Corporate Tax Rates: Recent Changes Give Certainty

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There are two categories of companies when it comes to the corporate tax rate. The two categories are determined by turnover and business activity.

The rate of 27.5% applies to corporate tax entities known as “base rate entities”. What is a base rate entity? Put simply, it is a company which carries on a business and has an aggregated turnover of less than $50 million. This is up from $25 million in the last financial year (ie 2017-18), but will stay at $50 million until 2023-24. The ALP has confirmed that it will not change the rules for base rate entities if elected – so there we have our first certainty.

The rate for base rate entities is locked in at 27.5% until 2023-24. The tax rate for all other companies remains at 30%, ie the standard corporate tax rate. This will not change.

There had been legislation before Parliament that proposed to progressively extend the 27.5% corporate tax rate to all companies regardless of turnover. However, the legislation did not make it through the Senate and the Government has since announced that it would not proceed with this proposal. This provides us with our second certainty – there will be no changes to the standard corporate tax rate.

The tax rate for base rate entities is scheduled to reduce after 2023-24, as this has already been legislated. It is reasonable to state this as the third certainty – that the tax rate for base rate entities will decline progressively to 25% by 2026-27.

Now, this is all perfectly straightforward if your company is carrying on what may be termed a trading business, eg providing services, buying and selling trading stock, importing/exporting etc. But if the activities of the company wholly or partly consist of receiving returns on investments – such as rent, interest and dividends (which are termed “passive income”) – then it can get a bit tricky.

The Government never intended that companies receiving passive income should benefit from the lower tax rate. It recently changed the rules for base rate entities to ensure this does not happen.

A base rate entity will only qualify for the lower 27.5% rate for a particular year if its passive income is less than 80% of its assessable income (and of course its aggregated turnover is less than $50m). Put the other way, companies that receive more than 80% of their income in passive forms will pay tax at the standard corporate tax rate, regardless of turnover.

The passive income is termed “base rate entity passive income” in the amending legislation. And what qualifies? Well, dividends and the associated franking credits to start with. Interest (or a payment in the nature of interest) also qualifies – but not if the entity is a financier – as well as royalties and rent. Another key area that qualifies as base rate entity passive income is net capital gains. This could be important for smaller companies – in that the sale of a substantial asset could shake the income mix and possibly put access to the lower rate at risk.

Does your company derive investment income?

If you are not sure of the implications of the new company tax rates, we can help. For example, if your business operates via a company, it may be worthwhile using the CGT rollover provisions to transfer assets into a separate entity, to ensure that the 80% rule is not breached. The split 27.5% / 30% rate also has implications for the imputation system and franking credits, which we would be happy to discuss.

Still Unsure About The Instant Asset Write-Off?

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If you’re thinking about purchasing some new equipment for your business, it may make sense to bring forward that purchase in order to take advantage of the “instant asset write-off” available until 30 June 2020.

The write-off allows small and medium businesses (with turnover up to $50 million) to claim a full deduction for any depreciating asset costing up to $30,000 in the year they first use it, rather than having to deduct the cost over several years under the usual depreciation rules.

Case study: David runs a distribution business with annual turnover of $1.4 million. He has been thinking about purchasing a computer upgrade (costing $8,000), an extra forklift ($24,000) and a new van ($35,000), which David would use 20% of the time for personal use.

Which assets qualify?

The $30,000 threshold is a per asset threshold, so the business could claim both the $8,000 computer upgrade and $24,000 forklift under the write-off, even though these total $32,000.

The $35,000 vehicle won’t qualify. Even though businesses may only claim the write-off for the business use proportion of an asset (in this case 80% or $28,000), the full cost of the asset must still be below the $30,000 threshold. The vehicle would be subject to the usual depreciation rules.

What’s the advantage of the write-off?

The write-off “accelerates” David’s deductions because the business can fully write off qualifying purchases in the first year, rather than gradually claiming deductions for depreciation over several years. This is clearly a benefit, but David’s decision about the purchases should also factor in:

  • how profitable the business is, and how a large deduction this year versus gradual depreciation over several years will be applied against the business’ assessable income; and
  • the cashflow impact of making the purchase, including whether finance is needed. Does the business genuinely need the new assets, and does the tax benefit of the instant write-off justify the expense involved in this capital expenditure?

