Business lending practices in spotlight at Royal Commission

Bank lending practices for small and medium enterprises (SMEs) were in the spotlight when the Financial Services Royal Commission (FSRC) held round three of its public hearings from 21 May to 1 June 2018. This round of hearings focused on the conduct of financial services entities when providing credit to SMEs. The hearings will also explore the legal and regulatory regimes, as well as self-regulation under the Code of Banking Practice.

The Royal Commission is interested in SME lending practices as they are an important sector of the economy – over two million SMEs account for more than 65% of private sector employment. The aggregate value of bank lending to small business (defined as loans of less than $2 million) accounts for around 28% of total bank lending to business. In addition to loan facilities and revolving trade finance, a Financial Services Regulatory Commission background paper notes that other financial products are often provided to SMEs, such as cashflow finance management and access to payments systems for credit cards and EFTPOS. SME owners also often rely on their personal finances and real estate to provide security to obtain access to SME finance.

The Royal Commission considered issues with SME lending practices by reference to case studies involving ANZ, Bank of Queensland, CBA, Westpac and Suncorp. The approach of the banks to enforcement, management and monitoring business loans will be considered by reference to case studies from CBA/Bankwest and NAB.

Remote and regional areas

The fourth round of the Royal Commission’s public hearings (25–29 June 2018) is focusing on issues affecting those who live in remote and regional communities, which relate to farming finance, natural disaster insurance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.

The Royal Commission is expected to provide an interim report by 30 September 2018, with a final report due by 1 February 2019.

Personal tax cuts now law

The Government’s seven-year personal income tax reform plan passed Parliament on 21 June 2018 intact after the Senate did not insist on earlier amendments that would have removed the third step from the plan. The Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 then received Royal Assent on 21 June 2018 as Act No 47 of 2018.

The personal income tax changes, announced in the 2018–2019 Federal Budget, are as follows:

• Step 1 will see a new non-refundable Low and Middle Income Tax Offset (LMITO) from 2018–2019 to 2021–2022, designed to provide tax relief of up to $530 per individual for each of those years. The offset will be delivered on assessment after an individual submits their tax return and will be in addition to the existing low income tax offset (LITO). The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar.
• Step 2 will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018. In 2022–2023, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar for income between $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.
• Step 3 will increase the top threshold of the 32.5% bracket from $120,000 to $200,000 from 1 July 2024, removing the 37% tax bracket completely. Taxpayers will pay the top marginal tax rate of 45% for taxable income exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

Tax rates and thresholds for 2018–2019 onwards

The following table reflects the now legislated personal tax threshold and rate changes (bold), excluding the 2% Medicare levy.

Rate	2018–2019 to 2021–2022	2022–2023 and 2023–2024	2024–2025 onwards
0%	$0–$18,200	$0–$18,200	$0–$18,200
19%	$18,201–$37,000	$18,201–$41,000	$18,201–$41,000
32.5%	$37,001–$90,000	$41,001–$120,000	$41,001–$200,000
37%	$90,001–$180,000	$120,001–$180,000	N/A
45%	$180,001+	$180,001+	$200,001+

Source: www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6111.

GST property settlement online forms

Amendments contained in the Treasury Laws Amendment (2018 Measures No 1) Act 2018 require purchasers of newly constructed residential properties or new subdivisions to remit GST directly to the ATO as part of settlement. This will apply from 1 July 2018.

The ATO says property transactions of new residential premises or potential residential land that involve GST to be paid directly to the ATO on or before settlement will require purchasers or their representatives to use the following online forms:

• Form one, GST property settlement withholding notification, is used to advise the ATO that a contract has been entered into for new residential premises or potential residential land that requires a withholding amount. This form can be submitted any time after a contract has been entered into and prior to the settlement date.
• Form two, GST property settlement date confirmation, is used to confirm the settlement date and can be submitted at the time of settlement and when the payment has been made to the ATO.

The ATO has provided instructions on how to complete the forms. The forms require the details of:

• the contact person;
• the property;
• the GST withholding amount; and
• purchaser and the supplier (vendor, seller, etc).

Both online forms can be completed and submitted by the purchaser or their representative. Depending on which state or territory the property is acquired in, the purchaser’s representative can include a conveyancer or a solicitor. The ATO says property suppliers are not required to submit these online forms.

Major ATO focus on work-related clothing and laundry this tax time

This tax time, the ATO will be closely examining claims for work-related clothing and laundry expenses. Assistant Commissioner Kath Anderson said, “last year around six million people claimed work-related clothing and laundry expenses, with total claims adding up to nearly $1.8 billion. While many of these claims will be legitimate, we don’t think that half of all taxpayers would have been required to wear uniforms, protective clothing, or occupation-specific clothing.” Clothing claims are up nearly 20% over the last five years and the ATO believes many taxpayers are making mistakes or deliberately over-claiming.

The ATO says that around a quarter of all clothing and laundry claims were exactly $150, which is the threshold above which taxpayers are required to keep detailed records about the expenses. “We are concerned that some taxpayers think they are entitled to claim $150 as a ‘standard deduction’ or a ‘safe amount’, even if they don’t meet the clothing and laundry requirements”, Ms Anderson said.

 

She said the $150 limit is there to reduce the recordkeeping burden, but it is not an automatic entitlement for everyone. “While you don’t need written evidence for claims under $150, you must have spent the money, it must have been for uniform, protective or occupation-specific clothing that you were required to wear to earn your income, and you must be able to show us how you calculated your claim”, the Assistant Commissioner said.

Ms Anderson also warned that “far too many are claiming for normal clothing, such as a suit or black pants. Some people think they can claim normal clothes because their boss told them to wear a certain colour, or items from the latest fashion clothing line. Others think they can claim normal clothes because they bought them just to wear to work.”

The ATO is concerned that the results from its random audit program show lots of taxpayers over-claiming by a small amount. “We know that some people think $150 is not a large amount and that nobody will notice if they over-claim. But while $150 might not be big individually, when you multiply it over millions of taxpayers, it adds up to a lot. And besides, no matter how small, other Australians shouldn’t be expected to wear your over-claiming.”

