Parliament has finally passed the Bill containing the increase in the SBE turnover threshold. While it all seems straight forward, there are a few details for taxpayers to get across. This Bill also includes the company tax rate cuts, changes to the way the imputation system works and the small business tax offset rules. This update provides a summary of the key aspects of the Bill and practical implications to take into account (see legislation).
If you have any questions about how any of the information contained in this monthly essential summary might affect you, please feel free to get in touch with one of our friendly and experienced accountants on 02 9267 0108, or by emailing info@exemplary-financial.flywheelsites.com.
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From the ATO
Focus on cash businesses
The ATO continues to focus compliance efforts on businesses that operate in the cash economy and has released a document explaining some of the measures that have been taken so far.
As part of these efforts the ATO has been visiting businesses that advertise as ‘cash only’ or that appear to deal mainly in cash. The ATO is also working with business and industry associations as well as local authorities such as Chambers of Commerce to try and improve compliance rates.
To date the ATO has focused specifically on the following industries:
- Hair and beauty industry.
- Restaurant, café, takeaway and catering.
- Building and construction.
In addition to these industries, the ATO will continue to focus on businesses that display any of the following features:
- They operate or advertise as ‘cash only’.
- Data matching suggests that they don’t take electronic payments.
- They are part of an industry where cash payments are common.
- Unrealistic income levels relative to the assets and lifestyle of the business and its owners.
- They operate outside normal small business benchmarks for the industry; or
- They are reported by members of the public for potential tax evasion.
Taxpayers in the industries noted above or that display some of the features noted by the ATO should consider reiterating the higher likelihood of ATO audit or review activity and the importance for these businesses to comply with their obligations and maintain documentation that explains all business transactions.
More information – Protecting honest business
R&D warning for the wine industry
Following the release of a number of taxpayer alerts in connection with the R&D tax incentive rules in recent months the ATO has issued another warning aimed at those in the wine industry.
The ATO is working with the Department of Industry, Innovation and Science to identify promoters who have been advising grape growers to claim amounts paid towards the compulsory Wine Grapes Levy under the R&D tax incentive.
While these amounts might be deductible to a wine producer, they cannot be taken into account when calculating tax offsets under the R&D tax incentive.
More information – Warning for promoters of tax schemes involved R&D in the wine industry
Rulings, IDs & Determinations
Over-franking of dividends in 2017
Now that the Bill containing the reduction in the tax rate for certain companies has become law, the rules for determining the maximum franking percentage for a dividend have changed as well.
This means that companies with aggregated annual turnover of less than $10m in the 2016 income year would be subject to a maximum franking rate of 27.5% for dividends paid in the 2017 income year.
If companies subject to the 27.5% limit have already paid dividends 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.
The company would need to adjust its franking account balance to reflect a maximum franking rate of 27.5%.
Main residence constructed on pre-CGT land
This tax determination deals with the situation where a taxpayer owns pre-CGT land and constructs a dwelling on the land, which is treated as a separate post-CGT asset for tax purposes. For example, this would generally be the case where construction of the dwelling commenced under a contract entered into after 20 September 1985.
The ATO has confirmed that it is possible to apply the main residence exemption to any capital gain that relates to the dwelling if the taxpayer establishes the dwelling as their main residence. The exemption can cover:
- The period that the dwelling was actually the taxpayer’s main residence (i.e., after they established it as their main residence).
- The period during which the dwelling was being constructed, subject to a 4 year time limit. This only applies if the dwelling is established as the taxpayer’s main residence as soon as practicable after the work was completed and it remains their main residence for at least 3 months.
If a choice is made to apply the main residence exemption to some or all of the construction period then this would generally prevent any other property from being treated as the taxpayer’s main residence for CGT purpose during that same period.
FBT car parking threshold
The car parking threshold for the FBT year that commenced on 1 April 2017 is $8.66.
In order for the provision of car parking benefits to trigger FBT, there must be a commercial car parking station located within a 1 kilometre radius of the employer provided car park where the lowest fee charged by the operator of the car park is more than the car parking threshold.
