Economic Stimulus Package – Part 2

A lot can change in just 10 days! As the Coronavirus pandemic continues to infect global financial markets, our team has been hard at work tracking all the relevant Government responses that could impact you and your business. 

In this special edition newsletter, we summarise all the key changes proposed by the Federal Government, the Reserve Bank of Australia (RBA) and the WA State Government over the last 14 days.

Draft legislation is now before Parliament and appears to have near universal support. This legislation is expected to pass without amendment.

Encouraging employment and easing business cashflow

Boosting cashflow for employers

Since our first newsletter, the Government has doubled down on its plan to encourage the continued employment of Australian workers. The Government is now proposing to offer small and medium sized businesses up to $100,000 in cash payments to retain workers. In order to be eligible, business will need to have turnover of less than $50 million.

Under the proposed measures, eligible employers will be entitled to a cash payment equal to 100% of their total PAYG withholding amount (that is the amount of tax they would ordinarily be required to withhold from their employee’s salary and pay to the ATO).

The payment will be delivered by the ATO as an automatic credit in the activity statement system from 28 April 2020. Entities will need to lodge their Business Activity statement (BAS) to be eligible but no new forms or applications are required. A maximum payment of $50,000 will be delivered over the next three months but an additional $50,000 will then be accessible for the June to September activity statements. Employers who have less than $10,000 in PAYG withholding will be entitled to a minimum of $10,000 over the next three months. An additional $10,000 will be accessible for the June to September activity statements, but is not linked to the level of PAYG Withholding as the Government recognise the circumstances may have changed and entities may no longer be making any payment subject to withholding. Any payment received by a business will be tax free.

This entitlement would disappear if eligible employers failed to lodge their IAS’s or BAS’s, or otherwise stopped paying wages prior to the end of the first cash boost payment.  It is important that you continue to report and lodge your BAS’s on a timely basis.

This is a very generous incentive which should help to slash the cost of retaining employees for many businesses. With this in mind,eligibility for the cash flow boost is subject to a specific integrity rule to counteract artificial or contrived arrangements entered into in order to obtain the cash flow boost. Specifically, an entity will not be eligible for the cash flow boost if that entity, or an associate or agent of an entity, undertakes a scheme with the sole or dominant purpose of obtaining or increasing the amount of the cash flow boost in relation to a period. Amounts paid under the cash flow boost, where the entity was not entitled to that payment or was not entitled to the full amount of the payment, will need to be repaid to the Commissioner. The Commissioner may impose administrative penalties for fraudulent, false or misleading statements. 

Supporting apprentices and trainees

The Government is also encouraging small businesses to retain their apprentices and trainees with eligible employers entitled to receive a 50% subsidy on all apprentice and trainee wages up to $7,000 each quarter per apprentice. The subsidy will be available for 9 months from 1 January 2020 to 30 September 2020.

The payment will only be made to employers who have less than 20 employees and in respect of apprentices or trainees who were with the business at 1 March 2020.  Should an apprentice or employee of this nature be made redundant, any remaining entitlement will be available to an employer (regardless of size) who takes them on.

Employers can register for the subsidy from early April 2020 and all claims for payment will need to be lodged by 31 December 2020.

Promoting business investment

The Government’s proposed capital investment incentives outlined in our first newsletter on 13 May 2020 (insert link) have not changed. Broadly, these incentives will provide accelerated deprecation to thousands of Australian businesses with annual turnover of up to $500 million.

Those companies that have been considering capital investment should closely consider the benefits available under this scheme. Some well-placed entities may even consider bringing forward their capital investment plans.

Payroll tax concessions

The Western Australian State Government has recently announced a number of payroll tax concessions for entities with less than $7.5 million in Australian taxable wages.

The State Government has announced that it will fast track the increase in the payroll tax threshold (which will now be $1 million) to 1 July 2020. In addition, businesses with an annual payroll of between $1 million and $4 million will be eligible to receive a once-off grant of $17,500. Finally, businesses with less than $7.5 million in Australian taxable wages will be able to apply to the Office of State Revenue for a deferral of their payroll tax payment to 21 July 2020.  Other States and Territories, including NSWQueensland, Victoria and Tasmania, have announced similar measures. Businesses with operations in these regions are encouraged to contact Cooper Partners to discuss their specific circumstances.

Promoting lending and financial support for business

Improving access to credit for small businesses

In a bid to keep struggling small businesses afloat, the Federal Government has announced that it will support short- and medium-term lending solutions. Broadly, this scheme will allow entities with under $50 million in turnover to apply for loans of up to $250,000 to fund their working capital needs. The loans will be for a period of up to three years, with an initial six-month repayment holiday. Critically, borrowers will not need to provide any assets as security for the loan.

Entities wishing to access these loans will apply directly to their preferred bank or credit provider. Banks and credit providers will be encouraged to make these loans as the government will stand guarantor for 50% of any loan balance. In addition, the Government has proposed a relaxation of responsible lending obligations for lenders providing credit to small business entities, making it easier for these entities to access finance quickly.

RBA support

On 19 March 2020, the RBA held an out of cycle meeting at which the official cash rate was cut to just 0.25%. In addition, the RBA announced that it would support banks, particularly those that lend to small business, by providing a $90 billion lending facility. Under this plan, the RBA will provide a three-year funding facility to authorised deposit taking institutions at a fixed interest rate of just 0.25%.  The more an institution lends to small business, the more they will be able to loan from the RBA at this low rate. It is hoped that these combined measures will encourage lending to smaller businesses while reducing the cost of credit.

Responding to creditor demands

The Government has proposed a number of changes to the Corporations Act 2001 and the Bankruptcy Act 1966 to provide businesses and individuals with greater time to respond to creditors demands. The minimum threshold for creditors to issue a statutory demand on a company will be increased to $20,000 (up from $2,000) while the company will now have six months to reply to a demand (previously 21 days). In addition, the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against an individual will increase to $20,000 (previously $5,000). All these amendments will apply for six months.

Trading while insolvent- temporary relief from personal liability

Under current legislation, company directors are held personally liable for any debts incurred while a company they direct trades while insolvent. Proposed Government changes are looking to relax this law to provide company directors with the confidence required to continue trading and employing staff during the Coronavirus crisis.

Under these changes, company directors will be shielded from personal liability in respect of any debts incurred in the ordinary course of their company’s business.  Directors will not be shielded for debts incurred outside of the ordinary course of their company’s business. These measures will apply for a limited period of just 6 months.

Supporting households and the vulnerable

Income support for individuals

The Government will implement a temporary fortnightly ‘Coronavirus supplement’ of $550 for recipients of Jobseeker, Youth Allowance Jobseeker and Parenting payments, Farm Household Allowance and Special Benefits payments. This supplement will be paid in addition to existing entitlements with the aim of reinforcing the social security safety net for any individual who loses their job.

Payments to low income households

The Government will also provide two separate payments of $750 to social security, veteran and other income support recipients and eligible concession card holders. These payments will not be made to individuals that can access the ‘Coronavirus supplement.’ They are scheduled to be made on 31 March 2020 and 13 July 2020.

Early access to superannuation

The Government has proposed to provide affected individuals with unprecedented early access to their retirement savings. Under this measure, certain individuals will be entitled to withdraw up to $10,000 from their superannuation fund during the 2020 financial year, with a further $10,000 able to be accessed in the 2021 financial year. Any amounts released will be free from taxation, and will not affect Centrelink payments.

To apply for early release an individual will need to satisfy one of the following requirements:

  • Be unemployed; or
  • Be eligible to receive a Jobseeker, Youth Allowance Jobseeker or Parenting payment, Farm Household Allowance or Special Benefits payment; or
  • On or after 1 January 2020:
  • Be made redundant; or
  • Have their ordinary working hours reduced by 20% or more; or
  • If they are a sole trader, have their business suspended or turnover reduced by 20% or more.