What’s the deadline?

The $30,000 write-off is a temporary measure.

Unless there are further government announcements, the threshold will return to $1,000 from 1 July 2020.

David must do two things if he wishes to utilise the $30,000 write-off.

First, he must purchase the asset by 30 June 2020.

  • For small businesses like David’s (with turnover under $10 million), the purchase can go as far back as 13 May 2015 (subject to the “first use/installation” rule discussed below).
  • If David’s business turnover was between $10 million and $50 million, the purchase would need to have been made after 2 April 2019 (because the measure was not available to medium businesses before then).

Be careful about financing asset purchases. If you “lease” an asset you may not qualify because you’re not the owner, but if you use a form of finance like a “chattel mortgage” (where the lender takes security over the asset) you can still claim the write-off.

Second, the asset must be first used, or installed ready for use, on or before 30 June 2020. This means David wouldn’t qualify if he buys the asset but it’s not delivered until after 30 June 2020.

If a small business purchased and also first used or installed an asset on or before 2 April 2019, a lower threshold will apply. Talk to your adviser about the tax treatment of that purchase.

Let’s look at your expenditure plans

If you’ve been considering new equipment for your business, contact us today to explore the optimal timing for that expenditure and whether the write-off can work for you.

 

The Australian Tax Office hotspots 2019 — do they apply to you?

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Every tax time, the ATO focuses on certain hotspots where taxpayers are prone — either accidentally or deliberately — to make errors. These are the areas it will concentrate its audit firepower on, and for those who have made claims in areas which the ATO will be targeting, they can be a wake-up call both to ensure that you get it right this year and that you go back and check that you did it right last year.

So, what is on the ATO’s list this year? Well, essentially, they’re looking at two main areas: work-related expenses and claims made by investment property owners.

The ATO recently claimed that there was an $8.7 billion shortfall between the tax individuals are expected to pay and the tax they actually are paying. The ATO believes that work-related expenses claims are the biggest element in that “tax gap” and have signalled that they’ll be looking closely at these deductions this year. In particular, they’ll be looking closely at:

  • Claims for work-related clothing, dry cleaning and laundry expenses (for instance the ATO has flagged that it will be checking taxpayers who take advantage of the exemption from keeping receipts for people who spend less than $150 on laundry expenses; the ATO believes that too many people are claiming this without actually incurring the expense)
  • Deductions for home office use, including claiming for “occupation” costs like rent, rates and mortgage interest, which are not allowable unless you’re actually running a business from home.
  • Overtime meal claims
  • Union fees and subscriptions
  • Mobile phone and internet costs, with a particular focus on people who are claiming the whole (or a substantial part) of the bill for their personal mobile as work-related
  • Motor vehicle claims where taxpayers take advantage of the 68 cent per kilometre flat rate available for journeys up to 5,000kms (the ATO is concerned that too many taxpayers are automatically claiming the 5,000km limit regardless of the actual amount of travel)
  • Incorrectly claiming deductions under the rule that allows taxpayers who have incurred work-related expenses of $300 or less in total to make a claim without receipts (the ATO believes that some taxpayers are claiming this — or an amount just less than $300 — without actually incurring the expenses at all)

All these are areas where we know taxpayers often make mistakes, often not helped by misleading or vague advice from the ATO about how the law actually works. Our top tip before making any claim is to be confident that you understand what you can and can’t claim, and that you have the necessary proof (invoices, receipts, diaries etc.) that you actually incurred the expenditure and that it was work or business-related.

Property spotlight

The other main focus this year is on people who make deduction claims in relation to investment properties and holiday homes. Over 1.8 million people — or about 8 per cent of the Australian population — own an investment property, according to ATO figures, so this is a large and growing population for them to focus on. The ATO believes errors in rental property claims are the second biggest component in the $8.7 billion tax gap (after work-related expenses), and indeed, they recently announced that in a series of audits, the ATO found errors in 90 per cent of returns reviewed. So, this year, expect them to focus on the following:

  • The ATO has announced it will be paying close attention to excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
  • They will also be looking at the incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.
  • They will be looking at holiday homes that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.
  • They will be keeping a close eye on incorrect claims for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years. Expect to see the ATO checking such claims and pushing back against claims which don’t stack up.

