Accounting

11 Jul

Posted at 17:42h in Accounting, Business Advisory, News, Tax

The immediate deduction for the cost of eligible depreciating business assets that has been available under the temporary full expensing concession since 2020 has now ended.

The instant asset write off method has now been reinstated for the immediate deduction of the cost of an asset.

From 1 July 2023, an immediate deduction will only be available to small business entities (with aggregated turnover less than $10 million) for assets costing less than $20,000.

07 Aug

Posted at 17:18h in Accounting, SMSF, Tax

The self managed superannuation fund (SMSF) space has always been a complex area for trustees, beneficiaries and advisers. In the past few years, the ATO has made many concessions and has put compliance action on hold because of COVID-19. However, for the 2022–2023 year and beyond it’s looking to scale up its compliance program as a reaction to indicators of heightened risk in the sector.

Recent statistics indicate that there are around 600,000 SMSFs, with over 1.1 million members holding an estimated total asset value of $876 billion.

While the ATO’s main compliance focus will always be on any activity that puts retirement savings at risk or inappropriately takes advantage of the concessional tax environment, in the near-term it will focus specifically on illegal early release of super in all forms. This is when individuals access their retirement savings before a condition of release has been met. This type of activity is currently on the rise.

One of the big red flags that the ATO looks out for is when individuals establish their SMSF and initiate a rollover but then fail to lodge a corresponding first annual return. This is a good predictor that an illegal early release has occurred, either as a result of deliberate behaviour or participation in a scheme.

New registrants that do not lodge will now be targeted with a “three strikes and you’re out” compliance campaign. The ATO will first issue a “blue letter” that encourages the SMSF trustees to take immediate action to lodge, offering a pathway for those who need support. If no response is received from the blue letter, the ATO will follow up with an “amber letter” warning trustees of the consequences of failing to lodge their return. Finally, if no response is received from the amber letter, a final warning or “red letter” will be issued advising the trustees that the ATO has commenced the disqualification process and will consider other enforcement action.

The ATO issued its first and second batches of “red letters” to funds in early April and June 2022.

As part of our compliance services, McGregor West will identify compliance issues such as the above, and alert Trustees to potential ‘red flags’.

05 Aug

Posted at 17:13h in Accounting, Tax

With COVID-19 lockdowns and restrictions in the rear-view mirrors of most of the country, the ATO is also beginning to resume ordinary compliance activity levels. One of the many areas it will be paying close attention to this tax time is “asset wash sales”.

Tip: An asset wash sale involves a person or business disposing of assets just before the end of the financial year. After a short period of time, they then reacquire the same or substantially similar assets. The ATO views these transactions as a form of tax avoidance.

Although there may be legitimate reasons for selling and then reacquiring the same or substantially similar assets, a wash sale is different from normal buying and selling as it is usually undertaken for the artificial purpose of generating a tax benefit – such as a capital loss – in the current financial year.

The assets involved in wash sales are not necessarily traditional assets such as shares. Taxpayers could also be disposing of crypto-assets and reacquiring them later as a part of a wash sale. With the price of many crypto-assets at a low ebb, people looking to rid themselves of these assets need to be careful they do not inadvertently attract the attention of the ATO.

To stamp out this behaviour this tax time, the ATO will use analytics to identify wash sales through data from various share registries and crypto-asset exchanges. Where the system identifies a wash sale, the capital loss claimed by the taxpayer in their tax return will be rejected. The Commissioner of Taxation may then make a determination to adjust their tax situation, and compliance action and additional tax, interest and penalties may be applied.

05 Aug

Posted at 16:55h in Accounting, Tax

Small businesses are again in the ATO’s sights this tax time, with a focus on stamping out deductions not related to business income, overclaiming of expenses, omission of business income and insufficient records to substantiate claims.

The ATO receives external data from a variety of sources, including the taxable payments reporting system for certain industries. This data can be used to data-match information included in tax returns to ensure completeness and accuracy.