Where there is more than one commercial parking station located within that 1 kilometre radius, the condition is satisfied where the lowest fee charged by any of the operators is more than the threshold
Tax treatment of rights and retail premiums
This draft ruling deals with the tax treatment of rights granted to retail shareholders and retail premiums paid to these shareholders in connection with renounceable right offers. The ruling only deals with the tax treatment where the shares are held on capital account.
The ATO previously issued TR 2012/1 that deals with the tax treatment of non-renounceable rights offers. This new draft ruling deals with renounceable rights offers.
The ATO confirms the following tax treatment for Australian resident eligible shareholders:
- The market value of entitlements when they are offered is non-assessable non-exempt income.
- Each entitlement (i.e., a right to be issued shares) is a CGT asset and a CGT event is triggered when entitlements are transferred to a successful bidder under a retail bookbuild process. The retail premium would be the capital proceeds with the cost base generally being limited to incidental costs.
- The acquisition date of the rights for CGT discount purposes is taken to be the same as the acquisition date of the original shares.
- Retail premiums are not ordinary income or dividends.
While similar treatment would apply to foreign resident ineligible shareholders, any capital gain or loss would generally be disregarded if the rights are not classified as taxable Australian property.
Timing of dividend from corporate limited partnership
The ATO has issued a draft ruling that looks at the issue of when a corporate limited partnership (CLP) has credited an amount to one of its partners, which would cause the partner to be treated as if they had received a dividend for income tax purposes.
A number of modifications are made under the tax law to treat partners in a CLP as if they were shareholders in a company for certain purposes.
For example, section 94M ITAA 1936 states that if a CLP pays or credits an amount to a partner against the profits or anticipated profits of the CLP then the amount paid or credited is taken to be a dividend paid out of profits derived by the CLP for tax purposes. However, there is some uncertainty around the scope of the word “credits” in the context of these rules.
The draft ruling indicates that:
- Credits does not mean paid or distributed.
- For an amount to be credited there must be more than a mere entry in the CLP’s accounts.
- There must be an in-substance appropriation of application of the resources of the CLP to confer a benefit on a partner for there to be a crediting.
- The benefit must be legally enforceable.
- The benefit must not be subject to a condition precedent.
The draft ruling provides a number of examples showing situations where the ATO considers an amount has been credited and those where the ATO considers that an amount has not been credited for the purpose of the CLP rules.
Cross border financing arrangements
The ATO has released further guidance on the application of the transfer pricing rules to cross border transactions. This time the ATO is focusing on cross border financing arrangements such as loans.
The aim of the PCG is to enable taxpayers to selfassess the level of risk that applies to related party financing arrangements by setting out the factors that the Commissioner would generally take into account in working through this process.
If a taxpayer finds that they are not classified as low risk based on the ATO’s then they might decide to take steps to reduce the risk rating of their related party financing arrangements.
Practitioners should be aware that these guidelines do not apply to businesses that are using the simplified transfer pricing record keeping options.
Cases
The Federal Court has confirmed that a Government grant received by the taxpayer in connection with the establishment of wind turbines should be taxed under the assessable recoupment rules in Subdivision 20-A ITAA 1997.
The taxpayer received a grant under a Government program that provided rebates for renewable energy projects in remote areas.
The taxpayer sought a private ruling from the ATO which confirmed that the grant should not be treated as ordinary income or taxed under section 15-10 on the basis that it was a bounty or subsidy received in relation to carrying on a business. However, the ATO determined that the grant should be taxed in the hands of the taxpayer under the assessable recoupment rules.
The taxpayer included the grant in its assessable income for the relevant tax returns but subsequently lodged an objection against the assessments for those years on the basis that the grant was not received by way of indemnity. The ATO disallowed the objection.
The Federal Court clarified that the grant would be assessable if it was received as a recoupment of a loss or outgoing, it was received by way of indemnity and the taxpayer can deduct an amount for the loss or outgoing in the current year or a prior year.
The Court held that the grant was taxed under the assessable recoupment rules. The Court found the following:
- The grant was received as a recoupment of an outgoing, even if the payment was on capital account.
- The term indemnity can include a sum of money paid to a person in respect of an outgoing incurred by the person.
