Client Alert Explanatory Memorandum (November 2017)

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Compensation for ATO systems outages

After the ATO’s unplanned system outages, it provided lodgment deferrals, and remitted interest and penalties where the outages affected practitioners and their clients’ lodgments. But what about compensation?

The ATO has advised that it assesses claims for compensation in two ways:

  • compensation for legal liability (eg negligence)– claims that are resolved on the basis of legal liability must be settled in accordance with legal principle and practice; and
  • compensation under the Compensation for Detriment caused by Defective Administration (CDDA) scheme, which allows the ATO to consider claims and pay compensation if practitioners or their clients have suffered disadvantage or loss because of defective administration.

The ATO says it considers claims in accordance with guidelines issued by the Department of Finance. Applications for compensation must address the criteria set out in the guidance material and establish that:

  • the practitioner or client suffered direct financial loss;
  • the loss was caused by the ATO’s defective administration; and
  • the practitioner or client has taken reasonable steps to mitigate that damage.

In this context, “defective administration” means:

  • a specific unreasonable lapse in complying with existing administrative procedures;
  • an unreasonable failure to institute appropriate administrative procedures;
  • an unreasonable failure to give the proper advice within an officer’s power or knowledge to give; or
  • giving advice that was in all the circumstances incorrect or ambiguous.

The type of compensation the ATO says it can consider is financial loss with a direct connection to its actions that lead to a finding of legal liability or defective administration. This can be a loss such as:

  • professional fees, where evidence of payment is provided and the decision-maker considers the fees to be reasonable;
  • interest for delays in providing funds in cases where no statutory interest can be paid;
  • bank or other administrative fees that the taxpayer incurred because of the ATO’s actions.

Generally, the ATO says claims for the following types of losses cannot be considered under claims of legal liability or the CDDA scheme:

  • claims for personal time spent resolving an issue;
  • claims for stress, anxiety or inconvenience;
  • claims for delays in receiving funds from the ATO where statutory interest was paid;
  • claims for costs associated with complying with the tax system, including costs associated with audits, objections and appeals – even where it is found that taxpayers complied with their obligations;
  • claims for the costs of putting in a claim or conducting a claim for compensation;
  • claims for taxation or other Commonwealth liabilities with substantive review rights that can be or could have been pursued.

Claims for compensation can be made using the ATO’s Applying for compensation form (NAT 11669).

For more information about how the ATO deals with compensation claims, send an email to compensation.application@ato.gov.au or phone 1800 005 172.

Small business restructure rollover: changes

The ATO has made a draft determination, under the Commissioner’s “remedial power” in the Taxation Administration Act 1953, which proposes to modify how the small business restructure rollover (SBRR) operates.

When the determination is finalised, it will modify s 40-340 of the Income Tax Assessment Act 1997 (ITAA 1997) so that where it provides balancing adjustment rollover relief for a depreciating asset under an SBRR, it “has effect as if it also provided that the disposal of the asset has no direct consequences under the income tax law”.

Under Subdiv 328-G of ITAA 1997, the SBRR is available in relation to the transfer of CGT assets, trading stock and revenue assets as part of a genuine business restructure. Generally, the SBRR’s effect is that no direct income tax consequences arise from the transfer of the small business’s assets, and their tax costs are rolled over to the transferee. However, for a depreciating asset, the benefit of the SBRR is provided under item 8 of the table in s 40-340(1). This provides rollover relief from the balancing adjustment event that happens on the transfer of the asset.

The main concern behind the modification (as reflected in the following example) appears to be the potential for a transfer to give rise to a dividend in the transferee’s hands.

Example

Fiona owns all of the shares in Orange Country Pty Ltd, which is a small business entity. Fiona decides to restructure her business to operate as a sole trader. She causes the company to transfer all of its assets, including an item of depreciable plant, to the sole trader entity for no consideration.

Under the capital allowance provisions, Orange Country Pty Ltd is taken to receive market value consideration for the transfer of plant. The company is entitled to choose the rollover and defer the tax consequences from the balancing adjustment event.

If the depreciable plant is paid out of profits derived by Orange Country Pty Ltd, Fiona’s assessable income will include the market value of the plant, under s 44 of the Income Tax Assessment Act 1936 (ITAA 1936). Alternatively, the amount would be an assessable deemed dividend under s 109C of ITAA 1936.

