Issue 93 – Federal Budget 2018

Joshua Easton


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← Issue 93 - Federal Budget 2018

Bonus Issue

YEAR END BONUS EDITION INCLUDING

YEAR END TAX PLANNING TIPS

 

OVERVIEW

The fringe benefits tax (FBT) year ended on 31.3.2018. If you operate through a company or trust, carefully consider whether all FBT matters have been
attended to and whether an FBT return needs to be lodged. The most common fringe benefit supplied to staff is a motor vehicle benefit. In a small business
audit, the two main areas of ATO focus are fringe benefits and Division 7A loans – see below.

SMALL BUSINESS

Check eligibility for small business tax regime

Small businesses (sole traders, partnerships, companies and/ or trusts with a turnover of less than $2 million) may be eligible for a range of tax benefits
including immediate write off of assets costing less than $20,000, a 27.5 per cent company tax rate, simplified depreciation, capital gains tax concessions
and accounting on a cash basis.

These measures have now been extended to businesses with a turnover of less than $10 million with the notable exception of the CGT Small Business Concessions.

Maximise depreciation deductions

 

Small businesses can get an immediate tax deduction for nearly all individual assets purchased costing less than $20,000, to the extent such assets are
used for an income producing purpose and is installed ready for use by the end of the financial year.

 

This measure expires on 30 June 2019.

 

For businesses registered for GST, the $20,000 threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold
is calculated on a GST-inclusive basis.

 

Review salary sacrifice arrangements

 

Employees can consider salary sacrifice arrangements under which their gross salary may be foregone to obtain either a packaged car for fringe benefits
tax (FBT) purposes, or they can make additional superannuation contributions.

 

We note that the option for employees to make tax deductible contributions became law on 29.11.2016 and took effect from 1.7.2017.

 

Make trust resolutions by 30 June

 

Trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2017-2018
financial year by 30 June.

In the event a valid distribution is not made then a default beneficiary may be assessable if there are no default beneficiaries, then the trustee will
be assessable at the highest marginal rate.

 

Seeking professional advice when starting a business

 

Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the year those expenses are incurred
rather than deducted over a five-year period as was the case prior to 1.7.2015. 

 

Small business restructure rollover relief

 

Since 1.7. 2016, small businesses have been able to change the legal structure of their business without incurring any income tax liability when active
assets are transferred by one entity to another. This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating
assets used, or held ready for use, in the course of carrying on a business. Seek on advice.

 

Stream trust capital gains and franked dividends

 

Trustees of discretionary trusts may be able to stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee
to make a beneficiary “specifically entitled” to those amounts, the trustee must document this resolution before 30 June and the beneficiary receives
or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

 

Private company loans

Income tax law can potentially treat a payment or a loan by a private company to a shareholder or an associate as an unfranked deemed dividend unless an
exemption applies.

 

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which
may be seven or 25 years depending on whether or not the loan is secured.

 

Prior to 30 June you should carefully review such debit loans on the company’s balance sheet.

Prevent deemed dividends in respect of unpaid trust distributions

 

An unpaid distribution owed by a trust to a related private company beneficiary that arises from 1. 7. 2017 will be treated as a loan by the company, if
the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed
dividend for the amount of the unpaid trust distribution in 2017-2018.

 

However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s
2017-2018 income tax return needs to be lodged. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement
for the sole benefit of the private company, and other conditions are satisfied. These rules are complex and professional advice should be sought.

 

Write-off bad debts

 

Businesses can only obtain income tax deductions for bad debts. If the debt still exists at the time it is written off. Thus, if the debt is forgiven or
compromised before it is written off as bad in the accounts no deduction will be available. The debt must also be unrecoverable and written off in
the accounts as bad prior to 30 June. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course
of carrying on a money-lending business.

 

Year End “tax effective” investment products

 

Proceed with caution and make sure you get independent professional advice.

 

TAX PLANNING TIPS 2017-18 

 

INDIVIDUALS

 

In general, individual income is derived and deductions are incurred on a receipts basis. The following suggestions may reduce your current year tax liability.

