SPECIAL EDITION - IMPORTANT 2017 EOFY TAX ACTIONS FOR SMALL BUSINESS ENTITIES (LESS THAN $10M TURNOVER)

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.

·         Important reminder for trusts - trust distribution essentials.

·         What’s new - An explanation of key changes that may affect you and the entity/ies

·         Financial house-keeping - Essential pre 30 June actions.

·         Reduce your risks and minimise your tax - Our tips and traps to reduce your tax liability and risks.

There are a number of tax changes that apply from 1 July 2017. We briefly explain these below …

In brief

Important reminder - Trust distributions

Timing of resolutions

Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2017 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 2017.

If valid resolutions are not in place by 30 June 2017, 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).

Low income tax offset and minors reminder

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.

Streaming of franked dividends and capital gains

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 2017.  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.

Tax exempt entities

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:

·       The trustee actually pays the entire distribution within 2 months of the end of the income year; or

·       The trustee notifies the entity in writing of its entitlement within 2 months of the end of the income year.

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.

TFN withholding

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:

·       Beneficiaries under a legal disability (e.g., minors);

·       Beneficiaries that are non-residents for tax purposes;

·       Beneficiaries that are exempt entities (e.g., deductible gift recipients etc.).

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 2016-17).

What’s new

Tax offset increased and broadened

From the current financial year (2016-17), the unincorporated small business tax offset will increase to 8% (up from 5%). And, the tax offset will apply to more businesses with the aggregated turnover threshold to access the offset increased to $5 million (up from $2 million). However, the maximum tax offset per year is still capped at $1,000. It is important to note that the offset is only available where an individual is a direct beneficiary of the trust that carries on a business and is classified as a small business entity.

Small business entity threshold increased to $10m

The threshold to access the small business entity concessions has increased to $10m from 2016-17 enabling more businesses to access these concessions.  The concessions provide access to:

·       Immediate deductibility for small business start-up expenses - New small businesses can immediately deduct a range of professional expenses required to start up a business – such as professional, legal and accounting advice as well as amounts paid to Government agencies to set up their business entity.

·       Simpler depreciation rules - Choose to pool assets and claim one deduction for each pool.  Plus, access to the $20k accelerated deductions (see $20k accelerated deductions for small business extended another year below).

·       Simplified trading stock rules - You can choose not to conduct a stocktake if there is a difference of less than $5,000 between the opening value of trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year.

·       Roll-over for restructures of small businesses – The ability to change your business’s legal structure without triggering CGT or income tax implications on transferring depreciating assets or trading stock.

·       Immediate deductions for certain prepaid business expenses - choose to claim an immediate deduction for prepaid expenses where the payment is for a period of service which is 12 months or less and ends in the next income year.

·       Accounting for GST on a cash basis – You can choose to account for GST on a cash basis (i.e. when you receive payment for a sale made). Your business can also claim GST credits when you actually pay for a purchase.

·       Annual apportionment of input tax credits for acquisitions and importations that are partly creditable - Account for the private portion of business purchases annually rather than on each activity statement. Full GST credits can be claimed for a business purchase and an adjustment made for the private portion of the purchase in a later activity statement.

·       Paying GST by quarterly instalments - You can choose to pay a GST instalment amount worked out by the ATO that can vary each quarter. Annual GST returns are lodged for this method.

·       FBT car parking exemption - An exemption from FBT on certain car parking benefits provided to employees.

Corporate tax rate reduction

For the 2017 income year, the tax rate for companies that carry on a business in their own right has been reduced to 27.5% if their aggregated annual turnover is less than $10m. While this is good news, it also impacts on the franking credits that can be allocated to dividends paid by the company.

For the 2017 income year onwards, the maximum franking percentage will be based on the company’s corporate tax rate for that year, which will be worked out using the company’s aggregated turnover for the previous income year. This is because the company may not know its aggregated turnover for the current year at the time the dividend is paid. This means that many companies which qualify for the 27.5% tax rate in the 2017 year will also be restricted in the amount of franking credits that can be attached to the dividends.

If companies subject to the 27.5% limit have already paid dividends in the 2017 year that have been franked to 30% then this would breach the maximum franking rate rules. The shareholders would only be able to claim back franking credits at the 27.5% rate, despite what might be shown on the distribution statement that they have received.

As a practical measure, the ATO is proposing to allow companies to issue written notification to shareholders with details of the correct franking credits that can be claimed. There is no need to seek the Commissioner’s discretion in this case. Also, the Commissioner will not impose penalties for providing an incorrect distribution statement in the first place as long as revised details are sent to shareholders.

It will be necessary to check that the correct amount has been subtracted from the company’s franking account balance as well.

$20k accelerated deductions for small business extended another year

The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended until 30 June 2018.

From 1 July 2018, the immediate deduction threshold will reduce back to $1,000.

There are no limits to the number of times you can use the immediate deduction assuming your cashflow supports the purchases.

If your business is registered for GST, the cost of the asset needs to be less than $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price.  If your business is not registered for GST, it is the GST inclusive amount.

