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Credit Cards

Are There Issues Using Personal Credit Cards for Business?

Many small business owners find themselves, for a variety of reasons, using their personal credit card to cover business expenses. But is that the right call? Whilst it may be easier and more cost effective to use a personal credit card for business expenses when you’re setting up, the accounting difficulties in the long term will probably make a small business credit card desirable.

Personal Credit Card Business Credit Card
Lower fees than business credit cards Simple to track and account for business expenses with monthly and online statements
Often have lower interest rates than corporate credit cards Avoid the danger of damaging your personal credit rating (if payments are missed or limits exceeded)
Can carry a single card Easy to provide proof of business expenses to the ATO
Enables you to maximise your reward points

Paying Tax by Credit Card

Many business owners are not aware that, since 2011, the Australian Taxation Office introduced a facility for businesses (and individuals) to pay their outstanding BAS and Income Tax debts using their credit card.

The ATO will accept payments of between $10 and $50,000. A card payment fee of 0.42% (VISA/Mastercard) or 1.45% (American Express) applies to transactions made using this service. (The fee is not subject to GST, and is equal to the fee the ATO incurs from its bank.)

Reward Points

Tax FBT Issues

A lot of business and personal credit cards offer reward points and other types of consumer loyalty programs (such as frequent flyers).

The courts have held and the ATO accepts that in most circumstances the rewards received under a consumer loyalty program are not taxable.

However, the ATO is mindful of businesses who try to integrate a loyalty progam into any of their employees’ remuneration packages.

Rewards may create a tax liability where:

  • the reward is received as part of an income earning activity, there is a business relationship between you/your business and the reward provider, and a business is being carried on or the benefit is convertible directly or indirectly to a monetary value; or

“Pamela is a sole trader operating a painting and wallpapering business, and she buys her paint from a paint wholesaler. The wholesaler has a loyalty program that entitles her to points which can be redeemed for shopping vouchers. There is a business relationship between Pamela and the paint wholesaler and it is this relationship that makes Pamela eligible to receive possible benefits.Pamela redeems her points for vouchers worth $2,500. Pamela uses the vouchers to acquire clothing for herself and her children.The redemption of points in return for the vouchers valued at $2,500 was as a result of business purchases of paint. The value of vouchers, $2,500, is assessable under section 21A of the ITAA 1936 as the benefit flows from the business relationship Pamela has with the paint supplier. The vouchers are assessable income at the time of receipt. Pamela is required to return $2,500 in her assessable income.

  • an employee receives a reward that is provided in such a way that their is a sufficient and material connection between the reward and his or her employment

John is an employee of XYZ Company. John uses his personal credit card for private expenditure. Under an arrangement (which can be explicit or tacit) between John’s employer and John, John is able to place all of the business expenditure of the company on his personal credit card. The company reimburses him for the expenditure he has paid on its behalf. Under the arrangement John’s points entitlement from the business expenditure is significant and exceeds 250,000 points per annum.

FBT may apply in this case. Any reward that arises from the redemption of the points has accrued in respect of significant business expenditure. The reward may have been provided under an arrangement, and may be in respect of employment.

GST and Reward Points

Are there any GST implications when you receive and/or redeem points under a credit card reward scheme for a reward?

The short answer is No, any goods or services purchased through redeeming of reward points are not considered a taxable supply.

 

Changes to the GST Treatment of Commercial Hire Purchase

If you are accustomed to purchasing motor vehicles and other business assets by way of a Commercial Hire Purchase (CHP), you are likely to be impacted by changes which come into effect on 1st July 2012 concerning the application of GST on CHPs. These changes were announced in the May 2010 Federal budget, but only take effect at the beginning of the 2013 financial year.

Whilst the nett impact on a business’s P&L is nil, it will impact your cashflow and you will need to consider whether CHP is still your best form of financing, or whether you should consider chattel mortgage or a finance lease. Perhaps more significantly, employees who have traditionally received a car allowance and have purchased their own vehicle using CHP will be impacted as they are unable to claim the extra GST paid as an input credit. CHP agreements entered into before 1 July 2012 will still be treated as per the current provisions, so it’s important that you review your situation immediately to decide whether you need to make a CHP purchase within the next few weeks.

Under the current provisions, GST is only payable on the purchase price of a vehicle or asset. Businesses that are registered for GST normally claim back this GST as an Input Tax Credit, either at the time of purchase (if accounting on an accrual basis) or progressively over the life of the loan (if accounting on a cash basis). The fees and interest charged over the course of the CHP loan are considered ‘mixed supply’ and are therefore not subject to GST.

From 1 July 2012, GST will be payable on the principal amount AND on all term charges (interest) and fees. This new component of GST will be payable upon settlement of the agreement, which can either be added to the loan amount or paid up-front.

As normal for a business, the extra GST charged can be claimed back as Input Tax Credits (progressively over the life of the loan). However, for entities and individuals that are not registered for GST, this extra GST will inflate the overall cost of purchasing via a CHP agreement. And for businesses it will still impact cashflow, as the extra GST will need to paid with each instalment before it is reclaimed at the time of the next BAS lodgement.

On the positive side, businesses using cash accounting will now be able to claim back the GST paid on the purchase price of the asset up-front (when they lodge their next BAS), in the same way businesses using the accrual method have always done.

Significantly, other forms of finance such as Chattel Mortgage will not be subject to GST on the fees, terms charges, and repayments. This may make Chattel Mortgages a more attractive option for some businesses, and worthy of consideration by individuals due to the savings on GST. Individuals purchasing a motor vehicle may also consider a Novated Lease, a form of finance in which the employer makes the repayments from the employee’s pre-tax salary (“salary sacrifice”). A Novated Lease is essentially GST-free, as the GST paid on the purchase price of the vehicle (up to the depreciation threshold), the lease repayments, and any packaged running costs can be claimed back as Input Tax Credits by the employer or financier, who passes this benefit on to the employee.

The best finance solution for each individual or business will differ, according to your circumstances, and you should get expert advice from your accountant or finance broker on which is the best solution for you.