Case studies from the ATO

An advertising manager claimed $1,854 for clothing and laundry expenses. Her claim was for clothing purchased at popular fashion retail stores. When the ATO contacted her, she said she represented her company at work functions and awards nights and was required to dress a certain way. The ATO explained that expenses for conventional clothing are not deductible, even if the taxpayer is required to wear them for work, and/or only wear them for work.

A car detailer claimed work related laundry expenses of over $20,000 per year over two years. When questioned, the taxpayer told the ATO he worked out the laundry expense at the rate of $227 per hour, as he valued his personal time. He then made a voluntary disclosure that his claim was excessively high and in no way a reasonable amount to claim. The ATO said the taxpayer’s claims were reduced to $0 in accordance with his voluntary disclosure. As he made a voluntary disclosure before the audit progressed, no penalties were applied.

Advisory Board to help clamp down on the black economy

The term “black economy” refers to people and businesses who operate outside the tax and regulatory systems, or who are known to the authorities but do not correctly report their tax obligations.

The Government is establishing a new Advisory Board to support its reform agenda to disrupt the black economy. The Minister for Revenue announced on 22 June 2018 that Mr Michael Andrew AO, who provided strong leadership to the Black Economy Taskforce last year, will chair the Black Economy Advisory Board.

The Advisory Board will include members of the private and public sector who will provide strategic advice on trends and risks in the black economy. The Advisory Board will also advise the Treasury about implementation of the Government’s decisions attacking the black economy and contribute to a Government report every five years about new threats emerging in the black economy.

The Minister said the Government’s actions to date have included a $10,000 limit on cash transactions, a comprehensive strategy to combat illicit tobacco, reforms to the ABN system, restricting government procurement to businesses that have acceptable tax records, and $315 million in additional funding to the ATO to increase its enforcement activity against black economy behaviour.

Source: http://kmo.ministers.treasury.gov.au/media-release/072-2018/.

Superannuation system: Productivity Commission draft report

On 29 May 2018, the Productivity Commission released a draft report recommending changes to improve the superannuation system by addressing unintended multiple accounts and default funds that underperform.

Deputy Chair of the Productivity Commission Karen Chester said that with default funds being tied to the employer and not the employee, many members end up with another account every time they change jobs. Currently, a third of accounts (about 10 million) are unintended multiples, meaning members pay excess fees and insurance premiums of $2.6 billion every year. According to the Commission, fixing these twin problems of entrenched underperformance and multiple accounts would lift retirement balances for members across the board. The difference in retirement balance could be up to $407,000 for a new workforce entrant when they retire in 2064 (or $61,000 for a 55-year-old today), Ms Chester said. Submissions on the draft report are due by 13 July 2018.

The main recommendations proposed in the draft report are as follows:

• Defaulting only once for new workforce entrants – a new mechanism for default funds whereby members would only ever be allocated to a default super fund once, upon entering the workforce. Under the proposal, new employees would be given a choice from a “best in show” list of up to 10 superannuation products identified by an independent and expert panel. If the employee fails to make a choice within 60 days, they should be defaulted to one of the products on the shortlist, selected via sequential allocation.
• Elevated MySuper authorisation – an elevated threshold for MySuper authorisation (including an enhanced outcomes test). The draft report recommends that funds should be required at least every three years to obtain independent verification of their outcomes test assessment, comparison against other products in the market and determination of whether members’ financial interests are being promoted. In addition, funds should be required to report to the Australian Prudential Regulation Authority (APRA) annually on how many of their MySuper members switched to a higher-fee choice product within the same fund each year. If funds fail to meet these elevated standards for five or more years, they should have their MySuper authorisation revoked, the draft report says.
• Cleaning up lost accounts – super funds should be required to transfer all lost and unclaimed accounts to the ATO, with the ATO empowered to reunite balances with a member’s active account (unless the member actively rejects consolidation).
• CGT relief for mergers – to faciliate fund mergers, the Government should make CGT relief permanent for funds that merge, and require APRA to report annually to the Council of Financial Regulators on the extent to which the MySuper outcomes test is bringing about fund mergers.
• Insurance – the Government should legislate to require trustees to cease all insurance cover on accounts where no contributions have been obtained for the past 13 months, unless they have obtained the express permission of the member to continue providing the insurance cover (note that the Government introduced legislation on 21 June 2018 proposing measures to protect low-balance and inactive super accounts from excessive fees and inappropriate insurance).

This draft report from the Productivity Commission has largely been overshadowed by the ongoing work of the Royal Commission into banking and financial services. Nevertheless, the inquiries complement each other. The Productivity Commission’s draft report provides an in-depth analysis of the super system, while the Royal Commission is focused on the conduct of those operating in the financial services industry. The Productivity Commission is expected to coordinate its final report with any findings and recommendations from the Royal Commission.

Source: www.pc.gov.au/__data/assets/pdf_file/0003/228171/superannuation-assessment-draft.pdf.

SMSF compliance: don’t slip up

With the self managed superannuation fund (SMSF) annual return lodgment deadline upon us, minds should have already turned to meeting compliance requirements. The 2016–2017 financial year includes a few twists and turns which trustees should factor in to avoid late lodgment.

The super changes from 1 July 2017 mean that SMSFs members with a pension balance of more than $1.6 million may need to consider reducing any excess, resetting CGT cost bases and getting actuarial certificates. This is in addition to the usual issues such as calculating taxable income and what expenses are deductible for the SMSF.

With all these changes, the ATO has allowed an extension to lodge returns by 2 July.

Beware the transfer balance cap

If people have a total balance of more than $1.6 million in pension phase as at 30 June 2017 in all of their super funds, they should have already reduced it to no more than $1.6 million by 1 July 2017, otherwise a penalty will apply. The excess can be either transferred to accumulation phase or withdrawn as a lump sum. For anyone in receipt of a defined benefit pension with a value of more than $1.6 million, or a combination of defined benefit and account based pension over that amount, an adjustment of all account-based pensions will be required. Any adjustment for these purposes can allow access to CGT relief, but there are exceptions.

