In The Xpress Lane – January 2018 Quarterly Update

A quarterly tax update

Cooper Partners summary of the top 5 hot-button issues during the last quarter — a super quick way to stay current on the “need to know” tax developments that are relevant to you.

In this quarter’s “In the Xpress lane”, the following is covered:

  1. Clarity on company tax rates
  2. ATO’s view on carrying on a business
  3. Warning!  Super Guarantee Compliance
  4. ATO to disclose overdue businesses tax debts to credit agencies
  5. What to look for in Tax Risk Management


Clarity on company tax rates

In our last quarter’s edition of this newsletter, we informed you that the Government released an exposure draft Bill for comment in September 2017 to clarify exactly which companies are eligible for the legislated tax cuts.

Since then there have been two important new developments in late October 2017:

  • the introduction of an amending Bill into Parliament, and
  • the issuing of an ATO draft public ruling.

We clarify how these developments impact the company tax and franking credit rates going forward.

To recap the following are the applicable company tax rates.

FINANCIAL YEAR

AGGREGATED TURNOVER LESS THAN

COMPANY TAX RATE UNDER THE THRESHOLD

COMPANY TAX RATE OVER THE THRESHOLD

2015/2016

$2 million

28.5%

30%

2016/2017

$10 million

27.5%

30%

2017/2018

$25 million

27.5%

30%

2018/2019 to 2023/2024

$50 million

27.5%

30%

2024/2025

$50 million

27%

30%

2025/2026

$50 million

26%

30%

2026/2027 onwards

$50 million

25%

30%

2016/2017 Company Tax Rate

Eligible companies with a turnover of less than $10 million will enjoy a tax rate of 27.5% in 2016/2017. Eligibility depends entirely on a company being a Small Business Entity (i.e. carrying on a business with an aggregated turnover of less than $10 million).

The original exposure draft for this tax rate change sought to introduce the eligibility concept of a “Base Rate Entity” (BRE), and of “passive income”. The amending Bill subsequently removed this criteria for the 2016/17 year. Therefore, the current eligibility criteria of needing to be a company carrying on a business applies for 2016/2017.

2017/2018 Company Tax Rate

Any company that is a “Base Rate Entity” in 2017/2018, will be eligible for the company tax rate of 27.5%. “Base Rate Entity” is defined as a company that has an aggregated 2017/2018 turnover of less than $25 million. The amending Bill removed the requirement to carry on a business and replaces it with a requirement that the company’s ‘passive income’ must not exceed 80% of its assessable income. If it does exceed this, then the company will not qualify for the 27.5% tax rate. Passive income’ is defined to include the following:

  • Portfolio Dividends
    (on shares with less than 10% voting interest)
  • Rent
  • Interest
  • Royalties
  • Franking Credits
  • Net Capital Gain
  • To the extent attributable to any of the above, amounts included in assessable income from a partnership or trust.

Trap: The passive income test is based on assessable income and not net income. So, it is irrelevant where say rental properties produced a loss.

2016/2017 Franking Credit Rate

If a company’s 2016/2017 aggregated turnover was less than $10 million, dividends paid in 2016/2017 by a company that is “carrying on a business” is subject to a maximum franking credit rate of 27.5%.

2017/2018 Franking Credit Rate

Currently, if a company’s 2016/2017 aggregated turnover was less than $25 million, dividends paid in 2017/2018 by a company that satisfy the passive income test is subject to a maximum franking credit of 27.5%.

Take Away Points for 2017/2018 and subsequent years

  • corporate beneficiaries merely holding passive investments conceivably will miss out on the reduced company tax rate;
  • companies that carry on active businesses such as managing large portfolio of properties or companies that have a large one-off capital gain in a year may miss out on the reduced company tax rate;
  • when varying 2017/2018 PAYG instalments keep an eye on the 80% passive income tax test as instalments at 30% tax rate may be more correct and thereby impacting the extent of any variation;
  • consider the applicable tax rate to determine the correct franking of any dividends;
  • ascertain whether fall below passive income test and whether any actions required pre 30 June;
  • consider classification of income in trusts and impact of distributing such income to corporate beneficiaries on the passive income test noting that for tax the ATO are of the view you can only stream, for tax purposes, franked dividends and capital gains.


ATO’s view on carrying on a business

At approximately the same time that the Bill amending the company tax rate was introduced to Parliament, the ATO released draft Taxation Ruling TR 2017/D7 setting out its view on exactly when a company is “carrying on a business”.

While this is not relevant for the eligibility of the lower company tax rate for 2017/2018 onwards (as this depends on the passive income test), it is relevant for the lower company tax rate in the years 2015/2016 and 2016/2017. The draft ruling provides the following examples of what constitutes ‘carrying on a business’.

 

CARRYING ON A BUSINESS?

Y

N

Dormant companies with retained profits and a bank account in which it earns small amounts of interest sufficient only to cover its ASIC fees

X

Companies engaged in the preliminary activity of investigating the viability of carrying on a particular business

X

Family companies with an unpaid present entitlement (UPE) from a family trust that have not demanded payment from the trust and also not entered into any arrangement with the trust to receive any profit from the UPE

X

Family companies whose only income is trust distributions from a discretionary trust which it distributes partly in cash to the shareholders with the balance held in a non-interest bearing bank account pending distribution to other shareholders. The company also has no other assets.

X

Corporate beneficiary companies who invest their distributions (e.g. enter into complying Division 7A agreements and derive interest income)

X

Passive investment companies either those just holding rental properties or share portfolios

X

Going Forward

The above information is based on a Bill currently before Parliament, and a draft Ruling. As such, the law is not yet settled nor has the ATO’s view in the ruling been finalised. However, depending on the final law and ruling, many more companies may now be eligible for both the lower company tax rate and, because of the ATO’s wider interpretation of ‘carrying on a business’, the Small Business Entity concessions. This may in turn require amendments to previous year tax returns to claim these concessions and lower tax rates.

