Author: Juston Jirwander

Warren Buffett, the legendary investor, once remarked, “Accounting is the language of business.” In the context of cash and accrual accounting, this quote underscores the essential role that accounting plays in conveying a company’s financial reality. Cash accounting speaks to the immediate availability of cash resources, while accrual accounting speaks to the broader economic activities that shape a company’s financial position.

In the realm of financial accounting, cash accounting and accrual accounting form the bedrock upon which businesses measure their economic activities and report financial performance. Each methodology offers distinct insights into a company’s financial position and transactions. This article will cover the nuances of cash and accrual accounting, unravelling their differences, benefits, and limitations. So, let’s unpack the difference between accrual and cash accounting.

Cash Accounting: A Snapshot of Present Finances

Imagine a quiet moment frozen in a bustling city, a snapshot capturing the essence of a vibrant street. Cash accounting, in the realm of finances, operates much the same way – freezing financial transactions into a single frame that represents a company’s immediate monetary movements. It’s like catching a single raindrop in mid-air amidst a storm of economic activities.

At its core, cash accounting is a pragmatic approach that revolves around actual cash inflows and outflows. When revenue comes knocking at the door in the form of tangible cash, it’s recorded as earned. Similarly, when expenses depart from the coffers, they’re noted as paid. This approach creates a clear depiction of a company’s liquidity and its aptitude in handling immediate financial responsibilities.

Pros of Cash Accounting: Uncomplicated Financial Insights

1. Simplicity: Easy Passage to Financial Clarity

For small businesses, especially those stepping into the realm of entrepreneurship for the first time, the allure of simplicity is magnetic. Cash accounting offers a straightforward approach that doesn’t demand an advanced degree in accounting to comprehend. The absence of intricate rules and elaborate procedures means that you can focus on the growth and prosperity of your business.

With cash accounting, financial reporting becomes a breeze. It minimises the complexities of accounting and translates them into an easily understood language. Small business owners can navigate through their financial data without getting entangled in the jargon, effortlessly grasping the inflows and outflows that shape their financial journey.

2. Immediate Tracking: Capturing the Rhythm of Transactions

In the realm of finances, timing can be everything – like capturing the exact moment a wave kisses the shore. Cash accounting offers this sense of immediacy, allowing you to record transactions as they occur. Picture it as a synchronised dance between your business and its financial activities, each step leaving a trace in the sands of your financial records.

The advantage of immediate tracking extends beyond mere record-keeping; it’s a tool for strategic decision-making. When a payment arrives from a customer, it’s recorded promptly. Similarly, when expenses are paid, they’re immediately noted. This real-time tracking ensures that your financial dashboard remains up-to-date, allowing you to gauge your business’s cash position at any given moment. Cash accounting becomes your financial GPS, providing accurate coordinates of your business’s financial journey.

Cons of Cash Accounting: The Shadows in Simplicity

1. Incomplete Picture: Ignoring the Symphony of Obligations

Cash accounting offers simplicity, but with it comes a trade-off – the sacrifice of a complete financial portrait. Imagine standing in front of a grand masterpiece, but only seeing a fraction of its intricate details. Similarly, cash accounting provides a snapshot of your business’s financial moment, but it can cast shadows over crucial aspects that shape its destiny.

The complexity of business extends beyond the immediate inflows and outflows of cash. It involves a symphony of obligations that resonate beyond the present moment. While cash accounting captures the stars of the financial show, it often leaves the supporting cast hidden behind the curtain. Long-term commitments, future debts, and impending expenses remain backstage, waiting for their cue. This is a key difference between accrual and cash accounting that must be considered.

2. Timing Mismatch: When Notes Fall Out of Tune

Picture yourself conducting an orchestra, each note resonating in perfect harmony. Now, envision one section of the orchestra playing out of sync – a discordant note that disrupts the entire composition. Cash accounting, in its pursuit of simplicity, can sometimes introduce a timing mismatch, creating dissonance between revenue recognition and the actual delivery of goods or services.

