December 2024 - Activ8 Accountants & Advisors

What is the Difference Between Employees and Contractors, and Why Does it Matter?

There are key differences between employees and contractors, and as with most things, there’s pros & cons for both. Understanding the obligations for your choices in business is key to your success, so let’s get clear on the type of people you work with in your business.

The Critical Differences Between an Employee and an Independent Contractor.

An employee works in your business and performs their role as a representative of your business. An independent contractor will provide a service TO your business and performs work to further their own personal business.

An employee represents your business, where as a contractor represents themselves and is more self-interested.

There is More Flexibility with Contractors.

An independent contractor has more control to choose how, when and where their work is done, they represent themselves and often work for a fixed fee. A contractor has the ability to subcontract or delegate to others and is responsible for providing their own tools and equipment, as well as bearing the commercial risk for any costs arising out of injury or defect in their work.

Where there is risk there can be reward. The flexibility can be very appealing but obviously for business owners an employee is likely going to be more reliable in the long term.

For Superannuation, a Contractor Can, and Often is, Still Considered an Employee…

Often the choice to lean towards putting on contractors instead of employees is driven by the desire to avoid paying their superannuation. Unfortunately, that is a bit of a misguided notion.

Even if someone is labelled as an independent contractor, have their own ABN, and work infrequently for short periods, they can still be considered an employee for super purposes.

This is When You Still Need to Pay Your Contractor Superannuation.

You still need to pay your contractors superannuation in these circumstances:

if the worker works under a contract that is wholly or principally for their labour
if they are a sportsperson, artist or entertainer paid to perform, present, or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity
if the person is paid to provide services in connection with any performance, presentation or participation in these activities
if the person is paid to perform services related to the making of a film, tape, disc, television or radio broadcast.

If a person’s contract is mainly for labour, super will most likely need to be paid, so as an employer you would need to be negotiating rates of pay to contractors while taking this into account.

Workers Compensation Also Needs to be Considered When Looking at Contractors.

As an employer you need to provide workers compensation for workers and ‘deemed workers’, but not for contractors, sub-contractors and labour-hire workers. Important to note that some contractors are deemed workers for compensation and insurance purposes. Here is an online link that can be used to check what your workers would be classified as.

Payroll Tax

Payroll Tax only applies if the total wages, contractor payments and superannuation exceeds the annual threshold of $1.3 million. Generally, payments by employers that relate to work performed by contractors are liable for payroll tax unless an exemption applies. Any part of the payments which are for materials, tools or equipment are not liable for payroll tax.

Employees and Contractors Can Both be Very Complicated to Negotiate.

Each situation is unique and can vary from situation to situation. There is no easy way around the obligations of business ownership and sometimes a legal specialist can be a good idea if there is any doubt.

Bearing in mind, an accountant who specialises in working with business owners (*us*) can make it a whole lot easier.

It’s Important You Understand Your Obligations as an Employer.

Knowing the difference between employees and contractors is crucial to your decision-making in the hiring process. Jumping into a scenario in an attempt to cut corners without the right advice can lead to unwanted consequences.

We are Accountants for Growing Businesses in Brisbane and Beyond.

We work exclusively with business owners who are serious about growing their businesses.

Diving into the world of employees and contractors? Talk to a business accountant who can handle all of your business’s financial obligations.

3 Reasons You Should Have a Self Managed Super Fund (SMSF) and 3 Reasons You Shouldn’t.

When it comes to your money, goals and life situation, no two set of circumstances are the same. There’s always a lot to consider – you want to be sure you’re making the right choice.

*Remember the following information is general in nature, and doesn’t take your specific situation into account. Before diving into a Self Managed Super Fund, make sure you speak to a qualified Financial Advisor.

In terms of your superannuation, there’s a lot of future-focused thinking that comes into play. For a Self Managed Super Fund (or SMSF) there are pros and cons.

Here’s 3 reasons we think you should consider an SMSF for your super, and 3 reasons you should avoid it.

You’ll have greater control.

A traditional super fund will invest your money for you, they’ll likely do it in a very safe way in order to keep your money safe and your investment growing at a stable rate.

A self managed super fund allows you to direct your money into the investments of your choosing – for example, you could put your money into property, shares, term deposits and a range of alternative options depending on your personal risk tolerance (some of us are more conservative than others). With the right knowledge or guidance behind you, this flexibility can be extremely beneficial and could really enhance the superannuation you build for your later years & retirement.

There’s a good amount of flexibility.

