Individual tax update

2017 has been largely about housing. On the good news front, we finally had the removal of the 1.5% budget repair levy from 1 July 2017 for those with taxable incomes over $180,000.  It is worthy of note that there is currently a proposal to reintroduce the temporary budget levy for high income earners.

The government has also announced that the Medicare levy will increase from 2% to 2.5% from 1 July 2019.

Also of note are the upcoming changes expected regarding super guarantee and employee wage reporting.

Residential Property Investors

There have been a host of changes around the way that properties are taxed following the budget. Most are now legislated or in the process of being passed without significant dissent.

Of note, with application from 1 July 2017 is the denial of travel costs to visit residential rental properties and limiting of deductions for depreciation of residential property fixtures, plant and equipment by property investors.

Prior to 9 May 2017, a deduction for depreciation is available when an investor purchases plant & equipment and fixtures as part of a residential property. Usually the deduction becomes available with the release of a quantity surveyors report.  From 1 July 2017 an investor can only claim a depreciation deduction for expenses actually outlaid for new items or acquired as part of a new property. Deductions for capital works are not affected by these changes.

Work Related Car Expenses

Individuals who claim the maximum allowable deduction on the cents per kilometre method are likely to get an ATO review based on a recent media release warning by the ATO.

The key message of the media release is to make taxpayers aware that the claim for motor vehicle expenses is not an entitlement. You must be able to prove that you were required to use your car for work purposes (not for travelling from home to work and back).

$1.6m Super Transfer Balance Cap

The new superannuation regime is now in place involving the $1.6m cap on contributions and commuting into pension phase, along with reductions to annual contribution limits. This will continue to involve some compliance and planning headaches during completion of the June 2017 accounts and Tax Returns as many pension phase SMSFs need to commute amounts back into accumulation phase.

Of particular note for many is the way the new rules apply to borrowing arrangements (LRBAs), borrowings by the super fund do not offset the asset value and payments to the loan from a non-pension phase source can count towards the contribution cap. This may make borrowings in super less appealing for those closer to the caps. 

Contributing the proceeds from downsizing into super

A motivation to sell property is created by the new downsizing super incentive, allowing significant contributions into the super environment.

From 1 July 2018, a person aged 65 years or older will be able to make a contribution into superannuation of up to $300,000 from the proceeds of selling their main residence. This contribution will be outside the current non-concessional rules.

To be eligible, the individual must have owned their main residence for at least 10 years.

Most likely less motivating is the new First Home Super Saver Plan, allowing certain withdrawals from super and the new CGT incentive when investing in low-rent affordable housing.

CGT and Land Tax Changes for Foreign Residents

Non-residents with property in Australia have also been attacked with the new charge for vacant properties and also the removal of the main residence exemption from 1 July 2019 (and any properties purchased post budget).

Following the lead of Victoria, NSW has also significantly increased the stamp duty and land tax surcharges on foreign persons, at least doubling the surcharges to 8% for stamp duty and 2% for land tax.  Complications can arise for companies and trusts where ownership exists overseas. In particular, trusts can be found to be a foreign person where a non-resident is a potential beneficiary. This has forced many to consider whether to amend the trust deed to remove certain beneficiaries.

CGT Withholding Clearance Certificates

All Australian resident vendors are now likely to need clearance certificates from the ATO to certify residency when selling a property. The foreign resident capital gain withholding regime now applies to properties worth $750,000 or more (it was previously $2m). The rate of withholding has also increased from 10% to 12.5%.

Don’t forget that the obligation rests with the purchaser to withhold the tax a remit the funds to the ATO at the time of settlement where no clearance certificate has been provided.

First Home Buyers

NSW has revamped stamp duty exemption for first home buyers of properties worth up to $800,000, with a zero stamp duty rate up to $650,000 (vacant land thresholds are between $350,000 and $450,000).

First home buyers lose access to the $10,000 grant for properties worth over $600,000 (or owner builder up to a total value of $750,000).

Proposal to change superannuation guarantee rules

The government has proposed to change the superannuation guarantee rules so that compulsory super is payable on salary sacrificed amounts. Currently if you sacrifice into super, unless the employment contract stipulates otherwise, employees may lose a portion of the super guarantee amount. The proposed changes seem fair enough and perhaps overdue. These changes should be kept in mind when reviewing any new contracts with employers.

Single Touch Payroll is coming

Employers with 20 or more staff will be required to commence using the new automated reporting system from 1 July 2018. The remaining employers will need to start using the system from 1 July 2019. If affected, employees will then be able to access their payroll and super contribution information from their MyGov account. This will include payment summaries.