Second hand goods are also deductible.  However, there are a number of assets that don’t qualify for the instant asset write-off as they have their own set of rules.  These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

If you purchase assets costing $20,000 or more, the immediate deduction does not apply but small businesses have the ability to allocate the purchase to a pool and depreciate the pool at a rate of 15% in the first year and 30% for each year thereafter.

Cleaning and courier businesses

From 1 July 2018, courier and cleaning businesses will need to lodge additional reports to the Australian Taxation Office about payments made to contractors (individual payments and total for the year). While this is a year away, if your business is affected by the change, think about what systems you will need to track and measure these payments and collect the required information from contractors.

GST and digital products & services

From 1 July 2017, certain supplies of digital products and services to Australian consumers by overseas suppliers will be subject to GST in Australia, even if the supplier does not have a physical presence in Australia. The rules are not intended to apply in situations where the Australian customer is registered for GST and the acquisition relates to their business activities.

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.

These rules apply to supplies of music, games, apps, movies and books as well as certain professional services. Contracts, supply agreements, licensing agreements and royalty arrangements for digital products may all be affected.

State tax warning for family trusts

Recent changes to State laws may trigger a surprise tax bill for family trusts (discretionary trusts).

The problem stems from legislative changes this year in New South Wales (NSW), Victoria (VIC) and Queensland (QLD) that impose a surcharge on foreigners purchasing residential land.

The issue arises because of the way family trust deeds are often drafted.  Trust deeds are typically drafted so that the trustee has the power to distribute income or capital to a very wide class of potential beneficiaries. As a result, if a foreigner could receive distributions from the trust then your trust may be liable to pay the new surcharge if it holds or purchases residential land in New South Wales, Victoria or Queensland.  The way the State laws are written, if you cannot exclude foreigners as beneficiaries (your cousin living in England for example) you are potentially exposed to the new tax.  It does not matter if a distribution to a foreigner is unlikely to happen, the trust deed just has to allow it as a possibility.

Assuming you don’t have foreigners that you want the trust to distribute to, the solution might involve amending your trust deed. The amendment would exclude a “foreign person” from being a beneficiary and being able to benefit from the trust. However, it would be necessary to work through this process carefully to ensure that even worse tax implications don’t follow (e.g. need to ensure the amendment does not cause the trust to be resettled).

Tax Office Targets

Who has central management and control of a company?

The issue of who holds central management and control over a company is not always clear cut. Central management and control refers to the high level decisions that set the company’s general policies and determine the direction of its operations and the type of transactions it will enter into. This does not include the mere implementation or rubberstamping of decisions made by others.

Central management and control can be important in determining the residency status of a company. Control is not always taken to be where the Board holds its meetings but where the decisions are actually made; the test is substance over form. There have been several cases lately where companies incorporated overseas were determined to be residents of Australia for tax purposes because the overseas Boards merely rubber stamped the decisions made by a local representative.

Tax & travel related expenses

Claims for work related travel expenses are a major area of focus for the ATO. The larger the claim the more likely it is that the ATO will take a closer look. If you claim travel expenses, it’s important to ensure that you fully understand what’s required.

Every year, the Commissioner publishes the reasonable rates for travel expenses when travelling overnight in the course of employment activities – accommodation, food and drink, and incidental expenses. These rates are only applicable if you receive a genuine travel allowance for that travel. If claims fall within the ATO’s reasonable amounts, you can deduct travel allowance expenses within Australia without being required to keep full written evidence of all the expenses. But, even if you can rely on the substantiation exception, you may still be required to show the basis for determining the amount of your claim - that is, you still might need to prove that you actually incurred the expenses, and the expenses were work related.

In order for accommodation and meals to qualify as a travel expense, you need to travel away from your home.  The ATO takes that to mean that you’re sleeping away from home - not just travelling for the day.

Financial house-keeping  

Employee reporting

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 2017-18 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.

PAYG payment summaries

You need to provide all of your staff with their PAYG Payment Summary on or before 14 July 2017.  This includes any staff that left your employment during the 2016-17 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 2017 needs to be lodged with the ATO on or before 14 August 2017. 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.

Reportable Fringe Benefits on PAYG Payment Summaries

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 Reportable Fringe Benefit (RFB) amount is labelled on the PAYG Payment Summary for this purpose.

Do you need to do a stocktake?

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 your business has an aggregated turnover below $10 million you can use the simplified trading stock rules. Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000.  You will need to record how you determined the value of trading stock on hand.

If you do need to complete a stocktake, you can choose one of three methods to value trading stock:

·       Cost price - all costs connected with the stock including freight, customs duty, and if manufacturing, labour and materials, plus a portion of fixed and variable factory overheads, etc.

·       Market selling value - the current value of the stock you sell in the normal course of business (but not at a reduced value when you are forced to sell it).

·       Replacement value - the price of a substantially similar replacement item in a normal market on the last day of the income year.

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.

Reduce your risks & minimise your tax

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 2017. It may be necessary for the company to declare dividends before 30 June 2017 to make these loan repayments.

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 2017, even if the fee or bonus is paid to the employee or director after 30 June 2017.

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.

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.  Small Business Entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.

5. Bring forward repairs, consumables, trade gifts or donations

To claim a deduction for the 2016-17 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 2017.  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.