Bendy like a pretzel. There is a great amount of flexibility when it comes to choosing how your superannuation allocates your investments. If you choose to have a self managed super, you can move where your money is invested as you see fit.

An SMSF also provides more flexibility when it comes to estate planning, giving you more control over how and when your superannuation benefits are distributed to beneficiaries upon death. They can also be structured to provide tax effective pensions to surviving dependants, making it a valuable tool for family wealth preservation.

It can save you some hard-earned cash.

For individuals with significant superannuation balances (often over $200,000 to $300,000), an SMSF can be more cost-effective than other superannuation funds. While SMSFs have fixed administrative costs, these can be spread over a larger balance, potentially reducing the per-member cost compared to retail or industry funds.

It can be a tax efficient choice.

Don’t want to pay any more tax than you need to? Neither do we.

Concessional Tax Treatment: Like other superannuation funds, SMSFs benefit from a concessional tax rate. The earnings on investments are taxed at a rate of 15% in the accumulation phase and can be tax-free in the pension phase.

Capital Gains Tax (CGT) Discounts: SMSFs can benefit from capital gains tax discounts on assets held for over 12 months, with a tax rate of 10% applying to those long-term gains.

Pension Phase Tax Advantages: If the SMSF moves into the pension phase (after retirement), the earnings on assets supporting a pension can be tax-free.

…and then there’s the cons.

where there is an upside, there’s usually a downside.

It can be time-consuming.

Time is money. A traditional superannuation fund will work away in the background and is not something you need to worry about in an ongoing fashion.

Managing a Self-Managed Super Fund (SMSF) can take up more time because, as a trustee, are responsible for all compliance, regulatory, and administrative tasks. This includes ensuring the fund complies with Australian Tax Office (ATO) regulations, handling annual audits, preparing financial reports, lodging tax returns, and maintaining detailed records of all investment decisions. You also need to stay informed about changes in superannuation laws and update your investment strategy and operations accordingly, which requires continuous monitoring and research. These tasks can be complex and require significant attention to detail to avoid penalties.

Bearing in mind, an accountant who specialises in SMSF management (*us*) can do all of the above mentioned management for you, making it vastly less complicated.

There is more risk involved.

Having your superannuation in an SMSF carries significant compliance risks, as you are personally responsible for ensuring the fund adheres to regulations set by the ATO. If you fail to comply with these rules, such as contribution limits, investment restrictions, or reporting deadlines, it can result in penalties, fines, or even the disqualification of the fund. The risk of making errors is higher because SMSF trustees need to stay updated on changing superannuation and tax laws, making it a bit of a challenge for anyone unfamiliar with the legal requirements.

With the benefit of making your own investment choices, that also comes with its own set of risks, especially if you’ve chosen something a bit more volatile. Obviously with a high risk investment, the reward can be huge, but the chances of it going poorly are there and that can and will affect your retirement savings if it doesn’t perform as you’d hoped.

An SMSF can be costly to set up and manage.

When you’re re-inventing the superannuation wheel, so to speak, you don’t want to get lost in a web of self sabotage. If you want to have that self managed super fund done in the most effective and tax efficient way, you’ll need to pay a professional to help you – and unfortunately, accountants are not working for free (bummer, I know).

When engaging an accountant, you want to make sure you have the right kind of person in your corner so you don’t get ripped off. You need to trust them implicitly or there’s potential that you’ll feel like you’re getting lead down the garden path.

Having a Self Managed Superannuation Fund can be a fantastic choice, and we love partnering with driven and ambitious business owners, to package up their business needs along with their SMSF.

Ensuring Tax Compliance for Your Rental Property

Be prepared come tax time so you don’t fall on the side of the ATO’s auditing targets.

‍Perhaps you’ve heard the news about the Australian Taxation Office (ATO) announcing its efforts to target landlords who are over-claiming tax deductions and failing to report income. According to data, it estimates, approximately 9 our out 10 of landlords are inaccurately reporting their net income from rental properties. This misreporting has resulted in a significant shortfall of around $1.3 billion, highlighting the discrepancy between the amount collected and the amount that should have been paid.

As a property owner and rental provider, it is crucial to be aware of your income tax reporting obligations and ensure compliance. Don’t fret, though. This article is here to help and remind you about your income tax reporting obligations as well as share some handy insights on ATO deductions.

What’s the situation and how can you prepare for it?

The ATO has advised that some landlords tend to leave out rental income or make mistakes when claiming property-related deductions and they want to tackle this issue head-on. This year they have pinpointed three main concerns related to landlord tax compliance. These include the misuse of investment loans for personal expenses, incorrectly categorising repair costs as capital works, and claiming expenses for personal use of the property.