For those remaining taxpayers who have not yet registered with MyGov, it will be an additional reason to do so. Keep in mind registration with MyGov can impact on where ATO notices are sent, so your tax agent may inadvertently cease to be the initial recipient of correspondences. Contact your tax adviser if you are unsure.

Part 3: tax tips for your small business

First published in Kochie’s Business Builders

In the third of our three-part series, we look at actions small businesses can consider to reduce their tax for 2017.

This article is all about income. As with accelerating deductions, deferral of income can result in a slightly lower personal top marginal tax rate next year and provide a cash flow benefit. Of course, deferring a taxable profit only works if the relevant entity is paying tax.

Owner remuneration
Income of family members from a business depends on the ownership structure (e.g. sole trader, partnership, trust or company). Wages, dividends or profit share may, in certain circumstances, have different tax outcomes to the recipients. It is therefore worthwhile to ensure you are aware of what your personal tax position is likely to be and plan appropriately.

Where wages or other forms of income are being paid to other family members, it’s worthwhile considering if a minor under 18 years can commence a full-time occupation prior to 30 June as this can provide them with the lower adult tax rates.

Owners should also consider repayment of any “Division 7A” loans (these are borrowings from a company) prior to year-end. Repayment this year can avoid a dividend (and resultant personal tax) that is usually required under the relevant rules. And if you have a discretionary trust involved, distribution resolutions should be completed prior to year-end.

Income deferral
Income deferral could be as simple as delaying the issue of invoices, however it is often necessary to review customer contract terms to determine when income becomes assessable. The general rule is that income becomes assessable when it is “derived”, typically meaning non-refundable or a present debt exists.

Despite being derived, income may also be non-assessable if it is not “properly referrable” to an income year. In practice this usually means that where services have been paid for but are yet to be performed they can be considered non-assessable “unearned income”.

Such amounts should be accounted for in a separate balance sheet account, which can be made as an adjustment after year end but they need to be identified. This can include a proportion of a receipt where a service is only partially performed. So, if you receive 20% of a contract up front but will not start work on it until July, that amount will be excluded from this year’s taxable income.

Income from the sale of goods is generally not assessable until the goods are delivered.

Be careful however when dealing with an associate. Schemes designed to provide an immediate deduction to one party but defers income to another may result in the deduction being denied.

Certain businesses may want to consider if they can use a cash accounting method for determining income, this may be possible for micro-businesses providing services relating to professional skill and personal work that does not rely on capital items such as plant and machinery.

Other areas to consider
Many businesses have multiple entities with transactions occurring between them. End of year is a time when you should ensure the appropriate invoices and other paperwork has been prepared. It is good practice to get a handle on what taxable profits are being made in each entity to ensure you don’t end up with, for example, profits in one entity and losses in another.

In terms of non-business investments, any term deposits may want to be commenced in early July if on an annual maturity cycle. Any investments sitting in a loss may want to be sold before year-end if other capital gains exist. Avoid repurchasing the same asset as anti-avoidance provisions may apply. Similarly, the sale of investments with an underlying capital gain may want to be deferred until July so the tax payable is effectively delayed for a year. The same principals can apply to depreciable assets if you are not using a small business pool method.

Finally, if you are expecting a refund, get your affairs in order and lodge your returns early. Your accountant will also love you for it!

Part 2: tax tips for your small business

First published in Kochie’s Business Builders

It’s that time of year when small businesses can benefit by considering strategies to minimise tax burden. In this second article of our three-part series for year-end tax tips we look at accelerating deductions and how small businesses can reduce their tax for 2017.

With the individual tax rate set to reduce by 2% for those in the top bracket, a tax deduction is worth a little bit more in 2017 than 2018. The mere deferral of a tax liability for one year can provide some welcome cash flow relief when it comes time to paying your tax. Indeed you never know what the future will bring, so a tax deduction taken in a year when you know tax will arise is like a mid-year gift.

Incur necessary expenses including prepayments
A business deduction does not necessarily need to be paid in order to be claimed. You often just need to have been issued an invoice. So for all those expenses (excluding inventory) you know you will need to outlay for, it may be better to order it this financial year. Suppliers who offer generous terms of settlement are ideal but even paying the cash before year-end can also be a good idea. Repairs and maintenance is a good example. Simply ensuring all invoices received have been accounted for is also something that can sometimes be neglected.

Small Businesses have the advantage of not having to spread out a deduction into a future year for prepayments where the service period is less than 12 months. Prepayments do not necessarily need to be “paid” however it is often necessary to trigger the deduction in the first place. Prepaying rent and interest are obvious big ticket items that can provide an early deduction.

