"Double deduction" clarifications...

[Apocalypse]

In my travels to educate myself prior to incorporating I've done some figures on the "cost" of FBT exempt items, reimbursements, and depreciation...

As I will be setting up a sole director/hareholder company that derives income through personal exertion no profit is to be retained in the company as the ATO would view this as a tax avoidance scheme - hence after expenses all money must be either paid out as salary or distributed as dividends...in situations where the income is derived from the business structure it may be more advantageous to retain funds within the company structure but I wont have this option.

Clarification one: if I buy a laptop, and my company reimburses me - the company can claim the GST back straight away? This is my current understanding...

This leads to the curious situation, that if I were to come under the highest marginal tax rate, that after reimbursement and depreciating it (GST inclusive value) personally over 3 years via prime cost...that after 3 years you would have MORE cash in your pocket than if you had not bought the laptop at all!!! In lower tax brackets it switches to slightly negative but still a remarkably cheap way of acquiring a laptop (for deductible purposes, of course...GeForce 6600 Go only for future-proofing purposes )

Clarification two: under this method, can the laptop be depreciated using the diminishing value method? If the effective life of a laptop is considered 3 years this would give a depreciation rate of 50%, which is better for cashflow purposes initially, and if the plan is to move the laptops on each year (CGT may apply...) it's much better overall.

Clarification three: is the effective life of a mobile phone 8 years? (Edit: whoops, found "cellular mobile" and effective life of 6⅔ years - still seems long...) It seems quite long but that's the most appropriate figure I've been able to glean from TR2000/18 - but I might be referring to the wrong version - there seems to have been a lot of updates/addendums...

 

[Apocalypse]

Additionally, given many mobile phone plans include a phone on a payment plan over the length of the contract, is it possible for the company to reimburse the "phone repayment" portion, in a FBT exempt manner, and then depreciate the phone personally still - I would assume for its value asdetermined by multiplying the monthly repayment by number of months?

 

[Peter 14.7]

I advise you get a very good small business accountant.

The rules are not simple. Also with all due respect in running a business, focussing on claiming every deducation is not as important as having income in the first place.

Again, get advice from your Accountant.

Peter 147.

 

[Mry]

Clarification one: if I buy a laptop, and my company reimburses me - the company can claim the GST back straight away? This is my current understanding...

This leads to the curious situation, that if I were to come under the highest marginal tax rate, that after reimbursement and depreciating it (GST inclusive value) personally over 3 years via prime cost...that after 3 years you would have MORE cash in your pocket than if you had not bought the laptop at all!!!

Not really. Lets say the laptop was $2,200.

GST claimed back on purchase - $200.
Reduction of income tax in the company ($2,000 x 30%) - $600.
Reduction of income tax in own name (if on highest tax bracket) over the life of the asset (48.5% x $2,200) - $1,067.
Total cost of laptop = $2,200 - $200 - $600 - $1,067 = $333.

Still better than $2,200 though.

btw - One laptop per year per employee. A second one would not be treated as an exempt FBT benefit.

 

[Apocalypse]

Peter 147

The income is pretty much a given. I'm basically analysing structures - I'd like to get the most appropriate structure in place given my circumstances now as well as for the next five to ten years; and acknowledging that the best laid plans and so on...also to allow some flexibility if/when those circumstances change. Hence, as part of the plan, I'm mapping out the scenarios with different structures in place - also with respect to how each structure interacts with other investment activities and family circumstances.

I recognise the rules aren't simple but I like to understand how and why. Ultimately I am responsible for my own taxation affairs, even if an accountant says something is fine and dandy...so if I'm not confidant that a certain interpretation of the rules is legitimate I'm inclined to err on the side of caution.

When I feel I've got enough of a handle on things then I'll seek the accountant's advice. Hopefully I'll then be able to comprehend that advice and ask questions more detailed than "Huh?"...

 

[Apocalypse]

Not really. Lets say the laptop was $2,200.

GST claimed back on purchase - $200.
Reduction of income tax in the company ($2,000 x 30%) - $600.
Reduction of income tax in own name (if on highest tax bracket) over the life of the asset (48.5% x $2,200) - $1,067.
Total cost of laptop = $2,200 - $200 - $600 - $1,067 = $333.

Still better than $2,200 though.

btw - One laptop per year per employee. A second one would not be treated as an exempt FBT benefit.