In the realm of business, revenue is often earned before the curtain rises on the performance. Cash accounting might record this revenue upfront, creating a discordant note between the cash inflow and the actual service provided.

This timing mismatch can lead to distorted financial performances, like a symphony with intermittent off-key notes. The financial reports may showcase peaks and valleys that don’t align with the business’s operational reality. Such inconsistencies can complicate accurate trend analysis, obscuring insights that are vital for strategic planning and decision-making.

Accrual Accounting: A Holistic View of Financial Realities

In contrast, accrual accounting provides an expansive vista of a company’s financial terrain. It acknowledges revenues upon their earned status and expenses as they are incurred, regardless of cash flow considerations. This is a major difference between accrual and cash accounting in that this approach provides a more comprehensive understanding of a business’s financial activities.

Pros of Accrual Accounting: Painting a Comprehensive Financial Landscape

1. Holistic Picture: Illuminating the Financial Horizon

Accrual accounting goes beyond the instant snapshot of cash movements and delves into the intricate tapestry of a business’s financial story. It’s like stepping back from a canvas to appreciate the entire masterpiece, each brushstroke contributing to the grand narrative. With accrual accounting, the focus shifts from the immediate cash flow to encompass the broader canvas of current and future financial obligations. This holistic perspective offers a clearer vantage point for decision-making.

2. Matching Principle: Weaving Threads of Financial Synchrony

In the realm of business, revenue and expenses dance in a delicate choreography. Accrual accounting, with its matching principle, ensures that this dance is harmonious and synchronised. It’s akin to a skilled conductor orchestrating a symphony, ensuring that each instrument plays its part at the right time. This principle aligns revenues with their associated expenses, creating a clear link between cause and effect.

Let’s use a manufacturing company as an example. When a product is produced, accrual accounting captures not only the cost of materials and labor but also the indirect costs, like depreciation of machinery or rent for the production facility. These expenses are matched against the revenue generated when the product is sold. This synchronisation provides a precise calculation of the profit earned from each sale, offering insights into the actual profitability of the business’s endeavors.

Cons of Accrual Accounting: Navigating Complexity and Timing

Complexity: Unveiling the Layers of Financial Interpretation

While accrual accounting unveils a more complete financial tapestry, its intricate threads can sometimes lead to a complex weave. This is where we hit another major difference between cash and accrual accounting. The inclusion of non-cash items and the necessity to estimate unearned revenue and incurred expenses add layers of sophistication to the accounting process.

Consider a construction project where services are provided over several months. Accrual accounting requires estimating the proportion of work completed and recognising the corresponding revenue even before the final invoice is settled. While this precision enhances financial reporting, it can also introduce complexity.

However, complexity doesn’t necessarily equate to chaos. Just as a complex dance routine showcases a dancer’s skill and artistry, navigating the complexities of accrual accounting highlights a business’s financial acumen. It’s a testament to a company’s ability to decipher intricate financial movements and present them as a cohesive narrative.

Delayed Insight: Timing and Decision-making

In the realm of business, timing is often the conductor that orchestrates operational decisions. Accrual accounting introduces a subtle delay in reflecting cash movements, which could impact short-term decision-making.

This symphony of timing can sometimes lead to a dissonance between cash movements and financial reporting. A business might have a successful month in terms of sales but face cash shortages due to delayed payments. Accrual accounting’s delayed insight could impact short-term operational decisions, prompting businesses to fine-tune their cash flow management strategies.

It’s important to note that this delay doesn’t undermine the accuracy of accrual accounting – it simply adds a layer of nuance to the rhythm of financial reporting. Just as a symphony’s timing creates suspense and anticipation, accrual accounting’s delayed insight prompts businesses to harmonise their cash flow orchestration.

In essence, the cons of accrual accounting showcase the multifaceted nature of financial interpretation. Complexity and timing intricacies are not roadblocks; they are pathways to a more sophisticated understanding of a business’s financial symphony. Embracing these nuances allows companies to navigate revenue and expenses with finesse and precision.