Depreciable Assets
We raised the $20,000 Instant Asset Write-off in the last edition, which means depreciable assets are usually limited for small business for old and expensive assets. Even these assets can be added to a “pool” providing a 30% depreciation rate (15% in the first year). But for those who have not pooled, it can pay to have a look at your depreciable assets prior to year-end to determine if any assets are no longer being used. These can be written off and their remaining depreciable balance claimed as an immediate tax deduction if they have been “scrapped”.

Bad debts
To get a deduction for a bad debt in the current year it needs to be “written off” in the ledger, before year end. There also needs to have been reasonable attempts to recover the debt and an argument can be made that there is limited likelihood of the debt being recovered. It can pay to review your debtors list and identify defiant customers.

Pay super
While super for the final quarter is not payable until 28 July, it will not be deductible in the current year if not paid before year end. So you might as well pay it. Also be wary of paying after 28 July, you will not receive a deduction at all.

For both staff and owners, additional concessional contributions into super should be considered both to take advantage of the cap ($30k or $35k if 49 years of age or over in 2017 then reducing to $25k next year) and to reduce taxable income.

Bonuses
In order to claim a deduction for bonuses the amount needs to have been determined before year-end and documentation should exist to prove that the decision to pay it was made, usually by way of a minute or communication with the recipient.

Analyse inventory
The value of closing stock is usually added back to taxable income and therefore the lower the value the better. An exception is where the simplified trading stock regime is chosen which avoids the need to make an adjustment if the movement in value is reasonably estimated to be less than $5,000. Either way it can be beneficial to carry out a detailed stocktake. The value of trading stock is reduced where stock can be argued to be obsolete or damaged, so the nature of the stock and trading history for each item can be relevant in minimising taxable income.

Essential 2017 year end tax tips

First published in Kochie’s Business Builders

It’s that time of year when businesses can benefit by considering strategies to minimise their tax burden.

This is the first of a three part series on tax we are doing to help prepare you for tax time. Here, we look at some actions small businesses can consider in order to reduce their tax for 2017.

When evaluating these strategies you should always keep in mind that spending money for the pure purpose of gaining a tax deduction can be counter-productive if the expenditure is not necessary for the business or expected to create a net improvement in profitability. With all transactions, the business decision should be made first with taxation considerations a secondary influencing factor.

The specific circumstances of each business can also impact on tax planning. For example, if a business is not currently making taxable profits it is of no use bringing forward tax deductions into the current year.

A welcome change for 2017 is the increase in the small business turnover threshold from $2m to $10m. This significantly extends access to a range of concessions, however unfortunately the Small Business CGT Concessions remain limited to $2m.

Ready to get more bang for your buck at tax time?

$20,000 Instant Asset Write-off
This has been a big attraction for a few years now but as it currently stands this is the last year it will be available. An immediate deduction is available for business acquisitions less than $20,000 and depreciation pools that fall below $20,000 can also be written off. The threshold is a GST-exclusive amount if registered for GST (therefore $21,999 maximum total spend on any one asset). The asset needs to be installed ready for use prior to 30 June. Excluded assets are those leased out to another party, capital works and certain in-house software.

Avoid a Credit Reference from the ATO
This is not really a tax tip as such, but could avoid enormous headaches. From 1 July 2017 the ATO will commence reporting outstanding tax debts of businesses to credit reporting agencies. This will only occur where the debt is in excess of $10,000, unpaid for over 90 days, not in dispute and no payment plan has been established (or an existing one has been defaulted).

We are informed that the ATO will notify businesses prior to referring a debt to credit bureaus however it’s strongly advised to contact the ATO promptly if any tax debt arises and arrange a payment plan. If a plan is defaulted, contact them again. It would also be prudent to review the ATO business portal, to ensure no overdue tax debts exist.

Consider restructuring
Restructuring can achieve various goals including asset protection, estate planning, income splitting and commercial objectives. It is often critical to complete these transactions while a business remains eligible for benefits such as the Small Business CGT Concessions and Restructure Rollover. It is also usually ideal to complete the transaction at the end of the financial year to simplify the accounting processes required.

To ensure sufficient time to analyse cost/benefits of restructuring and plan for implementation now is the time to be speaking with your accountant if anything is to occur this year.

Government delivers good news for business to support economic growth

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There is finally good news for some businesses in the lead up to the new Federal Budget being handed down in May. Items flagged in last year’s budget are finally progressing through the Government and the Senate. This includes company tax cuts and the ability for more businesses to access the small business tax concessions.

