Significant changes expected to Division 7A rules from mid-2019

The Division 7A provisions within the Tax Act play a critical role in governing how individuals borrow money from their businesses or tax effectively finance investment activities. In a move that may surprise many who already struggle to follow this technical area, the Australian Government appears set to change these rules from as soon as 1 July 2019. The proposed changes could create cash flow issues for many as a result of shorter or altered loan terms, higher interest payments and more immediate principal repayments. For this reason, we are encouraging clients to urgently review the proposed changes and consider their Division 7A–related strategies.

What is Division 7A?

Division 7A is a tax integrity rule that applies to shareholders of private companies, which may include individuals or trusts. If the company makes a payment or provides a loan to a shareholder, the government will treat the funds as unfranked dividends that add to the recipient’s taxable income – unless they use the Division 7A provisions to convert the amount into a complying loan.

These loans currently run for seven years unsecured or 25 years, if the shareholder agrees to provide property as security. During that time, the shareholders must repay the principal and pay interest, at the ATO Commissioner’s benchmark interest rate (currently 5.30%). Division 7A also extends to debt forgiveness and the private use of company owned assets, such as a boat or holiday house.

What is changing?

The government flagged its intention to revise Division 7A in the 2016/17 Federal Budget and has since provided some safe harbour conditions in anticipation of making amendments. It has now released a new consultation paper that provides further detail on the potential shape of the new regime and indicates it might be in place as soon as 1 July 2019. While the new rules are yet to be finalised and must still be legislated, our view is that the paper indicates the likely shape of the new rules. Given there is broadly bipartisan support for the changes, we also believe they may be passed.

Here is a summary of the proposed changes, each of which is discussed in detail below.

  • Loan terms will change from a maximum of seven or twenty-five years to a flat ten years.
  • The interest rate on 7A loans will increase from 5.30% to 8.30% (rates are as of today).
  • Interest repayments will be calculated on the amount owing at the start of a financial year, even if funds are repaid during the year.
  • There will be no limit on deemed dividends, due to the abolition of the distributable surplus.
  • Unpaid present entitlements will be caught in tax law and must become 10-year principal and interest Division 7A loans.
  • Calculation of repayments and interest will be simplified and the need for written loan agreements will be removed. It will also become easier for taxpayers to correct any inadvertent errors.

Examples

The following scenarios show the potential implications of the changes for an individual who has borrowed from his or her private company, and a private group that currently uses a corporate beneficiary.

Example 1

Raymond, a shareholder of XYZ Pty Ltd  withdraws $50,000 from the private company to partly fund his family holiday. As at 30 June 2019, Raymond has not reimbursed XYZ Pty Ltd for his getaway and the $50,000 remains outstanding as at the lodgement due date for XYZ Pty Ltd. Under the existing Division 7A rules, Raymond can place the $50,000 on a 7 year complying loan agreement at an interest rate of 5.2% (current rate for the 2019 year). The minimum yearly repayment required to be made prior to 30 June 2020 would be $8,704 (interest component being $2,600). Contrast this to the proposed changes, the loan term will change to a maximum of 10 years and the interest rate will be 8.3%. Under the proposed changes, the minumum yearly repayment would be $9,150 (interest component being $4,150). An increase in the interest component and miniumum yearly repayment required which will cause Raymond some cash flow issues.

Example 2

A variation to the above example would be if Raymond’s Trust, the Barona Family Trust makes XYZ Pty Ltd entitled to $100,000 of its share of profits for the year ended 30 June 2019 and does not actuall pay this amount to the company. The existing treatment of this unpaid present entitlement (UPE) would be for the Trust to place the UPE on sub-trust for 7 or 10 years on interest only terms (unless repaid prior to the lodgement due date). For the year ended 30 June 2020, interest income of $670 would be raised in the accounts of XYZ Pty Ltd with no principal amounts requiring repayment until the end of the loan term. Under the proposed changes, the interest only sub-trust option will no longer be available and the UPE must be placed on loan terms under the new 10-year loan model (unless repaid prior to the lodgement due date of the private compay). The minimum yearly repayment required for the year ended 30 June 2020 in respect of this UPE would then be $18,300 (interest component being $8,300).  As you can see, the changes are likely to lead increased strain on cashflow and a requirement for this group to find an unexpected $17,630 in loan repayments by June 2020.

Proposed changes in detail

Simplification of loan terms

The current Division 7A rules require a minimum yearly repayment over the term of the loan (currently seven years for unsecured loans and 25 years for a secured loan). The discussion paper proposes that from 1 July 2019, all new loans must have a maximum term of 10 years, whether the loan is secured or not. Consistent with the existing rules, the loan term would begin at the end of the income year in which the advance is made.

The annual benchmark interest rate which is currently set by the ATO Commissioner (currently 5.30%) is to be based on the small business, variable indicator lending rate as published by the Reserve Bank of Australia before the start of each income year (8.30% as of September 2018).

The minimum yearly repayment will be simplified to consist of a principal and interest component that is easy to calculate. The principal component will be equal annual payments of the initial principal advance divided by the term of the loan.

The interest component will be the interest calculated on the opening balance of the loan each year using the benchmark interest rate as previously mentioned. Interest will be calculated for the full income year, regardless of when the repayment is made during the year (except in Year 1).

If the loan is repaid earlier, interest will not be charged for the remaining years.

Transitional rules

Existing seven-year loans

All complying seven-year loans in existence on 30 June 2018 will have to comply with the new proposed loan model and new benchmark interest rate to remain compliant, but will retain their existing terms. That is, they cannot be extended to 10 years. Current loan agreements with written reference to the benchmark interest rate should not have to be renegotiated under this option.

Existing 25-year loans

All complying 25-year loan agreements in existence on 30 June 2019 will remain as is until 30 June 2021, at which point they can restart as a new 10-year loan. However, the interest rate payable for these loans during this period will have to equal or exceed the new benchmark interest rate.

Pre-1997 loans

Loans made before 4 December 1997 predate the introduction of Division 7A. However, under the proposed transaction rules any outstanding pre-1997 loans will need to transition to a 10-year term from 30 June 2021 if they are not already statute barred. This provides a two-year grace period before the first repayment is due, with the loan to be repaid over the subsequent 10 years. The taxpayer will have until the lodgement day of the 2020/21 company tax return to either pay out the amount of the loan or put in place a complying loan agreement, otherwise it will be treated as a dividend in the 2020/21 income year. The first repayment will be due in the 2021/22 income year.

Abolition of distributable surplus limit

The amount of the deemed dividend under Division 7A is currently limited to the distributable surplus of the private company that provides the benefit. The distributable surplus is essentially the net assets of the private company, which represents past and current profits.

The amendments will remove the concept of distributable surplus, resulting in no limit on a deemed dividend amount. This is contrary to the original intent and operation of the Division 7A integrity rule. A deemed dividend should emulate the situation of a real dividend where it is a distribution made out of profits.

Unpaid present entitlements to be included in tax law

An unpaid present entitlement (UPE) arises when a trust makes a private company a corporate beneficiary, thereby entitling it to a share of its profit, but does not pay the profit amount to the company in a given year. This is a common approach in private groups and the government’s proposed changes could have a significant impact on many from a cash flow point of view.

Currently, UPEs generally do not have a prescribed tax treatment under tax law. However, the Commissioner has taken the view that UPEs are generally within the scope of Division 7A under the extended meaning of a loan per the tax legislation unless the funds representing the UPE are held for the sole benefit of the private company.

This view is outlined in Taxation Ruling 2010/3 which applies to UPEs that arise after 16 December 2009. The Commissioner states that the funds can be held for the sole benefit of the private company if they are placed on sub-trust arrangements for seven or 10 years on interest-only terms with repayment of the principal at the conclusion of the loan.

The proposed changes state that all UPEs that arise on or after 1 July 2019 will need to be either paid to the private company or put on complying loan terms under the new 10-year loan model prior to the private company’s lodgement day, otherwise there will be a deemed dividend. That is, both principal and interest payments are required to be made each year, with the first due 30 June 2020.

The government is considering whether any transitional rules for sub-trusts that arose after 16 December 2009 should be introduced and whether pre-16 December 2009 UPEs should be brought within Division 7A. At this stage, it is unclear what the government will decide.