Businesses can only claim what they are entitled to, and the claiming method may differ depending on the type of business structure. For example, sole traders need to claim deductions in their individual tax return in the “Business and professional items” schedule, while partnerships, trusts, and companies need to claim deductions in their respective tax returns.

01 Jul

Posted at 16:49h in Accounting, News, Tax

As the end of another tax year approaches, the ATO is reminding businesses that it’s time to:

  • see if there are tax-deductible items your business needs before 30 June;
  • check if there are any concessions your business can access before 30 June;
  • think about your recordkeeping habits this past year – should anything be done differently in future?

If your business has employees, the Single Touch Payroll (STP) information for 2021–2022 must be finalised by 14 July. Remember to let your employees know when the information’s finalised, so they can lodge their income tax returns.

Deductions

Increasing your business’s tax deductions will lead to a lower tax bill. For example, you may be able to bring forward expenditure from the next tax year to the current tax year, or to deduct the full cost of a depreciating asset under the temporary full expensing rules. An immediate deduction is also available for start-up costs and certain prepaid expenses.

If your business is in an industry that requires physical contact with customers, you can claim deductions for expenses related to COVID-19 safety. This includes hand sanitiser, sneeze or cough guards, other personal protective equipment and cleaning supplies.

Charitable donations are another good way to increase your deductions. Don’t forget to keep donation receipts!

The ATO has three golden rules for a valid business deduction:

  • The expense must have been for business, not private, use.
  • If the expense is for a mix of business and private use, only the business portion can be claimed as a deduction.
  • You must have records to prove your business incurred the expense.

For example, if you buy a laptop and only use it for your business, you can claim a deduction for the full purchase price. However, if the laptop is used 50% of the time for your business and 50% of the time for private use, only 50% of the purchase price can be claimed as a business deduction.

Recordkeeping

Records explain the tax and super-related transactions conducted by a business. Businesses are legally required to keep records of all transactions relating to their tax and superannuation affairs as they start, run, sell, change or close the business, specifically:

  • any documents related to the business’s income and expenses;
  • any documents containing details of any election, choice, estimate, determination or calculation made for the business’s tax and super affairs, including how any estimate, determination or calculation was made.

Tip: Make sure you understand what records are needed for your business, and aim to make accurate and complete recordkeeping practices a part of your daily business activities. Talk to us about what records your business needs to keep, for how long, and what we can do to help!

03 Mar

Posted at 09:40h in Accounting, Business Advisory, Tax

Businesses that need a little more financial help will have one last opportunity to claim the loss carry-back in their 2021–2022 income tax returns. And businesses that have an early balancer substituted account period (SAP) for the 2021-22 income year are eligible to claim the loss carry-back offset before 1 July 2022.

The loss carry-back is a refundable offset that effectively represents the tax that the business would save if it had been able to deduct the loss in an earlier year using the loss year tax rate. It may result in a cash refund, a reduced tax liability, or reduction of a debt owing to the ATO. Eligible businesses include companies, corporate limited partnerships and public trading trusts.

A business may be eligible if it made a tax loss in 2021, carried on a business with an aggregated turnover of less than $5 billion, had an income tax liability in 2019 or 2020, and has met all of its lodgment obligations for the five prior income years.

Loss carry-back can either be claimed through standard business reporting enabled software, where it has the additional loss carry-back labels required, or by using the paper copy of the company tax return 2021 and attaching a schedule of additional information to report the extra aggregated turnover and loss carry-back labels required.

The ATO has developed a loss carry-back tax offset tool to assist businesses claiming the loss carry-back before 1 July 2022. Once all of the relevant information is provided, the tool will first determine whether the business is eligible to claim the loss carry-back tax offset, then calculate the maximum amount of tax offset available. It will also provide a printable report of the labels which will need to be completed.

