The end of the financial year is fast approaching and it’s time to start planning to prepare for your 2012 Income Tax Return. Now is a good time to start reviewing certain assets and liabilities owned by your business and consider what should be done prior to 30 June 2012. Some suggested areas for review are:

  • Review your depreciable assets (capital allowances) register and write-off or dispose of any assets no longer used. Examples of depreciable assets are computer equipment, office furniture (eg desks and chairs) and kitchen appliances;
  • Carry out any repairs and maintenance required so you can recognise the deduction by 30 June;
  • Review receivables and see if any bad debts can be written off;
  • Negotiate with lenders to see if you can prepay some investment loan interest expenses prior to year end;
  • Re-consider funding strategies for your business – end-of-year is a good time to consider whether you have the right debt funding and equity funding mix in place;
  • Consider any newly announced concessions from the recent May Budget. There may be things you can do now to take advantage of these concessions in the next financial year. For example, do you need to dispose of assets prior to year end? Do you need to defer acquiring certain assets until after the new financial year begins?
  • Talk to your tax adviser if you think you might incur tax losses this year and how you might be able to preserve those losses to apply against taxable income in future years.

To do!See your tax agent in relation to any of the above and for any end-of year planning tips. Your tax agent knows your business and is the best person to help you plan for the end of the 2011-12 tax year and for the start of the 2012-13 tax year.

Small Business Benchmark Updates

Small business benchmarks are financial ratios developed to help a business compare its financial performance to similar businesses in the same industry. The benchmarks provide guidance on what figures, such as amounts of income, the ATO would normally expect a business in that particular industry to report. The ATO uses these benchmarks to work out which businesses in particular industries might be avoiding tax by not reporting some or all of their income.

The ATO has updated its small business benchmarks with information from the 2010 financial year and they have also published new activity statement ratios for a range of industries. Benchmarks are now based on the most recent data available. The number of benchmark ratios has increased so businesses can now check their performance and recordkeeping against a greater range of ratios.

To do!

  • If your business falls outside the benchmarks that apply to your particular business, you may need to consider reviewing your records to ensure all your income and expenses, in particular cash amounts, are being recorded. Businesses in the same industry will differ from each other, though there will be common themes among them. It is well worth taking the time to review your business’s individual circumstances and satisfy yourself you are able to account for any difference between the industry benchmark and your business’s performance.
  • Your tax agent will be able to assist you to review your business’s performance and look at ways to bring your business’s performance to within the industry benchmarks, if appropriate.

A) Changes starting in the 2012-13 Income Year

i) Small Business: instant asset write-off and simplified depreciation

An “instant write-off” amount of $6,500 (increased from $1,000) will apply to small businesses who acquire “low cost” assets from 1 July 2012. “Low cost” assets might include, for example, inexpensive items of equipment, such as office furniture. In addition, an instant write-off for the first $5,000 of the cost of a motor vehicle purchased by a small business will also be available (unless the vehicle can be written off immediately).

Other changes simplifying depreciation for small businesses include the creation of a “general small business pool”. This will be made up of depreciating assets that you might already have in separate pools of assets (that are being depreciated at a faster rate than if they were not in
3 a pool) that will now be combined. Assets will be depreciated at a rate of 15% in the first year and at 30% in each subsequent year.

If you are currently considering some new asset purchases, your tax agent is the best person to help you decide when you should make those purchases.

To do!See your tax agent for advice on new business asset purchases, including what and when you should purchase.

ii) Entrepreneurs tax offset changes

The entrepreneurs tax offset is a tax offset equal to 25% of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less.

The entrepreneurs tax offset ceases to be available on 30 June 2012. The new small business asset instant write-offs and depreciation pool in effect replace this tax offset.

Urgent Note!If you are planning on claiming the entrepreneurs’ tax offset this year, talk to your tax agent soon!

B) Budget 2012-13 Announcement – Loss Carry Back for small business

As announced in the Federal Budget on 8 May 2012, starting in the 2012-13 income year, companies (and entities taxed like companies) will be able to carry back up to $1 million of tax losses incurred in the 2012-13 year to offset against tax paid in the 2011-12 income year. From the 2013-14 income year, tax losses will be able to be carried back and offset against tax paid up to two years earlier.

You should talk to your tax agent about how you might be able to take advantage of these rules and carry back any tax losses your business may have to offset against tax you have paid in prior years.

Note!If you incur any tax losses in the 2012-13 income year, you might be able to carry them back to offset against tax paid in earlier years. Speak to your tax agent to ascertain whether you are able to do this.