Self-correction

Given the complexity of Division 7A, it’s common for taxpayers to rectify inadvertent breaches – typically after their accountants have prepared their annual tax return. Traditionally this has been a laborious and expensive process involving a formal application to the Commissioner of Taxation.

The government is now proposing a self-correction mechanism that allows taxpayers to voluntarily rectify inadvertent breaches of Division 7A without penalty and without lodging an application for the Commissioner’s consideration. This should reduce effort and compliance costs.

Extension to review period

The review period in which the Commisioner can amend a tax return has been extended to 14 years after the end of the income year in which a loan, payment or debt forgiveness gave rise – or would have given rise – to a deemed dividend.

New safe harbour rules

The consultation paper proposes new safe harbour rules that provide certainty and simplicity for taxpayers. This includes formulas to calculate the arms-length value of a company’s asset that is being used by a shareholder or their associate.

Summary: positives and negatives

Your next steps

The government’s proposed changes are significant and, if passed in their current form, will have major implications for many companies, individuals and private groups as soon as mid-2019.

We urge clients and others to review their Division 7A–related strategies to ensure they will not be disadvantaged by the changes, and to make the most of any emerging opportunities. Even if the final regime is slightly different, it is clear that the government is paying close attention to Division 7A.

It is especially important to consider cash flow – particularly for those with UPEs owing to a corporate beneficiary and for which principal and interest repayments may become due from 30 June 2020.

Some of the responses we are already working on with clients include quantifying the potential impact of the changes, considering selling or refinancing assets, and creating new structures.

For more information or to discuss your situation, please contact our private clients team:

 

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.
Liability limited by a scheme approved under Professional Standards Legislation.

Foreign subsidiaries could be Australian tax residents under new ATO ruling

Companies have until 30 June 2019 to review operations

Foreign incorporated companies could be classed as Australian tax residents under a new ATO ruling, unless they change their governance arrangements by 30 June 2019.

The ATO’s ruling overturns the established position on how to determine where a company’s central management and control is located. Australian-based groups with foreign subsidiaries and those investing through foreign incorporated companies should assess their corporate structures immediately if they want to continue as non- tax residents.

From a board’s eye view to a more holistic approach

Central management and control has traditionally been held to reside in a company’s board of directors. This meant that if the board met outside of Australia, the company was treated as non-resident for tax purposes.

That position changed in early 2017 when the ATO withdrew an earlier decision on the matter (TR 2004/15) and updated its view in a draft ruling (TR 2017/2D).

The ATO changed its position in light of the High Court of Australia decision in Bywater. In that case, the High Court ruled that central management and control didn’t necessarily reside in a company’s board if that board abrogated its decision-making authority to another party and merely rubber-stamped its decisions without considering whether they were in the company’s best interests.

Central management and control key to tax status

The ATO confirmed its draft ruling recently in TR 2018/5 Income Tax: central management and control test of residency.

Its new position is that central management and control is more closely linked to where decisions are really made, rather than where the board meets. In particular, it has ruled:

  1. If a company’s central management and control is located in Australia, it will be considered to be conducting business in Australia and will be an Australian tax resident.
  2. A company doesn’t have to trade or invest in Australia to be considered an Australian tax resident. By basing its central management and control in Australia, it will be held to be conducting business here.
  3. Determining where a company’s central management and control is located is a matter of assessing where high-level decisions are made. High-level decisions include determining the direction of the company, as well as its policies and the types of transaction it will enter. They don’t include overseeing the company’s day-to-day operations.

Factors relevant to central management and control

When determining where a company exercises its high-level decision-making capacity – and therefore where central management and control reside – the ATO says it will now consider:

  • Where the people exercising central management and control make their decisions;
  • Where the company’s governing body meets;
  • Where the company declares and pays dividends;
  • Whether the nature of the business dictates where control and management decisions are made; and
  • Where the minutes or other documents recording high-level decisions are made.

Carrying less weight, but also relevant is:

  • Where the people controlling and directing the company’s operations live;
  • The location of the company’s books, register of shareholders and registered office;
  • Where the company holds shareholder meetings; and
  • Where shareholders live.

The impact of the ATO’s revised position

There is now a materially higher risk that foreign incorporated subsidiaries will be classed as Australian tax residents. The adverse tax implications of this could include:

  • Double taxation. The foreign company may have to pay tax in Australia on its worldwide income while still retaining its tax residency in another jurisdiction.
  • Denial of deductions. If the foreign company and its income are brought into an Australian tax consolidated group, the ATO may deny certain deductions, including interest deductions.
  • Removal of concessions. The company may lose any entitlement to concessions for controllers of controlled foreign companies (CFCs). This could include exemptions from Australian tax on foreign dividends, as well as any reductions in capital gains or losses from the disposal of foreign shares.

Complying with the ATO’s approach

To help companies understand and comply with its new approach, the ATO has also released Practical Compliance Guideline PCG 2018/D3. This provides guidance on how companies can determine:

  • The location of their central management and control;
  • Where their high-level decision making happens;
  • Whether a person is a real decision maker or merely influential; and
  • What activities constitute central management and control and what is day-to-day management.

What do you need to do?

The ATO Guideline provides that companies who want to continue being treated as non-tax residents have until 30 June 2019 to change their governance arrangements so that central management and control is exercised outside of Australia. Companies must also meet a number of ATO conditions or they will be subject to the new ruling.

This means that if you have an interest in a foreign incorporated company, we strongly recommend that you:

  1. Review your structure and governance arrangements;
  2. Analyse where the central management and control of any foreign incorporated companies really lies; and
  3. Make certain that you properly document any board meetings and other records so that you can prove how and where key decisions are made.

If you’d like help to perform these reviews or if you have any questions on how the ATO’s ruling affects you please contact Rachel Pritchard rpritchard@cooperpartners.com.au  or Robyn Dyson rdyson@cooperpartners.com.au or call (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.
Liability limited by a scheme approved under Professional Standards Legislation.

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.
Liability limited by a scheme approved under Professional Standards Legislation.
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Jemma Sanderson takes out SMSF Adviser of the Year

Jemma Sanderson takes out SMSF Adviser of the Year

Congratulations to Jemma Sanderson for recognition as Australia’s Self Managed Super Fund Adviser of Year for 2017. Jemma’s award was part of the annual Women in Finance Awards which seeks to uncover the leading women professionals in the finance sector.

Jemma received her award on Thursday night at a sold-out gala ceremony at The Star in Sydney. Michelle Saunders and Marissa Bechta also attended the ceremony while the Cooper Partners team in Perth sent their support via a surprise team video.

We are thrilled for Jemma and delighted that the advice, service and team work of Cooper Partners Financial Services was acknowledged among the top Performing advisers in the country.

A full list of winners is available here.

And more information about Cooper Partners here.

Jemma Sanderson takes out SMSF Adviser of the Year

Jemma Sanderson Nominated for Women in Finance Award

Women in Finance Award

Cooper Partners is proud to announce Jemma Sanderson and Cooper Partners Financial Services as having been nominated for the 2017 SMSF Advisor and SMSF Firm of the Year including a Women in Finance award.

Jemma is a Director and heads up Cooper Partners SMSF specialist superannuation services.

These awards acknowledge Jemma and Cooper Partners Financial Services as leading the charge as a professional firm with effective teams and strategies.

The judge’s criteria for SMSF Advisor of the Year include; client satisfaction, knowledge and experience in the finance and SMSF arenas. We congratulate Jemma in this unique opportunity to celebrate amongst the top performers in each state.

Cooper Partners is a boutique taxation and business advisory firm with a strong presence in the SMSF industry. We offer a fully complementary service from SMSF advice, including planning around transferring and ownership to the next generation. Through Jemma Sanderson our market leading advisor you will be ensured to receive the latest and up to date strategies to achieve your desired future outcomes. Visit https://cooperpartners.com.au for more information.

Superannuation – Pre 30 June Considerations


As 30 June 2017 approaches, it is important to attend to the usual requirements before 30 June, plus ensuring the relevant documentation is in place with regard to the new superannuation rules.

The areas for consideration include:

  1. Change in contribution caps from 1 July 2017;
  2. Ensuring minimum pension payments are made;
  3. Restructure of pension accounts;
  4. Tax exemption for transition to retirement income streams;
  5. CGT transitional provisions;
  6. Asset Valuations – Property and Unlisted Assets;
  7. Limited Recourse Borrowing Arrangements – Loan Repayments; and
  8. In-House Assets.