Eligible for CGT relief?

Where a pensioner has reduced the balance of their account-based pension to meet the $1.6 million cap, or they are in receipt of a transition to retirement pension (TRIS), they may have access to the transitional CGT cost base reset. The reset allows a fund to notionally sell the CGT asset at its market price and immediately notionally acquire it to reset the cost base for CGT purposes. The operation of the reset depends on whether the fund calculates its exempt and taxable income on a segregated or proportional basis. If the segregated basis is used, it is possible for the CGT asset to reset its cost base between 9 November 2016 and 30 June 2017, but if the proportional basis is used the market value on 30 June 2017 applies to reset the cost base.

Why would you reset the CGT cost base of the fund? The answer lies in the potential tax benefits. It’s not compulsory to reset if you qualify and sometimes, it may be better not to. Don’t forget the reset is available only if the amount you have in pension phase on 30 June 2017 is more than $1.6 million or you were receiving a TRIS at that time.

If you decide to reset the CGT cost base of an asset, an election must be made and information is required about the amount of the reset that is deferred at ss 8F and 8G of the fund’s Capital Gains Tax Schedule. Once the election is made, it’s irrevocable.

Is an actuarial certificate needed?

In some circumstances, an SMSF will be required to obtain an actuarial certificate. The certificate is required if, at sometime during the 2016–2017 financial year, the fund calculated its exempt pension income on a proportional basis. An actuarial certificate is not required if the fund used the segregated basis or the fund was wholly in pension phase throughout the financial year. For the 2017–2018 financial year, an actuarial certificate will also be required for all SMSFs where at least one fund member has a total superannuation balance of at least $1.6 million as at 30 June in the previous financial year.

Keep track of contributions

Keeping track of contributions is something trustees need to do. All contributions should be classified on the basis of their taxation and preservation status. If a fund member decides to claim a tax deduction for personal contributions, they will need to complete an election. It needs to be given to the fund when their tax return is lodged with the ATO, or by the end of the financial year after the contribution has been made, whenever is the latter. Trustees will be required to acknowledge receipt of the election.

Tax deductions for expenses

Deductions for expenses paid by SMSFs depend on a number of situations depending on whether the expense has been incurred in gaining the fund’s assessable income. This means that any expenses that relate to exempt current pension income (ECPI) are not deductible, as they are incurred in gaining the exempt income of the fund. A fund that has accumulation and pension members will apportion expenses between those that are deductible and those that are not. There are some expenses which can be claimed in full, whether they are linked to exempt or assessable income of the fund. These expenses include the ATO’s supervisory levy and premiums for death and disability cover.

Recordkeeping

Good SMSF compliance hinges substantially on good recordkeeping. But not every fund is necessarily good at it.

What records should be kept, when and for how long? Some SMSFs have resolutions and minutes for every investment transaction while others don’t go into much detail at all. But what level of detail is really necessary? The answer lies in the fund’s trust deed, investment strategy and what is required by the tax and superannuation legislation.

Every time an SMSF makes or disposes of an investment, the transaction needs to be seen in the context of the fund’s investment strategy and the degree to which allowable asset classes, ranges and allocations are specified in that strategy. This will have a bearing on the amount of documentation required.

The legislation does not include specific provisions for recording SMSF investments. This means that investment reporting requirements for all superannuation funds apply to SMSFs as well. In this context, it seems reasonable the more detailed the fund’s investment strategy the less likely it is to record investment decisions. However, in contrast, an investment strategy written in very general terms may mean recording of investment transactions more frequently and in greater detail.

For example, a fund with a single balanced option is unlikely to have to meet each time a contribution is made to decide where the money should go. In contrast, if the fund’s investment strategy is couched in broad terms and a member wishes to select specific investments as permitted by the fund’s trust deed, then documents indicating whether the selection is consistent with the overall investment strategy of the fund are likely to be worthwhile.

There are some areas where best practice seems to dictate that detailed documentation and/or minutes should be prepared, especially where the transaction is linked to specific provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regs). Examples include:

• acquisition of direct property, which can be owned wholly by the fund or owned jointly with other parties – documents would include those relating to the purchase of the property, rental agreements, agent appointments, plus those relating to service providers to handle repairs and maintenance;
• any collectible or artwork which requires documentation relating to insurance, storage and possible leasing, which may be required due to the legislation;
• loans by the SMSF to related and non-related parties which require a written loan agreement specifying the terms and conditions of the loan;
• any “in specie” contribution or acquisition of an investment, which needs to be tested against the acquisition of assets from related parties and accompanied by a minute stating the transaction is permitted;
• any in-house asset acquisition should be documented, as the 5% testing of the amount needs to be verified at time of acquisition, as well as outlining how the ongoing monitoring of the limit will be conducted; and
• finally, any investment where the trustees act more in the capacity of investment manager, rather than trustee should be documented as the terms and conditions of the investment should be documented.

So it’s important you document all significant meetings and decisions of your SMSF. It’s a legislative requirement and keeping your reporting obligations up-to-date will help see that your fund remains compliant.

Even where an SMSF is involved, minutes and resolutions need to be taken seriously and read carefully before signing. They provide an official and legal record, or evidence of actions and decisions made by the trustees. If the minutes and resolutions are ambiguous and unclear they can lead to possible legal ramifications. Just because an SMSF is small doesn’t change things; minutes and resolutions are just as important as they are for larger funds.

Trustees should affirm the investment strategy at least annually noting whether all current investments are consistent with that strategy. This will then cover any other investment related transactions that do not require specific documentation.

Make sure the investment strategy is reviewed or varied when certain member-related events occur. This would include admission, resignation or death of a new member, or the commencement of a pension benefit or lump sum.

Other good reasons for recording information about the fund’s investments relate to the trustees being challenged. Documenting an investment decision can be used as a legal defence to justify why it was made. Documentation assists auditors in carrying out their responsibilities under the SIS legislation and for reporting to the ATO as regulator of SMSFs.

The superannuation law requires that some records must be retained for various periods. For example, the fund’s accounting records, annual returns and other statements are required to be kept for at least five years. However, minutes of meetings such as reviewing the fund’s investment strategy, changes of trustees, member reports and storage of collectables and personal use assets need to be kept for at least 10 years. Documents like the fund’s trust deed and other essential documents should be retained if the trustees consider the fund may be subject to challenge.

Keeping records for an SMSF serves many purposes to provide a “corporate memory” for the fund which may be required for compliance purposes as well as to protect trustees from any unfounded challenges.

Time to start on SMSF returns

So, if you haven’t got to work on this year’s SMSF return, it’s certainly time to start now in view of the changes to super that have taken place. Don’t forget to make an adjustment if the total of your pension balances are impacted by the transfer balance cap, reset the CGT cost base if appropriate and arrange for an actuarial certificate if required. Then there’s making sure contributions are correctly classified, income is properly accounted for and deductions are correctly classified.

 

Tax planning

With the end of the 2018 income tax year rapidly approaching, this issue of Client Alert draws attention to year-end tax planning strategies and compliance issues that taxpayers need to consider to ensure they are in good tax health. It focuses on the most important issues for small to medium businesses and individuals to consider so as to increase their tax refund or minimise their tax liability in respect of the 2018 income tax year.

One interesting procedural matter this year is that 30 June 2018 falls on a Saturday, meaning that ATO payments or lodgments due on that day or on Sunday 1 July can be made on Monday 2 July 2018 without incurring a general interest charge. However, where practically possible, all actions, payments or lodgments should be undertaken before Friday 29 June 2018.

This “date shuffling” conundrum should be kept in mind when reference is made to actions to be undertaken by 30 June 2018.

Common tax planning techniques include deferring the derivation of assessable income and bringing forward deductions. It is equally important to consider any pending changes to the tax legislation, and to specifically take note of any commencement dates and transitional provisions.

Deferring derivation of income

Businesses that recognise income on an accruals basis (ie when an invoice is raised) may consider delaying the raising of invoices for services rendered until after 30 June and thereby delay deriving assessable income until after the 2018 income tax year.

For example, if cash flow permits, businesses could delay raising some invoices in respect of work in progress (WIP). Also note that service income received in advance (eg where amounts are received before 30 June 2018 but services are only provided after 30 June 2018) may only be assessable income in the 2019 income tax year.

If income is derived on the cash basis (eg interest, royalties, rent and dividends), businesses may consider deferring the receipt of certain payments until after 30 June 2018 (eg set term deposits to mature after 30 June 2018 rather than before 30 June 2018).

Companies with a turnover of between $25 million and $50 million may want to defer the recognition of income to the 2019 income tax year, to ensure that the lower tax rate of 27.5% applies (rather than 30% in 2018).

 

Bringing forward tax-deductible expenses through prepayments

To qualify for deductions in the 2018 income tax year, taxpayers may bring forward upcoming expenses (ie incur the expenses before 30 June 2018) or small businesses and individual non-business taxpayers may prepay expenses up to 12 months ahead (ie pay tax-deductible expenses relating to the 2019 income year before 30 June 2018). This should only be done subject to available cash flow and where there is a commercial basis for the prepayment.

Business expenses that may be prepaid include:

• short-term consumables such as office supplies and stationery;
• unpaid workers’ compensation insurance premium instalments; and
• superannuation guarantee payments (only due in July).

Also note that bonuses and directors’ fees that are confirmed and committed to by 30 June (as evidenced in Board minutes) may be deductible in 2018, even if these payments are only made after 30 June 2018.

Expenses that individuals may prepay include:

• investment property expenses such as insurance, rates, repairs and maintenance and strata fees;
• subscriptions to professional journals and memberships to professional associations;
• interest on investment loans (eg for share portfolios and investment properties); and
• income protection insurance.

 

Business planning issues

Lower company tax rates and imputation

As illustrated in the following table, company tax rates are falling in Australia.

Income tax year	Turnover less than	Company tax rate
2016	$2 million	28.5%
2017	$10 million	27.5%
2018	$25 million	27.5%
2019–2025	$50 million	27.5%
2026	$50 million	26%
2027	$50 million	25%

Under the law current at the time of writing, companies that are carrying on a business and have turnover of less than $25 million will be subject to company tax at a rate of 27.5% in 2018 (ie company tax will only be at the rate of 30% in 2018 if turnover is $25 million or more, or the company is not carrying on a business).

The rate at which dividends will be franked in 2018 will depend on whether the company’s turnover in the previous year (2017) was less than the current year’s turnover benchmark ($25 million for 2018).

That is:

• if the 2017 turnover was less than the 2018 turnover benchmark, the 2018 dividend will be franked at 27.5%; and
• if the 2017 turnover was equal to or more than the 2018 turnover benchmark, the 2018 dividend will be franked at 30%.

Company profits may therefore be taxed at different rates from the rate at which dividends are franked. This disparate tax treatment can lead to either:

• over-franking of dividends (eg if company profits are taxed at 27.5% but franking is done at a rate of 30%), in which case certain actions need to be taken to avoid the imposition of franking deficit tax; or
• under-franking of dividends (eg if company profits are taxed at 30% but franking is done at 27.5%), in which case franking credits may become trapped and may not be usable.

Further amendments, contained in the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, may soon affect the way companies and shareholders receiving dividends are taxed and how franking will be done. The Bill proposes to amend the tax law to ensure that a company will not qualify for the lower company tax rate if more than 80% of its assessable income is passive income (such as interest, dividends or royalties). The amendments would modify the requirements that must be satisfied for a corporate tax entity to qualify as a base rate entity, replacing the “carrying on a business” test with a “passive income” test. The Bill has been passed by the House of Representatives and is before the Senate at the time of writing.

 

Deductions for small business entities

Businesses that are small business entities (companies, trusts, partnerships or sole traders with total turnover of less than $10 million) will qualify for the following raft of tax concessions in the 2018 income tax year:

• the $20,000 instant asset write-off – an immediate deduction when buying and installing depreciating assets that cost less than $20,000.
• the simplified depreciation rules – accelerated depreciation rates of 15% or 30% for depreciable assets that cost $20,000 or more;
• the small business restructure rollover;
• an immediate deduction for start-up costs;
• an immediate deduction for certain prepaid expenses;
• the simplified trading stock rules – removing the need to do an end-of-year stocktake if the value of the stock has changed by less than $5,000;
• the simplified PAYG rules – the ATO will calculate PAYG instalments;
• cash basis accounting for GST – the ATO will calculate the GST instalment payable and annual apportionment for input tax credits for acquisitions that are partly creditable;
• the FBT car parking exemption (from 1 April 2017); and
• the ability for employees to salary-sacrifice two identical portable electronic devices, such as laptops (from 1 April 2016 to align with the FBT year).

These concessions are very powerful for small businesses, and if applied correctly, can lead to substantial tax savings.

Tip: The $10 million turnover threshold does not apply for the small business CGT concessions. To qualify for the small business CGT concessions, businesses must still have an annual turnover of less than $2 million, or satisfy the $6 million “net asset value” test.

$20,000 instant asset write-off

Small business entities that make eligible purchases of less than $20,000 and use or install the new or second-hand depreciating asset ready for use before 30 June 2018 will be able to instantly claim a tax deduction for the cost of that asset in the 2018 income tax year.

Assets costing $20,000 or more can be pooled in a general small business pool, treated as a single depreciating asset and depreciated at:

• 15% for such assets acquired during the 2018 income tax year; and
• 30% for the 1 July 2017 opening written-down value balance of the assets in such a pool.

Whether GST should be included in working out whether the $20,000 threshold is met depends on whether the purchaser is registered for GST:

• If the purchaser is registered for GST, the GST-exclusive amount is the cost of the asset.
• If the purchaser is not registered for GST, the GST-inclusive amount is the cost of the asset.

Originally, 2018 was to have been the last year taxpayers could claim the $20,000 instant asset write-off. However, in its 8 May 2018 Federal Budget the Government has proposed to extend this write-off by another year. This means that from 1 July 2019 the instant asset write-off threshold will revert to $1,000 a year.

Immediate deductibility of start-up costs

Small businesses started this year will be entitled to an immediate deduction for all start-up costs (eg lawyer and accountant fees, costs of company constitutions or trust deeds) incurred in the 2018 income tax year.

Small business restructure rollover

Small business entities can restructure their operations (eg changing the business structure from a company to a trust, or from a sole trader to a trust) without income tax consequences (ie no income tax consequences on transferring depreciating assets, revenue assets, trading stock or CGT assets between the different restructured entities).

The most appropriate structure for a small business (company, trust, sole trader, partnership or any combinations of these) may change over time, so this new rollover is welcome and will help businesses seamlessly restructure to suit their needs.

 

Claiming small business CGT concessions can be tricky

Broadly, if a business is being sold that has an aggregated turnover of less than $2 million (ie it is a CGT small business entity) or the value of its net CGT assets is $6 million or less (ie it satisfies the $6 million “net asset value” test), the business may qualify for the small business CGT concessions.

Depending on the particular circumstances, if the business is expanding rapidly and may be at risk of breaching the $6 million net asset value threshold, the owner may consider selling the business before this breach occurs, while the sale of the business is still eligible for the small business CGT concessions.

The small business CGT concessions include:

• a 15-year exemption – no CGT is payable;
• a 50% active asset reduction – a 50% CGT discount in addition to the 50% general discount;
• the retirement exemption – up to $500,000 lifetime tax-free limit; and
• the active asset rollover – minimum two years’ deferral.

At the time of writing, the Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 is before the House of Representatives. It proposes to restrict access to the small business CGT concessions from 1 July 2017 onwards to only the sale of:

• assets that were actually used in the small business – meaning no CGT concession on the sale of assets not used in the business; or
• shares or units in companies or trusts that are also small businesses – meaning no CGT concession on the sale of shares or units in an entity that is not a small business.

Taxpayers who intend to claim the small business CGT concessions in 2018 will need to consider whether they would be eligible for the concessions under the new law, if it is enacted.

 

General business issues

Beware of private company loans and unpaid trust distributions

The shareholders of companies operating businesses sometimes treat their companies as their own piggybank by making drawings from the companies to either fund other business interests or their private lifestyle.

Such cash advances need to be documented with a complying loan agreement that requires minimum principal and interest repayments at the benchmark interest rate by 30 June; otherwise they will give rise to a deemed dividend under Div 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Care must also be taken when a private company makes a loan or payment or forgives a debt of a shareholder (or a shareholder’s associate) or if a trust declares a distribution to a private company without the cash payment to the company; such unpaid present entitlements (UPEs) made after 16 December 2009 by a trust to a company may be treated as either a loan by the company to the trust or remain a UPE (if put on sub-trust).

Apply look-through treatment to earnout rights

If a business was sold in the 2018 income tax year subject to an earnout arrangement where the sale price is paid in instalments (if future performance markers are satisfied), the capital gains are recognised in the income year that the business was sold. This look-through approach not only defers the taxation of the capital gain on the earnout, but may also allow the financial benefit arising from the earnout to potentially qualify for the small business CGT concessions (ie the instalments paid after the sale will form part of the same CGT event as the original sale).

Review trust deeds and make trust resolutions

Trustees must make valid distribution resolutions before 30 June (or an earlier date if specified in the trust deed) to distribute trust income to eligible beneficiaries. If trustees fail to make valid distribution resolutions before 30 June, the trustee can potentially be assessed on all of the trust’s net income at the top marginal tax rate (45%).

Tip: Beneficiaries must quote their tax file number (TFN) to trustees before a trust makes a distribution to them for the first time. Failure to do so will result in the trustee withholding tax of 47% (the top marginal rate plus the Medicare levy) from all future distributions to the beneficiary.

To ensure that valid trustee distribution resolutions are made, the terms of the trust deed must be complied with.