Comparative Analysis: Timing Makes All the Difference

The key difference between accrual and cash accounting is all about the timing of revenue and expense recognition. Cash accounting emphasises actual cash inflows and outflows, focusing on the present moment. Accrual accounting, on the other hand, captures economic events as they occur, regardless of cash movements, painting a more comprehensive and forward-looking financial picture.

Imagine cash accounting as a pie-eating contest: you only count the pies you’ve already swallowed, ignoring the ones you’ve ordered but haven’t devoured yet. Accrual accounting, on the other hand, is like being a pie-eating contestant and recording a pie as consumed the moment you order it – before you’ve even tackled the first bite. It’s a bit like predicting your fullness level based on your eating ambitions!

Expert Guidance Matters

Understanding the difference between cash and accrual accounting must be achieved by looking in two distinct lenses through which businesses interpret and communicate their financial story. Cash accounting is akin to viewing a single frame of a movie, while accrual accounting provides the entire narrative. Both methodologies have their merits and drawbacks, making the choice between them a reflection of a company’s size, industry, and strategic goals.

When faced with the choice between cash and accrual accounting, seeking guidance from a skilled accountant becomes paramount. At Bishop Collins, we offer tailored consultations that delve into your unique circumstances. Our experts will not only elucidate the disparities between accrual and cash accounting but also provide personalised recommendations for your business. Contact us today and embark on a path of informed financial decisions.

As June arrives, businesses and consumers alike are familiar with the trademark End-of-Financial-Year sales (or EOFY to those in the know). For some, it’s a golden opportunity to hit the shops; for others, it’s a sign to start the often dreaded tax planning.

EOFY is very closely tied to tax planning—an essential aspect of financial management for businesses in Australia. By strategically managing your business’s tax obligations, that sinking feeling you’ve come to associate with business tax will disappear. You can minimise your business’s tax liabilities while maximising after-tax profits. In short, you can set your business up for ultimate financial and taxation success.

In this comprehensive article, we delve into the benefits of tax planning and explore effective tax planning strategies to help businesses navigate the final month of the financial year successfully.

1. Minimise Tax Liabilities

One of the primary benefits of tax planning is the ability to minimise tax liabilities. Every business owner aims to optimise their tax position, and tax planning plays a key role in achieving this goal.

The approach to your tax planning will vary based on the size and structure of your business.

At Bishop Collins, our tax planning process begins with a comprehensive review of your annual profit and a thorough calculation of your tax position. Based on this analysis, we offer customised options and valuable feedback to maximise the benefits of any available tax incentives, deductions, or offsets for the year.

By effectively implementing these strategies, substantial savings can often be achieved. It’s important to note a few things here regarding liability minimisation, some of which may apply to your business:

Cash Businesses

For businesses operating on a ‘cash basis,’ income is taxed when received, and deductions are claimed when paid. To reduce tax liabilities, a strategy could involve clearing payable bills within the financial year, reducing taxable income.

Accrual Businesses

In contrast, accrual-based businesses can claim deductions for expenses once they are incurred. However, businesses that carry stock must pay tax on closing stock balances. When placing purchase orders, focusing on overhead expenses or deductible business assets can help minimise tax obligations.

Superannuation

Superannuation is a critical aspect of tax planning. For employee super contributions, timely payment and processing before June 30th provide an easy deduction.

Business owners should also consider catch-up contribution rules and concessional contribution caps to boost their super and pay a lower tax rate.

Understanding the nuances of superannuation contributions can significantly impact tax liabilities.

Company Structure

Businesses operating as a company face different tax rates. Currently, the tax rate for small businesses in Australia is a flat 25%.

When planning taxes, it’s essential to consider both individual taxable incomes as business owners and the company’s profit.

Balancing dividend payments with the goal of long-term tax minimisation may involve increasing the company’s tax payable.

However, it’s crucial to exercise caution, as certain tax minimisation strategies can affect the company’s ability to pay franked dividends, potentially resulting in higher taxes.

Trust, Partnership, or Sole Trader Structure

Businesses operating as a trust, partnership, or sole trader should pay close attention to tax planning. These structures have their own unique considerations.

