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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

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

This article is reprinted from Acuity Magazine.

Under the new super rules, this year’s SMSF returns are going to be very complex and it’s important that practitioners are up to speed.

In Brief

• There’s no such thing as simple super anymore.
• The changes are the most significant in a decade and all details must be considered.
• There are now three options to be looked at.

Changes to Capital Gains Tax (CGT) rules require practitioners to carefully explore the full range of options, says Tony Negline, Superannuation Leader, Chartered Accountants ANZ.

Trustees of SMSFs eligible for CGT relief need to know there are other options besides simply uplifting the cost base of growth assets and deferring capital gains, says Negline.

Consider an SMSF eligible for CGT relief with one member who has over $1.6m in pension phase and another member in accumulation phase. The fund was unsegregated – that is, using the proportional method – for tax for the 2017 tax year and holds three parcels of shares in a Big Four bank. 

Once the fund calculates the asset gain or loss position at 30 June 2017, there are three options:

1. Electing no CGT relief
2. Electing relief, but no deferral of capital gains and capital losses
3. Electing relief, but deferral of capital gains only (Source: ATO Law Companion Guideline 2016/8)

Under Option One, the fund trustees may elect no relief for any CGT assets, as it may be difficult to justify the cost of CGT relief analysis and deliver certain value to clients.  

If Option Three is chosen for assets with unrealised capital gains, the fund commits to book a deferred tax liability and defer the capital gains until the asset is sold. However, “This may not be desirable, if the accumulation member will soon move to pension phase,” says Negline.

For assets with unrealised capital losses at 30 June 2017, trustees may choose Option Two and match these against actual or deemed capital gains which arise from choosing CGT relief which practically means going forward with a cost base lower than the actual buying price for some assets.

In addition, if the fund sells 1,000 bank shares during 2017/18 (say for $2.50 per share), the trustees can decide which of the three parcels is sold. If the sales occur before lodging the 2016/17 return, this may have a big impact on CGT relief planning.

For example, if the sale is deemed to be parcel 2 shares, and Option one (no relief) is chosen for these shares, a gross capital loss in the 2017/18 year of $5,000 will arise. The trustee would still need to decide what to do with parcels one and three.   

Some of the risks in the above scenario for SMSF practitioners include:

• Not knowing all these options are available
• Accepting CGT relief options that software seems to pre-empt
• Spending too much time on this type of analysis and finding little or negligible benefit for the client

People’s knowledge of the biggest changes to super in a decade will be tested over the next year and it is important to take into account all the detail so that clients can be assisted.

Reference: https://www.acuitymag.com/finance/the-2017-smsf-return-are-you-up-for-the-challenge?ecid=O~E~Newsletter~Acuity~201709

This is a reprinted report of an article posted by Class, Australia’s leading cloud-based SMSF administration software.

Kevin Bungard, CEO of Class, shares insights into how the advance in technology is driving a revolution in the competitive SMSF landscape.

In brief

• Accountants involved in SMSFs know change is occurring
• Online access is expected for SMSFs

Every accountant and adviser involved with SMSFs knows that their industry is undergoing profound change. The super reforms have been capturing the headlines but they are just the latest development.  The rapid advance of technology is helping drive a rapid revolution in the competitive landscape for SMSFs.

With about 25% of all SMSFs in Australia (140,000 funds) administered on their software platform, Class has a unique view of many of these changes. Kevin Bungard, CEO outlines the key trends that accountants and advisers in the SMSF space need to be aware of, so that they can “catch the wave” currently breaking over their industry.

The growing importance of online access for SMSFs

Online access is increasingly expected by Australians for their SMSFs, much like the way they already access bank accounts, share trading and other financial services. Class saw the need for providing ease of access and visibility for trustees, and developed its client view feature and mobile app.

The market share of online SMSF administrators has roughly doubled from 8% to 15% in the past five years, driven by competitive fees and user-friendly online access for trustees. Despite this Kevin claims that, “Accountants sometimes tell me that their clients are not greatly interested in online access to their SMSF, but could it simply be that clients who want online access are not choosing them for their administration?”