02 Aug

Posted at 10:25h in Accounting, News, Tax

If your business is experiencing financial difficulties due to the latest lockdowns, the ATO may be able to help by processing your tax return faster and expediting the release of any refund to you. To be eligible for priority processing, you’ll need to apply to the ATO and provide supporting documents (within four weeks of your submission) outlining your circumstances. “Financial difficulty” may include many situations such as disconnection of an essential service, pending legal action or repossession of a business vehicle.

Tip: Priority processing of a business tax return doesn’t guarantee a refund. If your business has outstanding tax or other debts with Australian government agencies, the credit from a return may be used to pay down those debts.

You can apply for ATO priority processing over the phone or through your tax professional after the lodgment of the tax return in question. Once the initial request for priority processing is received, you’ll be notified and contacted if more information is required. Processing will take more time for businesses that have lodged several years’ worth of income tax returns of amendments at the same time, and those that have unresolved tax debts.

Before lodging any priority processing request, check the progress of your return through online services, over the phone or by contacting us as your tax professional. If the return is in the final stages of processing, you may not need to lodge a priority processing request – the return will be finalised before the ATO has an opportunity to consider the request.

01 Aug

Posted at 10:15h in Accounting, News, Tax

The ATO has a range of year-end tax time options to support taxpayers who have been affected by the COVID-19 pandemic and recent natural disasters.

Income statements can be accessed in ATO online services through myGov accounts from 14 July.

The ATO also reminds those who may have lost, damaged or destroyed tax records due to natural disasters that some records can be accessed through their myGov account or their registered tax agent. For lost receipts, the ATO can accept “reasonable claims without evidence, so long as it’s not reasonably possible to access the original documents”. A justification may be required on how a claim is calculated.

Tip: Even if you can’t pay, it’s still important to lodge on time. We can help you understand your tax position and find the best support for you.

JobKeeper

Payments received as an employee will be automatically included in the employee’s income statement as either salary and wages or as an allowance. However, sole traders who received JobKeeper payment on behalf of their business will need to include the payment as assessable income for the business.

JobSeeker

Payments received will be automatically included in the tax return at the Government Payments and Allowances question from 14 July.

Stand down payments

Employees receiving one-off or regular payments from their employer after being temporarily stood down due to COVID-19 should expect to see those payments automatically included in their income statement as part of their tax return.

COVID-19 Disaster Payment

The Australian Government (through Services Australia) COVID-19 Disaster Payment for people affected by restrictions is taxable. Taxpayers are advised to ensure they include this income when lodging their returns.

Other assistance

The tax treatment of assistance payments can vary; the ATO website outlines how a range of disaster payments impact tax returns and includes guidance on COVID-19 payments, including the taxable pandemic leave disaster payment.

Early access to superannuation

Early access to superannuation under the special arrangements due to COVID-19 is tax free and does not need to be declared in tax returns.

04 Jul

Posted at 09:41h in Accounting, Business Advisory, News, Tax

Businesses that have accessed government economic stimulus measures need to take extra care this tax time. The ATO has announced that it will increase its scrutiny, conducting compliance activity on various economic stimulus measures introduced to help businesses recover from the effects of COVID-19. These stimulus measures include loss carry-back, temporary full expensing and accelerated depreciation.

While the ATO will continue to support businesses, most of whom are doing the right thing, it is looking at behaviour or development of schemes designed to deliberately exploit various stimulus measures. All taxpayers who’ve used the schemes should review their claims to ensure they are eligible, and that the amounts claimed are correct.

The loss carry-back measure allows eligible corporate entities to claim a refundable tax offset in their 2020–2021 and 2021–2022 company tax returns. In essence, companies get to “carry back” losses to earlier years in which there were income tax liabilities, which may result in a cash refund or a reduced tax liability.

The temporary full expensing measure allows immediately deducting the business portion of the cost of eligible new depreciating assets or improvements. Eligible businesses also have access to the accelerated depreciation measure for the 2019–2020 and 2020–2021 income years, in which the cost of new depreciating assets can be deducted at an accelerated rate.