Don’t forget, the ATO has access to numerous sources of third-party data including access to popular holiday rental listing sites such as Stayz and Airbnb, so it is relatively easy for them to establish whether a claim that a property was “available for rent” is correct.

The key tip is to ensure that property owners keep good records. The golden rule is: if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.

Other hotspots

Cryptocurrency

The ATO will also be taking a closer look at the booming market in investments in cryptocurrencies like Bitcoin. Increasing numbers of taxpayers are jumping on the bandwagon and the ATO believes that some of them are failing to declare the profits (and in some cases the losses) they are making on their investments. Remember, investing in cryptocurrencies can give rise to capital gains tax on profits. Traders can be taxed on their profits as business income.

To help them in their search, the ATO is collecting bulk records from Australian cryptocurrency-designated service providers (DSPs) as part of a data-matching program to ensure people trading in cryptocurrency are paying the right amount of tax. Data to be provided to the ATO will include cryptocurrency purchase and sale information. The data will identify taxpayers who fail to disclose their income details correctly.

The ATO estimates that there are between 500,000 and one million Australians that have invested in crypto assets.

Sharing economy

The ATO will also be looking closely at those working in the shared economy to ensure that income and expenses are correctly reported. Examples quoted by the ATO include services such as:

  • ride-sourcing – transporting passengers for a fare (such as Uber drivers)
  • renting out a room or house for accommodation (Airbnb hosts are the obvious example). The ATO is believed to be particularly concerned about taxpayers claiming the full CGT main residence exemption when part of their main residence has been rented out through Airbnb. The law prevents a full CGT exemption where part of a main residence has been used to earn income.
  • renting out parking spaces
  • providing skilled services – web or trade services etc. (Airtasker workers, for instance)
  • supplying equipment, tools etc.
  • completing odd jobs, errands, deliveries etc.
  • renting out equipment such as tools, musical instruments, sports equipment etc.

Source: Article by Mark Chapman – www.accountantsdaily.com.au

The Government has delivered tax cuts. So how much will you get?

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The Government’s income tax cuts have been passed by the Senate.

It is the second major tax cut in two years.

This is what that means for you.

This year: Modest cuts for most Australians

Modest tax cuts are available to millions of Australians almost immediately.

People earning between about $21,000 and up to $126,000 in the 2018-19 financial year will receive a boost.

But the laws apply unevenly across this group.

Income in 2018-19 Tax cut
$25,000 $255
$40,000 $580
$60,000 $1,080
$90,000 $1,215
$120,000 $315

There will be no increase for those on Newstart.

In four years: Boost for wealthier Australians

In 2022-23, a second phase of tax cuts arrive.

Ultimately, wealthier Australians will pay less due to a combination of changes to tax offsets and income thresholds.

Although this group mostly missed out on the benefits of stage one, in four years’ time they will be the big winners.

Those earning $120,000 or more will be $2,565 better off each year.

In six years: Boon for wealthiest Australians

Two years further down the track, the most controversial component of the package kicks in.

One whole tax threshold will be removed, leaving just four, and the tax rate for another threshold will be cut.

It will mean that once someone earns $45,000 in one year, every additional dollar they bring in that year will be taxed at the same rate — 32 per cent — up to $200,000.

This delivers massive cuts for those with an income close to $200,000.

For example, someone on $180,000 will be $8,640 better off.