For example, if the trust deed defines trust net income as equal to taxable net income, but the trustee resolves to distribute only accounting income to beneficiaries, this resolution may not be an effective distribution of trust income (in part or whole) – and it may result in the trustee being assessed at the top marginal tax rate (45%).

Since the exact trust net income will not be known by 30 June, trust distribution resolutions should be made distributing different percentages to beneficiaries (adding up to 100%), or distributing specified dollar amounts to certain beneficiaries and the balance to a default beneficiary.

Review bad debts and obsolete plant and machinery

Unpaid debts should be reviewed to determine the likelihood of not receiving payment of these debts and whether attempts to recover the debts will be successful. It is important to keep documentation as evidence where the debt is considered to be non-recoverable. If the debt is irrecoverable and income is reported on an accruals basis, the debt can be regarded as a bad debt for which a tax deduction may be claimed. This process must occur before 30 June.

It should be ensured that these bad debts have not been forgiven – forgiven debts do not qualify as bad debts.

This same methodology should be applied for plant and machinery. Review asset registers to identify obsolete plant and machinery, and be sure to scrap it (ie physically dispose of it). A deduction can be claimed for the written-down value of such assets.

Value trading stock at the lower of cost, market value or replacement value

The valuation of trading stock at year-end may impact on the amount to be included in assessable income for the 2018 income tax year. Because a lower closing value for trading stock may result in a lower taxable income, taxpayers have the choice of valuing trading stock on hand at 30 June at the lower of cost, market value or replacement value.

 

Individual planning issues

No more Budget repair levy

The Budget repair levy of 2% on the part of an individual’s taxable income that exceeds $180,000 no longer applies in 2018. Therefore, the top marginal rate for 2018 (including the 2% Medicare levy) will be 47%, as opposed to 49% in the 2017 income tax year. The FBT rate is also 47% for the 2018 FBT year.

Review salary packaging arrangements

Review any salary packaging arrangements (eg for motor vehicles) to ensure they were entered into before the services have been performed by employees or before salary review time, so that they will be effective.

With the lowering of the concessional superannuation contributions cap to $25,000 for everyone from 1 July 2017 (as opposed to either $30,000 or $35,000 for the 2017 income tax year, depending on the age of the individual), ensure that salary sacrifice agreements are reviewed to ensure there are no excess concessional contributions in 2018.

Manage exposure to CGT

Individuals may consider delaying the exchange of contracts to sell an appreciating capital asset until after 30 June 2018. That way, the capital gain will only be assessable in the 2019 income tax year.

If a capital gain has already been made this year, it may be possible to crystallise capital losses (eg by selling shares that have declined in value) to reduce the capital gain. However, when adopting this strategy, taxpayers must take care to ensure they are not engaging in “wash sales”, where shares are sold shortly before 30 June solely to realise the capital loss and then bought back shortly after 30 June.

A capital gain realised in 2018 will be eligible for the 50% CGT general discount to the gross gain if the asset was held for at least 12 months before it was sold (ie before the CGT event occurred).

Deduct work-related expenses

Although a myriad of tax law considerations are involved when claiming work-related expenses, there are three main rules:

• Only claim a deduction for money actually spent (and not reimbursed).
• The work-related expense must directly relate to the earning of income.
• An employee must have a record to prove the expense.

For example, a claim for work-related expenses will not be allowed if deductions are claimed for private expenses (eg travel from home to work and not required to transport bulky equipment), reimbursed expenses (eg an employee is reimbursed for the cost of meals, accommodation and travel) or if no records are kept.

Tip: Taxpayers who are overclaiming deductions for work-related expenses such as vehicles, travel, internet and mobile phones and self-education are on the ATO’s hitlist. Taxpayers must keep evidence to substantiate such claims.

Other practical issues to consider when claiming work-relates expenses include the following:

• When claiming work-related expenses relating to a vehicle, travel, internet, self-education or a mobile phone, taxpayers should ensure that the amount claimed for these expenses is reasonable and verifiable. The ATO is using real-time data to compare deductions claimed by taxpayers in similar occupations and income brackets, so it can identify higher-than-expected or unusual claims.
• When claiming deductions up to $300 (allowable without a receipt), taxpayers must still be able to substantiate the deductions claimed if they are questioned by the ATO.
• When claiming deductions for work uniforms, taxpayers should ensure they only claim for uniforms that are unique and distinctive (eg with the employer’s logo and specific to the taxpayer’s occupation) and not clothing for everyday use (eg plain suits worn by office workers).

Taxpayers working from home may be able to deduct a pro rata portion of water and electricity costs as well as depreciation for office equipment, provided they keep a diary of the hours worked at home to substantiate their claims.

An individual may claim the amount incurred on self-education expenses as a tax deduction, provided the expenses were incurred to maintain or improve the individual’s skill or knowledge necessary to perform the individual’s current job (as opposed to securing a new job). For example, an accountant attending an accounting seminar, conference or workshop to stay up to date with the latest accounting developments could claim the expenses as a deduction.

Make donations count for tax

Donations of $2 or more to deductible gift recipients are tax deductible. Donations of property to such recipients may also be tax deductible. However, donations to overseas charities may not be tax deductible.

Use negative gearing where appropriate

An investment property is negatively geared if the rental income is less than interest and other costs of maintaining the property. In such a case, the loss on the investment property can be offset against other income to reduce taxable income.

Because individuals on higher tax rates will gain a greater tax benefit from the loss deduction compared to individuals on lower tax rates, a possible strategy (provided CGT consequences and other circumstances have been considered as well) with married couples is to have the negatively geared property in the name of the spouse who earns the highest income. Of course, the benefit of this strategy reverses when the property yields a net income. Therefore, investment properties that are positively geared (ie when rental income exceeds the costs associated with the investment property) may be held in the name of the spouse with the lower taxable income. This also applies for interest-bearing deposits such as term deposits.

Pay superannuation contributions before 30 June

From 2018, both employees and self-employed individuals can claim a tax deduction annually to a maximum of $25,000 for personal superannuation contributions, provided the superannuation fund has physically received the contribution by 30 June 2018 and the individual has provided their superannuation fund with a “notice of intention to claim” document.

Taxpayers must be aware of exactly how long a superannuation contribution takes to reach a superannuation fund – for example, if a superannuation contribution is made one day before 30 June, but the payment is received in the superannuation fund’s bank account two days later (ie after 30 June), no tax deduction will be allowed in the 2018 income tax year.

Tip: If the employer is utilising the ATO small business clearing house, their super guarantee contributions are counted as being paid on the date the clearing house accepts them (provided the fund does not reject the payments).

An easy way to prevent any late payment issues is to pay superannuation contributions at the beginning of June each year.

 

Take note of 1 July 2017 superannuation changes

Fundamental changes to the superannuation landscape have occurred from 1 July 2017 (ie for the 2018 income tax year).

The following table gives a short summary of the most important superannuation rates and caps that apply.

CGT cap for non-concessional contributions	$1.445 million
Concessional contributions cap	$25,000
Non-concessional contributions cap	$100,000 (or $300,000 under the three-year bring forward rule)
Superannuation guarantee	9.5%
General transfer balance cap	$1.6 million
Total superannuation balance threshold	$1.6 million

Because the ability to contribute money to superannuation is severely curtailed from 1 July 2017, individuals may wish to consider alternative investment strategies outside of superannuation (eg family trusts, innovation companies, etc).

Innovation incentive

From 1 July 2016, some investors in certain small Australian innovation companies will basically qualify for two incentives for investments made on or after 1 July 2016:

• when they make the investment, a 20% non-refundable carry-forward tax offset on their investment (capped at $200,000); and
• when they dispose of the investment, a CGT exemption if the disposal occurs after holding the investment for more than one year but less than 10 years.

Regarding the $200,000 cap: there is no limitation on the amount sophisticated investors (ie investors with net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000) may invest, although the maximum amount of offset will remain at $200,000. However, non-sophisticated investors (eg “mum and dad” investors) may only invest a maximum of $50,000 a year in such companies.

 

Property ownership issues

There have been recent changes to:

• the tax treatment associated with residential rental properties (eg travel deduction and depreciation changes);
• withholding tax obligations for purchasers of property:
• 5% CGT withholding applies on the sale of any property for $750,000 or more, unless the vendor has a tax clearance certificate evidencing the vendor’s Australian tax residency;
• 10% GST withholding applies on the sale of new residential premises (from 1 July 2018);
• superannuation measures impacting home ownership (eg the first home super saver scheme and the superannuation downsizer incentive); and
• stamp duty and land tax issues – note that these are different in each state.

There is also a proposal to abolish the main residence CGT exemption for taxpayers who are no longer Australian tax residents. If it is enacted, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018, which passed the House of Representatives without amendment and is before the Senate at the time of writing, will change the tax law so that any individual vendor that is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer qualify for the full or partial main residence exemption, regardless of how long the home has actually been used as a main residence. This is causing some serious concerns. The time from which this measure would apply depends on the time when the home was acquired.

Furthermore, foreign investors need permission from the Foreign Investment Review Board (FIRB) before purchasing residential properties (excluding some new dwellings) or agricultural land in Australia.

Changes affecting residential rental properties in 2018

From 1 July 2017, individuals, discretionary trusts and self managed superannuation funds (SMSFs) will no longer be able to claim travel expenses (eg motor vehicle expenses, taxi or car hire costs, airfares or public transport costs, or costs for meals and accommodation related to the travel) incurred to inspect residential rental properties. Such disallowed travel deductions will also not be included in the cost base or reduced cost base of the rental property.

However, taxpayers may still claim travel expenses to inspect commercial premises and residential premises used to carry on a business (eg premises used as a retirement village). Property management expenses paid to real estate agents (which may involve real estate agents incurring travel expenses to inspect the residential rental property) will still be deductible.

Also from 1 July 2017, the depreciation on plant and equipment (eg washing machines and refrigerators) in residential rental units will be severely limited depending on whether:

• the plant and equipment was acquired before or after 9 May 2017;
• the plant and equipment have been previously used;
• the plant and equipment have been used in the taxpayer’s residence before; or
• whether the plant and equipment is installed in new residential premises.

Taxpayers who owned a rental property, or entered into a contract to purchase their rental property before 7.30pm on 9 May 2017, can continue to claim depreciation deductions for assets that were in the rental property before that date. It doesn’t matter whether the depreciating asset installed in the property was new or used, or whether the property was new. However, if a rental property was purchased at or after 7.30pm on 9 May 2017, the taxpayer cannot claim deductions for second-hand or used depreciating assets, whether they are bought with the property or separately. They also cannot claim depreciation deductions if they have used an asset for private purposes before installing it in the rental property.

Where a taxpayer buys a newly built property, or buys a property that has been substantially renovated, they will be entitled to claim depreciation deductions for new depreciating assets if no one previously claimed any depreciation deductions on the asset and either:

• no one lived in the property when the taxpayer acquired it; or
• if anyone lived in the property after it was built or renovated, the taxpayer acquired it within six months of the property being built or renovated.

Changes to the foreign resident CGT withholding rule

For the 2018 income tax year, a 12.5% non-final withholding tax applies when a non-resident sells property in Australia for more than $750,000 (in 2017 the CGT withholding rate was 10% and the sale price benchmark was $2 million). Therefore, in 2018, a non-resident vendor will only be paid 87.5% of the sale price, because 12.5% must be withheld by the purchaser and paid to the ATO as a prepayment of tax on behalf of the foreign vendor.

This measure will result in extra compliance requirements (eg tax resident vendors will also be subject to these rules unless they obtain ATO tax clearance certificates), but carve-outs from this rule are available (eg for purchases of Australian real property valued at less than $750,000 in 2018).

Tax resident vendors who are able to obtain ATO tax clearance certificates can avoid application of the 12.5% withholding rule when they sell a residential property for $750,000 or more. A tax clearance certificate – basically an ATO certificate confirming that the vendor is an Australian tax resident – provided to the purchaser before the settlement date would enable such a vendor to receive 100% of the purchase price from the purchaser.