I understand that trail of figures but when I ran the numbers in my own particular situation things changed slightly. I may well be opertaing under a misconception. May I present my calculations for perusal?

Note this is in the particular circumstance where my company (sole director/shareholder)would derive its income from my own personal efforts. My understanding is all profits must be distributed either as wages/salary or dividend, otherwise the ATO would view it as a tax avoidance arrangement.

For my calculations I chose an arbitrary initial value of $10000 representing the company's income. This assumes there is other income that puts this amount into highest marginal bracket. For convenience I am assuming no other expenses and the applicable marginal tax rate does not change ie. thresholds are not crossed.

No laptop
Company income: 10000
If no laptop, and no other deductions, 10000 paid out as salary (can't be retained). If done as dividend, end result would be the same...
Individual receives 10000, less tax at 48.5% (effectively)
= 5150 in pocket.

Laptop
Individual purchases laptop for 2200 (for 100% business purposes)
Company income: 10000
Company reimburses laptop purchase: 10000 - 2200 = 7800
(Individual receives reimbursement, which in this case is not taxable income as section 51AH applies. So net purchase price for individual is 0.)
Company claims GST back: 7800 + 200 = 8000
No profit to be retained so this 8000 is paid out as salary to the individual.
Individual receives 8000 less tax at 48.5%.
= 4120

BUT can depreciate laptop over 3 years - effectively getting 355 or so back each year. (We will assume income/marginal tax rates remain constant). So after 3 years has additonal 1067.

4120 + 1076 = 5196.

So after 3 years you have $46 EXTRA in your pocket AND a laptop. $46 more than you would have had, had the laptop NOT BEEN BOUGHT AT ALL!!

 

[Apocalypse]

And if you depreciated aggressively - diminishing value - you can depreciate 50% over 1 year, leaving a residual value of $1100. Then sell it one year and one day later - probably making a sizeable capital gain on it, but only having to include half that gain for taxation purposes...

 

[Peter 14.7]

As a Small Bus Op I should understand this but it is all very confising. I guess you could runa side busin second hand laptops but is the interest of the ATOP worth it.

On another matter, labtops compared to the latest OPC and MiniMacs done seem to stack up.

However I am very IT dumb, Peter 147

 

[Mry]

Ah, I see where we differ. I was looking at it from the company's perspective if it retains the profit and you were looking at it from the individual's perspective where they draw it all out.

Total cost of laptop = $2,200 - $200 - $970* - $1,067 = -$37
(* $970 = $2,000 x 48.5%)

You transposed 6 and 7 in your final calculation btw. It should be $37 instead of $46.

This assumes that the individual is paying the highest tax rate.

Some naughty people are getting the company to buy the laptop and then taking it back to the place they bought it from for a full refund once they own it. Calculate that one if you will, and I totally disclaim advising people to do this.

Apocalypse - Depreciable assets can't be sold as a capital asset. No 50% discount available.

 

[Apocalypse]

Peter 147: this is really just something I've come across in my research. I am "costing" incorporating - just looking if the figures square off against the extra hassle - it was just when I applied actual numbers to the laptop "double deduction" concept, for my particular circumstance (sole director/shareholder company, income derived from personal exertion rather than business structure) I got the rather anomalous result. It only works at the highest marginal tax rate - if you drop a bracket, the laptop ends up taking about $170 out of your pocket - still pretty good. But I thought I'd made an error in my calculations...I mean, how can you buy something and end up with MORE money than you would have had you NOT bought it...

Mry: thanks for the clarification. Another unwasted day (learned something new...). If depreciated diminishing value over one year, and then sold - say at 1500...its still a pretty new laptop - how does this look?

$2200 - $200 - $970 - (1100 x .485) = $496.50 out of pocket after 1 year.

Then sell for $1500. Less 1100 ("value" after 1 year depreciation) = $400 gain.

496.50 - 1500 + (400 x .485) = -809.50

About $800 'up' after a year...is that about right?

Thanks for your patience and tolerance.

Additionally: I've discovered that if I pay myself a salary I also have to pay myself super. If I were to pay dividends instead, would this allow me not to have to pay super?

 

[julia]

No CGT 50% discount as normal income tax applies to plant and equipment
Julia Hartman
www.bantacs.com.au
[email protected]