Individuals that wish to withdraw from their superannuation funds will need to apply to the ATO through their myGov account. The Government has indicated that separate arrangements will apply for members of a self-managed superannuation fund (SMSF) but have not yet indicated what this will entail. Accordingly, we caution SMSF Trustees against processing any withdrawals until the ATO releases further guidance.

Reduction of superannuation drawdown rates and social security deeming rates

In a bid to support pensioners impacted by stock market falls, the Government has proposed to reduce superannuation minimum drawdown requirements by 50%. This measure, which will apply for the 2020 and 2021 financial years, will stop pensioners from being forced to sell their superannuation funds assets in the current depleted market. In addition, the Government has announced a reduction in social security deeming rates which will provide some 565,000 Age Pensioners with increased entitlements under the Age Pension scheme. 

Administrative concessions from the ATO

The ATO has indicated that they will implement a series of administrative measures designed to assist Australians who have been unduly impacted by the Coronavirus crisis.   In particular, the ATO has indicated a willingness to provide tailored ‘support plans’ for businesses that get in touch. These support plans may include:

  • The potential to defer payments due through BASs, income tax assessments, fringe benefits tax assessments and excise for up to six months;
  • The ability to vary March 2020 quarter PAYG instalments to zero;
  • The remittance of some interest and penalties accrued after 23 January 2020;
  • The ability to switch to a monthly GST reporting cycle to gain quicker access to refunds; and
  • The potential to enter low or no interest plans for existing and ongoing tax liabilities of affected entities.

Access to all these concessions will only be available where contact is made with the ATO. Should you wish to apply for any of these concessions, please contact your Cooper Partners representative who can speak with the ATO on your behalf.

Now what?

Scott Morrison has indicated that there is still plenty of work to be done and has not ruled out a third round of stimulus measures.  As further information comes to hand, we will be sure to keep you updated.

If you would like to discuss any of the above measures and how they may apply to you, please do not hesitate to contact your Cooper Partners representative. 

We acknowledge the current commercial reality and are offering telephone conferences free of charge from 4:00pm to 5:00pm daily until we all get through these challenging times. 

Businesses coping with COVID-19

Given the uncertainty of the times ahead, it is critical to be as prepared as possible.  We outline what you can be doing now to put your Business Continuity Plan in place to put you in the best position for the months ahead.   

Be clear of your position relating to COVID-19

Now is the time to determine your organisation’s policies in relation to COVID-19 and ensure this is clearly communicated to your staff and clients, areas you should cover in this policy include:

  • Client/customer meetings.
  • Event attendance.
  • Staff travel.
  • Working from home, including hardware and software requirements, video conferencing and management of data security.
  • Infection control, including how you will respond if a member of your team becomes infected.
  • Health policies, including procedures your employees should follow should they fall ill, feel unwell or come into contact with someone who has recently travelled.

Given the rapidly changing nature of what we are all dealing with, it is important to be fluid and keep everyone informed.

  • Communicate regularly with your customers/clients through email, your website and social media pages to ensure they know you are open for business and to advise them of your business’ COVID-19 plans.

Advise your customers/clients about the measures and protocols you are taking to make your premises safe and how you will interact moving forward.

Employee Management

You have a duty of care towards your employees to provide a safe place of work. This includes not putting them in a position in which they could become infected by the virus without taking all reasonable precautions. To meet your duty of care, conduct a risk assessment to determine the risk that coronavirus poses in your workplace and implement necessary controls to eliminate or reduce risk.

You should be communicating openly with your employees and be clear about the options available should they be required to isolate themselves. Things you consider include:

  • Policies regarding working from home, including where employees are required to stay home to mind their dependents if schools are closed.
  • Offering flexible work hours.
  • Potential reduced hours for staff.
  • The legal requirements regarding reducing your employee’s work hours.
  • Compliance with any relevant industry awards.

How you will respond if employees refuse to come to work due to the threat of infection.

Maximise your cash position

For many it is business as usual, however given the uncertainty it is critical for business to maintain an appropriate cash flow to enable continued operation.

Maximise stimulus benefits

The Federal Government has announced a number of measures (Click here to view our newsletter on this topic) to assist businesses.

  • Ensure you are aware of how these work and maximise them.
  • There may be an opportunity to restructure how business owners are remunerated (ie instead of dividend or trust distribution, consider paying wages) to maximise these benefits.

The WA State Government has also announced a number of measures to assist employers:

  • Increase of the payroll tax threshold to $1 million effective 1 July 2020.  For employers with taxable wages less than $7.5 million this will mean an annual saving of $8,250.
  • Defer payment of 2019-20 payroll tax to 21 July 2021.
  • An application needs to be made to defer this payment.
  • One-off grant payment of $17,500 for employers with taxable wages between $1 million and $4 million.  There is no need to apply for this grant, the grant will automatically be paid via cheque from July 2020.

Prepare a cashflow forecast

Create or update your business cash flow plan for the coming months. You need to quantify your daily and weekly planned cash position to make informed decisions

Make use of ATO support

The ATO has announced the following measures for those experiencing difficulty.

  1. Individuals and businesses can request deferral of some payments (such as income tax, activity statement, FBT and excise payments) by up to 4 months.
  2. Businesses with under $20 million of turnover can elect to report and pay their GST monthly instead of quarterly to accelerate access to GST refunds (but only from 1 April 2020 and the registration must remain monthly for 12 months).
  3. Quarterly payers can vary their PAYG instalment for the March 2020 quarter and claim a refund of instalments paid for the September and December 2019 quarters.  Variation of PAYGI still needs to be supported by realistic expectation of income for the 2020 year.
  4. Businesses can request remittance of interest and penalties applied to tax liabilities incurred after 23 January 2020.
  5. Businesses can request a low interest payment plan for their existing and ongoing tax liabilities.

These measures are not automatic – businesses will need to contact the ATO using the hotline 1800 806 218.  We can of course assist you in this regard.

It is critical that businesses continue to lodge and report obligations in a timely manner. Failure to do so can result in additional penalties being charged.

Maximise cash in-flows

  • Verify accounts receivable – verify outstanding invoices with customers, so you know there is no realistic reason for a customer to dispute or delay payment when the time comes.
  • Confirm expected receipt dates – confirm the date that your customer has in their payable schedule for paying your invoices. You can then send reminders to ensure the payment arrives on time, and if not you have an alarm bell to be proactive in following up your cash flow.
  • Chase up late payments promptly – don’t be complacent in chasing late payments. You need to set a standard with your customers of what is expected. It’s proven that setting the expectation means you will be paid quicker than the other suppliers who are not chasing up on this.
  • Sell unused equipment – be realistic about what equipment you need in your business. Decide if you can sell any underutilised or obsolete equipment.

Minimise cash out-flows

  • Supplier terms – discuss payment terms with your suppliers to see if you can extend your terms or receive a discount if you pay early.
  • Reduce costs – reduce costs where possible. Many businesses have extras that in the good times seem to be needed (e.g. lunches, training courses). Be critical and if there is an expense that will not put you at risk or reduce productivity at this time, then think about cutting it.

Loan and lease repayments – Most banks have hardship teams offering a range of services that may be of support. For more information, or to find the number for your bank’s hardship team go to https://www.ausbanking.org.au/campaigns/financial-hardship/

Funding requirements

It is important that you consider your business’ ability to meet its creditors and service its debts over the next 6 – 12 months, particularly if you are experiencing reduced cash inflows from your customers and clients.