If more than one vendor is involved, each vendor must apply separately for a tax clearance certificate. If any of the vendors fails to provide such a tax clearance certificate to the purchaser, the purchaser must withhold 12.5% of the purchase price (in proportion to each vendor’s interest in the property).

New GST withholding rule on sale of new residential premises

For the 2018 income tax year, purchasers of new residential premises pay a GST-inclusive amount to the seller (ie GST is included in the purchase price, so the purchaser pays GST to the seller and the seller must remit the GST to the ATO).

However, from 1 July 2018, under a recently enacted law, purchasers of new residential premises will have to pay the GST component of the purchase price directly to the ATO:

• For sale contracts signed on or after 1 July 2018, the purchaser will be required to withhold and pay 10% GST to the ATO on the day the consideration is provided (ie at instalment dates or at settlement if there is a lump sum at settlement).
• For sale contracts signed before 1 July 2018, the 10% GST withholding rule will only apply to payments made on or after 1 July 2020 (ie GST withholding will not apply to consideration provided in this two-year transitional period).

This new GST withholding regime does not apply to the sale of used (ie not new) residential properties or the sale of new or used commercial premises.

Superannuation measures impacting home ownership

First home super saver scheme

From 1 July 2017, a first home buyer can salary sacrifice a maximum of $15,000 a year  to save for a deposit to buy a first home. The maximum amount that can be saved in such a way is $30,000. Provided the buyer’s partner does not already own their first home, the couple can put in a maximum of $60,000 ($30,000 × 2) to buy a first home.

TIP: These salary sacrificed amounts will count towards the annual $25,000 concessional contributions limit. Individuals need to take care not to breach the cap when making use of the first home super saver scheme.

Money saved in this way can only be withdrawn from the superannuation fund from 1 July 2018, with strict rules applying for the use of the withdrawn amount – for example, the ATO must be notified and the taxpayer must buy a home within a certain period after the withdrawal.

Super downsizer incentive available from 1 July 2018

The superannuation downsizer incentive only applies from 1 July 2018, but we include the following information because taxpayers who will qualify may decide not to sell their homes before 30 June 2018.

Broadly, under this incentive, an individual aged 65 or above may make a $300,000 non-concessional contribution (and with a spouse, the total contribution can be $600,000) from the proceeds of selling their home, provided the home was owned for the last 10 years up to the date of disposal and would have qualified for either a full or partial main residence CGT exemption.

Individuals need not buy a replacement residence or satisfy the “work test” (ie working for at least 40 hours over 30 consecutive days) to be able to make a downsizer contribution to their superannuation fund. Each person will only be able to access this incentive once.

The biggest drawcard here is that non-concessional contributions made under this incentive will not be subject to the $1.6 million total superannuation balance cap. Therefore, individuals that already have more than $1.6 million in superannuation may use the super downsizer incentive to contribute an additional $300,00 ($600,000 for couples) to superannuation.

Foreign residents and the CGT main residence exemption

Currently, any individual (regardless of their tax residency status) who sells their home can qualify for either:

• the full main residence CGT exemption – if the residence has been used as a main residence throughout the whole ownership period, whether through actual use or imputed use (various main residence extension rules, such as the six-year absence rule, impute main residence use to taxpayers for certain periods where a home was not used as a main residence); or
• the partial main residence CGT exemption – if the residence has been used partly as a main residence and partly for income-producing purposes during the ownership period.

However, if the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 is enacted, any individual vendor who is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer be able to qualify for the full or partial main residence exemptions, regardless of how long the home has actually been used as a main residence.The main residence exemptions will not be available for non-residents signing a contract of sale to sell their home:

• after 9 May 2017, for homes acquired after 9 May 2017; and
• after 30 June 2019, for homes acquired on or before 9 May 2017.

Assuming the Bill becomes law in its current format, a non-resident who disposes of their main residence in the 2018 income tax year will not qualify for the main residence exemption if the dwelling was purchased after 9 May 2017.

 

Tax compliance and developments

Keep relevant documents and make timely elections

Taxpayers must keep all relevant documents, usually for five years, to show that they have incurred the expense for which they are claiming a tax deduction. If a taxpayer needs to make an election to have a specific concession apply (eg for the small business CGT concessions, or family trust and FBT elections), they should ensure such an election is made by the relevant deadline.

Tip: Generally, only a taxpayer who directly incurs an expense (and derives the related income) may claim the tax deduction.

Single Touch Payroll

From 1 July 2018, employers with 20 or more employees (as determined by the number of employees an employer has on 1 April 2018) will have to run their payroll and pay their employees through accounting and payroll software that is Single Touch Payroll (STP) ready. It is a major reporting change for employers, and means employers will report payments such as salaries and wages and allowances, PAYG withholding and super information to the ATO directly from their payroll solution at the same time they pay their employees.

Employers need to have done a head count on 1 April 2018 to determine if they are a “substantial employer” and will therefore be required to use STP. This count has to include full-time and part-time employees, casual employees who are on the payroll on 1 April 2018 and worked any time during March 2018, any employee absent or on leave, seasonal employees and overseas employees. Not included are casual employees who did not work in March 2018, independent contractors and company directors.

GST on low value imported goods

From 1 July 2018, overseas vendors with a GST turnover of AUD$75,000 or more in Australian sales will have to account for GST on sales of low value goods (ie imported goods costing AUD$1,000 or less) to consumers in Australia (ie purchasers not registered for GST, or GST-registered purchasers that acquire the goods solely for private purposes).

Payments to contractors in building and construction

Businesses in the building and construction industry must report the total payments they make to contractors on a taxable payments annual report by 28 August 2018.

Currently, there are proposals to extend this taxable payment reporting regime to cleaners and couriers (from 1 July 2018) and to security providers, road transport and computer design services (from 1 July 2019). These measures are in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018, which has passed the House of Representatives at the time of writing.