 10 The two ways to record are: • Logbook method - track vehicle use in a current logbook, including the work usage reason, for up to five years. Usage is tracked for 12 continuous weeks than averaged across the year. • Cents per kilometre method - this requires a reasonable calculation of how your travel distance has been worked out. It’s not possible to claim 100% of km travelled. Equipment and tools Purchase of tools and equipment are essential to facilitate the work carried out by building companies and tradies. Certain items are FBT (Fringe Benefits Tax) exempt, such as clothing and electronics. Keep all receipts for work related purchases as a portion can be claimed back in your annual tax return: • New or used tools and equipment • Repair and maintenance • Interest on loans to purchase equipment and tools • Smartphones, computers, and tablets Old equipment Be sure to write off old equipment you’ve been unable to sell, as well as bad debts, before 30 June to qualify for a tax deduction. Small business concessions Small businesses may be entitled to key concessions within multiple company tax sectors. For tax purposes a small business has less than $10 million aggregated turnover. Concession can include: • Income tax concessions • PAYG concessions • GST concessions • Fringe benefits tax (FBT) concessions 11 Further deductions While work and investment related expenses cover the main areas for tax-deductible costs, other items include tax management, union fees, income protection insurance, and ATO approved organisations to whom you have donated, or gifted money. The direct correlation between deductions and your taxable income makes this an important area to focus on when preparing a self-lodged tax return. Seeking advice around qualifying deductions from Linc Accountants’ professional team can prevent timely, and costly, errors. Essential Evidence to Prepare Proof of expenses are essential to guaranteeing a successful claim for any sole trader or business owner within the construction industry. Minimal additional information is required by your tax accountants should a comprehensive set of invoices, receipts, and relevant documents be provided. Specific details are required, including the value of items or services received, item information, supplier, and date of purchase. Required documents It’s advised to retain all documentary evidence for at least 5 years from the date your tax return was first lodged. This may include: • Bank and credit card statements • Proof of interest earned • Receipts for all deductions claimed Lodgement Deadlines One key difference between self-lodging a tax return and working with a tax agent is a strict lodgement deadline. For sole traders submitting their own return you have from July 1st to October 31st to do so. Registered tax agents can be granted extensions to submit a tax return on behalf of a client after the October 31st deadline, should the taxpayer in question be a registered client before that date. Linc Accountants’ tax experts can analyse your particular employment and financial situation, and advise on the best course of action for lodging a late return. 12 Expert advice from Linc Accountants With a focus on helping business grow through expert guidance, Linc Accountants operates in a proactive manner to help each client develop and reach their full potential. As a boutique Perth accounting agency, we offer 20 years of niche experience working with companies in the trade, construction, and building industries. Whether you own a large construction company or operate as a sole trader, our expertise directly relates to assisting with tax compliance and related accounting services. Should you require general advice on self-lodging your tax return, or key assistance preparing financial statements and, contact Linc Accountants today to book an appointment, and start your new-and-improved tax journey. 08 6146 3300 jane@lincaccountants.com.au