Tax cut closed off for passive investment companies

The Government has released exposure draft legislation to deny access to the lower corporate tax rate of 27.5% for companies with predominantly passive income. The draft legislation would amend the Income Tax Rates Act 1986 to ensure that a “base rate entity” will qualify for the lower tax rate only if:

  • its “base rate entity passive income” is less than 80% of its assessable income for the year;
  • it “carries on a business” in the year of income; and
  • its aggregated turnover for the income year is less than the aggregated turnover threshold for the year (ie $10 million for 2016–2017; $25 million for 2017–2018; and $50 million for 2018–2019 and later years).

Meaning of “passive income”

Each of the following will be “passive income” of a base rate entity:

  • distributions (eg dividends), excluding non-portfolio dividends;
  • non-share dividends;
  • rent;
  • interest income;
  • royalties;
  • gains on qualifying securities under Div 16E of the Income Tax Assessment Act 1936;
  • capital gains; and
  • amounts included in assessable partnership or trust income, to the extent that they are attributable to base rate entity passive income as listed above.

Corporate tax rate for imputation purposes

In terms of working out the maximum franking credit for a distribution by reference to the “corporate tax gross-up rate”, the definition of the “corporate tax rate for imputation purposes” will be amended so that the entity can assume that its aggregated turnover, base rate passive income and assessable income are equal to the amounts for the previous income year. If the corporate tax entity did not exist in the previous income year, its corporate tax rate for imputation purposes for an income year will be deemed the lower corporate tax rate of 27.5%.

Example

Aco is carrying on a business. In the 2016–2017 income year, it has:

  • aggregated turnover of $8 million;
  • base rate passive income of $7.5 million; and
  • assessable income of $8 million.

For the 2016–2017 income year, 92.59% of Aco’s assessable income is base rate entity passive income. This means that the applicable corporate tax rate is 30%, even though the company’s aggregated turnover is only $8 million (ie under the $10 million aggregated turnover threshold for 2016–2017).

Aco wants to pay a dividend to its shareholders in the 2017–2018 income year. To work out its corporate tax rate for imputation purposes for the 2017–2018 income year, it must assume that its aggregated turnover, base rate passive income and assessable income are the same as for the 2016–2017 income year.

Aco’s corporate tax rate for imputation purposes is 30%.

Therefore, its corporate tax gross-up rate for that income year will be: (100% – 30%) / 30% = 2.33.

Aco makes a fully franked distribution of $100 per share in the 2017–2018 income year. The maximum franking credit that can be attached to that distribution is $42.91 (ie $100/2.33). Aco makes the dividend payment on 31 March 2018.

Amy holds 50 shares in Aco and receives a dividend of $5,000. Franking credits of $2,145 are attached to the dividend. For the 2017–2018 income year, Amy includes $7,145 (ie $5,000 plus franking credits of $2,145) in her assessable income in relation to the dividend.

Amy is entitled to a refundable tax offset equal to the amount of the franking credits. Amy’s total assessable income for the 2017–2018 income year is $30,000, so her marginal tax rate is 19%. Therefore, Medicare levy aside, Amy’s tax payable on the franked dividend is $1,357.55. The excess franking credits (ie $787.45) will be:

  • applied to reduce Amy’s other tax liabilities; or
  • if she has no other tax liabilities, refunded to Amy.

Emma also holds 50 shares in Aco and receives a dividend of $5,000 (and franking credits of $2,145). For the 2017–2018 income year, Emma includes $7,145 in her assessable income in relation to the dividend.

Emma is entitled to a refundable tax offset equal to the amount of the franking credits. Emma’s total assessable income for the 2017–2018 income year is $120,000, so her marginal tax rate is 37%. Therefore, Medicare levy aside, the tax payable by Emma on the franked dividend is $2,643.65. This means Emma will need to pay additional tax of $498.65 on the franked dividend.

Identification numbers for directors: an Icarus moment for phoenix activities?

The Government has announced a package of reforms to combat phoenix activities, including the introduction of a Director Identification Number (DIN).

Phoenixing involves deliberately transferring assets from a failed or insolvent company to a new company, with the intention to avoid paying the original company’s creditors, tax and employee entitlements (that is, the new company illegally “rises from the ashes” of the indebted company).

The proposed DIN would identify each director with a unique number, and interface with government agencies and databases to allow regulators to map the relationships between directors and entities, and between directors and other people.