  • Most banks have hardship teams offering a range of services that may be of support with regards to renegotiating repayments. For more information or to find the number for your bank’s hardship, team go to https://www.ausbanking.org.au/campaigns/financial-hardship/
  • Consider alternative funding sources – debtor funding solutions can free up cash without requiring property security.
  • Consider whether additional facilities or increased credit are appropriate in case of emergency, it may make sense putting these arrangements in place now.   

Be clear of your internal business procedures and policies

Insurance

  • Review your general insurance policies for any Business Interruption Insurance inclusions. Now is the time to contact your insurance agent to review your policy to understand precisely what you are and are not covered for in the event of an extended incident.

Decision Making

  • If key decision makers need to self-quarantine or are incapacitated in any way, are there mechanisms in place to ensure that the business can continue to operate.
  • Ensure any EPOA and Will are up to date now and ensure your family and professional advisors know where the original signed documents are.

At Cooper Partners, it is business as usual. We are available to support you and assist you in making your business decisions over this unprecedented time. If you have queries in relation to any of the above, please contact your Cooper Partners engagement team.

Scott Morrison’s Economic Stimulus Package

The Federal Government has unveiled a $17.6 billion economic stimulus package, designed to vaccinate the Australian economy from the unfolding coronavirus pandemic.

The measures, which will go before parliament in early March, are designed to support business continuity, encourage employment and maintain consumer confidence with much needed key tax breaks.

The Government’s plan is based around four key pillars, namely:

1.       Supporting business investment;

2.       Encouraging employment and easing business cashflow;

3.       Driving household spending; and

4.       Assisting severely affected regions.

Supporting Business Investment

The Government has indicated its intention to stimulate the economy by encouraging business investment. Under proposed changes to the instant asset write off program, eligible asset purchases of $150,000 (from $30,000) or less will become immediately deductible for tax purposes. In addition, the Government has proposed to open the concession to medium sized enterprises with annual turnover of up to $500 million. These measures are expected to apply until 30 June 2020.

Asset purchases in excess of $150,000 will also be encouraged with the Government allowing businesses to claim an immediate tax deduction for 50% of the asset’s purchase price. The remainder of the purchase price will be depreciated under the existing depreciation regime.  This measure is forecasted to apply until 30 June 2021 and will be accessible to business with turnover of up to $500 million.

These measures will be welcomed by profitable companies who intend to spend on additional equipment but may not provide relief to loss making businesses.

Companies that have been considering capital investments should closely follow these proposed amendments as they make their way through Parliament.

The table below demonstrates the after tax effect of the proposed changes for a profit making trading company that purchases a $100,000 tractor. It is assumed that the tractor will be purchased on 1 April 2020, has an effective life of 15 years and will be used solely in the business.

Encouraging Employment and Easing Business Cashflow

The financial centrepiece of the Government’s stimulus package is a plan to provide payments of up to $25,000 to employers with less than $50 million in turnover. Under the proposed measures, eligible employers will be entitled to a cash payment equal to 50% of their total PAYG withholding amount. Eligible business that pay wages will receive a minimum payment of $2,000 regardless of their total PAYG withholding amount.

The following example demonstrates how the changes will apply:

Sarah operates a building business and employs 8 construction workers on average full-time weekly earnings who each earn $89,730 per year. In the months of March, April and June for the 2019-20 income year, Sarah reports withholding of $15,008 for her employees on each Business Activity Statement (BAS). Under the Government’s changes, Sarah will be eligible to receive the following on lodgement of each of her BAS’s:

  • A payment of $22,512 for the March period, equal to 150 per cent as a ratio to her March 2020 withholding requirement.
  • A payment of $2,488 for the April period, before she reaches the $25,000 cap.
  • No payment for the May or June period, as she has now reached the $25,000 cap.

The Government is also encouraging small businesses to retain their apprentices and trainees with eligible employers entitled to receive a 50% subsidy on all apprentice and trainee wages up to $7,000 each quarter per apprentice. The subsidy will be available for 9 months from 1 January 2020 to 30 September 2020.

Both of these measures are expected to be administered through the employers Business Activity Statements. This will provide an immediate stimulus to eligible employers if the design of this initiative permits the credit to be applied against the PAYG withholding obligation. This measure will benefit around 690,000 businesses that employ around 7.8 million people.

Driving Household Spending

In somewhat of a policy backflip, the Government has also decided to issue a $750 cash handout to certain low income individuals.  Whilst it is not yet clear who will be entitled to the payment, the Government has indicated that it will be directed towards recipients of social security, veterans and eligible concession card holders. The vast majority of these payments are expected to be made by mid-April.

Assisting Severely Affected Regions

The Government has laid aside $1 billion to support specific communities and industries that are disproportionately affected by the coronavirus pandemic. Whilst details have not yet been released, it is expected that the tourism, agriculture and education sectors will receive the bulk of this funding.

Now what?

It is important to note that the measures outlined above must make it through Parliament before becoming law. The Labour party has indicated in principle support for the stimulus package but the devil will be in the detail and parliamentary delays should not be unexpected. Businesses owners are advised to wait until these changes are enacted to ensure they receive the promised benefits. In the meantime, remain calm and be sure to wash your hands! Cooper Partners will be sure to keep you up to date as these measures move through Parliament.

If you have queries in relation to any of the above proposals, please contact your Cooper Partners representative.

Employment taxes update

Employment taxes and superannuation have been the subject of a raft of changes over the last few weeks, on both a State and Federal level.

To ensure that your business is up to date on the latest changes, we summarise the following key topics in this edition:

  1. WA payroll tax cut – modest saving around the corner for employers
  2. Resurrection of the Superannuation Guarantee amnesty
  3. Salary sacrificed super – integrity measures passed
  4. PAYG withholding and reporting – reminder about denial of tax deductions
  5. Director penalties regime – expansion to GST
  6. Superannuation Guarantee opt out rules
  7. Redundancy and early retirement payments – concessional tax treatment extended for over 65s

1. WA payroll tax cut – modest saving around the corner for employers

In a move to stimulate the Western Australian economy and create more jobs, last week the McGowan Labor Government announced new payroll tax measures to increase the payroll tax exemption threshold over the next two years to $1 million, as follows:

It is anticipated that raising the payroll tax threshold to $1 million will result in 1,000 businesses in WA no longer being liable for payroll tax and a further 11,000 businesses (making up around 70% of businesses in WA) receiving a payroll tax cut.

The increased payroll tax threshold will provide a modest tax cut for employers each year. For example, employers with a taxable payroll of $1 million are expected to save just over $9,000 in 2021, while employers with a taxable payroll of $3 million are expected to save nearly $6,500 in payroll tax.

The rate of payroll tax remains unchanged (being a tiered rate of between 5.5% to 6.5% depending on the relevant amount of Australian taxable wages).

2. Resurrection of the Superannuation Guarantee amnesty

The Federal Government has reintroduced the Superannuation Guarantee (SG) amnesty rules into Parliament. The previous bill lapsed on 1 July 2019, following the election of the Morrison Government.

If passed, the proposed law will provide a once-off amnesty for employers to voluntarily disclose past SG non-compliance and pay employees’ full super entitlements. The amnesty period will run for six months from the date the legislation receives Royal Assent.

In summary, the SG amnesty encourages employers to correct previous non-compliance by:

  • Allowing employers to make tax deductible SG catch up payments for the period commencing on 1 July 1992 to the quarter ending 31 March 2018. The amnesty does not apply to SG shortfalls relating to the period on or after 1 April 2018.
    • Under the current law, superannuation contributions are only deductible when paid and are due 28 days after the end of the quarter. Late payments incur the SG charge and contributions offsetting the SG charge are not deductible.
  • The administration fee ($20 per employee, per quarter) is waived where employers self-correct SG shortfalls within the amnesty period.
  • Penalties and general interest charge for failing to provide a SG statement (which can be up to 200 percent of the SG charge) are waived.
    • Importantly, if an employer fails to disclose an SG shortfall to the Commissioner, he will not be able to remit penalties below 100 percent of the amount of SG charge payable, outside the amnesty period.
    • This ensures that higher penalties will be imposed for employers who do not make voluntary disclosures regarding SG non-compliance during the amnesty period.