Trusts, in particular, require careful distribution planning and producing distribution minutes by June 30th. The distribution should align with the business’s profitability, aiming to optimise tax outcomes.

Prepaid Expenses

Prepaid expenses offer potential deductions for small businesses if they relate to expenses within the next 12 months. Businesses can take advantage of this deduction by prepaying eligible expenses before the financial year-end.

Temporary Full Expensing of Depreciating Assets

The temporary full expensing of depreciating assets, which ended on June 30th, 2023, provided significant tax savings during the Covid era. However, managing taxes became more complex as profits fluctuated from year to year.

Businesses should exercise caution when selling assets, as the full deduction means paying tax on the full sale price. It’s crucial to notify your accountant of all sold and purchased assets during the year and provide the appropriate documentation.

2. Enhance Cash Flow

Tax planning also plays a significant role in optimising cash flow for businesses. Carefully managing the timing of income recognition and expense deductions allows businesses to align their cash flows with tax obligations.

EOFY Stocktake

Conducting an End-of-Financial-Year stocktake allows businesses to convert some stock into cash, providing a cash flow boost without a significant tax burden. This extra cash flow can be allocated to other tax-deductible items like super contributions.

Income Recognition and Expense Deductions

Strategically timing the recognition of income and deductions can help businesses manage their cash flow. Deferring income recognition to the following tax year or prepaying expenses before the financial year-end can reduce immediate tax burdens and improve cash flow.

3. Reduce Tax Risk and Compliance Issues

Proactive tax planning helps businesses mitigate tax risks and ensures compliance with the Australian Taxation Office (ATO) regulations.

Staying up to date with changing tax laws enables businesses to identify potential risks, avoid penalties, and maintain good standing with the ATO.

Engaging the right accountant is paramount to ensure good compliance management.

4. Structuring and Entity Selection

When it comes to tax planning, one of the fundamental considerations is selecting the appropriate business structure. The choice between sole proprietorship (or sole trader), partnership, company, or trust can have significant implications for your tax obligations.

Each entity type comes with its own set of tax implications, advantages, and limitations. By carefully evaluating the tax consequences of each option, businesses can make informed decisions that align with their financial goals.

For instance, a sole trader may offer simplicity and flexibility, but it also means that the business owner is personally responsible for all tax liabilities. On the other hand, forming a company can provide certain tax benefits, such as the ability to distribute profits through dividends and access lower corporate tax rates.

Partnerships offer the advantage of sharing tax responsibilities among partners, while trusts can offer tax planning opportunities through income distributions and asset protection.

This thoughtful approach to structuring not only optimises tax outcomes but also lays the groundwork for effective tax planning strategies in the long run.

5. Deduction Optimisation

Deductions can seem daunting, especially for business tax. Understanding and utilising deductions to your advantage, however, can become a major asset to the success of your EOFY tax planning and can ultimately deliver a much better after-tax return.

Identify Legitimate Deductible Expenses

To effectively optimise deductions, you’ll need to carefully review your operations and identify all legitimate business expenses that qualify for deductions. Among others, this includes:

• Costs related to rent
• Utilities
• Office supplies
• Travel expenses
• Advertising
• Professional fees
• Employee salaries

By comprehensively assessing your business expenses, you’re well-equipped to maximise your deduction potential.

Meticulous Record-Keeping

This is where a lot of people fall short in their tax planning efforts, and it’s understandable. Being organised and on-the-ball with record keeping can fall by the wayside, but it’s also essential for substantiating deduction claims and ensuring compliance.

Your business should maintain organised documentation, such as receipts, invoices, and bank statements, to provide evidence of the expenses incurred. If you’re not into the old-school method, there also plenty of easy-use apps and programs designed to make tracking deductions a whole lot easier.

Meticulous recordkeeping not only supports deduction optimisation but also facilitates smooth tax audits, if necessary.

Consult with Tax Professionals

While businesses can handle deduction optimisation on their own, consulting with a tax professional like Bishop Collins can provide valuable insights and ensure that no eligible deductions are overlooked.

Our tax professionals have the expertise and knowledge of current tax laws and regulations, enabling us to identify specific deductions that may apply to your industry or business circumstances.

