One of the most crucial aspects when applying for a loan is the serviceability assessment. A lender will assess your income versus expenses to determine that you can afford the proposed loan repayment. It sounds like a simple process but is quite complex.
Income is scrutinised with regards to its consistency post settlement. Each lender has slightly different policies. Generally, the more inconsistent an income the greater the scrutiny. For example, bonus income is usually averaged over 2 years and reduced by 20%. Likewise, expenses are assessed in a very conservative approach. For example, credit card repayments are calculated using the card limit at 3.8% (previously 3%). The proposed loan repayment will be calculated using an assessment rate.
The assessment rate is the interest rate used to calculate proposed loan repayments. The Australian Prudential Regulatory Authority ((APRA) – the banking regulator) recently reviewed their guidance regarding the assessment rate. Since December 2014 most lenders used a floor rate of 7.25% or a buffer of 2.25% (added to the actual rate). The highest of these two rates were used as the assessment rate. Given the low rate environment and the expectations this will continue for some time it was deemed unnecessarily high.
APRA has now allowed lenders to set their own floor rate with an increased buffer of 2.5%. Most lenders have implemented a floor rate between 5.3%-5.75%. As before, the higher of the two is used as the assessment rate. Below is an example of two loans with slightly different interest rates illustrating the assessment rate utilised.
In either example, you can see the assessment rate used is much lower than the previous 7.25% floor rate. This has a big impact on borrowing power.
This change affects all customers but most notably to First Home Buyers (FHB) and Investors. In one example a FHB client increased their borrowing power by $68K. This allowed them to consider a house instead of a unit. Assessment rates are not only applied to new lending but existing as well. Investors with multiple loans see a large increase in borrowing power. For example, one of our investor clients had an increase of $80K. This allowed the client to refinance their portfolio to a much lower interest rate.
Now is a great time to reassess your borrowing power and loan options. It could change your investment strategy or provide the ability to now refinance to a better deal and/or open up additional loan options to consider.
Beginners Guide to GST in Australia
Does my business need to register for GST?
Your business will need to register for GST if your annual turnover is $75,000 or more. You have a choice to register or not if it’s less than that.
You must register for GST if you reach the $75,000 turnover threshold or if it looks likely that you will exceed it. Once you’ve passed the turnover threshold, you must register within 21 days.
Taxi drivers and ride-sharing drivers need to register for and charge GST no matter what their turnover is. Not-for-profit organisations, by contrast, can reach a turnover of $150,000 before they are required to register.
You can register for GST online (and also apply for an ABN) via the Australian Business Register (ABR) website (www.abr.gov.au). You can also register for GST via the Business Portal on the ATO website or KPG TAXATION can help you register.
The ABR is the central registry of Australian business information so as well as getting an ABN and registering for GST you can get a business tax file number (TFN), apply for pay-as-you-go (PAYG) withholding and register your business name.
How does the GST work?
The current rate of GST is 10%. This means that if you charge $100 for your goods or services, your customer will be charged $110. The additional $10 is the GST which needs to be paid to the ATO.
When you buy supplies for your business, you’ll be charged 10% in GST which you can claim back as a credit. At the end of each GST period – usually quarterly but occasionally monthly – you need to account for the GST you’ve collected on your sales minus any that you’ve paid (the credits) on your purchases. The difference is the amount payable (or refundable if credits on purchases exceed debits on sales). You do this by completing a business activity statement and paying the net GST to the ATO
Businesses with a turnover of less than $75,000 are given the choice of registering for GST because if a business is spending extensively on supplies, the business might want to claim the GST credits back. This is particularly the case if GST credits on purchases exceed the GST charged to customers.
A business activity statement (BAS) is used to report all your periodic business tax obligations and entitlements. You need to report all the GST charged on your sales and the credits on your business purchases on your BAS as well as your pay as you go (PAYG) installments and PAYG withholding tax.
Businesses with a turnover greater than $20 million must complete a BAS on a monthly basis and other businesses can also choose to do this if they prefer (for instance, if there are cash flow advantages to your business). Otherwise, BAS forms are due quarterly.
You must lodge your BAS quarterly by the 28th day of the month following the end of the financial quarter (September, December, March, June). If you lodge monthly, your BAS must be lodged by 21 days after the end of each month.
Accounting for GST
When you make a taxable sale of more than $82.50 (including GST), your GST registered customers must be given a tax invoice in order for them to be able to claim the GST credit. If they request one and you don’t provide it at the time, you have 28 days from their request to give it to them.
Invoices need to display specific information. For sales of $1,000 or more, invoices must display:
- the words ‘tax invoice’
- the seller’s name and ABN
- date of the invoice
- buyer name and ABN or address
- a description of the items sold, the quantity and the price
- the GST amount or that the total amount includes GST.
Invoices for less than $1,000 need to have all the above but not the buyer’s details.
There are two ways to account for GST: the cash basis or the accruals basis.
Businesses with a turnover of less than $2m can choose which method they prefer. Other businesses must use the accruals basis.
If you apply the cash basis, you must account for sales and purchases in the period in which you are paid for sales or pay for purchases. The advantage of this method is that GST reporting is better aligned with cash flow, which can be helpful for small businesses.
If you apply the accruals basis, you must account for sales and purchases in the period in which you invoice sales or receive an invoice for purchases.
GST and income tax deductions
If you are able to claim an income tax deduction for something you’ve bought for the business, you can only claim for the net amount (without the GST). This is to prevent you effectively getting tax relief twice on the same amount.
If there’s no GST credit for that purchase (for example if it’s an ‘input taxed’ item), you can claim an income tax deduction for the gross amount (including the GST).
‘Input taxed’ items do not include a GST component in the price, hence a GST credit cannot be claimed. Examples of input taxed items include rent on residential premises, financial items such as loans, ATM transactions and sales of existing residential premises (excluding new homes or commercial buildings.