In the 2012-13 Budget, the Federal Government announced several changes will occur to the CGT provisions, including:

  • How certain CGT rollovers (that allow taxpayers to defer recognising capital gains) would apply to trusts, superannuation funds and life insurance companies. The changes ensure certain provisions that relate to certain types of taxpayers (eg absolutely entitled beneficiaries, bankrupt individuals, security providers and companies in liquidation) interact appropriately with certain CGT rollover provisions and with the “connected entity test” in the small business entity provisions. Taxpayers may apply these changes from the 2008-09 income. Otherwise, the measures will apply from the date of Royal Assent of the new provisions.
  • How certain rollovers that affect assets replacing revenue assets and trading stock apply to interposed companies, broadening the availability of the rollovers for all interests (eg shares) that qualify for the general conditions of each of the rollovers, rather than only shares in a tax consolidated group. These changes apply from Budget night (7.30pm AEST 8 May 2012).
  • These changes apply from Budget night (7.30pm AEST 8 May 2012), so if you are considering applying this rollover to a transaction, see your tax agent for assistance on how the changes might impact your transaction.
  • Amendments to the CGT rules so the same outcomes apply where a taxpayer receives compensation, damages or certain insurance proceeds indirectly through a trust as they would have if they had received the proceeds directly. It will also ensure that insurance policies owned by superannuation funds that were treated as being exempt from CGT prior to the 2011-12 Budget changes to compensation payments and insurance policies continue to be exempt from CGT. As this change is effective from the 2005-06 income year, you should speak to your tax agent to see if there is any impact on amounts of compensation payments you have received (if any) and insurance policies you have taken out since the 2005-06 income year.

To do!If you think any of the CGT changes are likely to affect your business, see your tax agent for advice on what, if any, impact the changes might have to your business.

In prior income years, trustees who were required to make resolutions prior to distributing income to beneficiaries had until 31 August following the end of the income year to make the resolutions. This extension came out of two old income tax rulings which the ATO withdrew in September 2011. This means that all trustees affected by this change must issue their resolutions by 30 June. As this change applies to the current year (1 July 2011 to 30 June 2012), trustees will need to make their resolutions by 30 June 2012.

To do!Check with your tax adviser how this change might affect you if you are a trustee.

The Budget edition of TaxWise referred to recently announced changes to the living-away-from-home allowance (LAFHA). The proposed changes:

  • Mean that employees, rather than employers, will be liable to tax on any LAFHA received that is not exempt;
  • Limit access to LAFHA to temporary residents who maintain a residence in Australia and who are required to live away from it for work purposes;
  • Require individuals to substantiate their actual expenditure on food and accommodation in excess of the statutory amount.

These changes are due to apply from 1 July 2012. All employers who provide these types of benefits to their employees should consider reviewing their current arrangements and seeing how these proposed changes might affect those arrangements.

To do!If you think the proposed LAFHA changes will impact arrangements you have in place with your employees, you should speak to your tax agent to discuss how these changes might affect you and your employees.

Note!The legislation has not been finalised yet so the details of the changes could change. Your tax adviser is the best person to keep you up to date with these developments.

A) Previous Announcements

In March 2012, changes to super were announced. These changes include:

  • The superannuation concessional contributions cap will remain at $25,000 for individuals under 50 years of age up to and including the 2013-14 financial year, commencing 1 July 2013;
  • From 1 July 2011, eligible individuals will be able to have refunded to them contributions to their superannuation fund that exceeded the concessional contributions cap (amounts up to $10,000 only). This amount will be treated as assessable income to the individual (and subject to tax at the individual’s applicable marginal tax rate for the year) rather than being subject to “excess contributions tax”.
  • The ATO can disclose an individual’s superannuation interests and benefits to a regulated superannuation fund or public sector superannuation scheme, an approved deposit fund, retirement savings account (RSA) provider or their administrators. The purpose of this change is to assist administrators of these bodies to gain access to a member’s superannuation interests, including amounts held by the ATO, and help their members consolidate their superannuation interests; and
  • Employers MUST report on employees’payslips the amount of superannuation contributions they will make on behalf of an employee as well as the date on which they expect to pay the contribution into the superannuation fund. The employer must also specify on the payment slip the name and number (if applicable) of the fund to which the contribution has been or will be paid.

B) Budget 2012-13 Announcements

The following announcements were made in the 2012-13 Budget in relation to superannuation changes:

  • Increasing concessional contributions caps (also known as pre-tax contributions) for individuals over 50 with low superannuation balances announced in the 2010-11 Budget has been deferred and will now start on 1 July 2014. This measure is intended to allow individuals aged 50 and over with superannuation balances below $500,000 to contribute up to $25,000 more in concessional contributions than allowed under the general concessional contributions cap of $25,000, which will apply to them in the 2012-13 and 2013-14 income year. In 2014-15, the general cap is likely to increase to $30,000 (the higher cap for individuals aged over 50 would then be $55,000).
  • Individuals with income greater than $300,000 (including superannuation contributions) will have the tax concession on their contributions reduced from 30% to 15% (excluding the Medicare levy). That is, the flat superannuation contributions tax rate will increase from a rate of 15% to a rate of 30%.
  • From 1 July 2012, the tax offset that applies to Employment Termination Payments (ETP) will be limited so that only that part of an affected ETP, such as a golden handshake, that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the ETP tax offset.
  • Amounts above $180,000 (known as the “whole-of-income cap”), will be taxed at marginal rates. This cap will complement the existing ETP cap (which will be $175,000 in 2012-13, indexed) which ensures that the tax offset only applies to amounts up to the ETP cap.