We can also provide guidance on:

• How to maximise deductions while maintaining compliance
• Navigate intricate deduction rules and avoid potential pitfalls
• Identify potential red flags or areas of ambiguity
• Provide clear guidance on how to approach specific deductions

Conduct Regular Reviews and Adjustments

Deduction optimisation is an ongoing process that requires regular reviews and adjustments. As your businesses evolves, your deductible expenses may change.

Conducting periodic assessments of deductible expenses and seeking advice from tax professionals ensure that your businesses is taking advantage of all available deductions.

By staying proactive and up to date with deduction optimisation, you can maximise your business tax savings and maintain a strong financial position.

6. Capital Gains Tax Planning

For businesses involved in buying or selling assets, capital gains tax (CGT) planning is a crucial aspect of tax optimisation.

By strategically managing the timing of asset sales and leveraging available exemptions, concessions, and rollover relief provisions, businesses can effectively minimise their CGT liabilities and maximise their after-tax profits.

Timing Asset Sales

Timing plays a critical role in capital gains tax planning. Businesses can strategically plan the sale of assets to minimise CGT liabilities.

For example, if a business anticipates a significant increase in the value of an asset, it may be beneficial to delay the sale until a later tax year to take advantage of potential exemptions or concessions.

Conversely, if an asset’s value is expected to decline, selling it sooner may result in a reduced taxable gain.

Exemptions and Concessions

As a business owner, it helps to be aware of the various exemptions and concessions available to you under tax laws. For instance, certain small business concessions may allow eligible businesses to reduce or defer their CGT obligations when selling active assets.

These concessions can include the small business CGT concessions, which provide opportunities for significant tax savings. By understanding and leveraging these exemptions and concessions, you can minimise your CGT liabilities and retain more investment gains.

Rollover Relief Provisions

Rollover relief provisions provide businesses with opportunities to defer or reduce CGT liabilities when disposing of certain assets and acquiring replacement assets.

These provisions aim to facilitate business restructuring, expansion, or reinvestment. By taking advantage of rollover relief, you can defer the CGT consequences of asset sales and effectively manage your busines tax obligations while maintaining operational flexibility.

Navigating Complex Rules

Capital gains tax rules can be complex, and businesses must navigate them carefully to ensure compliance and optimise tax outcomes.

Seeking guidance from tax professionals who specialise in CGT planning can help you navigate the intricacies of the rules, identify relevant exemptions and concessions, and develop tailored strategies that align with their specific circumstances.

Tax professionals can also assist in assessing the CGT implications of different asset disposal methods, such as outright sales, rollovers, or the use of trust structures.

7. Superannuation Planning

Superannuation planning plays a vital role in tax planning for businesses, offering valuable tax advantages and long-term financial benefits.

By maximising contributions to superannuation funds, you can leverage tax deductions and take advantage of the lower tax rates applied to these contributions.

Tax Benefits of Super Contributions

Contributions made to superannuation funds are typically subject to a lower tax rate compared to other forms of income. For businesses, this presents an opportunity to reduce your overall tax liabilities while simultaneously building retirement savings.

By diverting a portion of your earnings into super contributions, your business can enjoy immediate tax benefits and enhance its financial position for the future.

Tax Deductions on Super Contributions

Your business may also be eligible for tax deductions on your superannuation contributions. These deductions can provide further relief on taxable income, helping to lower your overall business tax burden.

It’s important for businesses to understand the specific rules and limitations surrounding deductible superannuation contributions, as they may vary based on factors such as the business structure and individual circumstances. Our accountants can assist you in navigating this.

Employee Benefits

Superannuation planning can not only benefits your business but also provide a valuable employee benefit. Offering competitive super contributions as part of an employee remuneration package can help attract and retain top talent.

Additionally, you can explore salary sacrifice arrangements, where employees agree to contribute a portion of their pre-tax salary into superannuation, further enhancing their retirement savings and maximising tax advantages for both parties.