In addition to the DIN, the Government will consult on implementing a range of other measures, including:

  • legislating on specific phoenixing offences, to better enable regulators to take decisive action against those who engage in this illegal activity;
  • establishing a dedicated phoenix hotline, to provide the public with a single point of contact for reporting illegal phoenix activity;
  • extending the penalties for promoting tax avoidance schemes to also capture advisers who assist phoenix operators;
  • giving the ATO stronger powers to recover a security deposit from suspected phoenix operators;
  • extending the director penalty provisions to make directors personally liable for GST liabilities;
  • preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors; and
  • prohibiting entities related to phoenix operators from appointing liquidators.

Tax measures for affordable housing

The Government has released draft tax legislation to implement elements of its housing affordability plan. The following measures are contained in the draft legislation:

  • enabling investors to obtain a 60% CGT discount in relation to affordable rental housing if they hold the investment for at least three years. Individual investors may invest by holding an ownership interest in affordable housing directly or through certain trusts, such as holding units within a managed investment trust (an MIT);
  • allowing MITs to hold affordable housing (residential premises) primarily for the purpose of deriving long-term rent. Those MITs will also be permitted to derive other eligible investment business income from investments, including shares or commercial property. MITs will be able to construct or develop the affordable housing property within the MIT;
  • precluding MITs from acquiring residential property other than affordable housing. MITs currently holding residential property will be allowed a transitional period, until 1 October 2027, for their existing property assets.

To qualify for the higher CGT discount and MIT concessional tax treatment, an affordable housing tenancy will need to be managed by a registered Community Housing Provider and provided as affordable housing for at least three years. As part of this, housing providers will determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.

Legislation for First Home Super Saver scheme and downsizer super contributions

A Bill has been introduced into Parliament to:

  • establish the First Home Super Saver (FHSS) scheme, which will allow individuals who are saving for their first home to take advantage of the concessional taxation arrangements that apply to the superannuation system; and
  • allow individuals aged 65 or over to use the proceeds from the sale of their main residence to make contributions of up to $300,000 to their superannuation provider (known as “downsizer contributions”).

FHSS scheme

Under the FHSS scheme, first home savers who make voluntary contributions into the superannuation system will be able to withdraw those contributions (up to certain limits) and an amount of associated earnings to purchase their first home. Concessional tax treatment would apply to amounts that are withdrawn under the scheme. The scheme will apply to voluntary contributions made into superannuation on or after 1 July 2017. Contributions will be able to be withdrawn from 1 July 2018;

Downsizer contributions

Under the proposed changes, downsizer contributions could be made regardless of the other contributions caps and restrictions that might apply to making voluntary contributions. However, downsizer contributions would not be tax deductible. The proceeds from contracts for the sale of a main residence entered into on or after 1 July 2018 would be eligible for use as downsizer contributions.

No GST on digital currency: Bill

The GST Act (A New Tax System (Goods and Services Tax) Act 1999) is being amended to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money.

Under the changes, supplies of digital currency made on and after 1 July 2017 will be disregarded for GST purposes unless the supply is undertaken in exchange for a payment of money or digital currency.

To give effect to this money-equivalent treatment of digital currency, the amending Bill inserts a definition of “digital currency” into the GST Act. In arriving at this definition, the drafters have taken into account two considerations:

  • the significant risk that any definition based on the current architecture of cryptographic currencies (like Bitcoin) may lose relevance if new technical approaches emerge; and
  • the existence of a number of types of digital assets that bear some similarities to digital currencies, but which are not treated as currencies, generally because either they are rights to particular things rather than having value only as a medium of exchange, or they are dealt with appropriately under the existing law.

Accordingly, the definition has been framed in terms of digital currency needing to have broadly the same features as state fiat currencies (legal tender). In particular, in the same way as state fiat currencies, the value of a digital currency must derive from the market’s assessment of the value of the currency for the purposes of exchange, despite it having no intrinsic value. The units must be capable of being consideration for any type of supply, and must be generally available to the public, free of any substantial restrictions on their use as consideration.

The definition also requires that digital currency must not have a value based on the value of anything else. Hence, units will not be digital currency if they are denominated in another currency, for example with a value pegged to the Australian or United States dollars.

Units are not digital currency – even if they have independent value and are fully transferable – if they provide the holder with benefits, entitlements or privileges, such as memberships or vouchers, other than an entitlement that is incidental to holding the unit or using it as consideration.

New financial and superannuation complaints authority

Legislation has now been introduced to establish a new external dispute resolution (EDR) framework and an enhanced internal dispute resolution (IDR) framework for the Australian financial system.

