6 TEENFINCA®: Teenage Financial Capability - Issue 2 www.thewealthacademy.com.au

Tax bubbles

Improving financial life skills and developing an awareness of taxation concepts can help young people make better financial decisions.

Tax on tips and gratuitiesIn some parts of the world, giving tips for service is expected. For many workers in those countries, tips are a major proportion of their income.

What happens with tips in Australia?

Have you ever gone to a local café for your coffee or lunch, seen the tip jar on the counter, and wondered how (or whether) the business is liable to pay tax on that ‘extra’ money? Depending on a number of factors, tips can add up to quite a sum over a year, assuming the café owner empties the jar each day.

taxation

Not surprisingly, the taxman has thought of this, and has issued guidance for dealing with ‘tips and gratuities’.

A business registered to collect Goods and Services Tax (GST) does not need to pay GST on the value of tips paid to staff, nor report this amount as income on activity statements or the business’s annual income tax return. This means the business owner does not have to deduct pay-as-you-go withholding tax from tips distributed to staff, nor include them on employee annual payment summaries. However, any portion of tips not distributed to staff, but kept as part of business takings, must account for GST and be reported as income.

If contractors are used, and they do not supply the business with their Australian Business Number (ABN), the business is expected to withhold 47% from tips provided.

For employees, it is generally the case that employment laws do not treat tips from customers as part of salary or wages. The Tax Office, however, takes a different view. It deems that any tips employees receive, either directly from customers or distributed by the employer, need to be reported by the individual as income if the employee is required to lodge an income tax return.

The Tax Office also advises business owners that it expects them to keep a record of tips paid to staff.

Key message:Talk to your accountant or tax agent about any tips you have received from employers. You may need to keep a record of the tips you receive.

7© 2016 The Wealth Academy

The deductible cuppaProviding morning and afternoon teas and light refreshments to employees (or their “associates”) at the employer’s business premises or worksite is tax-deductible to the employer. The same applies if the business provides such refreshments to visitors.

The Tax Office has ruled that this is not “entertainment”. If the business has no employees (for example, a partnership), claims for light refreshments are not allowed unless they are also provided to visitors.

Key message: Keep your receipts and record when you have ’cuppa meetings’ with employees or visitors.

Strange taxes around the worldThroughout history taxes have been levied to raise revenue, to bring about or fund social change, and to strengthen the leadership of governments. It has also made entire societies live quirky lifestyles in order to pay as little tax as possible.

As long as taxes have existed, citizens of the world have paid a host of sometimes weird and wonderful dues. Here are some of the more unusual taxes introduced.

• During the Middle Ages, soap was taxed in some European nations. The tax stayed in effect for about a hundred years. Great Britain repealed its soap tax in 1835.

• In 1660, England put a tax on fireplaces. Citizens began to brick over their fireplaces to hide them and so avoid having to pay the tax. It was repealed in 1689.

• Later that century, in 1696, England began to tax houses on the number of windows they had. This led builders to build houses with fewer windows, which in turn caused widespread health problems. The tax was repealed in 1851.

• In Russia in 1705, Emperor Peter the Great implemented a beard tax, in hopes it would force men to adopt the clean-shaven look popular in western Europe.

• New York City has a sliced bagel tax. The city levies taxes on prepared and non-prepared foods as separate items, which means sliced bagels are taxed once as a food item and again as a prepared food.

• In California, fresh fruit bought from a vending machine is taxed at 33%.

• In New Mexico, citizens over 100 years old are exempt from tax, but only if they are not dependants.

• In the US, states such as Iowa, New Jersey and Pennsylvania exempt pumpkins from sales tax if they are to be eaten. If they are to be carved (e.g. for Halloween), the tax applies.

Key message:Don’t think taxation is the same around the world; it may vary even in states across a country.

Did you know about the ‘longevity tsunami’? Recent data from the Australian Bureau of Statistics projected a ‘life expectancy at birth’ of 79.9 years for men and 84.3 years for women. But a representative body, the Actuaries Institute, said that those people who have already reached the age of 65 can expect to live longer than the population average; it is more likely that life expectancy of those aged 65 now will be 86 for men and 89 for women.

To further compound matters, an independent government advisory body, the Productivity Commission, recently published these statistics:

• the life expectancy for a baby born recently is 94 years for a girl and 92 years for a boy

• the population aged 75 years or more is projected to rise by four million by 2060, increasing from 6.4% to 14.4% of the population

• by 2060, there will be roughly 25 people aged 100 years old or more for every 100 babies (compared to just one centenarian now).

The crux of the life-expectancy issue is that Australians need to be financially prepared for at least a few more decades in retirement than is the norm at present.

Key message:Students today are expected to live much longer than their parents. This will mean they may be expected to work longer, pay taxes longer and save more for their retirement (which may seem to be a long way off for most students).