 

Prepayment of deductible expenses

 

An individual can claim a deduction for prepaid expenditure for a period not exceeding 12 months. The most common types of prepayments include:

 

  • Income protection insurance
  • Interest on investment loans
  • Interest on share portfolios
  • Investment properties
  • Membership and subscriptions
  • Investment property expenses
  • Corporate Body levies
  • Insurance
  • Repairs and maintenance
  • Rates

 

Prior to year-end an individual should review the gains and losses on each asset within their investment portfolio. There may be opportunities to:

 

  • Make sure assets have been held greater than 12 months before sale so the 50% discount can be applied to the gross capital gain – remember this is
    from “contract” to “contract” … not settlement;
  • Realise capital losses to offset any capital gains that were made earlier in the income year;
  • Defer realisation of capital gains until July.

 

Salary Packaging Arrangements

 

An effective salary sacrifice arrangement will reduce an individual’s marginal rate of tax.

 

The contractual arrangements should be documented or amended before year end as an individual cannot make a retrospective salary sacrifice arrangement
for income already earned. A typical salary sacrifice arrangement may include the following components:

 

  • Motor vehicle expense
  • Additional superannuation contributions
  • School fees

 

The top marginal tax rate applies on income in excess of $180,000. With the “mark-up” factors, fringe benefits tax effectively applies the top marginal
rate regardless of your income. However, for taxpayers not on the top marginal rate it is still possible to take advantage of FBT concessions.

 

Ongoing Tax Planning Issues

 

Kindly note, there is no tax deduction for non-concessional contributions.

 

2018 Contribution Caps from 1 July 2017

 

  • Concessional contribution (Employer contributions) $25,000.
  • Non-concessional contribution (Personal contributions) $100,000 or 3-year limit of $300,000.
  • Again, if you want to contribute more than $100,000 in non-concessional contributions contract your Accountant as this involves a 3-year average and
    you need to be certain you are eligible.

 

Salary Sacrifice Bonus into Superannuation

 

You may be able to optimise your tax position by salary sacrificing any prospective end of year bonus into super. Seek advice to ensure it is tax effective
and that contribution caps are not breached.

 

Superannuation – income

 

Individuals aged over 60 and retired are generally not taxed on any payments from a superannuation fund. Individuals aged between 55 and 60 will generally
be taxed concessionally.

 

Superannuation – rebate

A rebate of up to $540 is available for superannuation contributions made during the 2018 year for your spouse where you spouse’s income is less than $37,000
p.a. (this rebate reduces for income amounts up to $40,000 p.a.).

Superannuation – government co-contribution

The maximum co-contribution amount that you received is $500, based on an after-tax contribution of $1,000 (i.e. for every $1 contribution made, the government
contributes $0.50). This is reduced by 3.33 cents for each $1 of income over $36,813 p.a. up to $51,813 p.a. As there are also other qualifying criteria,
you should contact this office if you wish you access this benefit in 2018.

Transition to retirement income streams

If you are 55 or older at 30 June 2018, you may be eligible to commence a “Transition to retirement” pension. Benefits may include:

  • Receiving pension income while still working;
  • Ability to salary sacrifice to superannuation to access lower tax rates; and
  • Concessional tax treatment within your super fund.

 

Note that up to 30.6.2017, the income from assets supporting a transition to retirement income stream was tax exempt. Since 1.7.2017 this exemption no
longer applies.

Medicare Levy Surcharge (MLS) and Private Health Insurance Rebate (PHIR)

The thresholds for the imposition of the MLS (If not covered by private hospital insurance) are broadly as follows:

  • Singles (no dependants) – $90,000 pa; and
  • Families – $180,000 pa (plus $1,500 for each dependant child after the first)

 

There are a number of income amounts such as reportable fringe benefits, reportable superannuation contributions and investment losses counted in calculating
these thresholds.

Further, there is a “tiered” system for calculating MLS in the 2018 income year. The rate of MLS will be between 1% and 1.5% depending on the extent to
which income exceeds the relevant thresholds.

In addition, the PHIR is also means tested in the 2018 income year under a “tiered” system. The rate of rebate will be between 0% and 30% depending on
income levels. This means some taxpayers who have claimed a full 30% rebate from their health insurance provider on their premiums will have an additional
liability on lodgement of their return.

ATO recovery of Higher Education Loan Programme and Trade Support Loan Debt

The Higher Education Loan Programme (HELP) and Trade Support Loan (TSL) repayment rules to debtors who reside overseas have been extended by assessing
their repayment obligations on their worldwide income. Repayment obligations will commence a from 1 July 2017.

