Business tax update

In this edition we cover the saga around introducing the lower company tax rate, the new ‘similar business’ test for carry-forward losses, GST on digital imports, a warning on ATO settlements and the new altered tests around residency of companies.

Lower company tax rate

By way of background, the corporate tax rate for small business has been reduced to 27.5% in the 2016/17 year. The definition of a small business is dependent on turnover being less than $10 million, which could refer to the current year or prior year. In the 2017/18 year, a new category of “base rate entity” commences with a turnover requirement of less than $25 million (dependent only on the current year’s turnover). This increases to $50 million in 2018/19.

For many it has been a simple progression to the lower 27.5% rate from the 2017 year. However there has been a range of issues for some.

One issue has been how to determine if a company is “carrying on a business”, which is necessary to access the lower rate. This can be a surprisingly complex issue. By chance, earlier this year the ATO took a rather broad view in a ruling upon which all manner of companies in theory could claim to operate a business. The government then introduced a new rule to disallow access to the lower tax rate for companies receiving predominantly “passive” income, a new term with a new definition. At the end of the day we probably have more companies now eligible for the lower tax rate than was originally expected.

Trapped Franking Credits

Another significant issue associated with the lower company tax rate is franking credits. For some the problem is simple – they built up profits paying 30% tax and can now only distribute those profits with a 27.5% franking credit. This increases the “top-up” individual tax needed to pay on a given cash dividend.

Strategies to pay dividends in earlier years with a higher franking rate were not common because of the subsequent reduction in individual tax rates and a lack of desire to bring forward tax unnecessarily. Further issues arise for some where they move into the higher tax rate. The way the new rules apply is that you look at turnover for the previous year when determining what franking rate to apply to dividends. This makes sense as most companies need to know their franking rate mid-year. But it can result in a miss-match between tax rates and franking rates in a given year, and therefore either over or under franking.

We would recommend a discussion with your adviser should you require further clarification of the application of these rules to your entities.

Extension of $20,000 immediate asset write-off

A small win for business with the $20,000 immediate deduction for assets purchased by businesses with an aggregated turnover of under $10 million being extended until 30 June 2018. Assets will need to be used or installed ready for use by 30 June 2018 to qualify for the higher threshold.

Assets costing $20,000 or more can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. If the closing balance of the pool, adjusted for current year depreciation deductions (i.e. these are added back), is less than $20,000 at 30 June 2018 then the remaining pool balance can be written off as well.

From 1 July 2018, the immediate deductibility threshold will revert back to $1,000.

Annual reporting of payments to contractors

Currently businesses in the construction and building industries are required to report to the ATO on an annual basis the total payments they make to contractors. This report is due to the ATO by 28 August each year.

The aim of this was to ensure that the contractors are reporting income accurately.

By August 2018 all entities in the building, construction, cleaning and courier industries will need to lodge a report with the ATO by 28 August 2018 disclosing payments made to contractors.

New legislation may change ‘Same Business’ test

In order to take advantage of carry forward losses in an entity it is necessary to pass either the ‘Continuity of Ownership’ test or the ‘Same Business’ test. The Same Business test can be difficult to pass as it requires that no new business is entered into and, more pertinently, no new transactions are entered into. The way this was applied was seen as stifling innovation to resolve unprofitable businesses. In new legislation passed by the lower house but yet to be passed by the Senate, the Same Business test is to be changed to allow a greater degree of changes to the business. The new tests refer to four broad matters that must be taken into account:

  1. The extent to which the same assets are used to generate income
  2. The extent to which assessable income is generated from the same activities and operations
  3. The current and former identity of the business
  4. The extent to which business changes result from development and commercialisation of assets and products.

GST on digital product sales to Australia

From 1 July 2017 Australia has joined the multitude of countries introducing GST charges on digital products based on the location of the purchaser. Australia only taxes supplies to consumers, i.e. it does not tax supplies to locally registered businesses.

Businesses that purchase digital products from overseas may notice suppliers charging GST. While they are not obliged to do so their information gathering systems may not accommodate identifying Australian GST registered businesses. As a supply by an entity without an enterprise in Australia to a registered business is not taxable, there can be complications with making a claim. While there is a simplified registration system which does not provide an ABN (they have an “ARN”), many may complete full registration and therefore if the GST is significant the appropriate response is to request they remove the GST charge.

Beware the interest charge when making a settlement with the ATO

There is a recent case (Caratti v FCT), where the taxpayer came to an agreement with the ATO regarding their tax debt. Unfortunately their agreement was silent on any amount of interest being charged. The taxpayer was under the understanding that the amount included any interest charges, which were significant. Unfortunately the court interpretation of “tax debt” did not include any interest. Be warned.

Residency definition

A long-running series of cases on residency of effectively tax-haven companies has reached a conclusion with the result that it is easier for these companies to be considered to be residents of Australia, and therefore subject to tax in Australia on their worldwide profits.

The old practice of placing a nominee foreign director in the role as token manager will not automatically exclude a company from being an Australian resident when the control of the company effectively occurs in Australia.

Any foreign companies with a degree of control carried out from Australia should re-evaluate their residency status and ensure appropriate documentation is held to support the conclusion reached.

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