New legislation could see businesses lose tax deductions for payments to employees and contractors. This article details this new law, and provides a checklist of how to be compliant…
BASICS
In March, legislation was passed which will deny an income tax deduction for certain payments if the associated withholding obligations are not complied with by the business making the payment. This new law commences on 1 July 2019, and provides a very strong incentive for employers to comply with their withholding obligations. Under current law, employers are entitled to a deduction for actually having made a payment to an employee or contractor – irrespective of whether they have correctly met the withholding requirements in respect of these payments. This is, the payment itself is sufficient to claim a deduction.
NEW RULES
From 1 July 2019, a deduction will no longer be allowed in relation to the following payments:
Of salary, wages, commissions, bonuses, or allowances to an employee
Of directors’ fees
To a religious practitioner
Under a labour-hire arrangement
For a supply of services – excluding supplies of goods and supplies of real properyt – where the recipient of the payment has not quoted their Australian Business Number (ABN)
….if withholding applied to the payment, and the payer was required to withhold an amount from the payment and did not withhold an amount OR did not notify the ATO when required. To be clear, deductions will only be denied where no amount has been withheld at all from the payment that attracts withholding or no notification is made to the ATO. Withholding an incorrect amount (such as from an allowance etc.) or reporting the withholding incorrectly will not result in a deduction being denied.
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In the Budget on Tuesday, the Government announced that
it would increase the instant asset write-off threshold to $30,000 and extend
it to medium sized businesses (those with an aggregated annual turnover of less
than $50 million).
This, and the earlier change announced in January (to
extend the write-off threshold to $25,000) passed both Houses of Parliament
yesterday and is now law (subject to the formality of Royal Assent).
The amendments mean there will be three tiers in the
2018/2019 financial year:
1. $20,000
threshold for depreciable assets that are acquired and installed ready for use
before 29 January 2019. Only available for businesses with an aggregated
turnover less than $10 million.
2. $25,000 threshold for assets first used or
installed between 29 January 2019 and 2 April 2019. Only available for
businesses with an aggregated turnover less than $10 million.
3. $30,000
threshold for assets first used and installed after the 2 April budget
announcement and before 1 July 2020. Available for businesses with a turnover
of less than $50 million.
Going forward, all businesses with a turnover under $50
million are now eligible for a write-off of $30,000. This will be available
under 30 June 2020.
To get the taxation benefit of this in the current financial year, you will need to have the asset installed ready for use on or before 30 June 2019.
Following is a brief summary of some of the headline Budget measures.
BUSINESS
* Instant
Asset Write-Off Boosted and Expanded – Two key changes have been made:
o The write-off
has been extended to medium-sized businesses (those with an aggregated annual
turnover of less than $50 million.
o The threshold
has been increased to $30,000.
Therefore, subject to legislation, businesses with an
aggregated turnover of less than $50 million will be able to immediately deduct
purchases of eligible assets costing less than $30,000 that are purchased and
then first used, or installed ready for use, from Budget night (2 April 2019)
to 30 June 2020.
* Division
7A Changes Deferred – The Government’s proposed Division 7A changes will be
deferred by 12 months to 1 July 2020. To recap, Division 7A is designed to
prevent profits or assets being provided to shareholders or their associates
tax-free. You can read more about these proposed changes – which are not yet
even in draft legislative form – on the ATO website.<//www.ato.gov.au/General/New-legislation/In-detail/Other-topics/Targeted-amendments-to-Division-7A/>
* Crackdown
on Unpaid Tax and Super by Larger Businesses – The Government will provide more
than $40 million to the ATO to recover unpaid tax and Superannuation Guarantee
owed by larger businesses.
*
Strengthening ABN Rules – This measure imposes new compliance
obligations on ABN holders to retain their ABN. From 1 July 2021, ABN holders
with an income tax return obligation will be required to lodge their income tax
return and from 1 July 2022 confirm the accuracy of their details on the
Australian Business Register annually.
* Tackling
Sham Contracting – The Government will provide more than $9 million to
establish a dedicated unit within the Fair Work Ombudsman to address sham
contracting. This is where employers seek to avoid statutory obligations and
employment entitlements (such as paid leave and superannuation) by
misrepresenting employer/employee relationships as independent contracts.
PERSONAL TAX CHANGES
* Income
Tax Cuts by Increasing Tax Offset – Subject to the passage of legislation, tax
relief will be granted to individuals via the non-refundable low and middle
income tax offset (LMITO). The LIMTO will increase from a current maximum of
$530 per year to $1,080. Further, the base rate will increase from $200 to $255
per year for 2018/2019 through to 2021/2022. Depending on your level of income,
the changes will benefit individuals as follows:
o The LMITO will
now provide a reduction in tax of up to $255 for taxpayers with a taxable income
of $37,000 or less.
o Between
taxable incomes of $37,000 and $48,000, the value of the offset will increase
at a rate of 7.5 cents per dollar to the maximum offset of $1,080.
o Taxpayers with
taxable incomes between $48,000 and $90,000 will be eligible for the maximum
offset of $1,080.
o For taxable
incomes of $90,000 to $126,000 the offset will phase out at a rate of 3 cents
per dollar.