The new EDR framework is designed to ensure that consumers have easy access to a single EDR scheme, known as the Australian Financial Complaints Authority (AFCA), which will resolve disputes about products and services provided by financial firms. The AFCA scheme will replace the Superannuation Complaints Tribunal (SCT) and the existing EDR schemes approved by the Australian Securities and Investments Commission (ASIC); that is, the Financial Ombudsman Service (FOS) and the Credit and Investments Ombudsman (CIO).

Certain firms that provide financial and credit services to consumers will be required to be members of AFCA. This requirement will cover Australian financial services licensees, unlicensed product issuers, unlicensed secondary sellers, Australian credit licensees and credit representatives, regulated superannuation funds (other than SMSFs), approved deposit funds, retirement savings account providers, annuity providers, and life policy funds and insurers.

AFCA will be required to provide particulars to ASIC, the Australian Prudential Regulation Authority (APRA) and/or the ATO if it becomes aware that any of the following matters may have occurred in relation to a complaint:

  • a serious contravention of a law;
  • a contravention of the governing rules of a regulated super fund or of an approved deposit fund;
  • a breach in the terms and conditions relating to an annuity policy, a life policy or a retirement savings account; or
  • a refusal or failure by a party to a complaint to give effect to an AFCA determination.

If a complaint made under the AFCA scheme is settled between the parties, AFCA may also give the particulars of the settlement to APRA, ASIC or the ATO if AFCA believes that the settlement requires further investigation by those agencies.

Key features of the SCT’s complaints handling model, including the requirements for handling death benefit complaints, the decision-making test and the unlimited monetary jurisdiction, will be legislated into the new arrangements to provide certainty for stakeholders.

AFCA’s monetary limit of $1 million and compensation cap of $500,000 are almost double the existing limits. These increased amounts for both small business credit facility and other non-superannuation disputes will be set out in AFCA’s operating rules.

Before AFCA will consider a dispute, it will refer all complaints back to the financial firm for a final opportunity to resolve the dispute in a defined timeframe, to ensure that the IDR process has the opportunity to work.

AFCA will also have an independent assessor to investigate complaints regarding the ways disputes are handled. This measure aims to ensure procedural fairness.

Superannuation guarantee

Crackdown on employer non-compliance

The Government has announced a package of reforms to give the ATO near-real-time visibility over employers’ superannuation guarantee (SG) compliance. The package includes measures to:

  • require super funds to report contributions received more frequently (at least monthly) to the ATO;
  • roll out Single Touch Payroll (STP), with employers that have 20 or more employees transitioning to STP from 1 July 2018, and smaller employers from 1 July 2019 – STP is designed to reduce the regulatory burden on business and transform compliance by aligning payroll functions with regular reporting of taxation and superannuation obligations;
  • improve the effectiveness of the ATO’s recovery powers, including strengthening director penalty notices and using security bonds for high-risk employers; and
  • give the ATO the ability to seek court-ordered penalties in the most egregious cases of non-payment.

Salary sacrifice integrity: Bill introduced

Legislation has also been introduced to amend the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) so that employers will be prevented from using an employee’s salary sacrifice contributions to reduce the employer’s own minimum SG contributions. This change would apply to working out employers’ SG shortfalls for quarters beginning on or after 1 July 2018.

Currently, salary sacrificed superannuation amounts can count towards employer contributions that reduce an employer’s charge percentage for SG purposes. This means unscrupulous employers can potentially calculate SG obligations on the (lower) post-salary-sacrifice amounts.

To avoid an SG shortfall, an employer must contribute at least 9.5% of an employee’s ordinary time earnings (OTE) base to a complying superannuation fund. If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee’s total salary or wages base.

For the purposes of reducing the employer’s SG charge percentage, the Bill proposes to amend the definition of ordinary time earnings (OTE) so that the OTE base specifically includes any contributions that are “sacrificed ordinary time earnings amounts” of the employee for the quarter in respect of the employer. The Bill aims to ensure that contributions under a salary sacrifice arrangement will not be treated as contributions that reduce the employer’s SG charge. Rather, the mandatory employer contributions that reduce the SG charge will be calculated on a pre-salary-sacrifice base.

Where sacrificed salary or wages amounts (or sacrificed OTE amounts) are never contributed but instead paid to the employee in a later quarter (eg at the employee’s request), they will be disregarded to avoid double counting. The quarterly salary and wages base will also remain subject to the maximum contribution base ($52,760 per quarter for 2017–2018).

Example

Pablo has quarterly OTE of $15,000, which would ordinarily generate an entitlement to $1,425 in SG contributions ($15,000 × 9.5%). He salary sacrifices $1,000 in a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter.

