Reducing your tax exposure, maximising the opportunities available to you, and reducing your risk of an audit by the regulators is in your best interests. With the end of the financial year fast approaching, this update will help you do exactly that:
In brief - A summary of key changes and actions.
There were a number of pertinent changes announced in the 2016-17 Federal Budget. We have covered these in brief but have not gone into detail as these initiatives are subject to the outcome of the Federal election. We will advise you of any actions you need to take once the election result is known.
We want to help you achieve the best result for you and your business. If there is any additional assistance we can provide, or if you would like us to review your situation, please call us on (03) 8530 1600 or by e-mail at matthews@koustas.com.au.
| Date | Changes and actions |
|---|---|
| 1 July 2015 |
|
| Pre 30 June 2016 |
|
| 1 July 2016 |
|
| 14 July 2016 (on or before) |
|
| 28 July 2016 |
|
| 31 July 2016 |
|
| 14 August 2016 |
|
| 28 August 2016 |
|
| 1 July 2017 |
|
Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2016 at the latest (the trust deed may actually require this to be done earlier). Decisions made by the trustees should be documented in writing, preferably by 30 June 2016.
If valid resolutions are not in place by 30 June 2016, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).
The low income offset has not been available to minors who only receive ‘unearned’ income (e.g. distributions from a discretionary trust) since the 2013 income year. Minors who only receive ‘unearned’ income will be subject to penalty rates of tax on income that exceeds $416 – this may include the debt levy.
Normal marginal tax rates can potentially still apply to minors who receive distributions from a deceased estate or testamentary trust.
Trustees are only able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the beneficiary’s entitlement to the franked dividends is recorded in writing by 30 June 2016. For streaming of capital gains to be effective for tax purposes, the beneficiary’s entitlement must be recorded in writing by 30 June if the capital gains form part of trust income for the year or 31 August if the capital gains do not form part of trust income.
We can assist you with this process if you do wish to stream franked dividends or capital gains to specific beneficiaries.
If a trustee resolves to distribute income to a tax-exempt entity, the trustee will be assessed on that income at the top marginal tax rate unless:
Also, anti-avoidance rules tax the trustee on a portion of the income distributed to a tax-exempt entity where there is a mismatch between the net financial benefit to be received by the entity and the tax treatment of the distribution.
The trustee of a ‘closely held trust’, such as a discretionary trust, must withhold tax from distributions to beneficiaries where they have not provided their TFN to the trustee. The rules apply when distributions are made by a closely held trust to most types of beneficiary except where:
When a beneficiary provides their TFN and other relevant details to a trust, the trustee must lodge a TFN report for that quarter with the ATO. TFN reports are due by the last day of the month following the end of the quarter. A beneficiary’s TFN only needs to be reported to the ATO once. It is not necessary to lodge a TFN report if there are no new TFNs to report for a quarter.
If the beneficiary has not provided their TFN to the trustee by the time a distribution is made, the trustee is required to withhold tax from the distribution at the highest marginal rate plus Medicare levy (i.e. 49% in 2015-16).
| Date | Changes and actions |
|---|---|
| 1 July 2015 |
|
| Pre 30 June 2016 |
|
| 1 July 2016 |
|
| 14 July 2016 (on or before) |
|
| 28 July 2016 |
|
| 14 August 2016 |
|
| 28 August 2016 |
|
| 1 July 2017 |
|
Budget announcements – initiatives for business
The 2016-17 Federal Budget contained a number of initiatives for business. Whether theses initiatives come to fruition will depend on the outcome of the impending election. If the current Government is re-elected, we expect these reforms to progress reasonably quickly with the potential exception of the more controversial company tax rate reduction. If the Government is not re-elected, none of the other major parties have indicated that they would support these reforms at this point.
We will let you know what changes are likely once the election result is known.
New rules to prevent foreign residents avoiding tax when they sell certain Australian assets will affect everyone buying or selling property with a market value of $2 million or more from 1 July 2016. Many transactions involving shares in a company or units in a trust will also be caught.