The LMITO will be enjoyed straight after individuals
lodge their income tax returns for the above years.
* Income
Tax Cuts via Rate and Threshold Changes – The following changes are slated for
future income years:
o From 1 July
2022, an increase to the top threshold of the 19% personal income tax bracket
from$41,000 to $45,000.
o From 1 July
2022, an increase in the low income tax offset (LITO) from $645to $700.
* New
Deductible Gift Recipients (DGRs) Approved – The following organisations have
been granted DGR status from 1 July 2019 to 30 June 2024: Australian Academy of
Law, China Matters Limited, Foundation Broken Hill Limited, Motherless
Daughters Australia Limited, Superannuation Consumers Centre Limited, and The
Headstone Project (Tasmania) Incorporated. The Government will also establish a
deductible gift recipient (DGR) general category to enable Men’s Sheds and
Women’s Sheds to access DGR status from 1 July 2020.
SUPERANNUATION CHANGES
* Removal of Work Test for Certain Taxpayers –
The current superannuation work test will be removed for people aged 65 and 66
from 1 July 2020.
* Extending Eligibility for the Bring-Forward
Cap – From 1 July 2020, access to the bring-forward cap will be extended from
taxpayers aged less than 65 years of age to those aged 65 and 66.
* Increase to Age Limit for Spouse
Contributions – The age limit for spouse contributions will increase from 69 to
75 from 1 July 2020.
Last week (05/03/19), the Reserve Bank of Australia decided not to change the official cash rate of 1.5%. Two days later the December quarter economic growth figures showed that the economy had slowed considerably – growing by just 0.2% from October to December, and 2.3% over the previous 12 months. This is considerably less than the forecast 3% in the Federal Budget. As a result, many economists are now expecting the Reserve Bank to reduce interest rates even further in the coming year; which would represent record lows. It’s an opportune time therefore to review whether you are making the most of this low rate environment.
Have you considered the following?
* Fixed rate options. While rates are at an all-time low there may be opportunities to fix your loans for 3 or 5 years at under 5% per annum. Explore your options. Some borrowers may wish to fix just a portion of their loan.
* Review your position. Low interest rates offer an opportunity to refinance or revise your payment schedule to pay your loan off sooner. Talk to your broker to see if there’s a home or business loan that better suits your needs.
* Debt reduction. With lower rates, your monthly/fortnightly repayments will be less. Rather than pocketing the difference, if you put the difference into extra repayments, you can shave years off your loan and, in doing so, save thousands in interest. For example, a $500,000 home loan at an interest rate of 7% requires repayments of $3,078 per month over 30 years. At 4.5%, the repayments are $2,533, a difference of $545 a month. If you put that $545 into extra repayments, you can potentially take more than 9 years off the home loan term and save almost $140,000 in interest.
* Create an offset account. This is effectively a money source sitting beside your mortgage. Any savings inside this account are effectively offset against your loan, which in turn reduces the amount of interest you pay.
Of course, low rates will not be around forever. As a borrower it’s important not to become complacent and to make sure that you still have the capacity to meet your repayment obligations in the event that rates increase.
21 March February monthly Activity Statements – due for lodgement and payment.
April 2018
21 April March monthly Activity Statements – due for lodgement and payment. 21 April Quarter 3 (January-March) PAYG instalment Activity Statments for head companies of consolidated groups – due for lodgement and payment. 28 April Quarter 3 (January-March) Activity Statements – due for lodgement and payment (if lodging by paper). 28 April Quarter 3 (January-March) PAYG instalment notices (forms R and T) – final date for payment and, if varying the instalment amound, lodgment. 28 April Quarter 3 (January-March) GST instalment notices (forms S and T) – final date for payment and, if varying the instalment amount, lodgement. 28 April Quarter 3 (January-March) superannuation guarantee contributions to be made to a complying fund on behalf of your employees. 30 April Quarter 3 (January-March) TFN Report for closely held trust for TFNs quoted to a trustee by beneficiaries – fiinal date for lodgement.
Where one of these dates falls on a weekend or a public holiday, the due date is extended to the next business day.
15 January Due date for lodgement of income tax returns for companies and trusts that were taxable medium to large businesses in the prior year and are not required to lodge ealier. If you fail to lodge by the due date, your 2017/2018 income tax return will be due on 31 October 2018. 21 January Due date for lodgement and payment of December 2017 monthly Activity Statements. 28 January Due date for October-December 2017 Superannuation Guarantee contributions to be made to a complying fund on behalf of your employees. 31 January Final date for lodgement of october-December 2017 TFN report for closely held trusts for TFNs quoted to a trustee by beneficiaries.