1. Change in contribution caps from 1 July 2017

Pursuant to the new superannuation legislation, there have been changes to the superannuation contribution limits.

Concessional Contributions

Concessional contributions include employer contributions, salary sacrifice contributions, and personal deductible contributions:

  • The current limit for concessional contributions for the 2016/2017 year is $30,000, and $35,000 for members over 49;
  • From 1 July 2017, the concessional contribution limit will be reduced to $25,000 for all taxpayers, regardless of their age. This will be indexed in line with wages growth.

Non-Concessional Contributions

Non-concessional contributions include any after-tax voluntary contributions made by members:

  • The non-concessional contributions cap for the 2016/2017 year is $180,000. Where a member was 64 or younger on 1 July 2016, they are able to bring forward up to two future years’ contributions. This “bring-forward” provision allows members to make a one-off non-concessional contribution of up to $540,000 in the 2016/2017 year. It is important to note that where a member has previously triggered the bring-forward provision in the either the 2014/2015 or 2015/2016 year, this will limit the contributions that can be made in the 2016/2017 year. Accordingly, prior to making any contributions the contribution history should be reviewed to ensure the non-concessional contributions cap is not exceeded.
  • From 1 July 2017, the non-concessional contribution limit will be reduced to $100,000 per annum. Where an individual’s total superannuation balance is above $1.6 million on 30 June of the previous financial year, the individual is no longer eligible to make further non-concessional contributions to superannuation. The $1.6 million threshold is indexed in $100,000 increments. As a result, the bring-forward provision has also reduced to $300,000 from 1 July 2017.

Pre 30 June 2017 considerations:

In order to maximise your contributions to superannuation prior to 30 June 2017, consider the following:

  • Are you able to make concessional contributions up to your cap? This might include the ability to salary sacrifice an amount from your employer, or perhaps make a personal contribution and claim a deduction (please note, eligibility criteria apply to personal deductible contributions);
  • Do you have the capacity and available funds to make non-concessional contributions into superannuation before the new rules come in from 1 July 2017? This is the last chance to make non-concessional contributions up to $540,000;
  • Where you intend to make contributions electronically, ensure that you have left sufficient time for the contribution to be cleared into the fund’s bank account.  It is the time that the fund receives the contribution that is the relevant date for the fund, not the time that it leaves your bank account.

2. Ensuring minimum pension payments are made

To satisfy the 2016/2017 annual pension requirements, all pension payments must be withdrawn from the fund and transferred to your personal bank account by 30 June 2017.

Failing to the meet the minimum pension requirements could lead to your fund losing the tax exemption with respect to the income and realised capital gains generated by the assets supporting the pension, and as a result the fund’s income will be subject to tax.

30 June 2017 considerations:

  • Ensure you have paid the minimum pension amount prior to 30 June 2017.  In this regard, where you intend to pay electronically, ensure that you leave plenty of time to provide instructions to your bank or investment adviser if required to realise assets in order to pay out the pension in cash;
  • Individuals that have Transition to Retirement Pensions in place are subject to a 10% maximum drawdown of the pension balance at 30 June 2017 or the date the pension commenced.

3. Restructure of pension accounts – Transfer Balance Cap;

The Transfer Balance Cap (TBC) is the limit from 1 July 2017 on the amount of superannuation which can be transferred to the “retirement phase”.  The retirement phase includes income streams where the individual has met a full condition of release, that is, it is not a transition to retirement pension.

The impact of these provisions is that where a member has superannuation balances in the retirement phase above $1.6 million, the excess is required to remain in accumulation, or be removed from the superannuation system. It is important to note that the excess is not required to be removed from the superannuation fund, it can remain in the Fund in accumulation phase.

30 June 2017 considerations:

  •  Where you have a retirement phase income stream above $1.6 million, ensure the appropriate documentation is in place by 30 June 2017 to rollback any excess above $1.6 million back to accumulation phase.

4. Tax exemption for transition to retirement income streams;

From 1 July 2017, Transition to Retirement Pensions (TRPs) will be ineligible to receive a tax exemption with respect to the assets supporting such pensions.  Accordingly, earnings will be taxed at the standard accumulation rate of 15% (an effective 10% tax rate on long term capital gains).  Such a change will apply irrespective of when the TRP commenced.

30 June 2017 considerations:

  • Given that the tax exemption on TRPs within the Fund will cease from 1 July 2017, consideration should be given as to whether or not the TRP should continue post 1 July 2017.
  • This will be last opportunity prior to 30 June 2017 to make an election that a payment from a TRP is taxed as a lump-sum, rather than a pension payment.

5. CGT transitional provisions

As a result of the TBC (point 3), or where the member held a TRP (point 4), the fund may be eligible to apply CGT relief. CGT relief is available to ensure that tax does not apply to unrealised capital gains that have accrued on assets that were used to support superannuation income streams prior to 1 July 2017.

A fund will be able to make an irrevocable election to reset the cost base on assets which were held to support pensions. The Fund’s Trustee is able to elect that there is a deemed disposal of such assets, with any capital gain that arises from that deemed disposal being subject to tax in the 2016/2017 year.  Please note, this election must be made in the approved form on or before the due date for lodgement of the Fund’s income tax return for 2016/2017.

6. Asset valuations – property and unlisted assets

Where a superannuation fund has unlisted assets (such as direct property, unlisted shares, and units in unlisted trusts), the fund Trustees are required to value their investments at market value as at 30 June.

June 2017 considerations:

  • Consideration should be given to whether a market appraisal/valuation is required to be obtained for the assets and whether or not the services of an independent valuer is required. It will also be important that formal valuations are obtained where the Fund is utilising the CGT relief provisions;
  • Where the fund holds property, additional consideration should be given to ensure the required lease payments are made prior to 30 June and the lease payments are based on a market rate. Where the market rate has changed, this may need to be reflected from 1 July 2017 and in accordance with the lease agreement.

 7. Limited recourse borrowing arrangements – loan repayments

Where a superannuation fund has a limited recourse borrowing arrangement (LRBA) where the lender to the fund is a related party, the Trustee should ensure any obligations under the loan terms are complied with.  Further, in April 2016, the ATO released Practical Compliance Guideline 2016/5 (PCG 2016/5) in relation to borrowing arrangements entered into with related parties. Where an LRBA is structured in accordance with PCG 2016/5, the arrangement will be considered to be maintained on an arm’s length basis.

June 2017 considerations:

  • Ensure that all interest and principal repayments have been made, and continue to be paid monthly in accordance with the loan agreement and PCG 2016/5.

8. In-house assets

Where a superannuation fund has an investment or loan with a related party that is captured under the in-house asset rules, the Trustee needs to ensure the arrangement complies with the relevant provisions.

June 2017 considerations:

  • Where an SMSF has in-house assets that exceeded the allowable limit of 5% at 30 June 2016, the excess over 5% may be required to be disposed of prior to 30 June 2017;
  • Where an SMSF has in-house assets that exceeded the allowable limit of 5% from 1 July 2016, consideration should be given to reduce the IHA to less than 5% prior to 30 June 2017.

The Next Steps

If you would like further details or assistance with respect to any of the above strategies, superannuation in general, or wish to have your position reviewed in light of the new superannuation changes, please contact Jemma Sanderson at jsanderson@cooperpartners.com.au or 08 6311 6900.

End of financial year planning

Understanding what the potential tax liability will be for your business and allowing time for tax planning can result in considerable tax savings and with the end of the financial year fast approaching, now is a critical time to assess your year-end tax planning and tax compliance considerations.

The purpose of this guide is to highlight some year-end tax planning opportunities as well as some year-end compliance requirements you should be considering.

Small business entity? 

From 1 July 2016, the small business entity (SBE) turnover threshold will be increased from $2 million to $10 million.  Importantly, all business entities (incorporated or otherwise) that meet the new $10 million aggregated turnover test will be able to access a range of tax concessions.

To qualify as a SBE, the business must have an aggregated turnover (that is, your annual turnover plus the annual turnover of any business connected / affiliated with you) of less than $10 million and be operating a business for all or part of the 2017 year.

Relevant year-end tax planning initiatives to which the increased $10 million threshold opens up for the 2017 tax year include:

  • immediate deductibility for small business start-up expenses;
  • simplified depreciation rules, including access to immediate deductions for some depreciable assets (see further below);
  • simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;
  • immediate deductions for certain prepaid business expenses (see further below);
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO; and
  • FBT car parking exemption.