8. Tax Incentives

Tax incentives present a valuable opportunity for you to enhance your business’s tax planning strategies and foster innovation within your company.

By implementing eligible tax incentives, you can unlock potential tax savings and stimulate growth in key areas such as research and development (R&D).

In Australia, the government offers generous tax incentives specifically designed to encourage businesses to engage in innovative activities.

Research and Development (R&D) Tax Incentives

The Australian government provides substantial tax incentives to businesses involved in eligible R&D activities. These incentives aim to support businesses in their pursuit of innovation, technological advancements, and economic growth.

By carefully planning and documenting R&D activities, your business can access these incentives and enjoy significant tax savings.

Identifying Eligible R&D Activities

The first step in harnessing R&D tax incentives is to identify eligible activities within your business.

R&D encompasses a wide range of activities, including experimentation, hypothesis testing, prototype development, and technical problem-solving.

It’s essential to conduct a thorough assessment of your business operations and identify activities that meet the criteria for R&D tax incentives.

Collaboration and External Expertise

Collaborating with research institutions, universities, and industry experts can strengthen R&D initiatives and enhance your eligibility for tax incentives.

Partnering with external organisations can bring additional expertise and resources to drive innovation within the business.

These collaborations can also facilitate the sharing of knowledge, access to specialised equipment, and invaluable networking opportunities – all while optimising your business tax planning.

Engage a Tax Planning Professional

Tax planning is a vital aspect of financial management for businesses in Australia. Compliance with the country’s high tax burden can be challenging, but strategic tax management can significantly minimise liabilities, enhance cash flow, and reduce compliance risks.

By employing effective tax planning strategies such as entity selection, deduction optimisation, capital gains tax planning, superannuation planning, and leveraging tax incentives, you can pave the way for a successful year ahead.

Interested in getting profesisonal assistance with your EOFY tax planning this year? Get in touch with our experienced team to get started.

Let’s get something straight before I go anywhere with Fringe Benefits Tax. In the past I was not a fan of FBT, except for Not for Profit entities and Charities and for high net worth individuals in small circumstances.

In essence, I used to regard FBT as not worth the trouble for the employer entity; that is, until recent changes made to FBT on electric vehicles (EVs) from the 1st of July 2022. Eligible EVs and Hybrid cars are now exempt from FBT. I am now a fan!

Now for a little context to my update via a short history lesson.

FBT is applied on most non-cash benefits that an employer provides “in respect of employment”. The tax is imposed on the employer, not the employee, and is payable irrespective of whether the benefit is provided directly to the employee or to an associate of the employee.

FBT rules since the government introduced the legislation in 1986 and changes along the way are complex and designed to limit any tax savings of providing benefits to employees. As a general rule, it is not tax-effective for an employee to salary package benefits if their marginal tax rate is below the 2023 FBT rate of 47% (which is equal to the top marginal tax rate, including the Medicare levy).

Providing a benefit to employees was designed to attract employees and retain their services as the remuneration and the benefits enhanced their working experience. With most of these benefits being treated as a taxable benefit, the workload to provide them has lost its attractiveness.

These employees should generally limit the types of benefits they receive under salary packaging agreements to benefits that are exempt from FBT (e.g., work-related laptops) or to benefits that are concessionally taxed under the FBT rules (e.g., car fringe benefits), or to benefits that are “otherwise deductible” benefits such as additional superannuation contributions.

Note however, that this benefit of additional superannuation benefits paid for an employee are also not as beneficial to taxpayers whose taxable income plus superannuation contributions are in excess of $250,000 per year. So, as you can see the complexity makes it very time consuming and generally not worth the administrative burden on the employer. But things have changed!

Electric Vehicles, Hybrid Cars, Salary Packaging and Recent Changes

As an employer, you previously needed to pay FBT on motor vehicles (regardless of whether they were EV, Petrol or Diesel) provided to your employees. From the 1st of July 2022, you no longer need to pay FBT on benefits provided for eligible electric cars and associated expenses.