The new withholding rules capture:
If you are buying or selling a direct interest in real property located in Australia and the value of the property is $2m or more then the rules have to be considered. Withholding obligations will arise unless the vendor has received a clearance certificate from the ATO confirming their residency status.
If you are buying or selling shares in a company or units in a trust then a withholding obligation can also be triggered, even if the company or trust does not hold any real property interests in Australia. Withholding 10% of the purchase price will be required if either:
In these circumstances the vendor can make a declaration to the purchaser confirming that they are an Australian resident to ensure that the withholding tax does not apply. In general you would expect to see these declarations in the sale agreements as warranties.
A vendor can also make a declaration confirming that shares in a company or units in a trust are not classified as an indirect Australian real property interest. Shares or units that are not classified as an indirect Australian real property interest and do not relate to company title arrangements are outside the scope of the withholding rules.
Please contact us a.s.a.p. if you are contemplating or in the process of a transaction that involves real property with a value of $2m or more or you are buying or selling shares in a company or units in a trust and this is not occurring on the stock exchange as you might be affected by the new withholding rules.
There has been a lot of change lately to encourage innovation. Tax laws that come into effect on 1 July 2016 offer incentives for investment in early stage innovation companies (ESIC):
The initiatives also extend to early stage venture capital arrangements and partnerships offering:
A limited partner in an early stage venture capital limited partnership (ESVCLP) is entitled to a non-refundable, carry-forward tax offset which is equal to up to 10% of contributions made by the partner to the ESVCLP during the year. The amount of the tax offset may be reduced if the amounts contributed by the partners are not used by the ESVCLP in certain ways.
The incentives are designed to connect relevant start-up companies with investors that have both the capital and business experience to assist entrepreneurs develop successful innovative companies, particularly at the pre-commercialisation phase - where a concept is in development but the company needs additional funds to commercialise.
The amendments are designed to apply to a broad range of potential investors who are either investing directly or through a company, trust or partnership. As investments in innovation companies are often high risk, the amendments limit the risk exposure of retail investors to $50,000 per year. Sophisticated investors however are unrestricted.
In general, an ESIC qualifies if it is:
There are a number of conditions that need to be worked through to ensure that the ESIC and the investors qualify for the tax concessions. It’s important to seek advice if you plan on utilising these rules. Please let us know if we can assist.
Effective from 1 July 2017, certain supplies of digital products and services to Australian consumers (not businesses) by overseas suppliers will be subject to GST in Australia, even if the supplier does not have a physical presence in Australia. These rules apply to supplies of music, games, apps, movies and books as well as certain professional services.
The new rules use a vendor registration model. That is, businesses based overseas and selling into Australia will need to register and comply voluntarily with Australian tax law.
While this change is over a year away, if you or your suppliers are affected by these changes, you need to start working through the process now. Contracts, supply agreements, licensing agreements and royalty arrangements for digital products all need to be reviewed. For example, if you are not registered for GST then from 1 July 2017 some of the services or products you acquire from overseas suppliers may start being subject to GST.
The increased use of data matching has meant that everyone that falls outside of a set of standard parameters is a target. It’s more important than ever to ensure that you have the documentation to support decisions made, particularly when it comes to the treatment of contracts, transfers and payments between entities, and large tax claims. Recent targets include:
If your business has any dealings with overseas suppliers, customers or owners then unfortunately the tax rules you need to deal with are likely to be more complex than normal. For example, dealings with related parties overseas would generally fall within the scope of the Australian transfer pricing rules which are aimed at ensuring that the transactions are undertaken on arm’s length terms. While these rules can be difficult to apply in practice, the ATO has recently introduced some simplified record keeping options that can potentially be used by small to medium businesses to comply with these rules.
Even when dealing with unrelated parties there are additional tax rules that might need to be considered to ensure that your business complies with its obligations under the Australian tax system.
Please let us know if you are planning to enter into any new agreements with overseas parties so that we can review the position for you.