Small business taxpayers can claim an immediate deduction for certain prepaid (up to 12 months) business expenses before 30 June 2017 and obtain a full tax deduction in the 2016/2017 financial year.

The prepaid expenditure concession provides SBEs with cash-flow relief by enabling them to bring forward deductions that would otherwise be apportioned over two income years.

Examples of business expenditure items that you may wish to prepay over the coming months before 1 July include: • Rent • Insurance • Advertising • Repairs to business assets • Subscriptions • Business trips • Deductible interest • Seminars and conference bookings • Contract payments

Immediate deduction for depreciable assets costing less than $20,000

This concession, which essentially provides an immediate deduction for most depreciating assets costing less than $20,000 has been a very popular measure for small business taxpayers since the rules came into effect from 12 May 2015.  The increased threshold was due to revert back to its original threshold of $1,000 from 1 July 2017, however the Government recently stated it will extend the availability of the $20,000 concession until 30 June 2018, giving SBEs another year to access the concession.

The popularity of this concession stems from the ability to bring forward tax deductions rather than having them spread out over more than one year. This can have significant benefits, however it is important to understand some of the practical and commercial issues regarding the application of the simplified depreciation rules for small business.  Such considerations may include the optimal timing of deductions (e.g. a tax deduction is of limited benefit if your business is not paying any tax, or could better make use of deductions in later years), the impact that asset purchases may have on cash flow, and how the choice to access the $20,000 immediate deduction automatically triggers pooling rules that may not be beneficial to your business.

Broadly, to claim a deduction in 2016/2017 income year, a SBE must acquire an asset and must first use it or have it installed ready for use in its business on or before 30 June 2017.

Please contact us to ensure your future acquisitions will qualify as intended.

Other depreciation concessions for SBEs

Other depreciation concessions for SBEs include a write off of low value pool balances of up to $20,000 on or before 30 June 2018.

Depreciating assets costing more than $20,000 can be pooled and depreciated at a rate of $15% in the first year and 30% in subsequent years.

Concessional company tax rates

From 1 July 2016, the corporate tax rate for small businesses (i.e. businesses with an aggregated turnover of less than $10 million) has been reduced further to 27.5%.   From 1 July 2017, this reduced corporate tax rate will apply to all business with an aggregated turnover of less than $25 million.

General tax planning tips

The following key points are helpful in terms of general tax planning.

  • Delay income – Where appropriate, and if it will not adversely affect your cash flow, consideration should be given to deferring the recognition of income until after 30 June 2017.
  • Prepaid expenses (see above) – A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2017 for services to be rendered within a 12 month period.
  • Superannuation Guarantee Contributions (SGC) – The deadline for employers to pay their superannuation guarantee contributions for the 2016/17 financial year is 28 July 2017. However, if you want a tax deduction in the 2016/17 year the superannuation fund must receive the funds by 30 June 2017. The Tax Office deems a contribution made by electronic transfer is not paid until the amount is actually credited to a super fund’s bank account. As such, don’t leave the payment to the last minute.
    Please note that the failure to make the required SGC by the deadline of 28 July 2017 will mean you incur a non-deductible levy equal to the unpaid contributions together with a penalty.
    The SGC rate for the 2016/17 year is 9.5% of salaries. Note that there is no upper age limit for making super guarantee contributions for an employee. Removal of the limit is to encourage mature workers to stay in the workforce. This means you may need to make super guarantee payments for eligible employees aged 70 years or over.
  • Bad debts – Consider writing off any bad debts before 30 June 2017. For tax purposes a bad debt is an amount that is owed to you that you consider is uncollectable or it is not economically feasible to pursue collection. However, unless these debts are physically recorded as a bad debt in your debtor system before 30 June 2017, a deduction will not be allowable in the current financial year.
  • Repairs and maintenance – Are there any repairs and maintenance you should carry out prior to 30 June 2017?
  • Depreciation claims – further to the SBE depreciation concessions discussed above, a review of your depreciation schedule may give rise to a number of opportunities, including the ability to scrap and write off amounts, self-assessing effective lives, or allocating assets to a low value pool.

FBT exemptions for certain work related items

The purchase of Tools of Trade and other FBT exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.

Items that can be packaged include Handheld/Portable Tools of Trade, Computer Software, Notebook Computers, Personal Electronic Organisers, Digital Cameras, Briefcases, Protective Clothing, and Mobile Phones.

If structured correctly, the employer will be entitled to a tax deduction for the reimbursement payment to the employee (for the equipment cost), claim any GST input credit, and the employee’s salary package will only be reduced by the GST-exclusive cost of the items purchased.

You should buy these items before 30 June 2017.

Trading stock

Businesses that are required to conduct a stocktake of all trading stock should do so as close as possible to the end of each income year. Note: simplified trading stock rules for SBEs (discussed above).

You can choose to value trading stock via one of the following methods;

  • cost,
  • market selling value; or
  • replacement value.

Whilst the opening balance of trading stock has to reconcile to the closing stock balance of the previous year, there is an option in regards to the method that the taxpayer may choose for the current financial year.

A lower trading stock valuation may result in lower taxable income. A review of all trading stock will identify any obsolete stock (which can be valued at nil) and help minimise your taxable income.

Websites

You may be able to claim the expenses you incur in creating or maintaining a website for your business as a deduction.  Such costs include the costs of software, website development, domain name registration and server hosting.

Generally, you can deduction these costs in the year you incur them.  You can also depreciate the costs of a website over time.  You do this by various depreciation methods, including putting the expenses in to a pool.

Directors’ fees

If your company is planning on paying directors fees prior to 1 July 2017, you may want to consider putting a resolution in place by this date and pay the fees in the following financial year.

The benefit in such a strategy is that while the company claims a tax deduction for the director’s fees in the year that it makes the resolution, it doesn’t actually make the payment until the following financial year.

For tax purposes, accrued director’s fees are only deductible at the point in time that a company is definitely committed to making the payment. Consequently, it’s essential that your company, via an appropriately worded minute, makes an unconditional resolution in a shareholders’ meeting making the company “definitely committed” to making the payment. The resolution must not be conditional; it must not be subject to cash-flow considerations etc.

Please note also that directors fees are subject to PAYGW and superannuation requirements.

Private companies and deemed dividends

It is critical that all transactions between private companies and related trusts and individuals be identified and reviewed prior to 30 June 2017.

Business owners who have borrowed funds from their company in previous years must ensure that the appropriate principal and interest repayments are made by 30 June 2017. Current year loans must be either paid back in full or have a loan agreement entered in before the due date of lodgement for the company return or risk having it counted as an unfranked dividend in the return of the individual.

Watch out for any unpaid distributions owing to corporate beneficiaries as they similarly will need action and documentation before 30 June.

Discretionary trust resolutions

Income distribution resolutions must be drafted by the 30 June 2017 or earlier if required by the trust deed in order to avoid the trustee (or any default beneficiaries) being subject to tax (49% in the trustee’s case).

Whilst considering who the beneficiaries will be for the 2017 year, consideration needs to be provided to the Trust Deed which defines whom qualifies as an eligible beneficiary. Beneficiaries such as related companies, trusts and de facto spouses may not be covered by this definition.

Trustees may decide to distribute its profit to beneficiaries with low tax thresholds. However, whilst it may seem like a positive tax saving strategy, the unpaid distribution can be called upon at any time from the beneficiary.

Furthermore, the trustee may consider distributing to company beneficiaries. Such distributions will be taxed at the corporate tax rate, being 27.5% for entities under the $10 million threshold and 30% for all other corporate entities.

There are many other critical areas of trust compliance.  We recommend you contact us to ensure that these matters are properly attended to prior to year-end.

Deficit Levy

The abolition of the Deficit Levy from 1 July 2017 presents a tax-planning opportunity for high-income taxpayers. By way of background, the Deficit Levy was introduced on 1 July 2014. It is a 2% levy which applies on that part of an individual’s taxable income which exceeds $180,000. If you are on track to earn over this amount in 2016/2017, then consider deferring income where possible until after 30 June 2017 and enjoy a 2% tax saving.

