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 trust.
· 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 …
|Date||Changes and actions|
|Pre 30 June 2017||
· Review shareholder loan accounts and make minimum loan repayments (may need to declare dividends).
· For any employees, pay superannuation to deduct contributions in the current financial year.
· Ensure Tax File Numbers have been received from beneficiaries (excluding minors, non-residents and tax exempt entities).
· For business:
· Complete a stocktake where required
· Write off bad debts and scrap any obsolete stock.
· Ensure any inter-entity management fees have been raised.
|1 July 2017||
· Company tax rate reduction to 27.5% for entities with an aggregated turnover up to $25m.
· GST applies to digital products & services imported by consumers
|14 July 2017 (on or before)||· PAYG Payment Summaries provided to all of your staff.|
|28 July 2017||· Quarterly super guarantee payment due (1 April – 30 June).|
|31 July 2017||· TFN report due for any TFNs received from beneficiaries in the June 2017 quarter.|
|14 August 2017||· Annual PAYG Payment Summary lodged with the ATO. Penalties apply for late lodgement.|
|28 August 2017||· Taxable payments annual report for the building & construction industry due.|
|March 2018||· New levy applies to businesses employing foreign workers on skilled visas|
|1 July 2018||
· Company tax rate reduction to 27.5% for entities with an aggregated turnover up to $50m.
· Taxable payments annual reporting extended to cleaning and courier businesses.
Avoid ATO scams
Over the last 12 months there has been a significant influx of scams that purport to be from the ATO or another regulatory body.
The easiest way to avoid being caught in a scam is to register for my.gov.au.
This way, you never have to click on an email or respond to a phone call as you can simply go online and check if there is anything you need to know.
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.
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).
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).
Corporate tax rate reduction
For the 2018 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 $25m.
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 2018 year will generally be restricted in the amount of franking credits that can be attached to dividends paid during that year.
Cleaning and courier businesses targeted
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.
Crowd-sourced equity funding to private companies
From 29 September 2017, new rules establish a crowd-sourced equity funding regime for public companies. Private companies however have to wait a little longer with the legislation amending the Corporations Act currently in consultation. The rules for private companies are less onerous than those imposed on public companies but there will still be a level of compliance involved to access this new funding source including the preparation of annual financial and directors’ reports, audited financial statements where companies raise more than $1m, and rules that dictate how you need to interact with shareholders.
We will keep you informed about the changes when the final shape of the new regime is known to explore if a crowd based model is of benefit to you.
GST on property developments
The Government intends to change how GST is collected on sales of newly constructed residential properties or new subdivisions. From 1 July 2018, purchasers will be required to remit the GST directly to the ATO as part of the settlement process instead of the GST being managed by developers.
This proposal is only an announcement and not law. If you are affected by this change we will let you know more as soon as more details are released.
Levy on businesses employing foreign workers on skilled visa
Businesses with turnover of $10 million or more per year will be required to make an upfront payment of $1,800 per visa year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $5,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
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.
Intercompany and related party transactions
If your business has any dealings with overseas suppliers, customers or owners then 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.
The transfer pricing rules can be difficult to apply in practice. Over the last few years the ATO has been working to simplify the record keeping options that can potentially be used by small to medium businesses to comply with these rules. The eight simplified options cover: Small taxpayers; Distributors; Intragroup services; Low-level inbound loans; Materiality; Management and administration services; Technical services; and, low-level outbound loans.
For example, the simplified option relating to inbound loans can be applied if the following conditions are met:
· The taxpayer has a cross-border loan balance of up to AUD $50m across the Australian economic group throughout the financial year;
· The interest rate on inbound loans is no more than a specific rate published by the Reserve Bank of Australia (6.45% pa in June 2017);
· The funds provided under the loan are Australian dollar funds and this is reflected in loan agreements;
· Associated expenses are paid in Australian dollars;
· The taxpayer has not made sustained losses (i.e., losses incurred for three consecutive years including the year in question);
· The taxpayer does not have related party dealings in certain specified countries;
· The taxpayer has not undergone a restructure in the year.
Taxpayers who qualify for one of the simplified options and choose to use that option must disclose this on the International Dealings Schedule that is lodged with their income tax return. These taxpayers still need to retain documentation to demonstrate that the eligibility criteria were satisfied, but should not need to create more substantial transfer pricing documentation (e.g., benchmarking analysis).
Please let us know if you are planning to enter into any new agreements with overseas parties so that we can review your position.
Employee Reporting …
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.
Selecting the best stocktake value method
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:
· 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
Top tax tips
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.
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 employer 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.