Importantly, the employer must pay the SG shortfall to the Commissioner during the amnesty in order for the protections afforded under the amnesty to be available. The amnesty disclosure must also be a first time disclosure, i.e. the SG shortfall that has not previously been assessed or be under examination by the ATO (e.g. existing audit activity).

The takeaway: As and when the law is passed, employers must act quickly to ensure they meet the six month disclosure period in order to be covered under the amnesty.

3. Salary sacrificed super contributions – integrity measures passed

Under the current law, where an employee salary sacrifices their future salary and wages into superannuation, the salary sacrificed amounts count toward the employer’s mandated minimum SG contributions. Further, employers have the benefit of calculating their SG obligations on a lower post salary sacrifice earnings base. This can result in the employee receiving less SG contributions from their employer.

Integrity measures were recently passed on 28 October 2019 which ensure that an employee’s salary sacrificed super contributions cannot reduce an employer’s SG charge. Employers are required to make SG contributions at the current rate of 9.5% on the employee’s pre-salary sacrificed salary earnings base (up to the maximum contribution base). These measures have effect from 1 July 2020.

The takeaway: Ensure that payroll processes and employment contracts are updated to correctly reflect employers’ SG contribution requirements to avoid any future SG shortfall exposure.

4. PAYG withholding and reporting – reminder about denial of tax deductions

Although not new law – the bill was passed in November 2018 – now is a timely reminder that from 1 July 2019, employers can only claim deductions for payments made to workers (employees or contractors) where:

  • pay as you go (PAYG) withholding tax has been withheld from the payment; and
  • the amount has been reported to the ATO.

Any payments made to a worker on which tax has not been withheld or reported to the ATO are ‘non-compliant payments’ and are not tax deductible. Penalties and interest may still be imposed for failure to withhold PAYG.

The takeaway: to ensure that payments to workers are deductible, it is critical that workers are correctly classified as either employees (and subject to PAYG withholding) or independent contractors. There are specific common law tests which must be applied to determine this.

Where an employer mistakes an employee for a contractor and failed to withhold or report a payment, the payment is still deductible if:

  • the employer obtained an invoice that quoted the contractor’s ABN; and
  • there were no reasonable grounds to believe that the ABN is not correct or not the contractor’s ABN.

The takeaway: employers must ensure that their reporting obligations are being met on a timely basis. This includes:

  • correct procedures are in place for identifying contractors and checking ABNs;
  • lodgement and payment of Business Activity Statements on time;
  • Single Touch Payroll reporting for each STP pay event on time; and
  • ensuring PAYG withholding amounts are withheld before payments are made to workers.

5. Director penalties regime – expansion to GST

Currently, the director penalty regime applies to PAYG withholding and superannuation guarantee charge (SGC) payment obligations. Where an employer fails to comply with their payment obligations, directors are personally liable for these liabilities.

Proposed law is before the Parliament to expand the director penalty regime to GST, Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) obligations. Under the proposed changes:

  • It is expected that from 1 January 2020, directors will have an obligation at the end of the relevant tax period to ensure that payment of their GST liability for the period is paid to the ATO by the due date (for example, 28 days after the end of the quarter for GST);
  • a director will then become liable for the assessed net amount or GST instalment on the payment due date;
  • as GST liabilities are self-assessed, the proposed rules also provide the Commissioner with an additional power to make an estimate of GST liability (including LCT and WET) where a GST return has not been lodged by the due date. The estimate amount is deemed to arise and be payable on the day the entity was required to lodge its GST return. This ensures that taxpayers cannot avoid the director penalty regime by non-lodgement of its GST obligations;
  • after the lodgement due date, the Commissioner can issue a Director Penalty Notice for the unpaid amount. The penalty will be equal to the unpaid liability;
  • the director then has 21 days from the issue of the DPN to pay the liability. A director penalty may be remitted where the outstanding liability is paid in full within 21 days of the issue of the DPN.

The takeaway: it is critical that BAS lodgements are made on time and payments made by the due date. If you are a business that is struggling to meet reporting deadlines, seek assistance from a tax adviser to liaise with the ATO to avoid imposition of director penalties.

Individuals taking on directorship roles must do their homework and understand the tax compliance history of the business, or risk personal exposure to tax and employee liabilities.

6. Superannuation guarantee opt out rules

New law has been introduced impacting eligible individuals with multiple employers.

From 1 January 2020, these individuals can apply to opt-out of receiving SG from some of their employers where they have multiple employers and will exceed the $25,000 concessional contributions cap for the financial year. This change aims to reduce the number of people inadvertently exceeding the cap. Contributions over the cap are taxed at the individual’s marginal rate, rather than the concessional 15% tax rate paid by the super fund.

In order to qualify for the opt-out rules:

  • the individual must have multiple employers;
  • the individual’s income for SG purposes is expected to exceed $263,156 per financial year (i.e. employer contributions would exceed the $25,000 annual cap);
  • the individuals must submit their application to the ATO 60 days before the start of the quarter that the exemption will apply to;
  • a new application must be made for each financial year. If approved, the individual and their exempted employers will receive a copy of the exemption certificate from the ATO;
  • individuals must still receive SG contributions from at least one employer;
  • where an individual opts out of receiving SG, there is no requirement for the employer to pay the opted-out amount as wages.

As the quarter commencing 1 January 2020 is the first quarter that these rules are taking effect, the ATO has provided an extension to lodge the opt-out form to 18 November 2019.

The takeaway: employees choosing to opt-out of SG contributions should review their current employment contracts to ensure they are not disadvantaged by not receiving the reduced SG amount as an increase in their salary and wages.

7. Redundancy and early retirement scheme payments – concessional tax treatment extended for over 65s

New law was passed on 28 October 2019 to increase the concessional tax treatment of genuine redundancy and early retirement scheme payments provided to employees over the age of 65.

Prior to the change in law, payments in relation to an employee’s redundancy or retirement were only eligible to be concessionally taxed where the employee was under 65 at the time of their dismissal or retirement. Payments made to employees over the age of 65 were treated as ordinary ETPs and were not eligible to access the tax-free component.

From 1 July 2019, employees between the age of 65 and pension age (ranging from 65 years and six months to 67 years) can now access tax concessions which treat part of the genuine redundancy or early retirement scheme payment to be tax-free.

The tax-free component of the payment depends on the number of years of service of the employee. The amount in excess of the tax-free component is separately taxed under the Employment Termination Payment (ETP) rules. Different tax rates are applied depending on the amount and type of the payment and the age of the employee.

Next steps

For those interested in discussing the above changes in more detail and as well as any potential impact on you, please contact your Cooper Partners client engagement team.

A Property Tax Update – Take 2

Much can happen in 14 days in the property sector.  Since our Property Update issued earlier this month and our seminar held on 9 October 2019, we have seen the issue of further announcements impacting both property owners and property developers that we bring to your attention:

1.    Stamp duty cut for off-the-plan apartment purchases

2.    Restriction of tax deductions on vacant land

3.    Reintroduction of CGT main residence exemption Bill

4.    CGT incentives for affordable housing

5.    Sale of near new interest to foreign residents

6.    Keystart lending eligibility

 

1. Stamp duty cut for off-the-plan apartments

Off-the-plan apartment buyers in WA will receive a 75 per cent rebate on stamp duty for the next two years, capped at $50,000, under a stimulus package unveiled by the state government on 23 October 2019.