With effect from 1 July 2012, a new system will apply to GST, the luxury car tax (LCT), the wine equalisation tax (WET) and fuel tax credits to harmonise the system under which these taxes are collected with the self-assessment system that applies to companies and certain other entities for income tax purposes. The amendments apply to tax periods for the GST, LCT and WET and the fuel tax return periods that commence on or after 1 July 2012.

This means that the current system that applies to indirect taxes will now be aligned with the self-assessment system that applies for income tax purposes. Under the new system, for example, the Commissioner will be able to make a determination that errors made on a previous Activity Statement can be corrected on a current Activity Statement.

To do!See your tax adviser to find out how these changes may affect your compliance obligations, such as preparing your Business Activity Statements, for GST, LCT, WET and fuel tax credit purposes.

Anti-avoidance provisions contained in the tax law are aimed at trying to prevent taxpayers from structuring transactions and entering arrangements designed to avoid tax. Avoiding tax is different to evading tax which is a criminal offence.

Anti-avoidance provisions might apply in cases such as where a taxpayer tries, for example, to structure a transaction to gain a tax benefit that may not ordinarily arise if the transaction is carried out in another way and there aren’t necessarily sound commercial reasons why the transaction was structured in a particular way.

On 1 March 2012, the Federal Government announced that changes will be made to the existing general anti-avoidance provisions contained in the Federal Income Tax Act. The Government has not specified how it intends to change the general anti-avoidance provisions, though the amendments are intended to “clarify” how these provisions apply.

However it is important to be aware that the changes are intended to apply from 1 March 2012. So if you are currently considering entering into a transaction, you should seek advice from your tax adviser around the potential tax implications that may arise from the proposed transaction and guidance on what impact the general anti-avoidance provisions might have, if any.

Proposed amendments to the “director penalty regime” were announced by the Assistant Treasurer on 18 April 2012 to expand the tax law protections afforded to protect workers’entitlements and impose greater obligations on directors. The amendments will:

  • Expand the director penalty regime to include superannuation guarantee amounts meaning that directors will also be held personally liable for their company failing to pay employees’super contributions;
  • Ensure that directors cannot have their director penalties remitted by placing their company into administration or liquidation when unpaid Pay As You Go (PAYG) withholding or superannuation guarantee amounts remain unpaid three months after the due date; and
  • Restrict access to PAYG withholding credits for company directors and their associates where the company has failed to pay withheld amounts to the Commissioner.

Anyone who is a director of a company with employees should familiarise themselves with these proposed amendments as they directly impact a director’s obligations and responsibilities under the tax law in respect of employee entitlements.

The good news is there are some concessions under the proposed amendments:

  • New directors will have time to familiarise themselves with a company’s accounts (30 days instead of 14 days) before being held liable for the company’s debts.
  • The ATO will be required to serve penalty notices on directors in all cases before commencing action.
  • Directors will also have available to them a new defence where they may face penalties for superannuation debts where, broadly, they had a reasonable basis for thinking that the worker was a contractor rather than an employee.

The amendments are contained in an exposure draft. Directors concerned by these proposed changes should ask their tax agents to keep an eye out for when these changes might become law.

All developers of residential premises should take note that the GST provisions have been amended to ensure that sales of residential premises that have been constructed under certain arrangements known as “development lease arrangements” will be subject to GST (ie they will be treated as sales of new residential premises).

Even if there has previously been a “wholesale supply” of the newly built premises to the developer (ie the freehold or long-term leasehold interest in the land transferred to the developer upon completion of the development on the land), this will still be the case. This is something that developers who build residential properties under these types of arrangements should be aware of.

There are also some changes under the GST law confirming that subdividing or strata-titling newly built residential property won’t have the effect of stopping the new building from being new residential premises.

You should be aware that these changes will apply from 27 January 2011. If you are a builder who has constructed new residential premises since 27 January 2011, you should see your tax agent to see if these amendments affect the GST treatment you have applied to your project. You might need to consider amending your previously lodged Activity Statements if these amendments impact your business.

To do!See your tax agent if you are concerned how these new GST provisions might affect the GST treatment of a residential development you have undertaken. You might need to amend your Activity Statements as well!

If you are in the Building and Construction industry and you have an Australian Business Number (ABN), you may need to report certain payments you make to contractors for certain building and construction services.

You need to report certain details in relation to the contractor to whom you make payments, including their ABN, name, address and amount you paid them (including GST). Generally, these amounts need to be reported to the ATO by 21 July, which is very soon after the financial year end.

As these rules apply from 1 July 2012, it might be a good time now to look at the kinds of records you keep in relation to payments you make to contractors and see if you need to change anything to help you comply with these new rules. Your tax agent can assist you with the types of records you might need to start keeping to help you meet this obligation, or it might turn out that you don’t need to change any of your record-keeping details and you will be able to meet this obligation.

Tip!You should take the opportunity now to consider the impact of this reporting obligation and make any necessary changes now so you are ready for 21 July 2013! See your tax agent if you need help with this.

DISCLAIMERTaxwise® News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.