Posts Categorized: Tax
Companies beware – Division 7A changes
Division 7A is the area of tax law that requires shareholders or their associates (which includes family members and trusts) to repay loans to companies. Current laws been in place for 21 years but remain incapable of being fully understood by a reasonable person.
We therefore welcomed the announcement within the 2016 Federal Budget that the government would simplify Division 7A with effect from July 2018.
July 2018 has obviously come and gone.
However, Treasury has finally released a consultation paper.
Treasury alleges that it is based on the recommendations by the Board of Taxation. It is anything but.
In fact it’s downright scary!
Announcements from the 2016 Federal budget which have found their way into the Treasury consultation paper include:-
- All loans to be placed on 10 year terms.
- Removal of the need for a formal agreement.
Those aside, other changes are nasty to say the least and include:-
- Repayments in early years will be higher annual instalments to be equal.
- The interest rate will be calculated off a different base and will increase by some 3%. In other words, it costs individuals more and the company pays more tax.
- Repayments during the year will be disregarded so interest will be based off the opening balance. How unfair and unrealistic can you get?
- Pre-1997 loans that are not treated under the current system will be required to adhere to Division 7A.
- Division 7A currently only applies where there is an excess of assets over liabilities. This exemption will be removed.
- Unpaid distributions by trusts to companies will be required to be on 10 year loan term from 2019.
- Private use assets of the company will be required to be valued under a formula and subject to a market valuation every five years.
- The period of review under which the ATO can go back and review the situation will be increased to 14 years. Other than fraud (where the ATO can go back as far as I like), no area of tax law has a period of review anywhere near as long as this.
The 2016 Federal Budget announcement was made under the guise that there would be a simplification of Division 7A. This is not a simplification. This is dramatic shift under which the implications are far more onerous and costly.
Treasury’s consultation paper has caused a storm within the profession. It such a dramatic shift that it will be hard for the profession to retain current positions. There is also remarkably short period of time to do so as the amendments are to apply from July 2019.
We will keep our affected clients informed. Moreover, we will be actively be taking corrective stances before July 2019. We do though welcome any query you may have now.
Exempt fringes benefits – mobiles & other electronic devices
A small business can provide an employee with a portable electronic device every year and do so free of Fringe Benefits Tax. They qualify as exempt fringes benefits.
That could be a mobile, lap-top or tablet.
The limit is one per year but it must be used for work purposes.
It probably doesn’t mean as much to the owner of a small business as they are going to get a deduction under the $20,000 asset write-off concession (but which is due to expire come 30th June 2019). But if you are an employee, it is a cost effective way of buying such items.
Want to know a few more tips – then call us.
Or better yet, meet with us as our initial meeting with business clients is free of cost or obligation.
Single touch payroll for small businesses
Single touch payroll for small businesses is not far away.
Come July 2019, every small business in the country will need to report their payroll to the ATO at the time of payment. No longer will a business report total wages and tax on an activity statement and then confirm what was paid to whom by issuing PAYG Payment Summaries (group certificates) after year end.
Instead, at the time of payment, a business will need to report to the ATO:-
- How much was paid to each employee, and
- What the tax withheld was and what super is required to be paid.
This will allow the ATO to better chase up unpaid PAYG Withholding. Moreover, by matching super contributions received as reported by super funds, the ATO will be better placed to chase the almost $3 billion of unpaid SG super. And don’t think the ATO and the government aren’t serious about this. They have already announced an intention to legislate 12 months jail terms for unpaid super (presumably of some significant amount).
Not that directors don’t want to not pay PAYG Withholding and SG super. Since July 2012, PAYG Withholding and SG super unreported and unpaid after 3 months becomes a personal tax liability of a director.
This is not something to be left to July or that last minute.
Please pay attention to our progressive information and training.
The ATO has announced that small businesses don’t need to have a payroll program (and presumably they will release some on line version). But a payroll program will make it easier.
As stated above, we will educate and assist our clients to comply. If you have another accountant, then we welcome the chance to explain to you how we can help you in this area and other ways we can assist you to improve your business and to make you more successful and secure.
You may also wish to watch the following introductory ATO video.
Cash flow – state actual due date on invoice
Instead of stating terms such as 14 days on an invoice, we suggest stating the actual due date – such as Monday Nov 5.
We have found that other clients that have moved away from number of days to the actual due date have experienced earlier receipts from customers.
Savings from a company tax rate cut?
So Scott Morrison has said that they wish to accelerate the company tax rate cuts for small business. So what are the savings from a company tax rate?
Not much if you intend to pay out profits as dividends.
In fact you might be worse off.
For more, read our previous blog at:-
SMSF – minimum balances
ASIC is considering mandating a minimum balance for a self managed super fund (SMSF) to be opened.
Certainly there is good reason for this given reports as to how many SMSFs have unviable balances.
What is most important though is that one receives financial planning advice as to the appropriateness of opening a SMSF.