SMSF administrators in the cloud grow faster than their peers

The typical SMSF practice using Class grew at 17% per annum in the five years to November 2016, compared with an industry growth rate of 5%.

The right cloud-based SMSF software is highly automated and has audited, direct-connect data feeds to maximise processing efficiency. These make an SMSF business easily scalable and gives it the capacity to service more SMSFs without taking on more staff. It also gives directors more time to focus on business strategy.

Opportunities in DIY SMSFs and outsourced administration

There is a trend towards general accounting practices outsourcing their back of office administration, so they can focus on tax lodgement and the client relationship. There is a growth opportunity here for efficient administrators, since practices with 25 SMSFs or less still make up 11% of the market and are typically doing their administration with Excel. Class software can be easily white-labelled so multiple businesses can be administered under the one brand.

The huge pool of wealth waiting for you outside super

Despite a fall in growth of SMSF numbers last financial year, Kevin Bungard believes there will be a bounce-back once the sector has digested the super reforms. However, it’s highlighted the fact that SMSFs are not the be all and end all of wealth accumulation.

“Accountants should not ignore the huge opportunities in their clients’ non-super investments: an estimated $3 trillion of investable assets (excluding the family home). This includes trusts, companies and individual portfolios.”

Class developed its Class Portfolio product to help advisers and accountants administer these types of funds.

Our office is a user of Class Software for all superannuation reporting aspects. Please call us on (02) 9954 383 if you need any support regarding your SMSF fund.

Investment company Century Australia wrote to shareholders last week to tell them it was recalculating the franking credits it had issued with dividend payments made during the 2016/17 financial year.

Century’s turnover in the 2016/17 financial was below $10 million, which means that under the new company tax rates, its rate for the year is 27.5 percent.

For companies with turnover of up to $10 million in the financial year ended 30 June 2017, the company tax rate falls from 30 percent to 27.5 percent.

The maximum franking credit entitlement for a frankable distribution is based on the company’s tax rate in the prior income year.

And because the tax legislation has retrospective effect back to 1 July 2016, franking credits are affected.

In Century’s case, ordinary dividends were paid in September last year and May this year, and a special dividend was also paid in May. All were fully franked at 30 percent.

Century says: “We are currently working with our share registry to recalculate the revised franking allocations for the dividends paid during the 2017 financial year.

“Once this is complete, we will inform shareholders impacted by this change and provide them with amended dividend statements.”

As Century’s case shows, dividend distribution statements previously provided to shareholders are no longer accurate if the franking credits were calculated at the higher company tax rate of 30 percent and the company now qualifies for a lower tax rate.

Robert Deutsch, senior tax counsel at the Tax Institute, explains: “The change to the imputation rules means a small business will have to frank dividends at the rate of 27.5 percent. This could have the effect of ‘trapping’ franking credits in the company and lead to the real possibility that much excess credit will be wasted.

“While we support the reduction of the company tax rate for small business, we do not support the wastage of franking credits. This is an unfair burden to place on small business.”

Any company with historical franking credits as a result of tax payments paid at a 30 percent rate will effectively have some of their historical tax payments wasted, as the tax that has been paid by the company at 30 percent can only be passed through to shareholders at the lower corporate tax rate that applies in the year the dividend is paid – 27.5 percent.

Tax commentators like Deutsch says this is an unfair outcome for companies that have a balance of retained earnings and franking credits.

More companies will be affected when the lower company tax rate applies to companies with turnover up to $25 million.

In a note to clients on the issue, chartered accountants Lowe Lippmann says: “While a reduction in the tax rate will clearly benefit companies, consider that the profits earned by the company will eventually be paid to shareholders in the form of dividends and it is necessary to consider the taxation of these dividends when determining the total tax paid on company profits.

“These changes will be important for small companies that have a small number of shareholders. A reduced franking credit rate may lead to a higher personal income tax liability.”

Reference: http://www.shedconnect.com/government-stole-franking-credits/