The recent Federal Election of July 2016 ushered in a new government intent to make certain changes to tax. The government has now begun pushing these changes which were originally slated as part of the 2016 Federal Budget. Some changes have become law, such as those covering the R&D tax incentives in Australia. Some have been introduced into parliament but are yet to be legislated. All of them can potentially impact the bottom line of businesses and the financial standing of both individuals and entities. These changes, combined with increased ATO scrutiny and changed to rules regarding the hire of people on working holiday visas, mean you need to adjust your tax and business planning accordingly.
The following tax changes have recently become law…
1. Research and Development Tax Offset
Who does it effect?
Companies with expenditure on Research and Development, and who might be considering applying for R&D tax incentives in Australia.
What has changed?
Previously, companies which had less than $20 million in turnover per year would receive a tax offset of 45%, which was refundable to the taxpayer. Likewise, companies with over $20 in annual turnover received an offset of 40%, which was not refundable.
These tax offsets for R&D have been reduced. From 1 July 2016, companies with less than $20 million in turnover will receive an offset of 43.5%. Companies with over $20 million in turnover will receive 38.5%.
2. Single Touch Payroll System
Who does it effect?
Companies who employ over 20 people (regardless of whether these employees are hired on a full-time or part-time basis).
What has changed?
A new system has been introduced that eliminates the need for employers to produce PAYG payment summaries for employees at the end of each year. Instead, companies must implement a software system that sends payroll, PAYG, and superannuation information directly to the ATO. This seeks to reduce compliance costs and is not optional for companies who have more than 20 employees.
The following proposed tax changes have been introduced to Parliament…
3. Corporate Tax Rate Reduction
Who does it effect?
Immediately, companies with less than $10 million in turnover per year. Eventually, all entities who pay corporate tax.
What has changed?
The government wishes to see all companies subject to a uniform corporate tax rate of 25% by 2026-27. This change will occur progressively. In the immediate future, the proposed change aims to bring the tax rate for small business to 27.5% from 1 July 2016. Companies with an annual turnover of less than $10 million are considered small businesses for the purposes of determining corporate tax. For the purposes of Capital Gains Tax small business concessions, the turnover threshold for determining a small business remains at $2 million per year.
4. Small Business Tax Offset Increase
Who does it effect?
The small business income of sole traders, partnerships, or trusts.
What has changed?
Originally, a tax offset of 5% of the income tax attributable to the net income of a small business was delivered over total taxable income. This offset was capped at $1,000 per year. Now, the government proposes to increase this small business tax offset progressively to 16% by 2026-27, while keeping the cap at $1000. The immediate proposed change is for the offset to be increased to 8% from 1 July 2016, again keeping the cap at $1000.
5. Progressive Change in Franking Credits
Who does it effect?
Companies and shareholders who pass on or receive franking credits. Franking credits aim to eliminate double taxation of shareholders who receive dividends that have already been taxed, and then must themselves pay tax on this income. Effectively, shareholders receiving dividends will also receive a quantity of franking credits in proportion to the corporate tax rate of the company per dollar in profits.
What has changed?
Since the government plans to progressively change the corporate tax rate, the rate of franking credits must also change.
For example, in 2015-16 Jackie’s Chicken Company benefitted from $5 million in turnover and paid company tax at 30%. But, in light of the proposed changes in the corporate tax rate, it is subject to a changed tax rate of 27.5% on its turnover of $8 million in 2016-17. In this case, fully or partly franked dividends paid in 2016-17 would be subject to franking credits at 30%, while fully or partly franked dividends paid in 2017-18 would be subject to franking credits at 27.5%.
6. Third Personal Tax Income Threshold Increase
Who does it effect?
Individuals with taxable incomes greater than $80,000.
What has changed?
The tax rate has been increased to 32.5% for incomes from $80,000 to $87,000 from 1 July 2016. While this increase is not yet law, the ATO amended PAYG withholding tax tables to reflect this proposed change from 1 October 2016.
Whether or not these changes have been legislated, they clearly effect the income and business practices of a wide range of individuals and entities. If you think you may be effected by these changes, contact your Calibre Advisor to better prepare for the ensuing tax implications.
ATO Increases Scrutiny of Companies Funded by Credit Loan Balances
Companies and trusts can be funded in different ways. Credit Loan Balances often refer to loans injected by the proprietor to start the business or keep it funded when it is making losses. While in the past the ATO focused its audits more on the funds that owners took out of a business, now it is focusing on credit loan balances and how these funds have been sourced.
For example, Jackie’s Chicken Company may have $1,050,000 in assets:
| Asset | Value |
|---|---|
| Cash | $100,000 |
| Trade Recievables | $200,000 |
| Stock in Trade | $250,000 |
| Equipment and Machinery | $500,000 |
These assets are funded by different sources:
| Source | Value |
|---|---|
| Trade Payables | $150,000 |
| Credit Loan Balance | $850,000 |
| Equity | $50,000 |
Even though the credit loan balance may have been paid by the shareholder, it is treated as a debt rather than as equity in the business.
An ATO tax audit into the sources of this credit loan balance would focus on the following concerns and issues:
- Has Jackie’s Chicken Company derived sales that have been undisclosed in income tax returns, which are then taken by the owners and funnelled back into the business by way of a loan?
- How has Jackie sourced funds to inject into the business and has the owner themselves fulfilled their tax obligations? In particular, the ATO will compare tax returns submitted by owners of business with the size of the credit loan account. So Jackie’s Chicken Company injected a credit loan balance of $850,000 but recent tax returns lodged over the past 4 years shows that Jackie has declared on average $100,000 per year of taxable income. The ATO would investigate Jackie’s tax affairs and ask him to provide a reason for how he came up with the funds to finance the $850,000 loan account.
- How valid are the accounting entries in relation to the creation or increase of the loan accounts? The ATO is concerned that owners may use such loans to draw profits from the business as a means to escape income tax.
- If money has come from overseas to fund businesses, what is the source of those funds?
In light of this increased scrutiny, it is important to maintain clear documentation showing the source of your credit loan balance funds. It is especially important to ensure that there is clear documentation demonstrating the relationship between the parties and the terms of the arrangement when the funds are sourced from overseas.
Contact your Calibre Advisor to discuss how this increased ATO audit scrutiny may impact your business.
The Wide-Reaching Impact of Proposed Changes to Backpacker Tax
Backpackers are generally taxed as non-residents under working holiday visa arrangements (visa classes 417 and 462), particular if they cannot demonstrate a permanent address or abode. Changes to the tax requirements of these visas do not simply impact backpackers. Numerous businesses who hire people on working holiday visas, especially those in the hospitality, restaurant, agriculture and takeaway services sectors, will also be effected.
Currently, backpackers on these working holiday visas are taxed at a rate of 32.5% from every dollar earned whilst working Australia, since they cannot benefit from the tax free threshold that is available for residents.
Due to concern that this rate restricts the ability of industries such as agriculture to attract backpacker labour, the government aims to soften this rate:
| Proposed Rate | Income Bracket |
|---|---|
| 19% | Taxable income under $37,000 |
| 32.5% | Taxable income between $37,000 and $80,000 |
| 37% | Taxable income between $80,000 and $180,000 |
| 45% | Taxable income above $180,000 |
Backpackers will only benefit from these rates if their employers register with the ATO. These employers must demonstrate the genuine need to hire persons on working holiday visas, compliance with Fair Work stipulations on maximum work hours and working conditions, and must check that backpackers hold valid working holiday visas.
If these circumstances are of concern to your business, contact your Calibre Business Advisor today.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.