• 1 April – New FBT year begins. For entities subject to FBT, please refer to our FBT letter here >
• 21 April – Due date to lodge and pay monthly activity statements for March 2017
• 28 April – Due date to lodge and pay quarterly activity statements for the March 2017 quarter (if lodged by client)
• 28 April – Due date for employers to pay quarter 3 (Jan – Mar) superannuation guarantee contributions (SGC) for employees

Please Contact MatinCo for more information >

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Some background

Usually, meals are a private expense. And usually, there is no tax deduction for private expenses. The tax laws relating to deductions specifically exclude private expenditure. This is why an employee or sole trader can’t claim a deduction for meals they eat at work. Those meals are private expenses and the law prohibits individuals from claiming private expenses.

But things are different for a company (including a trustee company). A company cannot have a ‘private expense.’ So, the “private nature” exclusion in the tax law does not apply.

One of the effects of using a company or trust to run your business is that this generally means an employer/employee relationship exists – with the person running the business actually being classed as an employee of the company. So, if the company buys lunch, it is buying a meal for one or more of its employees.

As we say, companies cannot have private expenses and so the rules prohibiting deductions for private expenses do not apply to companies. This is usually addressed (from the point of view of the tax office) by the rules for fringe benefits. Where a company provides a non-cash benefit, this is typically referred to as a fringe benefit and taxed accordingly. This usually stops companies from paying the private expenses of its employees.

However, as with most rules, there are exceptions. When it comes to fringe benefits tax, one of the exceptions is meals. Food and/or drink provided by an employer (the company or trust) to employees is often FBT exempt. This means that the company can claim a deduction for it in certain circumstances. These circumstances are: that the food is consumed on the employer’s premises; that the food is not related to a “social function;” and that no alcohol is served with the meal (booze makes things social, not functional).

So, if a company provides things like sandwiches, wraps, cups of soup and other “light lunch” type food to be consumed on site, GST is claimable, a tax deduction is allowed and there is no FBT liability.

And the meal does not need to be lunch. Brekky and dinner can be deducted as well. Just make sure that

1. The relevant staff eat the relevant meal at work; and
2. They don’t have a beer for breakfast.

What this means for you

Let’s say you usually eat your breakfast/lunch/dinner while at work and what you eat passes the “light meal/no alcohol” test. You simply pay for the meal using your dedicated business credit card (that is, the credit card that you only use to pay business expenses).

Let’s say you buy yourself a sandwich and a soft drink each day. The light meal costs $13.20, with $1.20 being GST. The company can claim back the GST immediately. Depending on the ultimate tax rate of the person who receives the company’s profits, the company can also claim an effective deduction for up to 49% of the remaining $12 (if the profit recipient is in the top tax bracket). That’s $5.88.

This means that the after-tax cost of the lunch falls from $13.20 to $6.12, a saving of $7.08 or 54%.

$6.12 for a sandwich and a drink. You probably could not make it yourself for that price.

If this happened five days a week for 48 weeks, the annual saving would be $1,700.

And, of course, if you start early and/or work late you will probably need more than one meal while at work. The savings would be greater. Do you know any business owners who don’t start early or work late? This blog was written at 7pm at night.

If you would like to know more, you can find further reading on the ATO website at FBT exempt meal allowance and Tax Ruling TR 97/17.

An employer/employee relationship

For a company to claim deductions for meals, the people eating the meals need to be employees. And the company needs to be able to substantiate (i.e. prove) that this is the case.

Substantiation can often be overlooked when employing related parties in a business. Normal indicators of an employment relationship include:

• An employment agreement outlining the role to be performed;
• Use of a software payroll system that issues periodic pay slips i.e. fortnightly or monthly;
• Physical and regular payment of salary from the business account to a personal bank account;
• Payment of super guarantee; and
• Insurance through WorkCover for employees of the trust/company.

