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…
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.
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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Many lodgement and payment deadlines are looming for business including those relating to Activity Statments, Superannuation, and more….
12 May – 3rd Quarter 2018/2019 Activity Staterments – due for lodgement and payment if lodging electronically
21 May – April 2018 monthly Activity Statements – due for lodgement and payment
21 May – FBT annual tax return – due for lodgement and payment for self-preparers
28 May – Due date for lodgement and payment of the Superannuation Guarantee Charge Statement if you failed to pay Superannuation Guarantee on time for the January-March quarter. Superannuation Guarantee Charge is not deductible
21 June – May monthly Activity Statements – due for lodgement and payment
25 June – 2019 FBT annual tax return – due date for lodgement and payment if using a Tax Agent who lodged electronically
30 June – Superannuation Guarantee payments must be received by Superannuation funds by this date in order to be deducted in 2018/2019
30 June – End of the 2018/2019 financial year
Where one of these dates falls on a weekend or a public holiday, the due date is extended to the next business day.
The Government’s proposed Superannuation Guarantee (SG)
Amnesty will not proceed. To recap, the SG amnesty was to be available for the
12-month period from 24 May 2018 to 23 May 2019. To get the benefits of the
Amnesty (set out below) employers must have during this 12-month period
voluntarily disclosed any SG underpayments that existed in the past (going as
far back to when SG commenced in 1992). For an employer, the tax benefits of
the amnesty were:
* The administration component of the SG
Charge (SGG) would not be payable (this is a $20 per employee, per quarter, for
whom there is an SG Shortfall)
* Part 7 penalties would not be applied. This
can be up to 200% of the SG Charge that is payable (note that SG Charge
includes the SG Shortfall that is owed to employees)
* All catch-up payments made during the
12-month amnesty period were to be tax deductible.
By contrast, under the current law, when SG has been
underpaid or paid late, the SG Charge that must paid to the ATO is not
deductible, and late contributions that an employer has made to an employee’s
superannuation fund and has elected to offset against their SG Charge liability
are also not deductible.
With Parliament having been prorogued for the Federal
Election, the legislation to enact the Amnesty (which is opposed by the Labor
Party) will not pass into law. Therefore, employers who disclosed SG shortfalls
during the Amnesty period will be subject to the current law and not enjoy the
Amnesty concessions, irrespective of any assurances offered by ATO employees at
the time employers made disclosures. The ATO have however indicated that it
will exercise its discretion and not apply Part 7 penalties to these employers.
The Part 7 penalties aspect of the SG Charge regime did not require a change to
legislation as the discretion to waive penalties already sits with the ATO.Going forward, with super funds now reporting to
the ATO more regularly (at least once per month), we would strongly urge all
employers to pay SG on time and in full by the quarterly cut-off dates
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:
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.
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.
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.
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.
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
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.
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
The LMITO will be enjoyed straight after individuals
lodge their income tax returns for the above years.
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.
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.
* 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.
The ATO Commissioner, Mr Chris Jordan, earlier this year
stated that following ATO efforts, for the first time in almost 25 years, the
average work-related claim decreased over the past 2 years.
The Commissioner said the ATO’s next focus is rental
income and deductions. To this end, as part of the ATO’s broader random enquiry
program, ATO auditors have now completed over 300 audits on rental property
claims and “found errors in almost 9 out of 10 tax returns reviewed”.
He said the most common errors the ATO is seeing are:
interest claims for the entire investment loan where it has been refinanced for
classification of capital works as repairs and maintenance, and
not apportioning deductions for holiday homes when they are not genuinely
available for rent.
Regarding the first category of incorrect claims,
interest can still be claimed where a loan has been refinanced. However, the
borrowed funds must still be used for a deductible purpose (i.e. in relation to
the rental property). Where the refinanced amount is used for a non-deductible
purposes (for example, to buy a boat or car, or to make repayments towards the
family home), the interest that relates to that portion of the refinanced
amount will no longer be deductible.
In respect of repairs and maintenance, in a rental
property context, repairs generally involve a replacement or renewal of a worn
out or broken part, for example, replacing worn or damaged curtains, blinds or
carpets. Maintenance generally involves keeping the property in a tenantable
condition, for example repainting faded or damaged interior walls. By contrast
examples of capital expenditure include:
an entire structure or unit of the property (e.g. an entire fence, kitchen
cupboards, stove etc.)
improvements, renovations, extensions
repairs to defects that existed when you first purchased the property.
