Are there new beneficiaries to distribute to?

In our last tax tip, we outlined distributing to bucket companies. 

But may you not need to.

Perhaps there are people within your family group that your family trust can distribute to for the first time.  And the most obvious case is a child within the ancestral line who has turned 18 during the year.

If so, the trustee of your family trust could distribute up to the tax free threshold (adjusted for the Low Income and Low Middle Income Tax Offsets).

But beware as:-

  • The trust’s definition must not be narrow enough to exclude the newly turned 18 year old.

  • If the family trust has previously made a Family Trust Election (now there is a major topic in itself) that election may not include the newly turned 18 year old within the permitted family group.

  • It may be that the income distributed may upset some social security claim.

And don’t forget, any new adult beneficiary must be reported to the ATO before the end of July.

As is always the case with proper tax planning, there is much to consider.

Should you use a bucket company?

Should you use a bucket company is a common question at this time of year. 

Trusts are great for asset protection and flexibility.  However, all income must be distributed (be taxed in someone else’s name).  And if the profits are large, then family members might be paying a lot of tax at 39% and 47%. 

If the profits aren’t needed, then bucket companies can be attractive.  Whatever business income is distributed to the bucket company only gets taxed at 26% (25% next year).  That in itself can be a compelling reason.  So for this tax year, distributing $200,000 to a bucket company could save you up to $42,000.

The modern problem is what is the company going to do with the money as :-

  • If it is invested in cash it won’t make 1%.

  • If the company invests in appreciating assets then there is no CGT discount. 

  • If you take the money then you will pay tax at your marginal tax rate less the prevailing company tax rate.  That said, this isn’t such a problem if you are approaching retirement.

So bucket companies, whilst suitable for some, aren’t suitable for all.

And it must also be noted that you can’t assume you can add a bucket company to your group.  You need to check whether the trust deed permits it.

Not that it is necessarily the case, but the above concerns in your case might mean it is better to consider a re-structure.  We welcome the opportunity to discuss your situation with you.

How not pay tax on the Cash Flow Boost

Whilst JobKeeper got all the press, the Cash Flow Boost played a huge part in enabling employers to retain their workforce.

 The Cash Flow Boost was poorly named.  No cash was given to employers.  Rather employers received a credit on the March to September 2020 activity statements.  The credit was a least $20,000.  Employers with larger payrolls received up to $100,000 credit off their PAYG Withholding liability.

 But it was worth more than that.

It is what is called non-assessable non-exempt income.  In other words, no income tax was payable on the receipt of the credit on the activity statements lodged in the 2019/20 year.  Same for the Cash Flow Boost applied to the activity statements lodged in this financial year.

But that is not the end of the story.  And the next part is not as palatable for some.  There are three main scenarios:-

  • Sole trader employers retain the money tax free.

  • Companies will have the untaxed Cash Flow Boot form part of their retained earnings.  That means when later paid out as a dividend, there will be no proportional tax credit to attach that dividend.  Effectively, it results in what is called an unfranked dividend.  It means an individual shareholder will pay tax on the full amount of the Cash Flow Boost that they proportionally receive.

  • And the typical family trust -well it depends.  If the trust deed allows for different forms of income to be identified and streamed to individuals, then it comes out tax free.  If not is taxable.

In respect of trusts this should not be news.  Last year, we had a tax lawyer review our client’s trust deeds to ensure the Cash Flow Boost was treated as it was intended; as tax free income.

Was this handled properly for you last year?  Are you at risk of paying tax on the Cash Flow Boost your trust received this financial year?  Time to make sure – call us.

 

 

Be careful when claiming bad debts

A bad debt can be claimed as a tax deduction.  And with the end of financial year rapidly approaching, now is the time to determine what can be written off.

Probably the more important discussion is how to avoid bad debts in the first place.  That will be left to a future post.

To claim a bad debt, it must have already been reported as income.  That means those who report their income for tax purposes on a cash basis can’t claim a bad debt.

So for those who recognise income on an accruals basis – meaning income is recognised when the invoice is raised – they must have reached a position where all reasonable attempts to collect have failed.  It must therefore be more than doubtful. 

You then need to make an entry into your accounting system.  Those who are using a cloud file must process the bad debt in June.  Don’t fall for the trap of ding it later as cloud systems time date entries.

But what if I collect the money later?

There are genuine cases where this happens.  The customer could come into money through an inheritance or windfall and do the right thing and pay back their creditors.  In that case, you re-recognise the income as a bad debt recovered.

Beware of schemes of arrangement

Sometimes a business may not write off a debt but later accept so many cents in the dollar from a liquidator’s offer.  The problem here that accepting say 40 cents in the dollar does not entitle you to claim the other 60% as a bad debt.  So keep on top of your customers and ensure you write off bad debts as soon as you can.

Tip 

It is always a good idea to document the attempts you have made.  That way you will have some contemporaneous evidence as to your decision if the ATO start asking questions.

As I already said, the real question is what can you do to prevent bad debts in the first place – we welcome that discussion with you.

Instant asset write-off warning

 

The Instant Asset Write-Off is a great way to reduce both your 2021 tax liability and your 2021/22 PAYG Instalments.  And you won’t drain you cash flow if you finance the asset purchased.

But beware!

To be able to claim the write off in the 2021 tax year, you must have the asset installed and/or ready for sue before July.

If the car you ordered is not delivered until July then you won’t be able to claim until next tax year.

And as a footnote to the above, financing a lease will not able you to claim the write-off.  Under a lease, you are not the owner until you pay the final instalment.  This is just another trap.

If you want to know more then call us.

Is the super co-contribution good for me?

Under the super co-contribution scheme, the government will contribute $1 for every $2 of personal contributions made by an employed or self employed person.  The maximum government co-contribution is $500 (meaning that one would need to contribute $1,000 to receive the maximum entitlement of $500). 

To be qualify, one must:-

  • Be employed with their employer paying the compulsory SGC or be a self employed person running a business.

  • Have 10% or more of one’s income received from employment and/or a business.

  • Have combined assessable income (that being income before deductions), Reportable Fringe Benefits (RFBA) and employer super contributions in excess of basic SGC amount (RESC) of less than $54,837.

  • Have paid a non-deductible contribution into superannuation from after tax money by 30thJune 2021 – that is, you make the contribution out of a personal bank account.

  • Be less than 71 at the end of the financial year.

  • Not be a temporary visa holder.

  • Lodge a Tax Return for the year ending 30thJune 2021.

  • The maximum co-contribution for a personal contribution of $1,000 is $500 if your combined assessable income is under $39,87.  Thereafter it progressively reduces by 3.333 cents for every dollar in excess of $39,837 – there is no entitlement if your combined assessable income exceeds $54,837. 

  • Not have contributed more than your non-concessional cap.

  • Have a total super balance of less than $1,6200,000.

If you want to find out what you might be entitled to, click on the following link to the ATO’s calculator here

Other matters to note are:-

  • One’s own contribution and that made by the government will be preserved (that is, one will not be able to access it until one retires or satisfies another condition of release).

  • The ATO will deposit the co-contribution into one’s super account once they have reconciled one’s lodged 2021 Tax Return with the information provided by one’s super fund(s).  It is therefore likely that the vast majority of contributions will not be credited until at least January 2022.  

  • If you wish to make the contribution into a public or employer superannuation fund, you will need to ensure they accept such contributions and obtain the appropriate form and do so well before 30th For those with your own self managed super fund, your fund can only accept such a contribution if permitted by its trust deed (we will take no responsibility where a client does not consult with us beforehand). 

What is best for you depends on your circumstances and take into account a large number of considerations. 

You should therefore seek financial planning advice to ensure such a contribution will work as intended and is in your best overall interests.

 

Lockdown #4 state assistance

The Victorian State Government today announced it will provide assistance to those most affected by this current lockdown.

There will not be across the board assistance to all businesses; just to those most affected.

Brief details have been announced about 3 programs:-

  • Licensed Hospitality Venue Fund 2021 – under which $3,500 will be paid to each venue holding an eligible licence and food certificate.

  • Business Costs Assistance Program – $2,500 will be paid businesses operating in industries that cannot work during the current lockdown and cannot operate remotely.

  • Victorian Events Support Package – $20 million will be set aside to support operators in the events industry.  Further details are to be released.

It would be inappropriate not to point out that such financial support will not cover the losses for many business owners.  There would be many restaurants that have been forced to throw out $5,000+ of food.  It’s a straight hit to the bottom line when not being able to earn any income.  And it comes on top of the losses from the Valentine’s Day lockdown and the lockdowns last year.  So get out there and support your local restaurants and indeed small businesses.

What can you do now?

Applications will open on Wednesday 2nd June.  You can however register for the Business Victoria Update newsletter – to do so click here.

We will keep you updated.  Please though don’t hesitate to ask us any question you may have.

A quick lockdown update

So back into lockdown we go!

We are most sympathetic to those businesses that will suffer financially from this latest lockdown, particularly those in entertainment and hospitality.

The Maggs Reid team is now all back at home but thankfully due to modern technology, will be able to operate almost normally.  We do ask that you contact us by e-mail during this time.

Financial assistance

The state government is yet to announce any financial assistance to small businesses.  Please be assured that we will update you as soon as details are announced – but judging by one minister’s comments this morning, that, for unknown reasons that surprise me, won’t be until next week.

Compulsory QR codes

As a generalisation, businesses that deal with the public are now required to track visitors to their business electronically by using the government’s free QR service.  Such businesses could use other QR services from 30th April, but as of today, must use the government QR service.  You can read more at – https://www.coronavirus.vic.gov.au/about-victorian-government-qr-code-service.  Although we are not one stated industries that must use a QR system, we have adopted one as of yesterday as we believe it is a better system than manual sheets.

Survive and Thrive webinar

I take this opportunity to remind you that the next Survive and Thrive webinar will be held on Wednesday 9th June at 5:30 PM.  This month, we will address tax planning actions required before the end of the year.   And I’m sure all business owners will be interested in our guest speakers presentation on three legal common traps for small business owners.  You can book your place at – https://us02web.zoom.us/webinar/register/WN_l5ZhIapvTTqDqoKSSKStxg

Tax lodgements

Like all accountants, the demands of JobKeeper, rent relief applications, Land Tax applications, JobMaker, cash flow preparations to support loan applications and so on have meant that we are still to finalise and lodge a number of 2020 Tax Returns.  In fact that my accounting discussion group meeting on Wednesday night, no accountant, not one, managed to meet the required 85% lodgement deadline of last week.  Please do not be concerned as the ATO are tolerant and are rubber stamping all extension requests.  In managing our lodgement listing, we are cognisant of people’s positions and are prioritising those matters that require early retention.  We do appreciate your ongoing patience in he most unusual period. 

Portal improvement

I should again state that we have been preparing 2020 Tax Returns using new software; software that talks to other programs.  As part of this process we have been able to adopt better client portal and digital signing software.  What this also means is that the existing portal will be inaccessible after 30th June.  We assure you that we of course have copies of everything we have dropped into  your portal.  We have also saved copies of any documents that you have dropped into your portal.  You may though wish to retrieve any document you want at your electronic finger tips.

Stay safe and we look forward to seeing you soon.

What’s in the Budget for you?

What’s in the Budget for you? 

Probably significantly more than you think.

As what is now unfortunately the norm, there were plenty of pre-announcements before Budget night.  But there is much more to the Budget that was announced on Budget night or leading up to it.

In addition to some key business announcements (extension of loss carry back company rules and instant asset write-off) there were very welcome announcements to being able to getting more money into super.  Welcome I say as how can one provide for retirement with a contribution cap – which currently sists at $25,000 before being eroded by 15% tax, life insurance premiums and for some an extra 15% tax).

Also of note were the proposed changes to personal and self managed super fund residency rules.  I say welcome as the existing rules are quiet archaic in context of how people today live, work and travel – mind you we still aren’t going anywhere for a while with covid.

We will explore some of the key measures in our next survive and thrive webinar.  It will beheld at 5.30pm on Wednesday 2nd June and you can book here – https://tinyurl.com/reg0206

We will also flesh out some opportunities in upcoming blogs.

But having said all that, please keep in mind that:-

  • A Budget is only ever a series of announcements,

  • They still have to be legislated,

  • They may be changed slightly and

  • Many have start dates form July 2021 – and we may have a change of government before then.

Please though don’t hesitate to call us if you any questions.

Important action if you employ casual employees

Do you employ any casual employees?

If so, recent changes to the Fair Work Act require your attention.

In late March the Fair Work Act was amended to require an employer to convert the employment basis to either full or part time where:-

  • Employee has been employed for more than 12 months and

  • During previous 6 months, there has been a regular and systematic pattern of working hours.

Employers are required to make the offer of either full or part time employment the later of either:-

  • Before 27th September 2021 or

  • Within 21 days after an employee’s 12 month anniversary

There is however a provision to not make such an offer where there a “reasonable business grounds” not do so.  Unfortunately, this is a test that will be analysed in hindsight, so documentation of this decision will be imperative.

It should also be noted that many modern awards already stipulate a conversion from casual employment.

It must be said that casual employment is often misunderstood.  If someone works regular days then they are not a casual employee.  A casual is one who may be called upon the work on a Friday and Saturday night at a function, not the next week and then the following Saturday.  That said, there are many shades of grey.

You can read more at The Fair Work website here including the definition of an casual employee.

You can download the casual employment information sheet here.

Employment law is truly a specialist area.  Please let us know if you would like a referral.