February 2018
21 February Due date for lodgement and payment of January monthly Activity Statements. 28 February Due date for lodgement and payment of October-December 2017 quarterly Activity Statements, including electronic lodgments. 28 February Due date for lodgement and payment of Annual GST returns or Annual GST information reports – if you do not have an income tax return lodgment obligation. 28 February Due date for lodgement and payment of income tax return for self-preparing entities that were not due at an earlier date. If you fail to lodge by this date, your 2017/2018 reutrn will be due by 31 October 2018. 28 February Due date for lodgement and payment of income tax returns for medium to large businesses (taxable and non-taxable that are new registrants) 28 February Due date for lodgement and payment Superannuation Guarantee Charge Statement if you failed to pay Superannuation Guarantee Charge on time for the October-December 2017 quarter. Superannuation Guarantee Charge is not deductible.
Where one of these dates falls on a weekend or public holiday, the due date is esxtended to the next business day except in the case of October-December 2017 Super Guarantee contributions – these are due on Sunday 28 January 2018.
Many key dates are looming for business including those relating to Activity Statements, superannuation, and more
November 2017
11 November July-September quarterly Activity Statements – due for lodgement and payment (if lodging electronically) 21 November October monthly Activity Statements – due for lodgement and payment 28 November Superannuation Guarantee Charge (SGC) Statement – due for lodgement and payment if insufficient contributions or late contrifutions were made for the July-September quarter
December 2017
01 December Due date for income tax payment for companies that were required to lodge by 31 October 2017 21 December November monthly Activity Statements – due for lodgement and payment
The Government has passed legislation increasing the rate of the Small Business Income Tax Offset (SBITO). This article details this change and its tax impact.
INCREASED OFFSET Along with companies, the more than 70% of small businesses that are not incorportated will also enjoy additional income tax relief from 2016/2017. In 2016/2017 income and later income years, a higher rate of SBITO will apply:
For 2016/2017 to 2023/2024, the SBITO is 8% of an eligible individual’s basic income tax liability that relates to their total net small business income (up from 5% in 2015/2016).
For 2024/2025, the SBITO is 10% of an eligible individual’s basic income tax liability that relates to their total net small business income.
For 2025/2026, the SBITO is 13% of an eligible individual’s basic income tax liability that relates to their total net small business income.
For 2026/2027 and later income years, the SBITO is 16% of an eligible individual’s basic income tax liability that relates to their total net small business income.
Furthermore, the aggregated turnover test for access to the SBITO has been increased from 2016/2017 to $5 million (up from $2 million).
BACKGROUND By way of background, individuals are entitled to the SBITO if they are an SBE (i.e. sole trader) or they have a share of a smaill business’ net income included in their assessable income (for example, distrbutions from a partnership or trust which themselves are SBEs) provided the small business is not a corporate tax entity (i.e. company). An individual can only claim one SBITO for an income year irrespective of the number of sources of small business income that an individual receives. The maximum amount of the SBITO from all sources of SBE income is $1,000 for an income year which will be claimed in your year-end tax return.
Although capped at $1,000 per individual, serveral individuals within the one structure can enjoy their own SBITO (not just the business owner) provided at the end of income year they are assessed on income from an SBE. The discount is applied to your net small business income’ as follows:
The Government has just announced that it will introduce legislation into Parliament to clarify confusion around the applicable tax rate for companies.
By way of background, in recent times the Government has passed legislation to progressively reduce the company tax rate for companies with a turnover of up to $50 million as follows:
Income year
Turnover threshold
Company tax rate for entities under the threshold
Company tax rate for entities over the threshold
2015–2016
$2m
28.5%
30.0%
2016–2017
$10m
27.5%
30.0%
2017–2018
$25m
27.5%
30.0%
2018–2019 to 2023–2024
$50m
27.5%
30.0%
2024–2025
$50m
27.0%
30.0%
2025–2026
$50m
26.0%
30.0%
2026–2027
$50m
25.0%
30.0%
It appears that the Government’s intention in making these reductions was to encourage small to medium businesses to reinvest the tax savings in their business, and in turn promote employment and investment growth.
However, this intent became clouded recently when the ATO issued a draft Taxation Ruling in which it stated that, in its opinion, companies that were engaged in passive investments in shares and property could be seen to be carrying on a business, and thus eligible for the reduced company tax rate.
In response to this, the Government has stated that it will soon move to introduce legislation clarifying that only active trading companies qualify for the lower tax rate (and therefore not bucket companies or passive investment companies).
Accordingly, if your company because of its turnover currently qualifies for the 27.5% tax rate and you are varying or otherwise calculating its PAYG Instalments, these should be calculated based on the reduced 27.5% tax rate only where the company is actively trading.
Bucket companies and companies that are solely engaged in passive investments in shares and property should operate (and calculate their PAYG Instalments) on the basis of the 30% rate applying; irrespective of the level of turnover.