Income deferral and expense acceleration

Similar principles apply for those individuals earning below $180,000 who are not impacted by the Deficit Levy as follows:

If you will be earning more money this financial year (2016/2017) than next year (2017/2018) then consider deferring income until after 30 June 2017 where possible. This may involve for example deferring taxable capital gains by simply delaying the sale of the asset. Or it may involve delaying your retirement slightly and thus receiving any payout in 2017/2018 when you will likely be earning less income than when you were working.

Or if you have made a capital gain, and are holding a loss making CGT asset, you may wish to consider crystallising that loss – however, in pursuing this strategy, we recommend you speak us before any sale.

If you are looking to minimise your taxable income in 2016/2017 (perhaps you will be earning more money this financial year than next year, or you just need some cash-flow relief) consider bringing forward some planned deductible expenditure to before 1 July.

Individual taxpayers have access to a variety of different deductions and offsets which they may be able to claim against their assessable income.  However, given increased ATO scrutiny on work related expenses and rental property deductions, we recommend that you claim only what you are legally entitled to claim and ensure that you have all necessary receipts or credit card statements to back-up your claims.

Maximise motor vehicle deductions

If you use your motor vehicle for work-related travel, there are two choices for how you can claim work related travel. If your annual claim for kilometres travelled exceeds 5,000 kilometres, you will need to ensure that you have kept an accurate and complete log book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2017. You should make a record of your odometer reading as at 30 June 2017, and keep all receipts/invoices for motor vehicle expenses.

Alternatively, if your annual claim for kilometres travelled does not exceed 5,000 kilometres, you can claim a deduction for your vehicle expenses on a 66 cents per kilometre basis (regardless of engine type) based on a reasonable estimate.

Rental property owners

Investors in residential rental properties should be aware of proposed changes (as announced in the recent Federal Budget) to certain tax deductions available to residential rental property owners.

From 1 July 2017, investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property.  Investors who engage third party property managers to manage their property, including carrying out inspections, can continue to claim tax deductions for the fees paid.

Also from 1 July 2017, depreciation deductions on plant and equipment will be limited to expenses actually incurred by investors in residential rental properties (i.e. the investor must purchase the depreciable plant themselves in order to claim the depreciation).  This means that when a subsequent investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions for those pre-existing items that they inherit with the property. Going forward it is now proposed that the value or cost of items of existing plant and equipment will be reflected in the cost base of the property for CGT purposes.

This proposed measure will not, however affect existing investments held at 9 May 2017, with plant and equipment forming part of residential rental properties continuing to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

It is noted that these measures are intended to apply solely to residential properties.  Investors who own commercial rental properties will not be affected by these measures.

Maximise tax offsets

Tax offsets directly reduce your tax payable and can add up to a sizeable amount. Eligibility for tax offsets generally depends on your income, family circumstances and conditions for particular offsets. Taxpayers should check their eligibility for tax offsets which include, amongst others, the low-income tax offset, senior Australians and pensioners offset and the offset for superannuation contributions on behalf of a low-income spouse.

As you can see there are many factors that need to be considered before the end of the financial year.  If you wish to discuss any of the above in further detail, please contact our office on (08) 6311 6900.

2017 Federal Budget – Cooper Partners breaks it down for you

 

The centrepiece in the Government’s 2017 Budget is around housing affordability. This includes the introduction of various measures to attract sophisticated investors and managed investment trusts to invest in affordable housing for the benefit of low income earners by providing new tax incentives. Unfortunately, the Government did not take the opportunity to reduce red tape or bring genuine simplification to the tax system for businesses. It was pleasing that the Government has refrained from further changes to superannuation.

The key tax measures announced in the Budget included:

  • Reaffirming a commitment to previously announced company tax cuts to cover all companies
  • A raft of tax and superannuation measures intended to relieve pressure on housing affordability
  • An increase to the Medicare Levy by 0.5% to 2.5% from 1 July 2019
  • An extension of the instant asset write-off to 30 June 2018 for small business
  • A major bank levy to be introduced from 1 July 2017
  • A tightening of the ability of non-residents to obtain various benefits from owning Australian real property.

Information regarding these measures are provided in more detail below.

1. Key personal tax measures

  • Income tax rates – No changes were announced in the federal Budget in relation to personal income rates.
  • Temporary Budget Repair levy – From 1 July 2017, this levy of 2% of taxable income in excess of $180,000 will no longer apply. Therefore, excluding the impact of the Medicare levy, from 1 July 2017, the top marginal tax income tax rate will be 45 per cent. However, the Leader of the Opposition is calling for this levy to continue past 30 June 2017.
  • Medicare levy increase – From 1 July 2019, the Medicare levy will increase from 2% to 2.5 %. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also increase. The Leader of the Opposition however wants the 0.5% increase only to apply to taxpayers earning more than $87,000.
  • Medicare levy low-income thresholds – the thresholds for singles, families, and seniors and pensioners will increase from the 2016/17 income year.
  • Higher education loan program (HELP) – A new set of repayment thresholds and rates under the HELP program will be introduced from 1 July 2018. The minimum repayment income for the 2018-19 income year will be $51,956, up from the presently stated $41,999. Maximum student contributions will rise by 1.8% for 4 years from 2018, resulting in a total 7.5% increase from 2021. The first increase will take effect from 1 January 2018 and will apply to all students including those who are currently enrolled.

2. Extension of immediate $20,000 write-off for small business

 Affected clients:  Businesses with an aggregated annual turnover of up to $10 million.
Impact: The increase in the accelerated depreciation write-off threshold to $20,000 will be of great assistance to businesses matching the timing of cashflow to tax obligations. Business owners should be pleased with this outcome; it allows businesses the ability to buy new equipment and in doing so reinvest in their operations tax effectively. This combined with increasing the eligibility from a turnover of $2M to $10M extends the offer to a larger number of businesses.
Effective date: Availability of concession to be extended until 30 June 2018
In brief: Small businesses will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 provided they are first used, or installed ready for use, by 30 June 2018.

Depreciating assets valued at $20,000 or more (which cannot be immediately deducted) must be placed into the general small business pool (the pool) and depreciated at 15% in the first income year, and 30% for each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The current “lock out” laws from the simplified depreciation rules will continue to be suspended until 30 June 2018. These rules prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out.

From 1 July 2018, the immediate deductibility threshold, and the balance at which the pool can be immediately deducted, will revert to the previous $1,000 limit.

We welcome this extension, given the lengthy delays in the prior year announcements still being experienced before being passed as law, leaving little time before 30 June 2017 to act with absolute certainty.

3. Residential rental properties

Affected clients:  Investors in residential rental properties
Impact: There was no amendment to deny negative gearing. However, there will now be no deductions available for certain travel expenses incurred in respect to a residential rental property and plant and equipment depreciation deductions limited to outlays actually incurred by investors
Effective date: 1 July 2017
In brief: Investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property. This measure will affect all taxpayers, resident and non-residents who receive rental income form residential rental properties. Investors who engage third party property managers to manage their property, including carrying out inspections, can continue to claim tax deductions for the fees paid.

Depreciation deductions on plant and equipment will be limited to expenses actually incurred by investors in residential rental properties, so the investor must purchase the depreciable plant themselves.  This means that when a subsequent investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions for those pre-existing items that they inherit with the property.

Typically this was currently being achieved by the purchaser engaging a qualified expert to survey the property and provide a formal report outlining the depreciable value attributable to the plant acquired together with the property. Alternatively, where the purchaser allocated part of the purchase price of the property to the plant as part of the contract of sale, this cost was depreciated.

Going forward it is now proposed that the value or cost of items of existing plant and equipment will be reflected in the cost base of the property for CGT purposes.  For existing investments at 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017), plant and equipment forming part of residential rental properties will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

These measures are intended to apply solely to residential properties.  Investors who own commercial rental properties will not be affected by these measures.

4. Super incentives for downsizing

Affected clients: Australians aged 65 or above who are looking to ‘downsize’ their home
Impact: A higher super cap for downsizers
Effective date: 1 July 2018
In brief: A person aged 65 or over can make a non-concessional contribution into superannuation of up to $300,000 from the proceeds of selling their principal residence. They must have owned their principal residence for at least 10 years. This measure will apply from 1 July 2018 and is available to both members of a couple for the same home (i.e. up to $600,000 per couple).

These contributions are in addition to existing rules and caps and are exempt from the age test, work test and the $1.6m total superannuation balance test for making non-concessional contributions.