These types of capital expenses are not immediately
deductible, but rather must be claimed over a number of years.
The finally category of mistakes, involves claiming a
deduction for expenditure relating to the property, even though it is not being
rented out, or it is not genuinely available for rent. During these periods,
expenses cannot be claimed. To be clear, expenses may be deductible for periods
when the property has no tenants and you are not occupying it, providing it is
genuinely available for rent. To evidence this, you would need to show that it
is being given broad exposure to potential tenants, such as online or
newspapers advertisements etc.
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.
The first sitting of Parliament for 2019 wrapped up last week. While legislation to extend the Single Touch Payroll reporting regime to all employers passed into law (just awaiting Royal Assent), there are a couple of other measures that remain unlegislated which could impact your business. With the full Parliament only expected to sit for three more days (April 2 – 4) until an Election is called, there are now serious doubts surrounding whether these measures will pass into law. In view of this, we put forward the following suggested approach in the meantime:
The legislation to enact this measure is still before the Senate. To recap, the Superannuation Guarantee Amnesty was to be available for the 12-month period from 24 May 2018 to 23 May 2019. To get the benefits of the Amnesty (set out below) employers must during this 12-month period voluntarily disclose any Superannuation Guarantee underpayments that exist in the past (going back to when Superannuation Guarantee commenced in 1992).
For an employer, the tax benefits of the Amnesty are:
* The administration component of the Superannuation Guarantee Charge (SGG) is not payable (this is a $20 per employee, per quarter, for whom there is an SG Shortfall)
* Part 7 penalties will not be applied. This can be up to 200% of the SG Charge that is payable (note that SG Charge includes the SG Shortfall that you owe to employees)
* All catch-up payments that you make during the 12-month Amnesty period will be tax deductible.
By contrast, under the current law, when superannuation has been underpaid or paid late Superannuation Guarantee Charge that must paid to the ATO is not deductible, and late contributions that an employer has made to an employee’s superannuation and has elected to offset against their SG Charge liability are also not deductible.
If an employer is contemplating disclosing past superannuation shortfalls specifically to get the benefits of the Amnesty (including claiming a deduction for your late contributions) then it may be prudent to hold off until such time that the Amnesty actually becomes law (if at all). We will keep you apprised of the passage of the legislation through Parliament. However, with only a few sitting days remaining for this Parliament, and with the Opposition opposed to this measure, there are serious doubts about it becoming law.
Irrespective of the Amnesty however, all employers should consider coming forward to disclose and pay past shortfalls to get their Superannuation Guarantee affairs in order. The Government is committing more resources to this area – including requiring Superannuation Funds to report more regularly to the ATO (at least once each month) – therefore non-complying employers may be more easily detected going forward.
Enhancing the Instant Asset Write-Off
Legislation to expand and extend the Small Business Instant Asset Write-Off is still before the House of Representatives. This Bill seeks to extend the write-off by 12 months until 30 June 2020 (currently set to expire on 30 June 2019) and increase the threshold by $5,000 to $25,000; with the increase backdated to 29 January 2019. If passed into law, this would mean that there would be two thresholds for 2018/2019 as follows:
* $20,000 (for assets installed ready for use between 1 July 2018 and 28 January 2019), and
* $25,000 (for assets installed ready for use between 29 January 2019 and 30 June 2019.
Irrespective of the whether the legislation passes into law, it is important to have perspective. You are only getting back the tax rate on the asset, not the full value of the asset. This is the same as the old law where the write-off threshold was $1,000 You don’t get any extra cash than you would otherwise have received under the old rules – you simply get it sooner. Consequently, you should not let tax distort or blur your commercial instincts – as you don’t get any extra cash than you would otherwise have under the old rules, you should continue to only buy assets that fit within your business plan.
Many lodgement and payment dealines are looming for business including those relating to Activity Statements, Superannuation, and more….
MARCH 2019 21 March – February monthly Activity Statements – due for lodgement and payment
APRIL 2019 21 April – March monthly Activity Statements – due for lodgement and payment 21 April – Quarter 3 (January-March) PAYG instalment Activity Statements 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, lodgement 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 trusts for TFNs quoted to a trustee by beneficiaries – final 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.