For a $500,000 apartment, the change would represent a stamp duty saving of more than $13,000.

No cap will be placed on the purchase price and multiple rebates will be available to the same applicant for additional unit or apartment purchases within the same or different developments.

Importantly, the discount will also apply to the 7 per cent foreign buyer surcharge, which was put in place in January, and to which the construction industry has long argued has caused demand from overseas buyers to plummet.  As such, the inclusion of the foreign buyer’s surcharge in the rebate is expected to provide WA apartment developers with a value proposition compared with other states.

The rebate will be available for the next two years to any purchaser who signs a pre-construction contract to purchase a new residential unit or apartment in a multi-tiered development.

2. Restriction of tax deductions on vacant land

Further to our recent Property Update (Click here to view) regarding the Government’s proposed changes to the availability of deductions for vacant landowners, we can now confirm that the Bill containing these proposed measures has been passed by both Houses on 22 October 2019 and now awaits Royal Assent.

The Bill was passed with three amendments to the measure which denies tax deductions for expenditure incurred in holding vacant land. The amendments take the form of exceptions to the measure and will apply to vacant land that is:

  • held by primary producers;
  • available for use in carrying on a business under arm’s length arrangements; and
  • structures affected by natural disasters or other exceptional circumstances (for up to 3 years).

However, despite the above exceptions, it does appear that the final measure may still have some unintended but potentially adverse outcomes for primary producers and holders of farmland.

For example, tax deductions will still be denied in the following situations:

  • A non-arms-length lease of farmland by parents to adult child (over the age of 18);
  • A non-commercial lease agreement between an entity controlled by parents and an entity controlled by an adult child; or
  • Where residential property either exists on the land or is being constructed on the farmland.

The measures will apply to expenditure incurred in respect to holding vacant land from 1 July 2019.

3. Reintroduction of CGT main residence Bill

As previously advised in our Property Update (Click here to view) both Australian and foreign resident individuals may currently access the CGT main residence exemption where the dwelling was previously their principal place of residence prior to the sale of the dwelling.  However, as part of the 2017/18 Federal Budget, amendments to the CGT rules were announced and legislation containing these changes was introduced to Parliament.  The Bill however lapsed when the 2018/19 election was called.

This Bill has now been reintroduced to Parliament as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, and proposes to remove the entitlement to the CGT main residence exemption for foreign residents other than where certain life events occur during the period that a person is a foreign resident where that period is 6 years or less.

A life event includes a terminal medical condition to the foreign resident, their spouse or their child under 18 years of age; death; and divorce or separation.

Impact on Australian Expats

Where the Bill is passed in its current form, there may be some adverse tax outcomes for Australian citizens who temporarily become non-residents for tax.  For example,  if you move overseas and rent out your family home, and then decide to sell your Australian home while still overseas, you will need to pay CGT on the proceeds of the sale.

The current law contains the six-year absence rule, which means that if the family home is sold within six years of moving overseas, an exemption from CGT is available.  This will no longer apply where the Bill is passed unchanged.

That being said, where Australian expats return to Australia (and take up their Australian tax residency again) and resume living in the property within six years, the main residence CGT exemption will be retained.

The measures will apply (where passed) from 7.30pm ACT legal time on 9 May 2017 (the application time) however, transitional provisions will continue the main residence exemption for CGT events that occur to certain dwellings on or before 30 June 2020, where the dwelling was held before the application time.

4. CGT incentives for affordable housing

The above Bill also contains measures to encourage investors to increase the supply of affordable housing by allowing resident investors in “eligible affordable rental housing” to obtain an additional 10% CGT discount (on top of the existing 50% discount). The additional CGT discount will be available to resident investors who hold affordable housing directly or through certain trusts.

However, to qualify for the additional discount, the affordable housing must be held for a period of at least three years from the start date of the measure and be managed through a registered community housing provider in accordance with state and territory housing policies and registration requirements.

This measure is proposed to apply to capital gains realised by investors from CGT events occurring from 1 January 2018 for affordable housing tenancies that start before, on or after 1 January 2018.

5. Sale of near new interests to foreign residents

The same Bill also contains a technical amendment that enables a reconciliation payment to be made by developers who sell dwellings to foreign persons under a “near new dwelling exemption certificate”.

By way background, the introduction of the near-new dwelling exemption certificate creates flexibility for property developers and enables them to sell near‑new dwellings (dwellings that have previously been subject to a failed settlement) to foreign persons without the requirement that the individual foreign investor seeks their own foreign investment approval for the purchase.

6. Keystart lending eligibility

Under the measures announced in the WA state government budget, Keystart’s existing income limits for borrowers have increased by $15,000 for singles and couples and by $20,000 for families until 31 December 2019. The income limits will revert to previous levels on 1 January 2020.

The temporary changes to Keystart lending rules follow the McGowan Government’s $421 million extension of its loan book in December last year, boosting its lending capacity to $4.8 billion.  Based on median loan values, the $421 million extension potentially equates to an extra 1,100 new home loans, providing a much-needed boost to WA’s housing construction sector which is expected to create new jobs and support the economy.

The measures will complement the existing first homeowner’s grants and stamp duty exemptions for first home buyers.

Next steps

For those interested in discussing the above changes in more detail and as well as any potential impact on you, please contact your Cooper Partners client engagement team.

A property tax update – what you need to know

In recent years, real property owners have been subject to a number of significant legislative changes. Changes to the taxation of real property has been in response to a number of factors, including housing affordability, tax avoidance and the impact that foreign ownership has had on the Australian property market.

In this tax update, we summarise the following issues impacting real property owners:

  1. Restricting tax deductions available for vacant land owners;
  2. GST on the sale of new residential dwellings;
  3. Clearance certificate requirements on settlement of real property transactions;
  4. Acquiring dwellings from a deceased estate – new guidelines on the main residence exemption;
  5. Specific changes impacting non-resident owners, including:
    – Proposed changes to the CGT main residence exemption; and
    – Vacancy fee for foreign owners of residential dwellings.

1. Restricting tax deductions available for vacant land owners

Currently, taxpayers may claim deductions for costs incurred in holding vacant land where that land is held for the purpose of earning assessable income or in carrying on a business. These costs include interest on borrowings, land taxes, council rates and maintenance costs.

However, as part of the 2018/19 Federal Budget, the Government was concerned that some taxpayers are claiming deductions for costs associated with holding vacant land where it is not genuinely held for the purpose of earning assessable income.

To combat this, proposed legislation is currently before the Senate which in essence restrict non-business entities such as individuals, family trusts and SMSFs from negative gearing on their vacant land investments from 1 July 2019 unless the vacant land is used or held available for use for the purpose of carrying on a business (such as property development of primary production) conducted by either:

  1. The vacant land owner; or
  2. An affiliate, spouse or child of the vacant land owner; or
  3. Certain ‘connected entities’ of the land owner or its affiliates.

These rules however do not apply to vacant land owners that are a corporate tax entity, superannuation plan (other than a SMSF), managed investment trust, public trust, or certain unit trusts or partnerships.

As such, many private vacant land owners who are not running a business (e.g. where vacant land is held with the intention of constructing rental properties) will no longer be entitled to claim deductions for their land holding costs from 1 July 2019.

In the ‘plain vanilla’ scenario of Mum and Dad taxpayers purchasing a vacant block of land with a view to build a new rental property, under the current rules, the holding costs would be deductible, as there is a clear intention to earn assessable income in the future.

