It’s quite common for partners, whether married, defacto or same sex, to help partners in their small business with simple admin and bookkeeping tasks to keep things running. In many businesses, this often happens when the business grows and there simply isn’t enough time for one person to do everything that needs to be done. Their significant other steps in to help.
At first, this may be for only an hour or two over the week but as the business gets more demanding and these handful of hours grows, you realise you need a dedicated person on your staff. You need to start paying your partner for their time.
So, do you hire your spouse or hire an employee instead?
The answer is more complex than you may think. At first glance it sounds like a good idea. All of the income generated through the business is directed back into the household. If you split your income, your taxes are reduced as well. It’s a win / win situation as far as you can see, however there are some things you need to be aware when it comes to the world of tax and the Australian Taxation Office.
A current Australian Family & Private Business Survey reports that more than 35% of family members employed by Australian small business are spouses. More spouses are employed in family businesses than any other type of relative.
The Australian Taxation Office (ATO) requires you to register your spouse as you would any normal employee as a PAYG withholding employee. Personal income tax will need to be calculated with each pay period that you pay your partner and sent directly to the ATO.
Pro Tax Tip: All Australian businesses, regardless of size, need to have a Single Touch Payroll (STP) function to their payroll software if they have employees. This ensures that all employees receive their wage entitlements and will be able to see the amount of tax they pay as well as their superannuation from their myGov account. Your spouse / partner will need to be included with your STP reporting.
Employees are also entitled to superannuation, and your spouse shouldn’t be any different. You’ll need to make sure you’re paying the right amount of superannuation. You must set aside at least 10.5% of their ordinary time earnings into their super account. The minimum amount is called the super guarantee. You’ll need to transfer their super earnings into their super account every three months, although you can choose to pay more often if that suits.
Extra super payments
Adding extra super into your spouse’s super account pays. While putting extra money into your spouse’s super account you might be eligible for a tax offset while potentially adding future planning opportunities for you both. Even small amounts add up and voluntary payments can reduce your tax. If your spouse is on a low income, you may be eligible for extra contributions from the government.
Personal contributions include incomes from:
- salary and wages
- a personal business (for example, people who are self-employed contractors, or freelancers)
- investments (including interest, dividends, rent and capital gains)
- government pensions or allowances
- partnership or trust distributions
- a foreign source.
Pre-Tax Super Contributions
You can opt to pay part of your spouse’s pre-tax pay into their super account. This is known as salary sacrifice or salary packaging. The payments are called concessional contributions. Concessional contributions are taxed at 15%, which for most people is much lower than their marginal tax rate. Basically, you pay less tax while contributing to your and your spouse’s retirement savings, which pays off between spouses. Making extra contributions is tax effective if you earn more than $37,000 per annum.
Salary sacrificed amounts do count towards concessional contribution caps in addition to other compulsory contributions. Combined, extra super payments cannot exceed $27,500 per financial year, which may be beneficial because the total taxable income is lowered. If you go over the limit though, there may be extra tax to be paid. If you exceed your cap, you will have to pay extra tax and any excess concessional contributions will count towards your non-concessional contributions cap.
There have been recent changes. From January 1, 2020, the sacrificed amount does not count towards compulsory super contribution obligations. As an employer, you’ll be required to pay super guarantee contributions of 10.5% of the ordinary time earnings to avoid the SG charge in addition to the salary sacrificed amount. Before January 1, 2020, an employer was not required to pay an additional amount under the super guarantee legislation.
After-Tax Super Contributions
After-tax super contributions are known as non-concessional contributions. You can make up to $110,000 in non-concessional contributions.
Claiming Tax Deductions on Super Contributions
You can only claim a tax deduction on contributions to your spouse’s super fund from their before tax income. Expenses that can be claimed include the compulsory super guarantee, salary sacrifice amounts, and reportable employer super contributions shown on the annual payment summary.
Tax deductions that were made to the super fund from after-tax income may also be able to be claimed. You’ll need to give your super fund notice and receive acknowledgment. There are also other criteria that must be met.
Pro Tax Tip: Your tax deductions claimed on your personal super contributions will count towards the concessional contributions cap. Before claiming, consider if you will exceed the cap, if Division 293 tax applies to you, if you wish to split your super contributions with your spouse and how it will affect your super co-contribution eligibility.
Division 293 tax is an additional tax on super contributions which reduces the tax concession for individuals whose combined income and contributions are greater than the Division 293 threshold. You will be liable for the extra tax on either your taxable super contributions, or the amount that is over the current threshold – whichever amount is lower.
From 1 July 2017, the combined income and super contribution annual threshold after which Division 293 tax applies is $250,000. In prior years (from 1 July 2012), the income threshold was $300,000. Division 293 tax is charged at an additional 15% of an individual’s taxable contributions.
To be entitled to claim the spouse contributions tax offset there are several rules that need to be satisfied:
- The contribution must be from you to your spouse’s super fund
- You must be in a marriage, defacto or same sex long term relationship
- The contribution must be made using after-tax dollars that haven’t been claimed in a tax deduction
- Both of you must be Australian citizens
- Your spouse must be under 65, or if they are between 65 and 69 they must meet a work test requirement and be employed during the financial year for at least 40 hours over no more than 30 consecutive days.
- The receiving spouse’s income should be $37,000 or less for a full tax offset and less than $40,000 for a partial tax offset. If your spouse earns over $40,000, you’ll no longer be eligible, but can still make contributions on their behalf.
On your Tax Return
When you file your tax return, you’ll need to include your spouse’s details even if they work for you. Including your spouse’s income in your tax return allows the ATO to work out if you’re entitled to offsets, rebates or reductions such as the seniors and pensioners tax offset, super contributions tax offset, zone or overseas forces offset or invalid and invalid carer offsets, and if you’re liable for the Medicare levy or surcharge or private health insurance rebate.
Tax and superannuation rules do change on a regular basis. It pays to stay updated as well as doing a yearly review to make sure the decisions you made in the past are still relevant to you now. It’s best to seek expert guidance when thinking about any sort of financial decisions that affect not just you, but your spouse as well.
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