This is a welcome announcement following the unprecedented tightening of contribution limits in last year’s Budget, which seemed to contradict the intent of the super regime and erode people’s ability to provide for their own retirement.

5. First home super saver scheme

Affected clients: Individuals saving to buy their first home
Impact: First home deposit savings boosted at least 30% (compared to a standard deposit account)
Effective date: 1 July 2017
In brief: This scheme is intended to provide an incentive to enable first home buyers to build savings faster for a home deposit, by accessing the tax advantages of superannuation.

Up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Both members of a couple can take advantage of this measure to buy their first home together.

From 1 July 2018 onwards, an individual will be able to withdraw these contributions and their associated deemed earnings for a first home deposit. The withdrawals will be taxed at an individual’s marginal tax rate, less a 30% tax offset.

The First Home Super Saver Scheme on first reading appears to be an attractive measure but upon closer inspection, the relative saving of only paying tax at the super fund rate on the relevant contributions has marginal savings to first home buyers who are likely to be on lower income tax rates in any event.

6. Expansion of the foreign resident CGT withholding regime – impact for Australian vendors of property

Affected clients:  Australian resident and foreign resident vendors
Impact All transactions involving Australian real property with a market value of $750,000 or above will need the vendor and purchaser to consider if a clearance certificate is required.
Effective date: 1 July 2017
In brief: Where a foreign resident disposes of certain taxable Australian property (for example, real estate, or shares in land rich companies), the purchaser is required to withhold an amount from the purchase price and pay that amount to the ATO. Under this announcement, the applicable foreign resident CGT withholding rate will be increased from 10% to 12.5%. A clearance certificate is required to be provided by Australian resident vendors to satisfy the purchaser that no withholding is required.

Currently, the foreign resident CGT withholding obligation applies to Australian real property and related interests valued at $2 million or more. This threshold will be reduced to $750,000 from 1 July 2017, greatly increasing the range of properties and interests that will come within this obligation.

The impact for Australian residents is that a larger number of Australian resident vendors (i.e. anyone selling property with a market value of $750,000 or more) will need to apply for a clearance certificate from the ATO to ensure amounts are not required to be withheld from the sale proceeds.  Where a valid clearance certificate is not provided by settlement, the purchaser is required to withhold 12.5% of the purchase price and pay this to the ATO.

7. Non-residents and Australian housing

Affected clients: Non-residents buying, holding and selling Australian real estate
Effective date: From 7.30pm (AEST) on 9 May 2017
Summary of key measures:

  • The CGT main residence exemption will be removed for foreign and temporary residents.
    Existing properties held before this date will be grandfathered until 30 June 2019.
  • Foreign owners of vacant residential property, or property that is not genuinely available on the rental market for at least six months per year, will be charged an annual levy. The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired.
  • A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates.
    New dwelling exemption certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons (without each foreign purchaser seeking their own foreign investment approval). The current certificates do not limit the amount of sales that may be made to foreign purchasers.
  • An integrity measure for foreign resident CGT regime will be applied intended to ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.
    The principal asset test, which is relevant in determining whether a foreign resident’s asset is a taxable Australian property will now be applied on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property.

8. Access to small business CGT concessions to be refined and limited

Affected clients:  Small business taxpayers with aggregated turnover of less than $2 million or business assets of less than $6 million.
Impact: Business owners will have to be more careful than ever when declaring assets for CGT concessions
Effective date: 1 July 2017
In brief: Access to small business CGT concessions will be limited to deny eligibility for assets which are unrelated to the small business.

The concessions currently assist owners of small businesses by providing relief from CGT on assets related to their business which helps them to re-invest and grow, as well as contribute to their retirement savings through the sale of the business. However, some taxpayers are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

Limited information is currently available in relation to this measure however it appears to be targeted at the application of the maximum net asset value test and the small business entity eligibility requirements.

While the definition of small business for many measures has been lifted for those with an aggregated turnover of less than $10 million, the Government has left the turnover threshold for the small business CGT concessions at less than $2 million. This will lead to confusion by business owners as to what concessions they have access to.

9. LRBAs included in super balance and transfer balance cap

Affected clients:  Members who use new limited recourse borrowing arrangements (LRBA) within their super fund from 1 July 2017
Impact:  A reduction in the ability for a member to obtain an advantage by using a LRBA within their super account.
Effective date: 1 July 2017
In brief: The Government is concerned that LRBAs may be used to circumvent contribution caps, as well as transfer assets from the accumulation phase to the retirement phase when repayments are  made, that are not captured by the transfer balance cap. As an integrity measure, the balance of an outstanding loan in respect to an LRBAs by a super fund will be included in a member’s total superannuation balance, and any repayment of the principal and interest of an LRBA from a member’s accumulation account that increases the amount in the retirement phase for a member, will be a credit in the member’s transfer balance account for the purposes of the $1.6 million transfer balance cap.

10. Related party transactions SMSF integrity measures announced

Affected clients:  Members who have related party transactions in their SMSFs
Impact:  Reduced opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
Effective date: 1 July 2018
In brief: Currently the rules essentially provide that income derived by a super fund must be generated on an arm’s length basis. The non-arm’s length income provisions will be amended to ensure expenses associated with generating that revenue must also be calculated on an arm’s length basis. A super fund’s non-arm’s length income (also known as “special income”) is taxed at 47% instead of the 15% concessional rate.

The Government has said this measure is aimed at ensuring the 2016-17 superannuation reform package operates as intended, accordingly any non-commercial transactions, particularly in light of restructuring for the super reforms, will need to properly considered.

11. Increased CGT discount for the provision of affordable housing

Affected clients:  Resident individual taxpayers investing in affordable housing
Impact: An additional 10 per cent CGT discount (i.e. 60%), however this benefit somewhat negated by reduced rental returns during course of ownership of investment.
Effective date:  1 January 2018
In brief: The CGT discount will be increased from 50% to 60% for Australian resident individuals investing in qualifying affordable housing.

The conditions to access the 60% discount are:

  • the housing must be provided to low to moderate income tenants;
  • rent must be charged at a discount below the private rental market rate;
  • the affordable housing must be managed through a registered community housing provider; and
  • the investment must be held for a minimum period of three years.

The 60% discount will flow through to resident individuals investing in affordable housing via managed investment trusts as part of the tax measure enabling such trusts to invest in affordable housing (see below).

This initiative could be a very attractive proposition, with the overall effect of this measure increasing the effect of negative gearing as rental income will be limited but investment costs will likely stay the same with a reduced taxable capital gain on disposal.

12. Affordable housing incentives for MITS

Affected clients: Private sector and foreign investors in managed investment trusts (MITs) that invest in affordable housing
Impact: Concessional tax treatment for investors
Effective date: 1 July 2017
In brief: Investors in MITs that invest in affordable housing will receive concessional tax treatment, provided certain conditions are met, including that the properties are let as affordable housing for at least 10 years and that at least 80% of the income is derived from affordable housing in an income year.

A concessional 15% final withholding tax rate on investment returns, (including income from capital gains) is available for non-resident investors (from countries with which Australia has a recognised exchange of information arrangement) who invest in these MITs.

Resident investors in these MITs will continue to be taxed on investment returns at their marginal tax rates. Income from capital gains will be eligible for the increased CGT discount of 60 per cent, where applicable.

13. Purchasers of new residential properties to remit GST

Affected clients: Purchasers and developers of new residential properties
Impact: Administration burden imposed on purchasers, and vendors will need to consider cashflow and financing.
Effective date: 1 July 2018
In brief: Purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO at settlement.  This is a significant change from current practice, whereby the vendor remits the GST as part of their ordinary business reporting, and typically purchasers (being primarily private consumers) of newly constructed residential premises do not report or pay GST in their own right.

The Government are concerned as to the number of developers that have collapsed and been wound up, prior to setting liabilities owed to creditors and the ATO.

It appears that the Government expects that settlement agents will manage this payment as part of the settlement process.  However, this view may be somewhat over simplified given that developers may choose to use the margin scheme to calculate the GST liability and this underlying calculation and detail would not be known to purchasers or settlement agents.

Furthermore, builders and developers will need to consider the impact that this announcement will have on their cash flow and financing arrangements.

14. Major bank levy

A major bank levy will be introduced from 1 July 2017, however the full impact of the Government’s projected $6.2 billion levy on the big four banks and Macquarie at this stage is largely unknown.

