New government bill introduced on company tax issue

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

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

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

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.

The 2017 SMSF return: are you up for the challenge?

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. 

1
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

 

 

Occupation-specific guides

There have been a lot of discussions regarding work related deductions in the present. The ATO has published a guide as follows.

When completing your tax return, you’re entitled to claim deductions for some expenses, most of which are directly related to earning your income.

To claim a work-related deduction:

  • you must have spent the money yourself and weren’t reimbursed
  • it must be directly related to earning your income
  • you must have a record to prove it.

Occupation-specific guides are clearly explained for your understanding on what you can and can’t claim as work-related expenses.

The information is categorized under different deduction labels, including:

  • car expenses
  • home office expenses
  • clothing expenses
  • self-education or professional development expenses.

The guides are available for the following occupations:

  • construction worker
  • retail worker
  • office worker
  • Australian Defence Force
  • sales and marketing
  • nurse, midwife or carer
  • police officer
  • public servant
  • teacher
  • truck driver

Reference: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Deductions-for-specific-industries-and-occupations/

Please call us on (02) 9954 3843 to get advice on occupation specific deductions to maximize your refund.

Catching the wave of SMSF opportunities

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.

 

TAX CHANGES FOR SMALL BUSINESS – UPDATES

Instant deductibility threshold extended

Budget 2017-18 has extended the instant deduction for depreciating business assets costing less than $20,000 until 30 June 2018.

Please note that this provision only lets small businesses to claim a tax deduction earlier. It does not offer any additional tax deduction measured over the life of the asset.

With the extended definition of small business, businesses with group turnover under $10 Million can benefit from this provision for assets bought after 1 July 2016.

Tightening of small business Capital Gains Tax concessions

There are a number of concessions available to small businesses that can defer, reduce or remove liability to Capital Gains Tax.

The government has announced changes to the rules that will limit the concessions to assets that are used by a small business or ownership interests in a small business. This will prevent the concessions applying to non-business assets owned by an entity that carries on a small business.

It will also prevent structuring so that ownership interests in larger businesses pass the eligibility tests.

The extended definition of small business does not apply to the Capital Gains Tax concessions. The existing tests of group turnover under $2 Million or group assets under $6 Million still apply.

Payments reporting extended to couriers and cleaners

Taxable Payments Annual Reports currently have to be lodged by businesses in the construction industry.

Businesses have to lodge annual reports with the ATO providing details of payments made to contractors.

This requirement will be extended to the courier and cleaning industries from the 2018-2019 financial year, with the first annual reports due in August 2019.

Small Business Entity definition changed

As already mentioned, the Government has managed to pass the extended definition of small business. The change applies to the current financial year (from 1 July 2016).

If your business has a group turnover under $10 Million you can benefit from most Small Business Entity concessions. These include the simplified depreciation rules, the $20,000 immediate deduction limit, the immediate deduction for prepaid expenses, and accounting for GST on a cash basis, among others.

The extended definition of small business does not apply to the Capital Gains Tax concessions, and nor does it apply to the Small Business Income Tax Offset. The Small Business Income Tax Offset effectively provides a tax cut to unincorporated businesses with a group turnover under $5 Million.

Company tax rate reduced

The Government has also managed to pass the reduction in company tax rate to 25% by 2026-27. However, they were forced to amend the original plan in order to get the legislation through parliament.

Larger companies and companies that do not carry on business (such as investment companies and “bucket companies”) will continue to pay a 30% rate of tax.

The tax rate reductions will be phased in:

From 1 July 2016 to 30 June 2024 the reduced company tax rate will be 27.5%. In 2016-2017 it will apply to companies with group turnover under $10 Million. In 2017-2018 it will apply to companies with group turnover under $25 Million.

From 2018-2019 it will apply to companies with group turnover under $50 Million.

  • In 2024-25 the reduced company tax rate will become 27%.
  • In 2025-26 the reduced company tax rate will become 26%.
  • And from 2026-27 the reduced company tax rate will be 25%.

From 2016-17 (the current financial year) dividends paid by a company can only be franked at the rate of tax applicable to that company. For example, Dividend paid by small business entities in the 2016/17 income year now attract a franking credit of only 27.5%.

Super Contribution

Please note that the super contribution is now limited to $25,000.00 per person per annum. Clients should remember to adjust their salary sacrifices arrangements if applicable.

How the Government stole your franking credits

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/

SMSF survey reveals trustees are uneasy about offshore accounting

An overwhelming majority of SMSF trustees are uncomfortable with their personal financial records being processed and stored offshore, according to a recent survey.

A survey of SMSF trustees conducted by SMSF administration firm Superfund Wholesale found that 70 per cent of respondents were uncomfortable with their personal financial records being processed and stored offshore, while 93 per cent of respondents had a negative view of accountants and advisers sending work to offshore suppliers.

The survey also indicated that the recent global ‘Petya’ and ‘WannaCry’ ransomware attacks also caused concerns for SMSF trustees about the security of personal financial data.

Almost all survey respondents, or 97 per cent, believe offshoring is not secure.

SuperFund Wholesale director Kris Kitto said among the SMSF trustees surveyed, an overwhelming majority or 95 per cent, said if they were advised their personal financial information was going to be sent offshore, they would reconsider the services offered.

“Overall, 84 per cent of respondents were extremely or very likely to switch accountants or advisers if they started sending their personal financial information offshore, and stated that they would rather keep their personal financial data in Australia than receive a fee discount and go offshore,” said Mr Kitto.

Mr Kitto said there has been a rise in Australian accounting and advice businesses outsourcing parts of their operations to offshore providers.

If you would like us to prepare your SMSF financial reports using In-house Software, we guarantee that we never offshore our work to protect the confidentiality of the information.

Please call John Hurley on 02 9954 3843 or email admin@hurleyco.com.au to discuss your requirements.

Source: https://www.smsfadviser.com/news/15686-smsf-trustees-uneasy-about-offshoring-survey-reveals?utm_source=SMSFAdviser&utm_campaign=18_07_17&utm_medium=email&utm_content=1