So what are the eligibility requirements? This comes straight from the Australian Taxation Office website:
“You will now be exempt from paying FBT on benefits provided for electric cars that meet all the following criteria:

• the car is a zero- or low-emissions vehicle
• the first time the car is both held and used is on or after 1 July 2022
• the car is used by a current employee or their associates (such as family members)
• luxury car tax has never been payable on the importation or sale of the car.
• Registration, insurance, repairs, maintenance and fuel expenses associated with the eligible electric car are also exempt from FBT.”

Please note this exemption does not apply to motorcycles and scooters, whether they’re electric or not and home charging stations are also not exempt.

A WORD OF WARNING: as with all tax situations, there are several points to consider before rushing off to get that dream Porsche Cayenne EV for $300,000 packaged through the company. As luxury tax is applied to this vehicle, which means it is not eligible. The GST inclusive value of the car you are using must be below the Luxury car tax threshold.

For fuel efficient vehicles as outlined in the FBT exemption this threshold is higher than for other vehicles. In the financial year ending 30th of June 2023 this threshold is $84,916.

Example

Now that we can exclude any car in excess of $84,916, let’s look at an example to illustrate the attractiveness of this environmentally influenced tax benefit:

Sandra has a salary of $180,000 plus $20,000 Super (SGC plus additional super). She has always wanted a Luxury Plug-In Hybrid Car. The GST inclusive cost including options and charges was $84,000 with no Luxury Car tax applied.

Sandra has 100% private use. She purchases the vehicle through her company with cash and no debt as part of her Salary Package and the company takes ownership of the car on the 1st of May 2023. Registration, insurance, repairs and maintenance and fuel expenses are forecast to total $11000 for the year.

Side Note: As the car was purchased and ready for use before 30 June 2023 the Backing Business investment accelerated depreciation allowance provides for an immediate deduction to the Car limit for Financial Year 22-23 of $64,741.

This is a significant up front tax saving of $16,185 for the employer if it is a company (Base Rate entity). The company can claim the GST paid on the car Circa $7K also assisting in cashflow in July 23. So, benefit to the company, tick.

Now to Sandra. Sandra will salary package her car and running expenses for FY 22-23 so let’s compare Sandra buying personally or through her company.

Current Tax, No Package
Income Tax on Taxable income of $180,000 Inc Medicare = $55,267
Net salary of $124,733.
Less Running Costs $11,000
After tax and costs cash position = $113,733

Salary packaging all costs
Taxable income: $180,000
Less running costs net of GST: $10,000
Add back input tax credit from GST on vehicle capped at car limit of $64,741: $5,885 for the first year and 0 the following years.
Taxable Salary: $175,885 first year and $170,000 following years
Tax on Salary: $53,662 first year and $51,367 following years
After tax and costs cash position: $122,223 first year and $118,633 following years

Net Tax benefit to Sandra in the first year: $8,490
Net Tax benefit to Sandra each year thereafter: $4,900

That means the net tax benefit over five years is a whopping $28,090! Finally to complete my FBT update…

Other Recent Changes For the 2023 FBT Year Ended in March

The ATO has just released draft guidelines for calculating the electricity costs incurred by an employee when charging an electric vehicle at their home.

These guidelines are set out in Practical Compliance Guideline PCG 2023/D1 (‘PCG 2023/D1’).

Employers who choose to use the guidelines contained in PCG 2023/D1, can calculate the electricity costs incurred by an employee when charging an electric vehicle at their home, by applying the following formula:

4.2 cents x total KMs travelled by the vehicle during the FBT year.

Employers who pay/reimburse an employee’s electricity costs associated with charging an employer- provided electric car at their home will not be subject to FBT on the reimbursement.

FBT got you groaning out loud? Bishop Collins can Help

FBT can be a key element to the operation of your business, and as such should be something that you are fully knowledgeable on. That’s where Bishop Collins come in! We’re passionate about helping our clients understand the information they need to successfully and profitably run their business, and we are experts when it comes to business tax and accounting. Reach out to us today to see how we can help with all your business tax needs.

Whatever stage your business is up to at Bishop Collins we are passionate about helping our clients achieve their version of success. Feel free to reach out if you would like professional assistance for your business.