  Stage 1 Stage 2 Stage 3
Income Tax Cut from 2018-19 Tax Cut from 2022-23 Tax Cut from 2024-25
$ 30,000 $ 255 per year $ 255 per year $ 255 per year
$ 60,000 $ 1,080 per year $ 1,080 per year $ 1,455 per year
$ 90,000 $ 1,215 per year $ 1,215 per year $ 2,340 per year
$ 120,000 $ 315 per year $ 2,565 per year $ 4,440 per year
$ 150,000 $ 135 per year $ 2,565 per year $ 4,440 per year
$ 180,000 $ 135 per year $ 2,565 per year $ 8,640 per year

 

Source: Extracted from www.abc.net.au

Tax Tips for Small Business

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PRE-1 JULY 2019 TO-DO LIST
  • Make trust resolutions
  • Document the streaming of trust capital gains and franked dividends
  • Review private company loans
  • Consider deferring certain income, and bringing forward certain deductible expenses
  • Write-off bad debts
  • Pay employee bonuses and employee superannuation entitlements
RECORD-KEEPING TIPS
  • Record cash income and expenses
  • Account for personal drawings
  • Record goods for your own use
  • Separate private expenses from business expenses
  • Keep valid tax invoices for creditable acquisitions when registered for the goods and services tax (GST)
  • Keep adequate stock records
  • Keep adequate records to substantiate motor vehicle claims
MAXIMISE DEPRECIATION DEDUCTIONS

A key feature for small business in the 2019-20 Federal Budget on 2 April 2019 was the announcement that a small business entity (SBE) may potentially qualify for an asset write-off one under one of three varying caps during the year ended 30 June 2019.

A medium sized business entity (MSBE) will also be able to claim the instant asset write-off in respect of a depreciating asset that is both first acquired for a cost of less than $30,000 on or after 7.30pm on 2 April 2019 which is used or installed ready for use by 30 June 2020.

The write-off amount will depend on the date the asset is first used or installed ready for use for a taxable purpose. For businesses registered for GST, the threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.

Entity type   Data acquired Time depreciating asset first used or installed ready for use for a taxable purpose  Asset cost threshold 
Small business entity From 7.30pm 12 May 2015 1 July 2018 – 28 January 2019 $20,000
Small business entity From 7.30pm 12 May 2015 29 January 2019 – 7.30pm 2 April 2019 $25,000
Small business entity From 7.30pm 12 May 2015 7.30pm 2 April 2019 – 30 June 2020 $30,000

Where the cost of the asset is not available for the instant asset write-off deduction, it will be allocated to the general small business pool and depreciated at a rate of 15 per cent regardless of the date of acquisition during the 2019 year, provided the asset starts to be used or is installed ready for use during the year ended 30 June 2019.

For assets included in the pool at the start of the 2019 year, the opening pool balance will be depreciated at the rate of 30 per cent. Where a balancing adjustment occurs during the year, the asset’s termination value must be deducted from the pool.

However, where the closing balance of the SBE’s general small business pool is less than $30,000 as at 30 June 2019, the SBE will be entitled to a full deduction for the amount of the pool’s closing balance.

MAKE SURE YOU PAY THE CORRECT COMPANY TAX RATE AND APPLY THE CORRECT RATE FOR IMPUTATION

Most companies with an aggregated annual turnover of less than $50 million will pay tax at 27.5 per cent in 2018-19. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income.

To qualify for the lower tax rate in 2018-19:

  • a company must have an aggregated turnover of less than $50 million, where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity
  • no more than 80 per cent of their assessable income is base rate entity passive income (replacing the requirement to be carrying on a business).

The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate.

As a corollary to the base rate passive entity income rules in determining the tax rate of a company, there have also been changes to the dividend imputation rules that apply to the franking of dividends by a company.

The company tax rate for franking distributions needs to assume that the aggregated turnover, assessable income, and base rate entity passive income is the same as 2017-18.
Where the company did not exist in the previous year, its corporate tax rate for imputation purposes will be deemed to be at the lower corporate tax rate of 27.5 per cent for that initial year.

These differential rates create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your registered tax agent is best placed to assist you with these issues.

SMALL BUSINESS INCOME TAX OFFSET

You will be entitled to the small business income tax offset for the year ended 30 June 2019 if you carry on business and your aggregated turnover for the 2019 year is less than $5 million. The offset rate is 8 per cent of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.

The ATO will work out the offset based on the net small business income earned as a sole trader and share of net small business income from a partnership or trust, as reported in the income tax return.