However, under the proposed changes, Mum and Dad will no longer be able to claim these holding costs (e.g. interest on borrowings) until the rental property has been constructed and legally available for occupation and available for lease. Any costs incurred during the planning and construction phase and even prior to receiving an occupancy permit will no longer be deductible under the new changes.

Because of the definition of ‘vacant land’ which requires that a ‘substantive permanent building’ or ‘substantive permanent structure’ be on the land (both of which are defined terms), there is a risk that where a residential property is being unoccupied during periods of renovation, the property may fall within the definition of vacant land and holding costs associated with the property will be denied for that period. The proposed law is currently silent on this scenario.

Importantly, these new rules will apply regardless of when the land was purchased and there is no grandfathering of vacant land assets acquired prior to the Federal Budget announcement.  Further, there is no Commissioner discretion to waive these rules.

Key takeaways

  • If you hold vacant land or unoccupied residential dwellings, consider how these proposed changes will impact your 2019/20 tax return;
  • Maintain detailed records of all holding costs during the vacancy period, including documentation supporting when and if the land is used in carrying on a business; and
  • Seek advice if you are unsure whether the buildings and structures on your land meet the required tests under the proposed changes in order for the property to not be defined as vacant land.

2. GST on the sale of new residential dwellings

Changes were made to GST laws last year which now require purchasers of new residential dwellings (being dwellings not previously sold as residential premises) or newly subdivided land to pay a GST directly to the ATO as part of the settlement process.

However, these rules impact not just new residential dwelling vendors, but all residential dwelling vendors and suppliers, as they are now required to provide a written notice to the purchaser prior to settlement to advise whether the sale is subject to GST withholding and whether the margin scheme applies. Significant penalties may be imposed where the vendor and supplier fails to provide this written notice to the purchaser.

Key takeaways

  • If purchasing new residential property or newly subdivided land, be aware of any new acquisitions post 1 July 2018 and your GST obligations;
  • Land developers should be aware of the cashflow impact where relying on the margin scheme under these new rules.

For further information, please click here to view our previous article on this topic

3. Clearance certificate requirements on settlement of real property transactions

As part of the Foreign Resident Capital Gains Withholding Tax (FRCGW) rules, Australian resident vendors are required to obtain a clearance certificate from the ATO prior to settlement.

Where a clearance certificate is not obtained, the purchase of the real property is required to withhold 12.5% of the purchase price at settlement, where the real property has a market value of $750,000 or more.

Where the purchaser withholds the 12.5% tax, this amount is not a final withholding tax and the vendor can claim a credit for part, or all of the amount withheld at settlement on lodgement of their tax return for the relevant year.

Key takeaways

  • When buying and selling real property above the $750,000 threshold, consider your CGT withholding obligations and ensure that clearance certificates have been obtained prior to settlement. Where the vendor is a foreign resident or a clearance certificate has not been provided to the purchaser, the purchaser is required to withhold 12.5% of the purchase price to the ATO.

For further information, please click here to view our previous advice on this topic.

4. Acquiring dwellings from a deceased estate – new guidelines on the main residence exemption

Most taxpayers are aware that if they dispose of a dwelling that is their main residence and it is not used to produce assessable income, any capital gain or loss is disregarded under the CGT main residence exemption.

This exemption also applies where an individual inherits a dwelling from a deceased estate which was the deceased’s main residence, and the individual disposes of the property within two years of the deceased’s death. However, the Commissioner has the discretion to extend this two year period in certain situations.

The ATO has recently released a Practical Compliance Guideline which details when the Commissioner’s discretion will be exercised and provides a safe harbour for taxpayers. Where the safe harbour conditions are met, the individual may lodge their tax return as if the Commissioner had exercised his discretion.

Broadly, the safe harbour conditions outlined in the Guideline are:

  • During the first two years after the deceased’s death, more than 12 months was spent addressing:
  1. Either the ownership of the dwelling or the will is challenged;
  2. A life or other equitable interest given in the will delayed the disposal of the dwelling;
  3. The administration of the deceased estate is complex and delayed the completion of administration; or
  4. Settlement of the contract of sale of the dwelling is delayed or fell through for reasons outside your control.

Key takeaways

  • If you have inherited real property under a will, consider if the main residence exemption will apply to you where you intend to sell the property;
  • ·Seek tax advice where the sale is more than two years after the death of the deceased, to consider if Commissioner discretion to access the main residence exemption is likely to be granted and whether you can rely on the new safe harbour.

5. Specific changes impacting non-resident owners

a. Proposed changes to exclude main residence exemption

Under the current tax law, both Australian and foreign resident individuals may access the CGT main residence exemption where the dwelling was previously their principal place of residence prior to the sale of the dwelling.

As part of the 2017/18 Federal Budget, it was announced by the Turnbull government that changes should be made to the CGT rules so that foreign residents will not be entitled to claim the exemption where their main residence is sold.

The bill containing these changes was then introduced to Parliament, however it lapsed when the 2018/19 election was called. At this stage, a new bill has not yet been reintroduced. However, in the coming months we expect to see these CGT main residence rules be tightened as previously announced by the former Liberal government and fresh proposed changes drafted.

b. Vacancy fee for foreign owners of residential dwellings not residentially occupied

One area that has not received much air time is the vacancy fee which applies to foreign owners of unoccupied residential dwellings.

This fee applies to dwellings that not residentially occupied or rented out for more than 183 days in a ‘vacancy year’ and is payable on lodgement of a vacancy fee return. The vacancy fee is generally the same amount as the foreign investment application fee.

A foreign resident owner of a residential dwelling must lodge a vacancy regardless of whether the dwelling has been occupied or made available for rent where:

  • The foreign resident made a foreign investment application for residential property after 7.30pm AEST on 9 May 2017;
  • The foreign resident owner purchased the dwelling under a New Dwelling Exemption Certificate that a developer applied after 7.30pm AEST on 9 May 2017.
  • In order to meet the definition of residentially occupied, for at least 183 days in a vacancy year:
  • The owner or a relative of the owner must genuinely occupy the dwelling as their residence;
  • The dwelling must be genuinely occupied as a residence subject to a lease or licence for a minimum term of 30 days; or
  • The dwelling must be genuinely available as a residence on the rental market with a minimum term of 30 days.

Importantly, this would exclude short term rentals such as AirBnB rentals.

Next steps

For those interested to learn about the above changes in more detail and the traps to avoid in practice, do not hesitate to contact your Cooper Partners client engagement team.

Superannuation Update September 2019 – Investment Strategy, Borrowings and Contributions

Investment Strategy, Borrowings and Contributions

In this update we will discuss some recent ATO activity, measures being introduced that impact self-managed superannuation funds (SMSFs) and some contribution strategies to consider:

  1. ATO issues investment strategy warning to SMSFs with property and borrowings
  2. Super Guarantee opt-out and how it will apply
  3. Non-arm’s length expenses
  4. Borrowing arrangements and the impact on Total Super Balance (TSB)
  5. Downsizer contribution – big take-up with $1 Billion contributed. Are you eligible?
  6. Carry-forward concessional contributions – can you utilise this measure?

1. ATO issues investment strategy warning to SMSFs with property and borrowings

At the end of August, the ATO sent a letter to approximately 17,700 SMSFs regarding the fund’s investment strategy. This was a targeted campaign by the ATO to SMSFs who held at least 90% of its assets in a single asset class (i.e. property), and also had in place a limited recourse borrowing arrangement (LRBA).

Why did the ATO contact Trustees?

Under the superannuation law, a Trustee of an SMSF must formulate and review regularly an investment strategy that also considers:

  • Risk and return on investments;
  • Diversification of assets;
  • Liquidity of investments and cash flow;
  • The ability to discharge liabilities; and
  • Insurance considerations and cover for the members.