Since 1 January 2016, HELP and TSL debtors who are going overseas for more than 6 months were required to register with to ATO. Debtors already living
overseas had until 1 July 2017 to register.

ATO Data Matching

The ATO’s extensive data matching capabilities is based on information it receives from various sources including banks, share registries, employers, government
agencies and via its network of global information exchange agreements.

In terms of focus areas for compliance activities, the ATO continues to closely monitor:

  • Claims for work-related expenses that are unusually high relatively to others across comparable industries and occupations;
  • Excessive rental property expenses;
  • Non-commercial rental income received for holiday homes;
  • Interest deductions claimed for the private proportion of loans; and
  • People who have registered for GST but are not actively carrying on a business.

 

INCUR EXPENSES BEFORE YEAR END

Expenses that are incurred before year end can reduce taxable income. Consider forthcoming liabilities and the value in incurring them before year end.

If you have a rental property, consider whether you are maximising claims for capital works deductions on the property. A report from a quantity survey
or suitably qualified specialist will maximise your entitlements.

Pay income protection insurance premiums before year end.

Motor Vehicle Expenses

There are now only two methods which can be used to claim a deduction for motor vehicle expenses.

There are:

  • The cents per km method (for up to 5,000 business kilometres travelled); and
  • The log book method (log book kept over 12 weeks and updated every five years).

 

Also, from 1 July 2015, there is a single cent per kilometre rate of deduction determined by the Commissioner. For the year ended 30 June 2018 the single
rate of deduction determined by the Commissioner is 66 cents per kilometre.

Detailed records assist in maximising deductions.

Zone Tax Offset

Since 1 July 2015 the zone tax offset has been limited to those taxpayers whose usual place of residence is within the designated zones. The zone tax offset
is a concessional tax offset available to individuals against their income tax liability in recognition of the isolation, extreme climate and high
cost of living associated with living in designated zones.

The changes made to the zone tax offset will remove “fly-in-fly-out” and “drive-in-drive-out” employees, whose usual place of residence is located outside
of the zone, from being eligible to claim the zone tax offset for the 2016 income year and later income years.

Claiming Travel Allowance Deductions

An audit focus by the ATO continues on travel allowance expenses being claimed by individual taxpayers. If you intend to use the exception for retaining
substantiation for these claims the following must apply:

  • You must be receiving a bona fide travel allowance from your employer;
  • You must be working away from home (on overnight stays) in the course of performing employment duties;
  • You must calculate the claim correctly for your salary level and location of work; and
  • You must be able to show that you are incurring travel expenses.

 

OTHER BUSINESS CONSIDERATIONS

Defer Income

  • Cash or accruals reporting – recognition of income on a receipts basis will generally defer the point of derivation. 
  • Review service contacts – do the terms of the contract mean income can be recognised periodically when the services are performed? 

Bad debts

Write off bad debts in the books of accounts prior to 30 June 2018.

Bonuses

Ensure all bonuses are determined and properly documented before year end.

Depreciation

  • Scrap obsolete item of plant and equipment; 
  • Utilise depreciation pools to their full extent; and 
  • For SBEs (see above) consider taking advantage of the immediate write-off up to $20,000 for each individual asset acquired after 7.30 pm 12 May 2015
    up until 30 June 2018. 

Trading stock

Consider these may be obsolete stock to write off and note closing stock can be valued at year end at the lesser of cost, market value or replacement value.

Generally, an entity must perform a stock take to determine the physical quantity and value of each item at year end.

Prepayment of Expenses

In some circumstances, small businesses (with turnover of less than $10 million) should consider prepaying expenses prior to 30 June 2018. A tax deduction
can be brought forward into this financial year for expenses like insurance premiums, subscriptions and memberships, travel, advertising and interest.
A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2018 for services to be rendered within a 12-month
period.

SPECIAL BONUS ISSUE

 

2018 Federal Budget Update……………….

 

COMMITMENT TO ENTERPRISE TAX PLAN

The government has re-affirmed its commitment to the Enterprise tax plan including company tax cuts.

This ten-year enterprise tax plan aims to progressively reduce the corporate tax rate to 25 per cent by the 2026-27 income year.

Since the ten-year corporate tax rate reduction proposal in the 2016-17 Budget, the government has only been able enact a 25% rate, but only for companies
with an aggregated turnover of up to $50 million, with the 30% rate still applying to all other companies.