It is likely the levy will affect the entire banking system and a major levy on bank liabilities may ultimately be covered by consumers, whether through interest rates and account fees, however that being said, the banks will be under close scrutiny from ACCC not to pass on the levy to consumers. At this stage and as demonstrated by the recent drop in the banking sector, shareholders (and super funds) will most likely feel the effect through reduced share prices and profits.

15. Other measures announced

  • Extension of Contractor taxable payments reports (TPRS) to the courier and cleaning industries with effect from 1 July 2018.
  • From 1 July 2017, the GST treatment of digital currency (such as Bitcoin) will be aligned with that of money to remove the double taxation that arises on the purchase and exchange of the digital currency.
  • An annual foreign worker levy is to be introduced, with the amount of the levy ranging from $1,200 to $1,800 per worker per year for temporary visas, and a once-off $3,000 to $5,000 per worker for permanent skilled visas. The levies are used to support skills training by way of a new Commonwealth Fund.

If you would like to discuss the budget changes and how they may affect you, please do not hesitate to contact Michelle Saunders, Marissa Bechta, and Jemma Sanderson on (08) 6311 6900.

Company tax rates reduction and increase to Small Business Entity threshold

TAX UPDATE

Company tax rates reduction and increase to Small Business Entity threshold

In brief:

Following the release of the 2016/17 Federal Budget, a number of measures were announced that offered tax concessions to small business and corporate taxpayers.

However, the ensuing Federal Election opened up a debate as to whether or not such measures would be introduced as announced, causing much uncertainty amongst the business community.

On Friday 31 March 2017, the amended Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) was finally passedby the Senate (with 6 Government amendments to be referred back to the House of Representatives for approval) subject to further approval when Parliament returns on 9 May 2017 before it is granted royal assent.

The key points arising from the Bill are:

  • With effect from 1 July 2016, companies with an annual turnover of less than $10 million will pay 2.5% less tax at the new corporate rate of 27.5%. At present, small businesses corporate taxpayers with turnover less than $2M have a tax rate of 28.5%, compared to a rate of 30% for turnover greater than $2M.
  • From 1 July 2017, companies with a turnover of up to $25 million will get the 2.5% reduction to 27.5%, with the drop then applying to businesses under $50 million in the 2018-2019 financial year.
  • The corporate tax rate will then progressively reduce to a rate of 25% by the 2026-2027 financial year, for those businesses with a turnover of less than $50M.
  • The unincorporated businesses tax discount has been extended to those businesses with an annual turnover of less than $5 million, and will be increased to a rate of 8% with effect from 1 July 2016 (increasing to a rate of 16% by the 2026-27 financial year), up to a maximum discount value of $1,000.
  • The small business entity aggregated turnover threshold is increased from $2 million to $10 million with effect from 1 July 2016.
  • The aggregated turnover threshold for access to the small business income tax offset will be limited to $5 million, and the current aggregated turnover threshold of $2 million will be retained for the small business capital gains tax concessions.
  • It remains to be seen whether the Government will be able to introduce tax cuts for larger businesses as proposed in the Budget, although they have indicated an intention to continue to support this.

 Small business entity threshold

The Bill has extended access to a number of small business tax concessions by increasing the threshold for these concessions to $10 million, up from the current $2 million threshold.

From 1 July 2016, all businesses with aggregated annual turnover of less than $10 million will have access to the following concessions:

  • immediate deductibility for small business start-up expenses;
  • simplified depreciation rules, including access to immediate deductions for some depreciable assets (see further below);
  • simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;
  • roll-over for restructures of small businesses;
  • immediate deductions for certain prepaid business expenses;
  • a simplified method of paying PAYG instalments calculated by the ATO, rather than the PAYGI rate method which can be more time consuming to determine;
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
  • annual apportionment of input tax credits for acquisitions and importations that are partly creditable; and
  • FBT car parking exemption.

Immediate deductibility of depreciable assets- action required by 30 June 2017.

With effect from May 2015, small business taxpayers are eligible to claim an immediate deduction for asset purchases costing less than $20,000 up to 30 June 2017. From 1 July 2017, the asset cost threshold will reduce to $1,000 for an immediate deduction.

For these small businesses whose income exceeded $2M but was less than $10M, there was uncertainty as to whether they would in fact be able to access this concession during the 2017 income year, whilst awaiting the passing of law to increase the small business entity income threshold, thereby potentially delaying business and commercial decisions. The passing of this Bill through senate will now give such businesses the certainty they need, in order to proceed with the purchase of assets that qualify for the immediate deduction, or otherwise provide comfort that such a deduction will be available for assets purchased in the past 9 months.

We remind that in order to qualify for the immediate deduction, such asset purchases must not only be committed to and held by the business, but the asset must also be installed ready for use prior to 30 June 2017.

Small business entity definition – Same Same but Different

As stated above, the new legislation will amend the current definition of a ‘small business entity’ in the Income tax Assessment Act 1997 to increase the aggregated turnover threshold for eligibility as a small business entity from $2 million to $10 million.

For the purposes of the small business income tax offset, an entity is required to work out whether it is a small business entity for the income year as if each reference to a small business entity  (which imposes the aggregated turnover threshold) to $10 million were a reference to $5 million.

The new legislation also retains the current aggregated turnover threshold of $2 million for the purposes of the small business CGT concessions. It achieves this by replacing references to ‘small business entity’ with the new defined term ‘CGT small business entity’.

An entity will be a CGT small business entity for an income year if that entity is a small business entity for the income year, and would still be a small business entity for the income year if each reference to a small business entity (which imposes the aggregated turnover threshold) to $10 million were a reference to $2 million.

This change does not affect the operation of the small business CGT concessions.

Franking of dividends

Whilst the standard corporate tax rate remains at 30% for companies with large turnover, they will continue to frank dividends at 30%. Companies with turnover less than $10M will also be able to frank dividends at the 30% rate. Notwithstanding they pay company tax at a lower rate.

Further, considerations should be given to the impact on franking accounts due to the change in corporate tax rate, which may be relevant in considering a company’s dividend policy.

Get in touch with us

The passing of this bill through Parliament now offers businesses more comfort when considering proposed transactions in light of the 2016/17 budget announcements, and will now enable them to consider the opportunities that may be available to them.

We welcome the passing of the Bill to increase the small business entity turnover threshold, as this will now give more businesses access to tax concessions which were previously not available to businesses with a turnover of more than $2 million.

However, the complexities in the differing thresholds require those entities wishing to access the small business tax concessions and incentives to carefully consider carefully their eligibility to the new rules.

Should you wish to discuss this further, please do not hesitate to contact our office.

Fringe Benefits Tax – Our top 10 to keep you in the know this FBT season

The 2016/17 FBT year is coming to a close on 31 March and in order to get you ready for FBT reporting, we present our top 10 tips, changes and reminders to keep you up to date this season.

1. Key 2017 rates, dates and thresholds

For the second year in a row, the FBT rate will remain at 49% for the year ending 31 March 2017 to reflect the Temporary Budget Repair Levy. However, the 2017/18 FBT year will see the FBT rate and associated type 1 and type 2 gross up rates fall as follows:

 

The 2017 FBT lodgement date is 21 May 2017. However, employers on a tax agent list by 21 May will be eligible for a lodgement extension date to 25 June 2017. Any FBT liability is payable on 28 May 2017, regardless of whether an employer is on a tax agent list.

Other key rates and thresholds include:

  • Car parking threshold: $8.48
  • Statutory benchmark interest rate: $5.65%
  • Reasonable food and drink amounts for employees living away from home (per week)
    • $242 for one adult;
    • $363 for two adults; and
    • $485 for two adults and two children
  • Reportable fringe benefits threshold: Taxable value exceeding $2,000 (i.e. grossed-up value of $3,921).

2. Handy exemption for small businesses providing multiple electronic devices

From 1 April 2016, small businesses with an aggregated annual turnover of less than $2 million will enjoy an extended concession on all the qualifying work-related portable electronic devices provided to employees (such as laptops, tablets, GPS navigation devices or mobile phones), even when the devices may have overlapping functions. To access this concession, it is important that the device be primarily used for use in the employee’s employment.

All other employers are limited to the FBT exemption only applying to one device per employee where a device of each kind has a substantially similar function.

3. Restrictions on reducing FBT on car expense payments

From 1 April 2016, the “otherwise deductible” rule has changed for car expense payment fringe benefits (i.e. where an employer meets or reimburses an employee for fuel or other running expenses).