- The fact that the payment was made under the Commonwealth’s Renewable Remote Power Generation Program does not prevent the grant from being treated as a payment by way of indemnity.
- The taxpayer was able to claim deductions in relation to the loss or outgoing incurred, albeit under the depreciation system (ie, the simplified depreciation rules in this case).
The court also found that even if the payment was not made by way of indemnity it would still have been assessable to the taxpayer because depreciation deductions could have been claimed under Division 40, despite the fact that the taxpayer chose to calculate its deductions under Division 328 (i.e., the simplified depreciation rules).
This decision confirms that the assessable recoupment rules can apply in a broad range of situations where taxpayers receive payments in connection with expenditure they have incurred and for which deductions can be claimed, either upfront or over a period of time. The fact that the payment was not made under a contract of indemnity did not prevent the payment from being treated as being made by way of indemnity. The Federal Court took a broad meaning of this term.
Legislation
Changes to SBE threshold and company tax rates
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Parliament has finally passed the Bill containing the changes to the SBE turnover threshold, company tax rate cuts and small business tax offset rules. The key changes are summarised below.
SBE turnover threshold
The turnover threshold for SBEs has been increased to $10m from 1 July 2016. This means that businesses with an aggregated turnover of less than $10m can access most of the SBE concessions including the simplified depreciation rules. The main exceptions are:
- A $5m threshold applies for the purpose of the small business tax offset rules.
- A $2m threshold continues to apply for the purpose of the small business CGT concessions in Division 152.
Small business tax offset
The tax offset rate has been increased to 8% (up from 5%) for the 2017 income year. This will remain in place until the 2025 income year. As noted above, the turnover threshold is increased to $5m, although the maximum tax offset is still $1,000 per year.
Corporate tax rate
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 the following thresholds:
- $10m for the 2017 income year.
- $25m for the 2018 income year.
- $50m for the 2019 income year.
From 1 July 2017, only current year turnover will be relevant in determining the tax rate that applies to a company.
Franking credit rates
Many practitioners are aware that even though the company tax rate for SBEs was 28.5% for the 2016 year, these companies could still attach franking credits to dividends up to 30%.
However, this changes from 1 July 2016 onwards. 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.
The way this will work in practice is as follows:
- Determine the company’s aggregated turnover for the previous income year.
- Determine the corporate tax rate that would apply to the company in the current year if its turnover was the same as the previous income year (this is referred to as the ‘corporate tax rate for imputation purposes’).
- Determine the corporate tax gross up rate for the current year (i.e., 100% – corporate tax rate for imputation purposes) / corporate tax rate for imputation purposes).
ATO Issues Notices To Outlaw Motor Cycle Gang Members
Two hundred Outlaw Motor Cycle Gang members have been served notices by the Australian Taxation Office (ATO) for failing to comply with their tax obligations. We hope for the sake of the ATO staff the notices were delivered by mail!
There are not a lot of details about exactly what type of income the ATO is targeting but tax law does not differentiate between legally and illegally earned income: If you earn income, you pay tax. Simple. An English tax law case back in 1886 set the precedent with Justice Denman stating, “In my opinion if a man were to make a systematic business of receiving stolen goods, and to do nothing else, and he thereby systematically carried on a business and made a profit of 2000 per year, the Income Tax Commissioners would be quite right in assessing him if it were in fact his vocation.”
The difference between legally and illegally derived income is that you can’t claim losses or expenses if you have been convicted of an indictable offence related to that business activity.
The operation targeting the bikers is part of a joint taskforce with the Australian Federal Police. Data matching technology in recent years has helped identify movements of cash and income from undeclared and often illegal activities. The ‘follow the cash’ philosophy works well and often results in frozen bank accounts, disrupted cash flows and supply chains, which impacts on the overall viability of illegal activities.
If you feel that the any part of the above essential tax summary may be relevant to your current, or future financial situation – and you’d like to discuss matters with an experienced accountant; please get in touch with the team at Fortis Accounting Partners via info@exemplary-financial.flywheelsites.com, or by calling on 02 9267 0108.