However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer’s SG obligation, and only makes a total contribution of $1,425 (mostly consisting of the employee’s $1,000 salary sacrificed amount, and only $425 of employer mandatory contribution).

As a result of the new amendments, Pablo’s $1,000 sacrificed contribution would no longer reduce the employer’s SG charge. Therefore, the charge percentage would only be reduced by 2.83% ($425 / $15,000 × 100). As the employer is required to contribute 9.5%, it must contribute an additional 6.67% to meet its minimum SG obligations. The total contribution of only $1,425 would mean the employer has a shortfall of approximately $1,000 (6.67% × $15,000).

With sacrificed contributions no longer reducing the charge, Pablo’s employer would need to contribute $1,425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, for a total contribution of $2,425, to avoid a shortfall and liability for the SG charge.

Client Alert (November 2017)

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Compensation for ATO systems outages

After the ATO’s unplanned systems outages, it provided lodgment deferrals, and remitted interest and penalties where the outages affected practitioners and their clients’ lodgments.

The ATO has also advised that it assesses claims for compensation in two ways:

  • compensation for legal liability (eg negligence); and
  • compensation under the Compensation for Detriment caused by Defective Administration (CDDA) scheme, which allows the ATO to consider claims and pay compensation for disadvantage or loss because of defective administration.

The ATO considers claims in accordance with guidelines issued by the Department of Finance.

TIP: If your tax affairs were affected by the ATO systems outages, contact us to find out if you’re eligible to seek compensation.

Small business restructure rollover: changes

The ATO is proposing to modify how the small business restructure rollover (SBRR) operates.

The SBRR means that small businesses can restructure from one legal entity to another – for example, from a company to a trust – and transfer the business’s assets to the new structure without immediately causing a capital gains tax liability.

The ATO’s latest proposed changes address the fact that the transferred business assets in this type of restructure could still give rise to a dividend for the transferee.

TIP: Are you thinking about changing how your small business operates? Talk to us for more information about the options and tax implications.

Tax cut closed off for passive investment companies

The Government has released exposure draft legislation to deny access to the lower corporate tax rate of 27.5% (down from 30%) for companies with predominantly passive income. Under the changes, companies will qualify for the lower tax rate only if:

  • their passive income is less than 80% of their assessable income for the year;
  • they “carry on a business” in that year; and
  • they come below the aggregated turnover threshold for the year ($25 million for 2017–2018).

Identification numbers for directors: an Icarus moment for phoenix activities?

The Government has announced a package of reforms to combat phoenix activities, including the introduction of a Director Identification Number (DIN).

Phoenixing involves deliberately transferring assets from a failed or insolvent company to a new company, with the intention to avoid paying the original company’s creditors, tax and employee entitlements (that is, the new company illegally “rises from the ashes” of the indebted company).

The DIN would identify each director with a unique number, allowing regulators to map the relationships directors have with entities and other people.

Tax measures for affordable housing

The Government has released draft tax legislation to implement elements of its housing affordability plan. The proposed measures include an increased capital gains tax discount for people who hold affordable rental housing investments for at least three years.

Under the draft legislation, managed investment trusts would be allowed to hold affordable housing investments with the main aim of deriving long-term rental income, but purchasing residential property that is not affordable housing would no longer be permitted for these trusts.

TIP: If this legislation is passed, there will be a transitional period for managed investment trusts that already hold non-affordable housing residential property to change their investments to comply with the changes.

Legislation for First Home Super Saver scheme and downsizer super contributions

A Bill has been introduced into Parliament to establish the First Home Super Saver (FHSS) scheme and allow people aged 65 or over to make “downsizer contributions” to their super.

The FHSS scheme will allow people to make voluntary contributions into super, take advantage of the associated tax concessions, and later withdraw the contributions and associated earnings to buy their first home.

The downsizer contribution changes will allow older Australians who sell their main residence from 1 July 2018 to make non-deductible contributions of up to $300,000 to their superannuation from the sale proceeds.

No GST on digital currency: Bill

The GST Act (A New Tax System (Goods and Services Tax) Act 1999) is being amended to ensure that digital currency, such as Bitcoin, is disregarded for GST purposes unless the supply is made in exchange for a payment of money or digital currency.

To achieve this, a definition of “digital currency” will be inserted into the GST Act. Under the new definition, a digital currency has broadly the same features as state fiat currencies (legal tender). In particular, the value of a digital currency must derive from the market’s assessment of its value. A digital currency’s value cannot be based on the value of anything else, so it must not have, for example, a value pegged to Australian or United States dollars.