Income tax rates for Australian tax residents

Rate (%) Current tax thresholds Income range ($) Thresholds from 1 July 2018 Income range ($) Thresholds from 1 July 2022 Income range ($) Thresholds from 1 July 2024 Income range ($)
Tax free 0 – 18,200 0 – 18,200 0 – 18,200 0 – 18,200
19 18,201 – 37,000 18,201 – 37,000 18,201 – 41,000 18,201 – 41,000
32.5 37,001 – 87,000 37,001 – 90,000 41,001 – 120,000 41,001 – 200,000
37 87,001 – 180,000 90,001 – 180,000 120,001 – 180,000 _
45 >180,000 >180,000 >180,000 >200,000

Income tax offsets for Australian tax residents

Income tax offsets Current From 1 July 2018 From 1 July 2022
Low and Middle Up to $530
Low Up to $445 Up to $445 Up to $645

 

Seven-year personal tax plan

This aims to target tax relief for low and middle-income earners first address ‘bracket creep’ and make personal taxes simpler and flatter.

It will be delivered in three steps:

Step 1

A new non-refundable low and middle-income tax offset will provide tax relief of up to $530 to low and middle-income earners every year from 2018-19 to
2021-22.

The offset will be delivered on assessment after an individual submits their tax return and is in addition to the existing low-income tax offset. This
is projected to assist over 10 million Australians, and around 4.4 million people will receive the full $530 benefit for 2018-19.

Step 2

Will increase the top threshold of the 32.5 per cent tax bracket from $87,000 to $90,000 from 1 July 2018, providing a tax cut of $135 per year to around
3 million people. This will prevent more middle-income earners from being pushed from the 32.5 per cent tax bracket into the second highest tax bracket
of 37 per cent.

In 2022-23, to lock in the tax relief for low and middle-income earners from the new offset, the Government will increase the top threshold of the 19 per
cent tax bracket from $37,000 to $41,000 and increase the low-income tax offset from $445 to $645.

Tax relief of up to $1,350 per year will be provided by further increasing the top threshold of the 32.5 per cent tax bracket from $90,000 to $120,000
from 1 July 2022. This tax cut is projected to stop around 1.8 million taxpayers facing the 37 per cent tax rate in 2022-23, keeping them in the 32.5
per cent tax bracket.

Step 3

Will ensure more Australians pay less tax and make personal taxes simpler and flatter. Under this final step, from 1 July 2024 the Government will increase
the top threshold of the 32.5 per cent tax bracket from $120,000 to $200,000, removing the 37 per cent tax bracket completely.

The plan means that around 94 per cent of all taxpayers are projected to face a marginal tax rate of 32.5 per cent or less in 2024-25. This compares with
a projected 63 per cent of taxpayers in 2024-25 under current settings without change.

The Government maintains it is prioritising tax relief to low and middle-income earners to help them with cost of living pressures while being fiscally
responsible.

The Government will take decisive action in the fight against the black economy

The Budget reforms follow recommendations made by the Black Economy Taskforce in their final report to Government and will be complemented by a comprehensive
suite of supporting measures which build on our significant tax integrity measures.

The Government will establish a multi-agency Black Economy Standing Taskforce to undertake a cross agency approach to combatting the black economy, with
more effective exchange of information to develop increased intelligence and be equipped to identify and prosecute the most egregious cases of black
economy activity.

Additional funding for the Australian Taxation Office (ATO) will expand its data analytics and data-matching capabilities and allow greater leveraging
of community information through the introduction of a hotline for the reporting of black economy and illegal phoenixing activity.

This new capability will be supported by an enhanced enforcement strategy including mobile strike teams to break-up illegal behaviour as it is identified.

Together, this new approach will deliver targeted, stronger and more visible enforcement which will demonstrate the very real consequences for participating
in the black economy.

The Government will introduce new measures to strike at the illicit tobacco market and prevent the flow of funds to organised crime syndicates.

An economy-wide cash payment limit

The Government will introduce an economy-wide cash payment limit of $10,000, applying to payments made to businesses for goods and services from 1 July
2019.

This cash payment limit will capture high-value transactions and help stamp out opportunities for criminals to launder the proceeds of crime into goods
and services, or for businesses to hide transactions to reduce their tax liabilities.