Specifically, the ATO letter appeared to be targeting the diversification aspect of the above. Recently, the ATO provided a further update on this campaign and stated:

We were concerned that these SMSF trustees may not have given due consideration to diversifying their fund’s investments and the risks associated with a lack of diversification when formulating and reviewing their investment strategy.

They also provided that this lack of diversification together with the borrowing could lead to a significant loss where the sole asset loses value.

What should you do?

Where your SMSF fits the above profile (i.e. has majority of its assets invested in property with an LRBA) or you haven’t reviewed your strategy recently, you should review the investment strategy and ensure it satisfies the above requirements of  risk, return, diversity, liquidity, ability to discharge liabilities and insurance. You should also ensure that you have appropriate support and reasons for any fund investments.

2. Super Guarantee opt-out and how it will apply

The Super Guarantee (SG) opt-out was introduced to Parliament in May 2018, where high-income earners who had multiple employers, had the choice to opt-out of receiving mandated employer contributions. This would allow individuals who received contributions from multiple employers and as a result exceeded their concessional contribution cap (currently $25,000), to opt-out of receiving compulsory contributions to remain within the cap and avoid any excess contribution issues. The original legislation lapsed prior to the Federal Election.  In July 2019, this measure was re-introduced and is now waiting Royal Assent to become law.

Points to note where you would like to utilise this measure:

  • The employee will need to apply to the ATO for an employer shortfall exemption certificate;
  • Certificates can be issued to different employers. However, at least one employer must still make SG contributions for the employee;
  • The application needs to be made 60 days before the first day of the quarter in which the exemption is to apply;
  • The application can be refused by the ATO;
  • Just because an individual opts-out to receive SG, the employer is not required to pay the opted-out amount as wages. The employee will need to negotiate this with the employer. This is an important point to note, as employees may be disadvantaged if they apply for the certificate but haven’t arranged with their employer to ensure that the amount not contributed to superannuation is received as salary and wages

3. Non-arm’s length expenses

Non-Arm’s Length Income (NALI) is a concept whereby income derived by an SMSF is taxed at the top marginal rate where the income has arisen from an investment where the parties were not dealing on an arm’s length basis.

This concept has been extended to Non-Arm’s Length Expenses (NALE), where the income, or gain on sale of asset, will be subject to the NALI rules. where expenses incurred by a fund with respect to an asset are not arm’s length.

For example, where an SMSF holds property under a borrowing arrangement and derives arm’s length rent, but does not pay an arm’s length interest rate on the loan, this will be considered NALE and as a result the investment will be tainted with a NALI classification. This would result in the rental income and any future realised capital gain on the sale of the property being subject to NALI and taxed at the top marginal rate, as opposed to tax at 15% in the fund, or 0% (for 100% pension funds).

4. Borrowing arrangements and the impact on Total Super Balance (TSB)

A member’s TSB is generally the total amount they have in superannuation across all of their accounts (however, there are some modifications).

Where a person’s TSB exceeds certain thresholds, they become ineligible for particular provisions, including (but not limited to):

  • The ability to make carry forward concessional contributions, where TSB exceeds $500,000 (discussed in further detail below);
  • Non-concessional contributions, where TSB exceeds $1,600,000; and
  • Spouse offset.

This is relevant to SMSFs who also have an LRBA in place. New law has been introduced and upon receiving Royal Assent (which is expected to occur shortly), will include the outstanding balance of certain LRBAs in the member’s TSB.

Points to note:

  • Applies to LRBAs commenced after 1 July 2018;
  • Only applies to members who have satisfied a condition of release with a nil cashing restriction (i.e. over age 65 or attained preservation age and retired), or those whose interests are supported by assets that are subject to an LRBA with a related party.
  • Does not apply to LRBAs in place before 1 July 2018 and refinanced after 1 July 2018.

What does this mean?

For members where this law may have application it may cause the members TSB to exceed $1.6 million and prohibit them from making non-concessional contributions (as an example). These contributions may be required in order to fund any loan repayments.

Accordingly, anyone considering undertaking an LRBA where they may fall under this new measure as they have retired or the loan is with a related party, it is worthwhile considering the impact this will have on their overall strategy.

5. Downsizer contribution – big take-up with $1 Billion contributed. Are you eligible?

The ATO has recently revealed that members have contributed $1.1 billion to superannuation from the superannuation downsizer measure since it’s introduction on 1 July 2018.

The downsizer measure allows members over age 65 to contribute up to $300,000 from the proceeds of the sale of their home to superannuation, subject to certain requirements.

Eligibility:

  • You are over age 65 at the time of the contribution;
  • You or your spouse owned the property for more than 10 years;
  • The property is in Australia and is not a caravan, houseboat or mobile home;
  • The property is covered in full or part under the main residence exemption;
  • The contribution is made from the proceeds of the sale to superannuation within 90 days;
  • You make a choice to make a downsizer contribution in the approved form;
  • You have not previously made a downsizer contribution.

Points to note:

  • A downsizer contribution does not count towards the contribution caps;
  • The member’s total super balance is not taken into account, i.e. the member can have more than $1.6 million in super and still make a downsizer contribution;
  • The work test does not have to be satisfied, which is 40 hours of gainful employment in a 30-day consecutive period;
  • $300,000 can be contributed by each spouse;
  • The property doesn’t have to be your main residence at the time of the sale. As long as it was your main residence at some stage throughout the ownership period, whereby the member is going to claim some of the main residence exemption, this provision is available;
  • Utilising this provision does not make you ineligible to make other contributions to superannuation (where you are separately eligible to make such other contributions).

6. Carry-forward concessional contributions – can you utilise this measure?

We are now into the second financial year regarding the carry-forward concessional contribution rules, which means individuals can start utilising this measure.

Since 1 July 2018, an individual can carry forward their unused concessional contributions for a maximum of five years.  The individual may be able to contribute these unused amounts to superannuation provided their total superannuation balance at the commencement of the financial year in which the contribution is made is less than $500,000.

For example, if you have a total superannuation balance of $400,000 at 1 July 2019 and have made $10,000 of concessional contributions (including employer contributions) to superannuation during the 2018/2019 financial year, you may be able to make up to $40,000 of concessional contributions to superannuation during the 2019/2020 financial year ($15,000 carried forward from the 2018/2019 year and the 2019/2020 cap of $25,000).

How can we help?

If you would like to know how you are affected by these changes or need assistance, please contact your Cooper Partners engagement team.

 

 

Fringe Benefits Tax – Getting you ready for FBT in 2019

With the end of the 2018/19 FBT year now upon us, we provide you with the latest updates to get you ready for the FBT season, including the ATO’s audit hotspots.

1. Latest FBT rates and thresholds

For the 2019 FBT year, the FBT rate will remain the same at 47% with the associated Type 1 and Type 2 gross-up rates also remaining the same as last year.

 

Other rates and thresholds are as follows:

 

Key FBT dates to be aware of:

 

2. Revised exempt vehicle record keeping guidelines

In July 2018, Practical Compliance Guideline (PCG) 2018/3 Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles was introduced. The PCG applies to the 2019 FBT year and later years and represents a safe harbour from record keeping where certain conditions are met. The previous draft PCG has been updated to allow employers to satisfy the record keeping requirements where the employer has a policy in place limiting private use of the vehicle and obtains assurance from the employee that their private use is limited to the use outlined in the PCG.