The currency units must be useable as consideration for any type of supply, and must be generally available to the public.

Units will not be considered digital currency if they give the holder benefits (such as memberships or vouchers), other than entitlements incidental to holding the unit or using it as consideration.

TIP: When the new definition passes into law, no GST will apply for supplies of digital currency made on or after 1 July 2017.

New financial and superannuation complaints authority

Legislation has now been introduced to establish a new external dispute resolution framework and an enhanced internal dispute resolution framework for the Australian financial system.

Consumers will have easy access to a single external dispute resolution scheme, the Australian Financial Complaints Authority (AFCA). Certain firms that provide financial and credit services will need to be members of AFCA, including Australian financial services licensees, unlicensed product issuers, unlicensed secondary sellers, Australian credit licensees and credit representatives, regulated superannuation funds (other than SMSFs), approved deposit funds, retirement savings account providers, annuity providers, and life policy funds and insurers.

Before AFCA will consider a dispute, it will refer the complaint back to the financial firm so it can attempt to resolve the dispute within a defined timeframe. AFCA will also have an independent assessor to investigate any complaints about how disputes are handled.

Superannuation guarantee

Crackdown on employer non-compliance

The Government has announced a package of reforms to give the ATO near-real-time visibility over employers’ superannuation guarantee (SG) compliance. The package includes measures to:

  • require super funds to report contributions at least monthly to the ATO;
  • roll out Single Touch Payroll (STP); and
  • give the ATO the ability to seek court-ordered penalties in severe cases of non-payment.

Salary sacrifice integrity

Legislation has also been introduced to prevent employersfrom using an employee’s salary sacrifice contributions to reduce the employer’s own minimum SG contributions. This change would apply to working out employers’ SG shortfalls for quarters beginning on or after 1 July 2018

Planning for the post-Christmas slump

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Planning for the post-Christmas slump

If you have failed to properly prepare for the post-Christmas slowdown many businesses experience, you may be in for a shock when you return from your well-deserved break.

Post-Christmas is a dangerous time for small businesses, especially business to business (B2B) operators. As business starts to slow down for the Christmas closure periods, so too does the cash flow. Without proper planning, your business could become another statistic.

For most businesses, reduced cash flow doesn’t typically have an impact until what I call ‘graveyard month’: between late February and early March. This is the time when most businesses collapse due largely to the slowdown catching up with them.

Christmas is a perfect storm, with B2B sales declining, employee leave-loading pay and a dip in cash flow caused by customer spending wrapping up until mid-January. It is easy for businesses to fold under the financial burden.

With proper planning, however, you can avoid the stress of reduced cash flow and, by acting now, you can build a buffer to protect you from the slow Christmas period. Taking early action is crucial for businesses wanting to avoid the effects of graveyard month.

With these tips you can start preparing now, to ensure you too can enjoy the silly season without worrying about what might greet you in the new year:

Assess your cash flow

Planning ahead means considering your cash flow patterns and ensuring that there are enough funds coming in, compared with the amount being spent in outgoings. A useful hint is to look at making incoming payments as frequent as possible; this means you don’t need to wait until a job ceases to invoice.

Your aim should be to have as many accounts at least partly paid off as possible before Christmas. A great way to do this is to provide added incentive by offering discounts to clients who pay before Christmas. The customer receives a discount and you see the benefit in your cash flow.

Put off purchases and look to payment terms

While you want to ensure payments are coming in as quickly as possible, you should also try to extend outgoing payments as far as your suppliers will allow, to reduce outgoing funds and again build a buffer of cash, reducing the risk of being caught off guard.

You should avoid making any large purchases at this time of year. However, if you must place stock or inventory orders, try to negotiate payment terms that don’t require immediate payment, or can be paid through instalments.

It is often easier to negotiate lengthening payment terms rather than trying to reduce the price, as it might put your suppliers offside and hint that your business may be in distress.

Recover outstanding debts

While you might look to extend your own payment terms with your creditors, you should also be tightening payment terms for your own outstanding debts. Look at your debt ledger before Christmas and refer debts older than 60 days to a collection agency.

Even if you only receive partial payment, it means you are more likely to receive some of the outstanding money, instead of scrambling to make up the funds when you are hardest hit.