As with everything to do with tax, the key is to document the employment relationship. Remember, the ATO is not there to be difficult. If the employment relationship is genuine (and most people use companies or trusts specifically so that their personal liability is limited, meaning that the employment relationship is the whole point of using the company), then the tax concession is available.

The two key things to remember

Please keep two key things in mind: the meal cannot include alcohol and the meal must be eaten on your business premises. The standard practice of business owners eating dinner at your desk while catching up on (digital) paper work meets the rules.

We really hope this tip helps you in your business. If you think it will, why not contact us and we will show you exactly how to apply it in your workplace.

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Around Australia, house prices have risen by more than 500% in the last 20 years. How will your kids be able to buy their home?

What’s more, the world of work is changing, and it’s not a good idea to assume your children will enjoy safe employment with just one or two employers during their working lives.

More probably, as the sociologists tell us, they will have a “patchwork” of part-time and casual engagements, with nothing like the secure tenure that typified their fathers’ and mothers’ employment experiences.

I am sure your kids are bright, and bright people tend to do well financially. But it is still not a safe bet that they will blitz their way in and out of university or trade school and then into the top echelons of the work-force. The competition is tough, and is going to get tougher.

What’s more, the competition is not just here in Australia. The global economy means our kids are competing against the brightest minds from anywhere in the world.

Given all this, you can understand why children stay home well into their mid-twenties. They have no choice: they cannot afford to leave. The entry price in the most popular suburbs in all our major cities is becoming too high for most people under age 40. And even then, you would be amazed how often the new home is only afforded with a bit of discrete help from grandma and grandpa. It’s just not possible otherwise, particular if there are kids in the kitchen or on the horizon.

What can you do to help? Here is one simple solution. “Buy” your child a home now. It does not have to be something they will live in when they are 50. But it should be in a part of the world that has good growth prospects. Buying another home in effect insulates your family against future home price increases – and helps to protect the next generation against the risk of home prices running away even further.

If your own home is paid off or nearly paid off, and you are still earning at a reasonable clip, most of the banks will lend you a similar amount at home loan rates without too much fuss or bother. Make sure the interest rate is the same as the home loan rate: the banks will often try to squeeze an extra percentage point or two here, and have been known to tell clients that they have no choice but to charge that bit extra. “It’s the ‘investment loan rate,’” they say.

Space does not allow us to explain the tax maths of all this. But we will explain it in our next ebook The User’s Guide to Negative Gearing, which will be published in March. The ebook will show that a relatively small after tax cost to mum and dad in the early years spares your child a large before tax cost in the later years. This gives your child a real economic head start in life and, with a bit of luck, the child’s own efforts will amplify this head start many times over.

The bottom line is that, for higher income earners, it’s almost cash-flow neutral to 100% gear a rental property if the interest rate is 5%, the rental yield is 3.5% and depreciation can be thrown in as well. The tenant (with a little help from the tax office) basically pays the place off for you.

Sometimes, the second and subsequent homes are owned through a family trust and the children just live in them later on while saving for their own homes and investments. This has the added advantage of protecting the children against the risk of losing assets in divorce or a bad business experience. Residential property can be a great investment for a trust (and everyone else for that matter).

This strategy works with one, two or even three children. Maybe the maths become a bit daunting with four or more children, but the idea can of course be modified by buying the homes a few years apart or buying lower priced homes and letting the children up-grade them later under their own steam.

Or maybe just aim for half a home for each child.

Call us old-fashioned, but we think this concept is even more important for your daughters. It might be 100 years since the suffragettes, but women still do not have equal incomes or workplace opportunities. Most women have less than $40,000 in superannuation when they retire. That won’t go far.

Virginia Woolf thought it took a room of one’s own to achieve gender equality. We’d change that to a home of her own – for each of your daughters.

There is a saying in business that the best time to plant a tree was always ten years ago. But there is an even better saying in philosophy: the meaning of life is to plant trees that someone else will sit under in the future.