Legislation containing the proposed tax cuts for companies – bringing company tax down to 27.5% – has now been passed however it is limited to companies with under $50m turnover.  The company tax cuts were intended in last year’s budget to apply progressively to all companies, however objection from opposition parties and deals made to pass the legislation resulted in the tax cuts being limited to small and moderate sized businesses.

For the 2016/17 year (this tax year) it will be limited to companies with less than $10m, for the 2017/18 year the threshold will raise to $25m turnover then $50m from the 2018/19 year onwards. The tax rate will gradually decrease from 27.5% to 25% from the 2025 to 2027 years.

Importantly, the new legislation also includes the budget proposal to increase access to the small business tax concessions (excluding CGT) to $10m from 1 July 2016. This means, for example, companies with between $2m and $10m turnover will be able to obtain an immediate write-off for depreciable assets acquired prior to 30 June. This is great news for a large number of businesses and should factor into business planning strategies for the 2017/18 financial year. Small business owners should contact their adviser to discuss these changes and how they can take advantage of this immediate stimulus prior to 30 June.

The legislation also progressively increases the small income tax offset for sole proprietors (eventually to 16% by 2027) and raises the threshold to $5m turnover.  Another great win for small business!

Contact Prosperity on 1800 855 844 or mail@prosperityadvisers.com.au if you would like to know how these changes can benefit your business.

‘Backpacker Tax’ Back-Pedal

Sad businessman pushing hand truck with taxes. Tax time and taxpayer finance concept

Jacqui Lambie’s push for a reduction in the ‘backpacker tax’ to 10.5% has won senate approval yesterday. The 10.5% rate is in line with New Zealand. The pressure is back on the coalition in the lower house to agree to lower its proposed 19% rate to 10.5%, or the impending 32.5% rate will apply from January 2017.

The requirement for employers to register with the ATO as employers of working holiday makers (WHMs) to withhold at the new rate appears likely to remain. This is despite some concern raised in the senate report issued on 9 November about the regulatory burden, particularly on smaller employers. The ATO are describing it as a simple, once-off registration, so it is hoped that the ATO will make the process relatively straight-forward.

The 19% rate to be applicable to incomes up to $37,000 was included in a bill that was passed in the lower house last month. This aligns with the tax rate for residents for incomes between $18,200 and $37,000.  It applies to Subclass 417 (Working Holiday) and Subclass 462 (Work and Holiday) visas that allow people aged between 18 and 30 years of age from 38 partner countries to work in Australia for up to 12 months (Subclass 417 visa holders can apply for a second year visa).

The debate has dominated question time with both sides of parliament arguing that the other is threatening to make Australia internationally uncompetitive. Malcolm Turnbull stating that the backpackers affected may be considered non-residents, so the 19% represents a benefit to them which labour was effectively blocking by demanding 10.5%. Scott Morrison further arguing that under the 10.5% rate backpackers could be better off than Australian residents in certain circumstances. Barnaby Joyce pointing to the loss of revenue under a 10.5% rate.

Labour are arguing that the 10.5% supports Australian tourism and agriculture, backpackers spend their income in Australia and if the government does not agree it will force the 32.5% rate to apply.

It is humbly proposed that perhaps a 10.5% rate applying only up to 18,200 may be a compromise both sides could swallow, however we could very well end up with a 12 – 15% rate based in part on comments by Pauline Hanson.

 

NSW Stamp Duty relief has arrived!

Care for Savings - Woman with a Piggy Bank

We are pleased to confirm that the NSW Government has finally passed changes to stamp duty. As of 1 July 2016. NSW stamp duty on transfers of business assets, unlisted marketable securities and mortgages has finally been abolished. Transactions relating to land will still attract stamp duty unfortunately which includes transfers of land-rich entities and landholder duty.

From 1 July 2016 NSW stamp duty will no longer be payable on:

  • transfers of marketable securities – including shares in private companies and units in unit trusts (assuming land rich duty does not apply)
  • transfers of business assets including goodwill and intellectual property and plant and equipment when part of a transaction which includes goodwill (excluding land, certain goods e.g. when associated with land and not stock-in-trade)
  • mortgages executed after 1 July 2016 (nominal duty if executed prior to 1 July with the initial advance made after that date)
  • transfers of statutory licences and permissions and gaming machine entitlements
  • company charges and security agreements.

For individual investors the benefits will largely be limited to unlisted shareholdings because transfers of listed shares is already free of stamp duty and the application of stamp duty to transfers of land remains unchanged. However the removal of stamp duty on mortgages will be a welcomed change!

Overall these changes will make a range of restructures of businesses and other entities more attractive and will provide significant savings for business sales. To find out what the changes mean for you, please speak with your Prosperity adviser.