Being on top of your tax game is simpler than it seems. Here are two things that you can do to help avoid issues:

File Correct and Honest Tax Returns: It’s stating the obvious, but ensure you accurately report your rental income and claim deductions that you’re entitled to. Honesty is key when meeting your tax obligations.
‍Seek Professional Guidance: Don’t be afraid to reach out to a tax professional or accountant who specialises in property taxation (*us*). They can offer expert advice on which deductions you can claim and guide you through the ins and outs of rental property taxation.‍

What Can Landlords Claim?

By understanding what you can claim, you can maximise your deductions and minimise any risk of non-compliance. Here are a few things you may be able to claim:

Mortgage Interest: Ah, the sweet relief of claiming the interest you pay on your mortgage as a deduction. Just make sure you accurately apportion it if you use the property for personal purposes too.

Utilities, Insurance, and Operational Costs: If you foot the bill for these expenses, you can claim them as deductions. Just keep those receipts handy!

Property Maintenance and Repairs: Any costs incurred to keep your property in tip-top shape for tenants, such as fixing leaky pipes or giving the place a fresh coat of paint, can be claimed as deductions. That’s some good news for your wallet!

What can you do to prepare for an audit?

‍In light of the ATO’s scrutiny, it is essential for landlords to ensure that their tax returns accurately reflect their rental property income and expenses.

We don’t want you stressing over a potential audit, but it’s always wise to be prepared, just in case.

Stay organised and maintain detailed records of all income and expenses related to your rental property. This includes rental income, receipts, invoices, and documentation for all claimed deductions. A little extra effort now can save you headaches later.

If a discrepancy or error is detected during the lodgement of a tax return, the ATO temporarily halts the processing and contacts the taxpayer to request an explanation. In some cases, the ATO may conduct further investigations after the return has been processed and ask taxpayers to review and make any necessary amendments to their return.

Time to review your records system?

A property records system is a tool that allows you to keep track of all the details related to your rental property in one place. You have a couple of options. It might be in the form of excel spreadsheets and folders on drive or cloud, or it might be a software packagehelps you maintain your records. Either way we suggest your system covers the following areas:

Tenant and lease information/documentation
Property condition reports
Bond collection
Maintenance requests and work orders
Financial records such as rent payments and expenses
Reports and analytics

‍‍A property records system allows you to keep everything in one place and easily accessible, so you can always stay organised and on top of things.

By keeping a good system in place to manage things, understanding the deductions you can claim and seeking professional guidance when needed you’ll be well-prepared to navigate the ATO’s watchful eye. Remember, there’s no need to panic. With a little organisation and the help of Activ8, you can be prepared and stay ahead!

Interest Rates – Has the RBA Stuffed It Up?

The tide is turning against the RBA, with more and more economists starting to think they’ve got it badly wrong.

Headline inflation is back in the target range, underlying inflation is moving ever closer to target, and yet the Reserve Bank of Australia remains stone-faced, the monolith of Martin Place. The RBA says it can’t cut rates, not yet. Not with unemployment so low.

The idea is that if there is an economy-wide shortage of workers then it’s a zero-sum game. Businesses that lose workers to businesses paying higher wages will, in turn, bid up wages to fill their vacant positions. The result is rapidly rising wages. These higher wages eat into the profits of businesses, so businesses use their market power to put up their prices which causes inflation.

This is known as a wage-price spiral. Simply put, the RBA believes low unemployment leads to higher inflation.

The RBA reckons we need unemployment to rise to somewhere around 4.5 per cent from where it is now. That would mean tens of thousands more people looking for work. Not a pleasant prospect.

However, the unemployment rate has tracked sideways at around 4.1% for the past 6 months and the inflation rate has been tracking downward during this period. Wages growth is already falling and it’s wages growth that is really the feedback loop from low unemployment to high inflation.

It can also be argued that the RBA estimate of how low unemployment needs to be to set off a wage-price spiral is wrong. The RBA Review released in 2023 pointed out the errors in this thinking pre-Covid. The RBA is repeating its mistakes now. Wage growth is falling, GDP per capita is 2.5% below the long-term trend – only being held at that level due to government spending on infrastructure, and household consumption is back to 2018 levels.

Interest rates have sat at 4.35% now for more than a year as inflation has fallen. As always, the rate rises took a few months to have their impact, but right now they are smashing the economy. The next RBA Board meeting is not until mid-February. Hopefully the data the RBA gets then opens the way to rate cuts earlier rather than later.