These sayings are relevant here. This strategy was a great one to implement ten years ago. The return on residential property was 8% per year for the ten years to December 2015 (source: ASX/Russell Long Term Investing Report. You can read this report here).

An investment returning 8% per annum for ten years provides a total return of 116% for the period. A $400,000 home purchased in 2005 was worth $864,000 in 2015 (including the rent received). If only you had read this in 2007, you would now be sitting pretty!

But ten years ago was ten years ago. The key is to not be having the same regret in 2027. So, get in touch with us now and let us talk you through how you too can help your kids have a home of their own.

If you would like more information on home loans contact MartinCo today >

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This is especially important when it comes to the interest you pay on your debt. Minimising the real after tax cost of debt is necessary to maximise the real after tax return on your investments – including the investment you are making in your business or practice.

When is interest deductible?

Interest is deductible where the purpose of the borrowing is to generate assessable income.

The critical word is “purpose”. How do you prove purpose? Paper proves purposes. In the case of interest on debt, purpose is proved by looking at the detail of the borrowing and what it was actually used for. The courts have often looked at the question of purpose, in the context of whether interest on a loan is tax deductible against business or investment income. You can get an idea of the scope of their enquiries by reading ATO Taxation Ruling TR 95/25, which can be accessed here: ATO Income Tax Ruling TR 95/25.

When you use borrowed money to generate income, it’s always a good idea to create and retain a clear paper trail showing the deductible purpose. This paper trail should be long and detailed, including for example the original e-mail to your bank manager to get the ball rolling, the formal loan application, the loan documents and all other documents created in connection with and as a result of the loan. This includes things like bank statements reconciled to actual receipts, etc.

Tax deductible debt is cheap money

• At present some people are borrowing money for as little as 4% a year.
• If a business owner is in the 37% tax bracket, this means the after tax interest rate is just 2.5% a year
• Inflation is running at about this level, which means the real interest rate is virtually nil.
• In other words, once you consider tax and inflation, tax deductible debt is very cheap money.

Once you have debt, everything you buy is borrowed

I was chatting with Adam, a fellow financial adviser. We were discussing Eve, a new client Adam met while holidaying in Eden (NSW – and yes, the names have been changed). Adam said Eve was quite well off and had just paid $200,000 cash for a new parcel of shares. But when he looked at Eve’s financial statement he noticed she also had a $200,000 home loan. It was not much. And her home was worth well over $600,000. But it was still a loan.

This means that Eve had in effect borrowed to buy the shares. This is because she could have used the cash she used to buy the shares to pay off debt instead. When Adam pointed this out, Eve tried to disagree. She told him she would never do that. She would never borrow money for investments.

The point is that, whenever someone has any debt, that person in effect borrows every time they spend any money at all. It does not matter whether they buy a litre of milk, a new shirt, a new car or a parcel of shares. They have in effect borrowed because they could have used the cash involved to pay off the loan. But they did not. This means they have more debt than they would have had if they had not bought the milk, the shirt, the car or the shares. So, they have ‘borrowed’ money to buy the milk.

What’s more, because Eve’s debt was a home loan, the interest was not tax deductible.  If she was paying 4% to her lender, then this was the after-tax cost.

A simple thing for Eve to have done would have been to use the $200,000 to repay her loan, then borrow $200,000 specifically to buy shares. Shares generate taxable income, in the form of dividends. Because tax is paid on dividends, interest on money borrowed to buy shares is deductible. If Eve is in the 37% tax bracket, then the after-tax cost of the debt falls to just 2.5%.

On a $200,000 loan, this equates to a saving of $3,000 per year. Every year.

The golden rule

This brings us to the golden rule of debt management, which is to:

1. Use cash to pay for private costs, including loan repayments on private debt such as home loans; and
2. Use debt to pay business and investment costs.  Your business and your investments generate taxable income. So debt used to finance these activities is usually deductible.