Home office expenses
You can claim home office expenses if you:-
- Run a business from your home, or
- Undertake work duties from home.
Substantiating a claim to the ATO’s satisfaction is paramount.
A classic case of running a business from home is a doctor. To one side of the house will be a shingle, an entrance, reception, waiting rooms and doctors’ rooms. It may be run from home but it looks like a business. In such cases, a claim for occupancy expenses can be claimed. A claim can also be made for running expenses as can someone who simply undertakes some of their work at home.
What home office expenses can be claimed for a place of business?
- Running costs of heat light & power.
- Occupancy costs – such as rent, or mortgage interest, rates as insurance.
- Other costs such as phone costs, depreciation of fittings.
If not separately metered, some of these costs will need to be apportioned. Apportionment can be made on a percentage area basis or by tracking business usage.
Where home is a place or work, travel from the work place for work purposes is deductible (whereas travelling from home to work is private).
A word of warning though
If home is a place of business, then the home will lose part of its capital gains tax exemption. Tax will only be payable when the home is sold (but note that Capital Gains Tax does not apply to assets bought before 19th September 1985).
That said, the gain may not be that significant. If the work area was say 20% of the home area and only used that way for 5 years out of the 30 years the home was owned, then the taxable gain would only be 3.33% of the total gain (before any loss is offset or 50% Capital Gains Tax discount applied).
The ATO outlines some of the basis in the following e-mail.
We would welcome the opportunity to discuss your situation with you.
We will examine running expenses in a future blog.
Special disability trusts
Special disability trusts are a most effective way to provide for a family member who suffers from a severe disability. Special disability trusts provide for the accommodation and care of family member. Such trusts receive substantial social security and tax relief.
Special disability trusts receive the following social security concessions:-
- Up to $500,000 can be gifted into a special disability trust before gifts are counted under the asset gifting rules .
- The first $669,750 within a special disability trust will not be assessed under the assets test.
- The income of a special disability trust doesn’t count against the beneficiaries income test.
- All reasonable medical and home care expenses can be paid by the trust.
- A special disability trust can also pay up to $12,000 of discretionary expenses.
By transferring a parent’s assets into a special disability trust, a parent can improve their age pension entitlement.
A special disability trust can be established in two way:-
- Via a will. However, it must be noted that there is a risk that the provisions of a will may not comply with future laws.
- In one’s lifetime. However, this means that on-going costs are incurred from day one.
Does a special disability trust sound like a good option for your family’s situation?
You should only make that decision after receiving financial planning advice from a qualified financial planner. You also need a referral to a qualified lawyer who specialises in this area (we can refer you).
You should also have Centrelink assess your child to ensure they qualify.
What is the company income tax rate for 2018?
What is the company income tax rate for 2018? Sounds like an easy question doesn’t it. And so it should be? It has however proved to be anything but – until now.
Thankfully, and at long last, the Senate has passed the legislation that determines which companies pay the 27.5% income tax rate after 30th June 2017. Corporate businesses with turnover of less than $25,000,000 for the year ended 30th June 2018 (and $50,000,000 thereafter) will pay the 27.5% company income tax rate if they pass a new income test. The planned further reductions in the company tax rate did not pass.
Confusion has reigned until now. For the 2017 year, the ATO defined a company as carry on a business where there was a view to making a profit. It was justified on the basis of very old case law (none of which I ever recall studying at university). More notably, it was completely contradictory to what was considered a business where operated within in a trust of partnership or by an individual.
Why did the ATO take this approach?
It meant that dividends could be franked at only 27.5% (despite having paid tax at 30% on those profits). It meant that individuals would either pay more tax or receive a lesser refund. Some consider it to be theft.
So why did the government fix this?
The government was clearly annoyed that the ATO took the approach they did. They proposed legislation a year ago – which has taken until now for our parliamentarians to pass.
So which company businesses qualify for the 27.5% company income tax rate?
Companies that receive less than 80% of its revenue from passive sources. Passive sources include:-
- Interest
- Rents
- Capital gains
- Dividends from companies where less than 10% of the issued shares are held.
- Trust distributions and profit shares – their character depends on the nature of the income as earned by the trust or partnership.
Franking rate
The same test will also apply to determining the franking rate. That said, one refers to the income derived in the prior year to determine the current year franking rate. Yes, it is possible to be paying 30% tax yet only be able to frank dividends at 27.5% in any one year.
We would welcome any question you may have.
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 of Taxable Payments Annual Report 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.
Ways you can lodge the Taxable Payments Annual Report
- The main software providers enable the Taxable Payments Annual Report to be lodged from the software.
- You can also lodge by paper.
- You may also wish to view the following YouTube clip from the ATO on how to lodge the Taxable Payments Annual Report through the Taxpayer Portal.
https://www.youtube.com/watch?v=SRhFsB-k1Uc
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 – so much so that it has now been expanded to other industries from July 2018.