These are the conditions which must be met to satisfy the record keeping exemption:

  1. The vehicle provided to a current employee is an ‘eligible vehicle’ and is provided to the employee to perform their work duties. Please click here to view eligible vehicles.
  2. The vehicle’s GST inclusive value is less than the luxury car tax threshold at the time the vehicle was acquired (i.e. $66,631 for the 2019 year);
  3. The vehicle is not provided as part of a salary packaging arrangement;
  1. The employee uses their vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip;
  2. The employer has a policy in place that limits private use of the vehicle and obtains assurance from their employee that their use is limited to private journeys (other than home to work travel) which are:
    • No more than 1,000 kilometres in total; and
    • No return journey exceeds 200 kilometres.

Where employers are satisfied that the conditions in the PCG are met, the following records should ideally be maintained:

  • Declarations should be obtained from employees to show that the private use is no more than 1,000 kilometres in total and no return journey exceeds 200 kilometres; and
  • Evidence that the employer has a policy in place limiting private travel.

3. Don’t get caught out with an invalid logbook

In a recent Private Binding Ruling sought by an employer, the Commissioner did not accept a logbook that was backdated to a previous FBT year to calculate a car fringe benefit under the operating cost method. This was on the basis that the records maintained did not meet the substantiation requirements for a valid logbook. The employer used diary records and calendar appointments to recreate the logbook and provided an estimate of the number of kilometres travelled, however could not confirm the odometer readings. There were also inconsistencies between the logbook and records maintained.

This raises the importance of a logbook being prepared correctly to be considered valid. If a logbook is not valid, the statutory formula method, at the rate of 20% of the base value of the car, must be used to calculate the amount of a car fringe benefit.

These are what a valid logbook should contain:

  • When the logbook period begins and ends (i.e. identify the relevant 12-week period);
  • The car’s odometer readings at the start and end of the logbook period;
  • The total number of kilometres the car travelled during the logbook period;
  • The business-use percentage for the logbook period;
  • The number of kilometres travelled and reasons for each journey, start and finishing dates and odometer readings at the start and end date of each journey.

A new logbook will be valid for five years, however, where the business use percentage of a logbook changes by more than 10%, a new logbook will need to be completed.

4. ATO guidance on travel related benefits – still in draft but applies now

In 2017, the ATO issued Draft Taxation Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? While TR 2017/D6 is still yet to be finalised, the draft ruling applies to the 2019 FBT year and onwards in relation to employee travel expenses.

In determining whether travel benefits are ‘otherwise deductible’ and therefore not subject to FBT, employers should consider whether an employee is required to travel as part of performing their work-related duties having regard to the guidance provided in the draft ruling.

It is important to note that the previous 21 day rule for distinguishing travelling for work versus living away from home has been withdrawn and new guidance has been provided by the ATO.

For further details on the ATO guidance on travel expenses, please click here.

5. No escape for frequent flyers

It is becoming common for businesses to accrue frequent flyer reward points for airline travel, with these points accruing separately to an individual’s frequent flyer points. A recent Private Binding Ruling issued by the ATO confirms that where frequent flyer points are transferred to an employee’s frequent flyer account under an Airline Business Rewards Program, this will give rise to a fringe benefit at the time the points are transferred to the employee (subject to the minor benefits exemption).

The taxable value of the benefit is to be determined using the notional value of the property i.e. the amount the employee could be expected to pay under an arm’s length transaction.

Where the employee uses the frequent flyer points for work-related travel, the taxable value of the benefit may be reduced under the otherwise deductible rule. However, practically this may not be able to be determined until long after the frequent flyer points have been transferred to the employee.

6. ATO audit hot spots

In 2019, the ATO have announced the following areas as a particular audit focus:

  • Private use of motor vehicles – the ATO have increased audit activity to capture employers failing to identify or report vehicles used privately as well as incorrectly applying exemptions.
  • Employee contributions – the ATO are using data matching software to find mismatches between income tax returns and FBT returns where contributions have not been disclosed as income or overstated to reduce the taxable value in the FBT return.
  • Non-lodgement – the ATO are focusing on employers failing to identify fringe benefits and miscalculating benefits such that the taxable value is reduced to nil. We recommend that where employers are registered for FBT and the taxable value is nil, an FBT return is lodged instead of a notice of non-lodgement as this will avoid an unlimited amendment period.
  • Living-Away-From-Home Allowance (LAHFA) – the ATO have expressed concern that LAHFAs are not being calculated correctly. Errors include claiming a reduction for ineligible employees, failing to obtain declarations, claiming a reduction for invalid circumstances and failure to substantiate.
  • Car parking valuations – situations that will attract the ATO attention include using inappropriately low market valuations, fees for car parking facilities incorrectly classified as a commercial car park and insufficient evidence to support the lowest fee for the car parking rates used.

Future Developments to watch

7. Exempt fringe benefits may be caught – Division 7A proposed changes

As part of the Government’s proposed reform to the deemed dividend provisions (Division 7A ), an amendment has been proposed affecting the interaction between Division 7A and the FBT rules in relation to the provision of exempt benefits by a private company to an employee (who is also a shareholder or associate of a shareholder) from 1 July 2019. By way of background, Division 7A contains anti-avoidance measures that prevent private companies from making tax-free distribution of profits or assets to shareholders or their associates by way of loans, payments or the use of property.

If the proposed amendments go ahead, a payment/provision of an asset from a private company to a dual capacity individual (someone who is an employee and a shareholder of the company) must constitute a fringe benefit in order to be excluded from the Division 7A rules. Accordingly, legitimate employment-related benefits provided to a dual capacity individual which are exempt from FBT will become subject to Division 7A.

Commonly provided FBT-exempt benefits which may be impacted by this proposed change include:

  • The provision of eligible work-related items (e.g. laptop computer primarily used in an employee’s employment);
  • Certain FBT-exempt living-away-from-home and relocation benefits;
  • Provision of an exempt vehicle; and
  • Minor benefits that are exempt from FBT.

These changes are very likely to significantly increase the FBT cost for closely held and family owned businesses operating out of private companies.

Your next steps

If you would like further information on how FBT may impact you, please contact our FBT team:

Super balance over $1.6m? You should review your position now

Super balance over $1.6m? You should review your position now

Changes to the rules around superannuation effective 1 July 2017 mean anyone with a substantial super balance should review their estate planning immediately. If they don’t, anyone they pass their super to may face the prospect of tax penalties, and even the possibility of being disinherited. 

How the new regime deals with our super when we die

On 1 July 2017, the final reforms under the new superannuation regime came into effect. These change what’s possible when it comes to passing super to a surviving spouse and could have major tax implications if you have a substantial balance in your SMSF.

  • There is now a limit of $1.6 million to how much you can most tax effectively keep in super;
  • When a member dies, the spouse doesn’t get the benefit of the deceased’s limit, only their own, so the effectiveness of the limit halves;
  • The effect of this limit is compounded by another rule which prevents spouses holding their deceased’s super in accumulation phase for their own benefit. 

What do you need to do?

If you’re affected by these changes, you need to make sure your estate planning around your super considers the new regime. If it doesn’t, your super may be taxed more than it would otherwise be, or may not end up where you want.

You should also ensure that the mechanisms in your SMSF give effect to your intentions.  After all, any death benefit nomination you make won’t be effective unless it is in line with both the superannuation laws and your fund’s trust deed.

For this reason, we recommend that you review:

  • Any nominations or death benefit documentation under your SMSF
  • Any documents affecting pensions under your fund
  • Your fund’s trust deed, especially any requirements it makes for payments and instructions
  • How your fund deals with trustee succession
  • Your will and other structures to make sure they reflect your intentions.

How we can help

Cooper Partners specialises in estate planning for SMSFs. We can review all your estate planning documents, including your trust deed, to analyse any risks and make sure your super goes where you intend. We can also help ensure your wealth stays within the family – and in a tax effective way.

To arrange an estate planning health check, contact Jemma Sanderson on (08) 6311 6903 or jsanderson@cooperpartners.com.au 

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.