Following this simple rule means you will pay off your expensive non-deductible debt as fast as possible. This minimises the after-tax cost of your debt. And when you minimise a cost – any cost – you increase your profits.

The golden rule does require you manage cash flow in the right way. If you don’t, then you can fall foul of the tax laws. So, please contact us and we can show you how to manage your debts to legally and legitimately minimise your tax and therefore maximise your profits.

If you would like more information about tax deductible debt please contact MartinCo today here >

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We love family homes. For a start, we love families – and families live in family homes. What’s more, enjoying your home is the easiest way to enjoy life in general. A happy home – and a home you are happy with – is an essential part of a happy life.

But that is not the only reason we love helping people get the best family home they can afford. Family homes are not just great places to live. History shows that family homes are also cracking investments. Over the last 20 years Australian property has averaged a return of more than 9.5% a year, including both rents and capital gains. That means that house values doubled every seven or eight years. (Yes, these are average figures across the country and not every market did this well. But all markets did at least quite well over that time period).

Things are even better when gearing is involved. ‘Gearing’ is a fancy word for borrowing – and most people borrow money to buy their family home. If you start with 20% equity (and borrow the remaining 80% of the purchase price), and the house doubles in value, then the value of your equity increases to 60% of the increased value of the house.  The proportion of debt halves when the value of the property doubles.

But that is not all. Even better is the fact that the family home does not attract Capital Gains Tax (CGT). This means that you do not pay tax when selling a home that has increased in value. This is a central plank of Australia’s taxation system and it is not going to change any time soon.

Combine this tax treatment with the long-term results that Australia’s housing market has achieved, and you find that most Australians are living in tax-free investment machines. For example, if you are in the 45% tax bracket and you own a $1,000,000 property and it goes up in value by just 5%, or $50,000, that’s the equivalent of earning an extra $92,500 a year in pre-tax salary. This is because you would have to earn $92,500 and pay tax at 45% to be left with $50,000 in cash. What’s more – you can’t live in cash. That is why houses are usually better places to hold wealth than cash.

The last 20 years has seen constant growth in the value of Australian homes, with Perth being an exception in the last few years (having grown by more than the national average prior to the tailing off of the mining boom). This has a lot to do with our constantly growing economy (we have not had a recession for 25 years now). In addition, immigration has been a particularly important driver of the national economy. And guess what? People still want to come to live in Australia. That won’t change any time soon.

The Australian obsession with home ownership is likely to continue. It makes sense to invest wisely in the home. We strongly encourage home ownership strategies, and their close cousin, debt management strategies, whenever we meet with a client. Even if the rate of growth slows (or we get a negative year or two), long term the right housing purchase turns out well. What’s more, this ‘investment’ gives you a place to live as well.

(One word of clarification: when we say housing we do not mean high rise apartments. Their economic future is very different to homes and units in small blocks).

And our advice is not just about homes for clients. We also help with homes for the children of clients and even sometimes the grandchildren of clients. Indeed, it is these adult ‘kids’ that our clients tend most to worry about. “How will our kids ever afford their own home?” is one of the most common things we are asked. In our blogs and ebooks for this month and next, we will discuss various ways to make buying and holding property as easy as possible. And we will not just focus on your home. We will look at ways to help other people – typically your kids – own their homes as well.

Feel free to contact MartinCo now and we can talk you through ways that make home ownership much more achievable for you and the people you care about.

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At MartinCo, we pride ourselves in being friendly, accessible accounting specialists who make it our business to make your business more successful. We work alongside you to build wealth and help you reach your financial goals.

You can find out all the information you need about working with us using our comprehensive suite of accounting services. For more information about us and on other parts of our business click the links below.

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Please take the time to browse our site and get to know us and how we can help benefit you, your family, your business and your retirement.

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Our Business Include:

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• Financial Advice
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Click here > to find more about out about MartinCo services

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