Before rolling over your accounting software for the new financial year, make sure you:
Prepare your financial year-end accounts. This way, any problems can be rectified and you have a ‘clean slate’ for the 2016-17 year. Once rolled over, the software cannot be amended.
Do not perform a Payroll Year End function until you are sure that your payment summaries are correct and printed. Always perform a payroll back-up before you roll over the year.
You need to provide all of your staff with their PAYG Payment Summary on or before 14 July 2016. This includes any staff that left your employment during the 2015-16 financial year.
If we prepare your Payment Summaries for you, please provide us with the data file from your accounting software.
The ATO imposes penalties for the late lodgement of PAYG Payment Summary Statements.
The annual PAYG Payment Summary Statement for the year ending 30 June 2016 needs to be lodged with the ATO on or before 14 August 2016. However, if we are preparing your Payment Summary for you and you only employ family members in your business (closely held employees), you may be eligible for an extension.
Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount on their PAYG Payment Summary. This is referred to as a `Reportable Fringe Benefit’ (RFB) amount and a label is included on the PAYG Payment Summary for this purpose.
Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business. If you do need to complete a stocktake, you can choose one of three methods to value trading stock:
A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year; you can choose the most tax effective option each year. The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock. This should give rise to a deduction even though the loss has not yet been incurred.
Before rolling over your accounting software for the new financial year, make sure you:
You need to provide all of your staff with their PAYG Payment Summary on or before 14 July 2016. This includes any staff that left your employment during the 2015-16 financial year.
If we prepare your Payment Summaries for you, please provide us with the data file from your accounting software.
The ATO imposes penalties for the late lodgement of PAYG Payment Summary Statements.
The annual PAYG Payment Summary Statement for the year ending 30 June 2016 needs to be lodged with the ATO on or before 14 August 2016. However, if we are preparing your Payment Summary for you and you only employ family members in your business (closely held employees), you may be eligible for an extension.
Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount on their PAYG Payment Summary. This is referred to as a `Reportable Fringe Benefit’ (RFB) amount and a label is included on the PAYG Payment Summary for this purpose.
Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business. If you do need to complete a stocktake, you can choose one of three methods to value trading stock:
A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year; you can choose the most tax effective option each year. The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock. This should give rise to a deduction even though the loss has not yet been incurred.
1. Declare dividends to pay any outstanding shareholder loan accounts
If your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company, then this can be treated as a taxable dividend. The regulators expect that top up tax (if any applies) should be paid by shareholders at their marginal tax rate once they have access to these profits. This is unless a complying loan agreement is in place.
If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June 2016. It may be necessary for the company to declare dividends before 30 June 2016 to make these loan repayments.
As the tax rules in this area can be extraordinarily complex and can lead to some very harsh tax outcomes, it is important to talk to us as soon as possible if you think your company has made payments or advanced funds to shareholders or related parties.
2. Directors' fees and employee bonuses
Any expected directors’ fees and employee bonuses may be deductible for the 2016-17 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2016, even if the fee or bonus is paid to the employee or director after 30 June 2016.
You would generally be definitely committed to the payment by year-end if the directors pass a properly authorised resolution to make the payment by year-end. The employer should also notify the employee of their entitlement to the payment or bonus before year-end.
The accrued directors’ fees and bonuses need to be paid within a reasonable time period after year-end.
3. Write-off bad debts
To be a bad debt, you need to have brought the income to account as assessable income, and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.
4. Review your asset register and scrap any obsolete plant
Check to see if obsolete plant and equipment is sitting on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June.
5. Bring forward repairs, consumables, trade gifts or donations
To claim a deduction for the 2015-16 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.
6. Pay June quarter employee super contributions now
Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2016. However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.
Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Your personal or company sponsored contributions need to be received by the fund before 30 June to be deductible.
7. Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes. It may be possible to contribute assets with unrealised losses to superannuation in order to do this.
8. Raise management fees between entities by June 30
Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.
This is a general list of what to have ready when we next meet with you:
And, if we are preparing your individual income tax return: