Labor’s proposal to tax trusts

The following was an article within our August edition of Tips & Traps.  It has been re-posted here due to the article in The Age on Friday 25th August (which will be subject to a separate post).

Bill Shorten recently announced Labor’s policy proposal to tax trust distributions and do so at a flat rate of 30%. Presumably this will mean trusts would pay tax on their income and then grant a 30% credit on any beneficiary distribution – thus a trust distribution would carry a tax credit just as company dividends do now.

It is only an announcement of intention. The next election is not due until the back half of 2019.  If they win that election, legislation would then have to be drafted and passed through both parliamentary houses.  Usually, but not always, such big ticket items are announced within a Federal Budget (which is delivered in May).  One would therefore expect that if this becomes law, it would do so no earlier than for the year ending 30th June 2020.

In his announcement, Shorten said they were targeting barristers, investment bankers and other high net worth individuals. It was also made clear that it was not intended to apply to:-

  • Special disability trusts.
  • Deceased estates.
  • Charitable trusts.

Whilst certain taxpayers were targeted in the announcement, there did not appear to be any practical acknowledgement that most trusts run small businesses; it is estimated that this accounts for two-thirds of all trusts. Many of these are tradies, farmers, retailers, manufacturers and every other sort of business within the Australian economy.

Presumably to avoid double taxation, the tax payable by the trust will be a refundable tax credit. If so, the total tax paid on trust profits won’t change – it is just a question of how much the trust pays (being 30%) and what an individual will pay (if their marginal tax rate is higher than 30%) or be refunded (if their marginal tax rate is less than 30%).

Some closing thoughts:-

  • The Rudd called Henry Tax Review recommended no such changes to trusts (nor were any announcements based targeting certain occupations).
  • The early part of the second Howard government explored taxing trusts but desisted when it became clear that it would be counterproductive to economic growth.
  • It was also thankfully acknowledged that a common driver in setting up a trust is asset protection. Our experience has been that if someone is as wealthy as that targeted by Shorten, they are far, far more concerned about protecting say a $1,000,000 property than what marginal tax rate they pay on the net rental income.
  • If they really wanted to be serious about collecting a fairer share of tax, there are other things that could be targeted. They could for example attack husband and wife trade partnerships (both political parties have been too scared to do so and despite having the power in the personal services income laws to deal with unrealistic income splitting) or look through arrangements where a high income earner funds a property bought in their spouse’s name.

At MRS, we will spend today planning for your success tomorrow.

 

ATO’s Taxable Payments Annual Report

28th August is the end date for lodging the ATO’s Taxable Payments Annual Report.  This form requires those businesses within the building and construction industry to report all payments to contractors within the building and construction industry.

Building and constructions includes more services than one might think as evidenced by the following link – http://tinyurl.com/y7hrnfxm

You need a good accounting system to simplify the reporting as you need to report the following for each contractor:-

  • Name
  • ABN
  • Address
  • Gross payment including GST as well as the total GST amount. It is important to note that for those who run an accrual accounting system, reporting is based not off the date of the contractor invoices, but they year in which they are paid.

If you are struggling with this reporting requirement, we would be happy to help you or refer you to a good book-keeper.

So what to the ATO do with all this data? They crossmatch all payments reported to each business within the building construction industry to their reported income.  The ATO had a field day some years ago with a pilot program of plasterers within the Hunter Valley.  Obviously it is paying dividends if the ATO still requires this reporting.

At MRS, we will spend today planning for your success tomorrow.

Small business tax breaks

Now that a small business is defined by the ATO as one with group turnover under $10,000,000, there are many more businesses that can avail themselves of the many and valuable small business tax breaks.

The tax breaks can be summarised as follows:-

  • A company tax rate of 27.5%. Please note that companies with non-business income (that is “passive” income from investments, rents and trust distributions) will continue to pay company tax at 30%. Please also note though that small businesses will only be able to frank dividends at 27.5% so any tax saving is short lived if most profits are paid out as dividends.
  • The Small Business Income Tax Offset of up to $1,000 for non-corporate businesses (that is sole traders or those who receive a share of partnership or trust business income).
  • The choice to use the simplified depreciation rules. This is important for those businesses who wish to purchase assets costing less than $20,000 (ex GST) before July 2018. Please see our past blogs for further details.
  • The choice to use a simplified trading stock rules under which one can estimate their stock if they believe it is not changed by more than $5,000 (which probably means you need to do a stock take anyway).
  • The ability to claim prepayments (such as insurance and prepayments rents & interest).
  • 100% write-off of start-up expenses.
  • The ability to elect to pay GST on a cash basis.
  • The option to pay fixed dollar instalment amounts of GST.
  • The option to pay fixed dollar amounts of PAYG Instalments.
  • Access to the FBT car parking exemption.
  • The ability to provide employees with multiple work related portable electronic devices (lap-tops, tablets, calculators, GPS navigation receivers and mobiles) within the one year and free of FBT.
  • The ability to use the free ATO Small Business Superannuation Clearing House.
  • The ability to restructure under the new small business CGT restructure rollover relief provisions. Please note though that the small business CGT concessions are still only available to those businesses with group turnover under $2,000,000 and/or net asset value under $6,000,000.

So what does this mean to you?

It depends on what you are trying to achieve. There are occasions where we have and haven’t used these rules depending on the short and/or long-term benefits to our clients.  Grabbing at shiny red apples hanging on a tree is no substitute for proper planning.  We address these opportunities throughout the year, particularly so when undertaking pre year end tax planning review of our clients.

If this is all news to you then you should be looking  for a new accountant.  We welcome your call.

At MRS, we will spend today planning for your success tomorrow.

A welcome change to super

There has been a welcome change to super. Without going through all the rules and a carve out, there was a basic prohibition against employees obtaining a tax deduction for personal contributions into super.  However, from July an employee can claim a deduction for personal super contributions (and the 10% rule has been removed).

How will this work? Say Fred is employed by Turnbull Wind Farms Pty Ltd.  If Fred’s salary was $100,000 the SG super thereon would be $9,500.  Fred could make a personal contribution of up to $15,500 so that he uses all of his $25,000 concessional contribution cap.

A word of warning though – the $25,000 is measured on contributions received by your super fund.  As such, one needs to be aware of contributions for the June 2017 quarter which can legally be paid as late as 28th July 2017 and/or whether an employer has changed from making contributions at the end of each quarter to doing so on a monthly basis.  You need to check with your super fund before making any final contribution(s) as you might be closer to your contribution cap thank you think.

In Fred’s case, he may not need the last $15,500 of income. Paid as a salary, it is subject to tax and Medicare Levy of 39% whereas the tax on the super contribution would only be 15%.  Fred will save tax of $3,720 by making a personal contribution.

So those who will benefit from this welcome change include:-

  • Those whose employer who won’t allow an employee to salary sacrifice into super. You would be surprised how common this is.
  • Those whose employer legally follows the book and bases SG super off the after super salary sacrifice pay. This too is surprisingly common.
  • Those employers who charge through a packaging provider for a super salary sacrifice arrangement.
  • Where a client could better use the cash during the year and only make a contribution at year end.
  • An employee of one’s business who doesn’t wish to incur WorkCover and Pay-roll Tax on employer contributions in excess of SG super.There have been some other welcome changes to super which will outline in future weekly blogs.The removal of the basic prohibition against employees obtaining a tax deduction for personal contributions into super is a welcome change .

There have been some other welcome changes to super which will outline in future weekly blogs.

What should you do? You should discuss your situation, needs and goals with a financial planner to ensure making a personal super contribution is in your best all round interests.

How much do you need to retire with?

How much do you need to retire with? It is a question that many think about without ever really doing anything about it.

So how much do you need?

The Association of Superannuation Funds of Australia (AFSA) releases quarterly moderate and comfortable living expenses for both singles and couples. In its latest release, it has measured that a single person requires $43,655 and a couple $59,971 to fund a comfortable retirement.

So much do you need to have invested to generate at least that level of income? For a couple earning an average of 6% (including franking credits & capital gains net of tax), they will need approximately $1,000,000.  However, if a couple invests only in term deposits earning 2.5%, then assuming an average tax rate of 15%, they will need more than $2,800,000.

It is becoming a more important question as the population ages and consecutive governments struggle with funding the age pension. I was born in the early 60’s when there was 7 people working for every age pensioner.  Today there are only 4.5 workers funding every age pensioner.  Even more alarming are the predictions that there will be only 2 & 1/3rd workers supporting every age pensioner.  Do you think the amount of the age pension and the levels at which one becomes entitled are going to rise or fall? 

And then there is longevity risk. We are living longer than our parents and grand parents – meaning our investment capital has to last longer.

So what are you going to do?  Speak to a financial planner.  A financial planer will take into account your needs, wants & resources and then advise you what is best for you in terms of the best tax structures, strategies and investments (notice that investments is listed last as it is my experience that strategy, structure and the way and timing as to how they are implemented usually delivers greater results and savings than the investment themselves). 

As accountants, we are prohibited from providing this service to you – but our separate financial planning firm can.  Why not call them today.

At MRS, we will spend today planning for your success tomorrow.

 

Reasonable travel allowances

Getting receipts whilst travelling can be hard and at times bordering on next to impossible. Getting your employees to do so can be even more difficult.  Fortunately, the ATO recognises this and provides relief through what are called reasonable travel allowances.