You can also find extra money by looking at your old written-off debts and referring them to a collection agency. Make sure you refer them to an agency that doesn’t charge unless the debt is recovered, so you can rest assured you won’t be left out of pocket, even if the debts can’t be recovered.

Determine your stock levels

Evaluating your current stock levels will help give you a clearer idea of what you need for the new year. It also gives you the opportunity to sell off anything you don’t require or that has been with you for six months or longer. Holding a pre-Christmas or New Year’s sale will help you stay afloat in financial hardship.

By focusing on your post-Christmas survival now, you are setting your business up for the best chance of success. It’s the businesses that don’t look ahead that will be caught out in graveyard month.

These simple steps will help you determine your priorities, analyse your strengths and weaknesses, and make sure you are well equipped to handle whatever the Christmas period throws at you. These steps might even allow you to relax and enjoy Christmas with your loved ones.

Reference: https://www.mybusiness.com.au/growth/2524-planning-for-the-post-christmas-slump?utm_source=MyBusiness&utm_campaign=27_10_17&utm_medium=email&utm_content=5

 

New government bill introduced on company tax issue

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The federal government has introduced a bill clarifying the tax rate for passive investment companies, after a period of consultation with the industry revealed a series of flaws with its initial approach.

The passage of Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 will mean a company will not qualify for the lower company tax rate of 27.5 per cent if more than 80 per cent of its assessable income is passive income.

“This is a ‘bright line’ test that will replace the previous requirement that a company be ‘carrying on a business’” a statement from the government said.

The amendment will apply prospectively from the 2017/18 income year. In the 2016/17 income year, a company will need to be carrying on a business and have a turnover under $10 million to qualify for the 27.5 per cent tax rate.

The exposure draft (ED) was met with contention in mid-September, and mid-tier firms like HLB Mann Judd are satisfied that key issues have since been addressed after consultation with industry.

“A welcome change in the bill compared to the ED is in the timing of commencement, in that under the bill the ‘bright line’ test will apply prospectively for the 2017/18 year onwards, noting also that the test will be applied each year based on the previous year’s percentage of passive investment income and aggregated turnover,” partner for taxation services, Peter Bembrick, told Accountants Daily.

“It had been proposed in the ED that the test would apply retrospectively from the 2016/17 year, which in our view had the potential to cause significant problems for companies that have already finalised their 2017 financial statements and income tax returns, paid dividends, issued dividend statements to shareholders and in some cases amended dividend statements following previous government announcements. 

“This would affect small public companies in particular, and in our view it would have been unreasonable to force such companies to make amendments to the various documents, not to mention the impact on shareholders who may have already lodged their own 2017 income tax returns.

“Fortunately the outcome of consultation by Treasury with accounting firms and professional bodies is that the government has removed this aspect of retrospectivity. There may still be some impact where companies have declared franked dividends since 1 July 2017, but the situation should be much more manageable than if the changes had been applied to the 2016/17 year.”

Mr Bembrick put together a checklist of key items for accountants to assess now, including: 

  • Review companies who have already lodged their 2017 tax returns, and those under preparation, in the light of the ATO’s draft ruling TR 2017/D7 and other available guidance, especially if the existence of a business is not immediately obvious
  • If there are particular concerns on this point, options to consider may include preparing a reasonably arguable position paper, obtaining a private ruling from the ATO, or seeking an opinion from a revenue law barrister
  • Review the situation for companies who have declared dividends since 1 July 2017, and review the application of the “bright line” test with reference to the bill and examples in the Explanatory Memorandum
  • More generally, review the implications of the new rules for clients’ structures (especially those with multiple layers, including trusts) going forward, and ensure that the implications of future tax and dividends are appropriate
  • Pay particular attention to structures involving businesses that may still generate large amounts of passive income, such as rent payable by an operating company to a related entity owning the business premises

 

If you are unsure of the above regarding your company, please contact us on 02 9954 3843 or email admin@hurleyco.com.au

 

Reference: https://www.accountantsdaily.com.au/tax-compliance/10943-new-bill-introduced-on-contentious-company-tax-issue?utm_source=Accountants%20Daily&utm_campaign=19_10_17&utm_medium=email&utm_content=2

Draft legislation on lower corporate tax rate eligibility released

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Treasury has released exposure draft legislation that will generally exclude passive investment companies from accessing the lower corporate tax rate from the 2016/17 income year.

Currently, the corporate tax rate for qualifying small corporate tax entities has been reduced to 27.5% for small business entities with a turnover threshold of $10m in the 2016/17 income year. From the 2017/18 income year, access to this rate will be expanded to apply to “base rate entities” with the turnover threshold increasing progressively to $50m in the 2018/19 income year. Under the Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 it is proposed that the lower corporate tax rate will be extended to all corporations by the 2023/24 income year.