SMALL BUSINESS CGT CONCESSIONS

There are significant tax savings potentially available where an eligible active asset used in a business is sold for a profit and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2019 year.

Additional conditions must now be met when a taxpayer disposes of an active asset being a share in a company or an interest in a trust on or after 8 February 2018.

Given the complexity of the small business CGT concessions, taxpayers should consult their registered tax agent for advice.

MAKE TRUST RESOLUTIONS BY 30 JUNE

As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2018-19 financial year by 30 June.

If a valid resolution is not executed by 30 June, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.

A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust’s accounts do not need to be prepared by 30 June.

As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.

DOCUMENT THE STREAMING OF TRUST CAPITAL GAINS AND FRANKED DIVIDENDS TO BENEFICIARIES

Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts. The trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

These streaming rules are complex, and taxpayers should consult their registered tax agent for advice.

CLAIM DEDUCTIONS FOR PROFESSIONAL ADVICE WHEN STARTING A BUSINESS

Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the financial year those expenses are incurred rather than deductible over a five-year period as was the case previously.

If you established a business during the year, you should speak to your registered tax agent about claiming professional advice fees as an expense.

CONSIDER TAX IMPACTS FROM ANY RESTRUCTURING

Small businesses can change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.

This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.

However, caution must be exercised – business restructuring is complex, so you should first speak to your registered tax agent.

REVIEW YOUR PRIVATE COMPANY LOANS

The income tax laws can potentially treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:

  • a payment or a loan by a private company to a shareholder or an associate (like a family member)
  • the forgiveness of a shareholder’s or associate’s debt
  • the use of a company asset by a shareholder or their associate
  • the transfer of a company asset to a shareholder or their associate.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.

There are various things a private company can do before its 2018-19 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.

Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return needs to be lodged.

The rules around private company loans are complex and changing, therefore you should consult your registered tax agent on this.

PREVENT DEEMED DIVIDENDS IN RESPECT OF UNPAID TRUST DISTRIBUTIONS

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan by the company, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the unpaid trust distribution in 2018-19.

However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2018-19 income tax return needs to be lodged.

Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.

Trustees and beneficiaries should consult their registered tax agent on the full implications of these very complex rules if applicable.

WRITE-OFF BAD DEBTS

Businesses can only obtain income tax deductions for bad debts when various conditions are met.

A deduction will only be available if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available.

The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business.

Certain additional requirements must be met where the creditor is either a company or trust.

CHECK IF THE PERSONAL SERVICES INCOME RULES APPLY

Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. You can receive PSI even if you’re not a sole trader. If you’re producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

If the PSI rules apply, they affect how you report your PSI to the ATO and the deductions you can claim.

PAYING EMPLOYEE BONUSES

If you pay staff bonuses and you want to bring expenses into the 2018-19 year, ensure they are quantified and documented in a properly authorised resolution – for example, board minutes – prior to year-end to enable a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.

PAY ANY OUTSTANDING SUPERANNUATION ENTITLEMENTS

Ensure superannuation guarantee payments for employees are up-to-date, and report and rectify any missed payments to the ATO.

From 1 April 2019, there are new powers and offence penalties related to the payment of superannuation guarantee obligations.

Employers can also claim deductions for superannuation contributions made on behalf of their employees in the financial year they are made.

PREPARE FOR SINGLE TOUCH PAYROLL

Single touch payroll (STP) reporting has been extended to all employers from 1 July 2019. A number of options are available depending on the number of employees you have, whether they are closely held and whether you report via your tax or BAS agent.

Check with your payroll software provider to find out if your software is STP compliant.

If you don’t currently use payroll software, you should consult your registered tax agent for advice.

SEEK INDEPENDENT ADVICE ON INVESTMENT PRODUCTS PROMOTED AS BEING TAX EFFECTIVE

The end of the financial year often sees the promotion of investment products that may claim to be tax effective.

If you are considering such an investment, seek independent advice before making a decision, particularly from your registered tax agent.

Source: https://www.cpaaustralia.com.au/professional-resources/taxation/tax-tips/small-business.