Cooper Partners will monitor the progress of this Bill and draft ruling and once passed will contact our clients for those where a review of the applied company tax rate and any other small business concessions is warranted.


WARNING! Super Guarantee Compliance

In a measure to boost employer Superannuation Guarantee compliance, the Government announced proposed reforms to the way super funds report to the ATO. An exposure draft bill has now been released in order to introduce these integrity measures, which also would give the ATO power to issue directions to take specific actions to employers in default of their obligations.

Super funds will soon be required to report contributions received from employers more frequently, at least monthly, to the ATO. This in turn will enable the ATO to identify and take prompt action against employers who are not meeting their Superannuation Guarantee obligations, whilst also permitting the ATO to disclose information to employees that are affected by employers’ failure to comply.

Additionally, to aid Superannuation Guarantee compliance the Government will:

  • Improve the effectiveness of the ATO’s recovery powers including strengthening the Director Penalty Notice regime and the use of security bonds for high-risk employers.
  • Enable the ATO to direct an employer (or a person associated with the employer, including Directors or Executives) to undertake approved education courses relating to superannuation guarantee obligations, if they have failed to comply.
  • Give the ATO the ability to seek court ordered civil or criminal penalties in the worst cases of non-compliance including employers who are repeat offenders, or employers who do not comply with a specific direction issued by the ATO.
  • Give the ATO the ability to issue a direction to an employer requiring payment of the superannuation guarantee charge (including an estimate) by a particular time period.

In the meantime until these reforms are passed, the Government is focussing on employers who are not paying their workers Superannuation Guarantee or who are paying it late. The due dates are important because, by law, if you are even one day late you are required to lodge an SG Charge Statement with the ATO. The introduction of criminal penalties to the late payment of superannuation guarantee charge, unlike of other debts owed to the ATO, reflects the Government’s focus on ensuring that employees receive all of their entitlements from employers on a timely basis.

Actions

In view of these changes, as a matter of some urgency, all employers should review their current Superannuation Guarantee compliance processes.

Are you;

  • correctly identifying Ordinary Time Earnings;
  • calculating the correct Superannuation Guarantee amounts payable; and
  • paying contributions on time?

We can assist you by conducting a SGC Health check and make sure you ready before 1 July 2018. Contact your Cooper Partners engagement manager if you wish to discuss further.


ATO to disclose overdue businesses tax debts to credit agencies

The Government announced that the ATO would be allowed to report to Credit Reporting Bureaus (CRB) the tax debt information of entities that don’t effectively engage with the ATO to manage those tax debts.

Under present laws, the ATO is not authorised to report this information because of confidentiality of taxpayer information provisions in the Tax Acts.

The Government has announced that it will allow the Australian Taxation Office (ATO) to disclose tax debt information of businesses to registered credit reporting bureaus (CRBs). The ATO will only be able to disclose tax debt information of a business where certain criteria are met.

The measure will commence following the passage of legislation.

CRBs may include the tax debt information in their credit reports which are available for purchase by parties who wish to use this information to make an informed decision on the credit worthiness of a business.

While the specific circumstances and exceptions for disclosure will be subject to public consultation and confirmed through the passage of law, the ATO will only disclose tax debt information of a business to a CRB if the business meets all of the following criteria:

– it has an Australian Business Number (ABN);
– it has a tax debt, of which at least $10,000 is overdue by more than 90 days; and
– it is not “effectively engaging with the ATO to manage its tax debt”.

Effective engagement is said to be either entering into a formal payment plan in relation to the debt, lodging a Part IVC objection against a taxation decision to which the debt relates or appealing to the Administrative Appeals Tribunal for review or appealing to a Court against a decision to which the debt relates.

The ATO will notify a business if they meet the reporting criteria, advising that they have 21 days to respond before their tax debt information is reported to CRBs.

If you have any queries in relation to this please contact your Cooper Partners engagement director or manager.


What to look for in tax risk management

In recent ATO reviews of taxpayers, tax risk management has become a focus of their risk reviews. It plays an important part in the ATO’s decision making about whether to progress from the review to an audit and impacts their tax risk rating of a company.

At present the ATO is focussed on the existence of policies and procedures. But it will be soon change to implementation and strict adherence to these policies.

Tax risk management should be a part of good corporate governance. Accordingly, it is appropriate to review your Company’s risk management.

So what should you look out for:

At the board level:

  • a well-documented tax control framework;
  • tax strategy determined and reviewed;
  • clear role and allocated responsibilities;
  • the board is informed appropriately and timely;
  • periodic internal testing is undertaken.

At the management level:

  • well documented controls;
  • well understood roles and responsibilities;
  • transaction sign off procedures;
  • sufficient capability of tax matters;
  • controls in place to identify significant transactions;
  • data is appropriately retained and accessible and integrity not compromised;
    record keeping policies;
  • policy around advising the board on tax matters;
  • advisor engagement;
  • maintaining reconciliations and explanations between accounting and tax return disclosures;
  • ongoing training and keeping up to date for tax law developments and administration changes

For public companies and large private companies, the ATO view establishing and implementing tax risk management is no longer an option and must be an integral part of corporate governance. It may seem to not add a lot of value but it is an investment worth making to foster better relations with the ATO.

Cooper Partners’ team of specialists in tax dispute resolution is able to assist you in the development of your tax risk management manual and also conducting periodic internal testing of compliance with your procedures and policies.

If you wish to discuss any of the above in further detail, please contact Michelle Saunders or Marissa Bechta on (08) 6311 6900.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
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