The exposure draft legislation proposes to amend the Income Tax Rates Act 1986 to ensure that a corporate tax entity will be eligible for the lower corporate tax rate only if it is a base rate entity, ie:

  • the corporate tax entity carries on a business in the income year
  • the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold for that income year, and
  • the corporate tax entity does not have passive income for that income year of 80% or more of its assessable income for that income year.

The amendments will commence from 1 July 2016, and apply to the 2016/17 and later income years.

Reference: http://www.iknow.cch.com.au/document/xatagnewsUio2898230sl875561242/draft-legislation-on-lower-corporate-tax-rate-eligibility-released

Crowd-sourced equity funding for proprietary companies Bill introduced

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Crowd-sourced equity funding is an innovative type of fundraising that allows a large number of individuals to make small financial investments in exchange for an equity stake in the company.

Legislation to create a crowd-sourced equity funding regime for public companies will commence on 29 September 2017. Extending the crowd-sourced equity funding framework to proprietary companies will allow these companies to access an alternative form of finance with additional obligations that will protect investors.

The amendments extend the crowd-sourced equity funding regime to proprietary companies by:

  • expanding the eligibility for the crowd-sourced equity funding regime to proprietary companies that meet eligibility requirements
  • providing that proprietary companies with shareholders who acquire shares through a crowd-sourced equity funding offer are not subject to the takeovers rules
  • adding special investor protection provisions for proprietary companies accessing the crowd-sourced equity funding regime, and
  • removing the temporary corporate governance concessions in the Corporations Amendment (Crowd-sourced Funding) Act 2017 for proprietary companies that convert to or register as public companies to access the crowd-sourced equity funding regime.

The special investor protection provisions that will apply to proprietary companies accessing the crowd-sourced equity funding regime include requirements to:

  • maintain a minimum of two directors
  • prepare annual financial and directors’ reports in accordance with accounting standards
  • have their financial reports audited once they raise $3m or more from crowd-sourced equity funding offers, and
  • comply with the existing related party transaction rules that apply to public companies.

Eligible companies are able to raise A$5 million through CSF.

 

Reference: http://www.iknow.cch.com.au/document/xatagnewsUio2894474sl873925854/crowd-sourced-equity-funding-for-proprietary-companies-bill-introduced

The ATO has issued a statement on mental health issues for business owners

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One in five people in the workplace experience some sort of mental health condition. Stress, depression or anxiety can take a toll on your ability to run your business as well as your overall quality of life.

To mark World Mental Health Day on 10th October and National Mental Health week, the Australian Taxation Office (ATO) encourage you to reflect on your mental wellbeing, and the wellbeing of those around you.

If you find yourself struggling with your mental health and are having difficulties meeting your tax and super commitments, contact them early so they can work with you.

They can help you:

  • organise a payment plan
  • delay a lodgement or payment
  • request priority processing of your tax return refund
  • book an after-hours call back
  • register for personalised business assistance.

You can call us directly or you can ask someone to speak with us on your behalf.

To find out more about how they can help, and to learn about some of the common warning signs that suggest you should reach out for support, visit their web page or watch their video on https://www.ato.gov.au/Newsroom/smallbusiness/General/Looking-after-your-mental-health-/?sbnews20171003

Small business owners experiencing mental health issues:

Having a mentally healthy workplace is important. Stress, depression or anxiety can have a negative impact on your quality of life and ability to run your business. This can affect the people who are involved with your business including employees, contractors, partners and clients.

Your mental health is important, so it’s good to learn how to recognise warning signs or ‘red flags’ that may suggest you need to reach out for support. Common warning signs include:

  • finding it hard to concentrate
  • avoiding necessary day-to-day tasks and obligations
  • feeling irritable, stressed or teary
  • constantly thinking of work, even during personal time
  • being unable to sleep
  • disconnecting from friends and family
  • changing eating and/or drinking habits.

The ATO understand these circumstances can affect meeting your tax and super obligations. If you’re having difficulty paying your tax, they encourage you to contact them as early as possible. You can speak with them directly, or ask someone to speak with them on your behalf. They want to work with you to solve the problem before the situation escalates; it’s never too late to speak with them.

Next step:

  • Contact the ATO on 13 11 42 or contact Hurley & Co on 02 9954 3843 for further guidance.