The Government will consult on the implementation of this measure.

Stronger Commonwealth procurement processes

The Government will ensure that it is a leader in best practice procurement and promotes supply chain integrity by introducing changes to Commonwealth
procurement processes. From 1 July 2019, businesses tendering for Commonwealth contracts over $4 million (inclusive of GST) will be required to provide
evidence of a satisfactory tax record.

Further measures – Phoenix Companies

Reforms to combat illegal Phoenixing and black economy

The government will reform the corporations and tax laws and provide the regulators with additional tools to assist them to deter and disrupt illegal phoenix
activity. The package includes reforms to:

Introduce new phoenix offences to target those who conduct or facilitate illegal Phoenixing

Prevent directors improperly backdating resignations to avoid liability or prosecution

Limit the ability of directors to resign when this would leave the company with no directors

Restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator

Extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts, and

Expand the ATO’s power to retain refunds where there are outstanding tax lodgements.

 

Superannuation measures

The Protecting Your Super Package — announced today in the Commonwealth Budget and due to commence on 1 July 2019 — aims to proactively
reunite Australians with their low balance, inactive super through the existing Australian Taxation Office (ATO)-led account consolidation regime.

 

 

 

Fee protections

In 2015-16 there were around 9.5 million super accounts with balances of less than $6,000. The Government will act to protect accounts like these from
excessive erosion by capping administration and investment fees on these accounts at three per cent annually. This change will prevent the application
of hundreds of millions of dollars of fees on these accounts.

The Government will also ban exit fees for all superannuation accounts. Exit fees cost superannuation members around $37 million in 2015-16, simply to
close an account with a super fund. This ban is a significant win for the many Australians who want to rollover their accounts to a different fund,
or who hold multiple accounts and see exit fees as a barrier to consolidating their accounts.

Tailoring insurance arrangements in superannuation

Australians should not be defaulted into insurance they cannot claim on, or which is significantly beyond what they need.

The Government will tailor insurance arrangements in super by ensuring that cover is offered on an opt-in basis for accounts of young members below the
age of 25, inactive accounts that have not received a contribution in 13 months (where the member has not elected to retain existing cover), and low
balance accounts below $6,000.

Based on the most recent data, around 5 million individuals will have the opportunity to save an estimated $3 billion in insurance premiums by choosing
to opt-in to this cover, rather than paying for it by default.

Reuniting your super

The Government’s Protecting Your Super Package also benefits Australians with multiple superannuation accounts by supercharging the ATO’s account
consolidation regime to proactively reunite lost and low balance inactive accounts.

All inactive superannuation accounts with balances below $6,000 will be transferred to the ATO to protect them from further erosion. The ATO will use sophisticated
data-matching processes to reunite these accounts with a member’s active account where possible. This measure will include the proactive payment of
lost accounts already held by the ATO.

This new system is expected to send $6 billion of superannuation back to 3 million members’ active superannuation accounts in 2019-20.

High income earners with multiple employers

Individuals whose income exceeds $263,167, and have multiple employers, will be able to nominate that their wages from certain employers are not subject
to the superannuation guarantee (SG) from 1.7.2018.

REFORMING THE R&D TAX INCENTIVE

The Government’s reforms aim to:

Improve the integrity of the R&D tax concession, helping ensure ineligible R&D claims are denied;

Continue to provide support for smaller companies that undertake R&D activities; and

Refocus support for larger companies towards those undertaking additional, higher intensity R&D.

 

Integrity: strengthening anti-avoidance rules in the tax law so the ATO can ensure taxpayers do not avoid paying their fair share of tax
by using tax schemes involving the program;

Enforcement: additional resourcing so the Government can help ensure that ineligible R&D claims are denied;

Transparency: publishing company names claiming the R&DTI and the amounts of R&D expenditure they have claimed, to improve public
accountability for R&D claimants;

Guidance: enabling Innovation and Science Australia to produce public findings similar to the ATO, and provide more effective, binding
guidance on the scope of what is eligible R&D. This will help ensure taxpayers do not unintentionally misinterpret the meaning of the law;

From 1 July 2018:

Introduce a $4 million annual cap on cash refunds for R&D claimants with aggregated annual turnover less than $20 million. Amounts that are in excess
of the cap will become a non-refundable tax offset and can be carried forward into future income years;

Exclude R&D tax offsets f