Previously, employers could elect to reduce the taxable value of car expense benefits under one of three methods. The new rules now limit the calculation of the work-related use percentage of the expenses to either the logbook method or the business use method.

Under the business use method, the work-related use percentage of the car expenses is taken to be the lower of 33.33% and the estimated work-related use percentage. The estimated work-related use percentage is determined by forming a reasonable estimate based on the employee’s odometer records maintained throughout the FBT year and the patterns of use of the car during the FBT year.

Under the logbook method, the work-related use percentage is determined by maintaining records of the car’s use in a logbook for a minimum of 12 consecutive weeks.

Basically, where no logbook is kept, the work-related use percentage will be limited to 33.33%. In order to reduce FBT exposure on car expenses, the onus is on employers more than ever to ensure that staff are keeping accurate records of their personal car usage.

Note that these changes have no impact on car fringe benefits and are applicable only to the provision or reimbursement of car expenses.

4. New changes to salary packaged entertainment

From 1 April 2016, all employers providing salary packaged meal entertainment or entertainment facility leasing expenses (EFLE) benefits to employees will be unable to use the 50/50 split method and 12 week register method for valuing the salary packaged benefits. Only the actual method can be used to determine the FBT on these benefits. This has created an extra burden on employers who usually apply the 50/50 split method for non-salary packaged entertainment benefits provided to employees, increasing the amount of record keeping required. However in our experience, employers that are not FBT exempt or FBT rebatable do not typically provide salary packaging to employees for entertainment expenses, so this recent change is not likely to impact many taxable employers.

Salary packaged meal entertainment or EFLE benefits provided to employees of FBT exempt and FBT rebatable employers are now subject to a separate single grossed-up cap of $5,000. This means that these employers now have to include salary packaged entertainment in their capping thresholds to determine whether they are subject to FBT on any excess of the cap.

5. Good news for employers with fleet vehicles

The ATO released Practical Compliance Guidelines in late 2016 which provides a concession for FBT record keeping in relation to logbooks held by employees driving fleet vehicles. Under the new Guidelines, the ATO have accepted that employers may use an ‘average business use percentage’ by taking the average of the valid logbook percentages for each car in the fleet, provided that at least 75% of the cars in the fleet have a valid logbook.

The average business use percentage can be used for a period of five years in respect of the fleet – including replacement and new cars, provided that the fleet remains at 20 cars or more. The Guidelines may also be used as a basis for determining each relevant employee’s reportable fringe benefits amount.

There are a number of requirements in order to access this FBT concession however:

  • The cars are ‘tool of trade cars’ – e.g. cars used for a predominant business purpose. The position of the employee is also relevant as key executives are unlikely to be considered to have a tool of trade car;
  • The employees are mandated to maintain logbooks in a logbook year;
  • At least 75% of the cars have valid logbook maintained by the employer;
  • The cars are of a make and model chosen by the employer, rather than the employee (or the employee has a choice of a limited range of cars);
  • Each car in the fleet has a GST-inclusive value less than the luxury car limit applicable at the time the car was acquired (currently $64,132); and
  • The cars are not provided as part of the employee’s remuneration package (i.e. not salary packaged).

Employers should consider whether they can qualify for the simplified record keeping concession in light of the above requirements and do comparisons to actual logbook work-related percentages recorded by employees to determine whether an average percentage is more favourable.

6. Luxury cars create issues for senior executives

FBT reporting on car fringe benefits is always a focus area for the ATO, however employers providing luxury vehicles to employees (often business principals and executives) will attract particular attention. The provision of company cars to senior executives will always be a common remuneration incentive, however there are a number of issues which may arise when providing a luxury vehicle to an employee.  

  • Whether the vehicle is an exempt vehicle for FBT purposes: FBT can be avoided where the vehicle falls within the definition of an exempt vehicle. That is, it is broadly not a ‘car’ with the principle purpose of carrying passengers – i.e. a workhorse vehicle with a carrying capacity of over one tonne. There is a wide misconception that any SUV or vehicle with the employer’s logo or signage would qualify as an exempt vehicle, however the specifications of each vehicle provided to employees should be considered to determine whether it qualifies;
  • Whether private use of the vehicle is limited: The provision of a workhorse vehicle is only FBT exempt if the private use of the vehicle during the year is limited to ‘minor, infrequent or irregular’ use (other than travel or and from work). Use on the weekends is therefore likely to attract FBT. Employers should review their employee handbook and policies relating to private use of company cars.

7. New safe harbours for private use of workhorse vehicles on the horizon

The ATO is currently drafting guidelines which may provide a safe harbour for certain private use of workhorse vehicles. As noted above, the FBT exemption for private use of these vehicles is extremely strict. The purpose of the guidelines is to develop safe harbours that align the tax treatment with commercial realities and provide appropriate risk mitigation to employers. As this is at proposal stage only, it is not known to what extent the ATO is willing to accept private use by employees of these vehicles however any relaxing of the current rules will be a welcome change.

8. Salary packaging still tax effective

With many households feeling the squeeze of financial pressure, employers may find that their staff are enquiring about their salary packaging options. Salary packaging is still a tax effective option for both employees and their employers, however caution must be had as to the types of benefits that are packaged. The packaging of FBT exempt benefits, such as laptops, mobile phones, briefcases and other portable tools of trade will still provide a benefit to both parties.

Salary packaging superannuation is not considered a fringe benefit and will not attract any FBT, however care should be taken in relation to the employee’s contribution limits.

Salary packaged cars continue to remain popular, with employees on income of $87,000 or more receiving the most benefit. When structuring the employee’s salary package, employee contributions are still popular as they usually provide the greatest cash benefit to the employee. It is important that employee contributions to reduce any FBT are reviewed by employers, as often the salary packaging provider may not appreciate the FBT risks involved where contributions are not paid on time, or where there is a deficit or excess in contributions made by the employee compared with the FBT liability.

9. ATO areas of focus – employers and benefits in the spotlight

In 2017, the ATO will be paying particular attention to:

  • Public Benevolent Institutions (PBI) and FBT-rebatable employers: Charities, not-for-profit organisations, religious institutions and sporting clubs claiming FBT exemptions or rebates are all in the spotlight in the 2017 FBT year. The ATO will be actively checking whether these entities are in fact eligible to claim the concessions which significantly reduce or eliminate their FBT bill.
  • LAFHA benefits: The ATO is concerned that employers are incorrectly providing living away from home allowances to employees who are not ‘living away from home’ but are instead travelling for work or have permanently relocated. Broadly, LAFHAs (which also includes reimbursed accommodation expenses) are taxed under the FBT regime – often at concessional rates due to a number of reductions available, such as the 12 month rule. However allowances paid to employees who are not living away from home temporarily, but are instead travelling or who have permanently relocated, are not taxed as fringe benefits but are generally taxed to the employee personally at their marginal tax rate. LAFHAs have historically been used by employers as a remuneration incentive to attract key staff to move for work as the allowance was usually tax-free. While there have been significant measures to restrict the concessions, the ATO believes that too many employers are accessing the LAFHA concessions for situations not intended under the FBT rules.

10. Manage your risk – data matching still capturing non-lodgers

Data matching in the following areas is being conducted by the ATO to identify employers not lodging FBT returns. The ATO is now regularly imposing Failure to Lodge on Time penalties and interest charges on employers.

  • Motor vehicle purchases and registrations: The ATO is continuing to undertake data matching to identify employers who have purchased cars, but have not disclosed car fringe benefits in their FBT return, or appropriate employee contributions in their income tax return. Where the FBT on a car fringe benefit is reduced in full by employee contributions, while there is no obligation to lodge an FBT return, employers should still weigh up whether a nil return is lodged in order to reduce future compliance risks. This is because the amendment period is three years from the lodgement date of a return. Where no return is lodged, this exposes the employer to an unlimited time period of review;
  • Year end PAYG payment summaries: The ATO is actively checking situations where reportable fringe benefits are disclosed on an employee’s group certificate at 30 June but no FBT return has been lodged, in assessing which employers are possible targets for further review or audit;
  • Tax return – employee contribution disclosures: Where employer companies or trusts file tax returns with employee contributions disclosed, but no FBT return has been lodged, this is will raise the risk of the employer entity being considered for ATO audit or review.