One can claim travel expenses in one of two ways:-

  • Have your Company or Trust keep all receipts and claim the deduction in the entity’s Tax Return.
  • Have your Company or Trust pay you an amount no greater than the ATO set travel allowance.  This allowance will be deductible to your Company or Trust.  It will be income within your personal Income Tax Return against which you can claim an amount of not greater than the allowance without being required to substantiate it.  Being an allowance, it is to be included on a PAYG Payment Summary.

Reasonable travel rates are set for:-

  • Domestic travel – amounts in respect of overnight stays for accommodation, food & drink and incidentals.  These amounts vary for each major centre and high cost remote areas. 
  • Overseas travel – amounts for food & drink and incidentals (receipts must be kept for all accommodation).  Allowance rates vary for each country and the employee’s salary level.

The ATO have recently released the rates for 2017/18 in TD 2017/19 which you can access at http://tinyurl.com/ybclevu8

Please don’t hesitate to call if you would like to discuss how you may be able to benefit from using this system.

Finally, please always remember that an overseas travel claim is not deductible unless it is supported by a travel diary or record.  The same applies in respect of a domestic trip which is for 6 or more nights.

At MRS, we will spend today planning for your success tomorrow.

June quarter deadlines

There are a number of upcoming June quarter deadlines.

For those of you who are employers, Friday 28th July is the end date for satisfying your SG super obligation for the June 2017 quarter.  Late payments will attract substantial interest and penalties which effectively doubles or triples the cost.  Even if your cash flow is tight, this commitment should be paid before anything else.

The final day for payments and reporting of Victorian Pay-roll Tax is Friday 21st July.

For those who lodge a quarterly BAS or IAS, your June quarter activity statement is due to be lodged by Friday 28th July (but 11th August for activity statements if you have registered your business as a user of the Taxpayer Portal and are not paying only fixed $ instalments).   

Please note that lodgement of an activity statement (even if it is nil statement) and payment are two separate requirements.  Late lodgement attracts a minimum non-deductible fine of $180 for every 28 days that a form is lodged late whereas as late payment results in an interest levy (which is often remitted).  A fine is not tax deductible, interest is.  Not that we encourage it, but should you not be able to pay an activity statement in full, do not defer lodgement as the possible fines are significant.  The ATO will of course in time identify that an activity statement liability has not been paid and follow it up; but by this time though the liability should be paid in full anyway and at worst, incur a deductible interest charge far less than any non-lodgement penalty.

Please be mindful that the ATO now reports unpaid business tax liabilities of more than $10,000 not subject to a payment arrangement directly to credit reporting agencies. Please refer to our blog from 12th June 2017 for further information.

I remind you that under the Director Penalty Regime which came into effect in July 2012, PAYG Withholding (WH) and SGC super which remains unreported and unpaid after 3 months now results in the unpaid amounts becoming a personal liability of any directors.  Placing a company into liquidation doesn’t avoid or extinguish this liability.  For further information, please refer to our September 2012 Tips and Traps newsletter.

Please contact us should you have any queries or require assistance.

For other key dates, please click on the Key Dates button on our firm app. If you haven’t done so already, you can download it from either Google Play or the Apple App stores.  Simply type in Maggs Reid Stewart at either site and we should come up first with our logo prominent.  You will also find a heap of useful tools and calculators in our app.

At MRS, we will spend today planning for your success tomorrow.

 

Getting your stocktake right

Getting your stocktake right is critical in order to understand how your business is performing. In order to be able to report correctly and properly understand how your business is performing you need to:-

  • Count your stock accurately and

  • Value your stock correctly and

  • Have your cost of goods sold section properly include all those expenses directly related to producing the goods you sell

Get any of these wrong and you won’t know where you are at (and heading). It is not uncommon to hear of small businesses who have taken on a large contract at a discounted price only to make less profit than they were before or even go out of business.  Our clients don’t have this problem as we focus on ensuring their accounting system correctly states their true cost of goods sold.  Consequently, we can then show our clients from our powerful analysis tools such things as how fast they can grow before running of cash and how much more cash will sit in the bank account if they reduce their average stock holding by say 10 days.

We issue our clients with a stock take checklist. Please ask us for a free copy.

At MRS, we will spend today planning for your success tomorrow.

Our $1,000,000 challenge

We have embarked upon our financial year end tax planning review process after modifying our year end checklist following our attendence at a number of seminars and webinars on recent tax changes.

Our pre year tax planning checklist addresses dozens of issues but in summary identifies what benefits and savings you can take advantage of and highlights the areas that require rectification. We then set out a summary of the savings, the actions you need to undertake and the timing of your future tax payments.

This year we at MRG have collectively set the challenge to save our business clients and their families collectively $1,000,000 of tax and other benefits.

We only exist because we have clients and we are firmly focused on delivering them an optimum outcome. With look forward to sharing the final scorecard with you.

At MRS, we will spend today planning for your future success