The ATO will review claims as part of its tax time compliance activities as well as actively identifying tax schemes and arrangements seeking to exploit those schemes. The ATO will actively pursue concerning or fraudulent behaviours, including imposing financial penalties, prosecution and imprisonment for the most serious of cases.

Tip: If your business used the various stimulus measures, we can help you confirm your eligibility and the amount of deduction claimed to avoid potentially costly compliance activity from the ATO down the line.

12 May

Posted at 18:49h in Accounting, News, Tax

PERSONAL TAXATION

Personal tax rates unchanged for 2021–2022

In the Budget, the Government did not announce any personal tax rates changes, having already brought forward the Stage 2 tax rates to 1 July 2020 in the October 2020 Budget. The Stage 3 tax changes will commence from 1 July 2024, as previously legislated.

The 2021–2022 tax rates and income thresholds for residents are therefore unchanged from 2020–2021:

  • taxable income up to $18,200 – nil;
  • taxable income of $18,201 to $45,000 – 19% of excess over $18,200;
  • taxable income of $45,001 to $120,000 – $5,092 plus 32.5% of excess over $45,000;
  • taxable income of $120,001 to $180,000 – $29,467 plus 37% of excess over $120,000; and
  • taxable income of more than $180,001 – $51,667 plus 45% of excess over $180,000.

Stage 3: from 2024–2025

The Stage 3 tax changes will commence from 1 July 2024, as previously legislated. From 1 July 2024, the 32.5% marginal tax rate will be cut to 30% for one big tax bracket between $45,000 and $200,000. This will more closely align the middle tax bracket of the personal income tax system with corporate tax rates. The 37% tax bracket will be entirely abolished at this time.

Therefore, from 1 July 2024, there will only be three personal income tax rates: 19%, 30% and 45%. From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30%. With these changes, around 94% of Australian taxpayers are projected to face a marginal tax rate of 30% or less.

Low income offsets: LMITO and LITO retained for 2021–2022L

Low and middle income tax offset

The Government also announced in the Budget that the low and middle income tax offset (LMITO) will continue to apply for the 2021–2022 income year. The LMITO was otherwise legislated to only apply until the end of the 2020–2021 income year, meaning low-to-middle income earners would have seen lower tax refunds in 2022.

The amount of the LMITO is $255 for taxpayers with a taxable income of $37,000 or less. Between $37,000 and $48,000, the value of LMITO increases at a rate of 7.5 cents per dollar to the maximum amount of $1,080. Taxpayers with taxable incomes from $48,000 to $90,000 are eligible for the maximum LMITO of $1,080. From $90,001 to $126,000, LMITO phases out at a rate of 3 cents per dollar.

Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge their tax returns for the 2021–22 income year.

Low income tax offset

The low income tax offset (LITO) will also continue to apply for the 2021–2022 income year. The LITO was intended to replace the former low income and low and middle income tax offsets from 2022–2023, but the new LITO was brought forward in the 2020 Budget to apply from the 2020–2021 income year.

The maximum amount of the LITO is $700. The LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000, and then at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.

Self-education expenses: $250 threshold to be removed

The Government will remove the exclusion of the first $250 of deductions for prescribed courses of education. The first $250 of a prescribed course of education expense is currently not deductible.

Background

A limitation on deductibility exists under s 82A of the Income Tax Assessment Act 1936 (ITAA 1936) regarding deductions that would otherwise be allowable under s 8-1 if the self-education expenses are necessarily incurred for or in connection with a course of education provided by a place of education (eg a school, uni, college, etc) and undertaken by the taxpayer for the purpose of gaining qualifications for use in the carrying on of a profession, business or trade or in the course of any employment.

In those circumstances, currently only the excess over $250 may be deductible.

Primary 183-day test for individual tax residency

The Government will replace the existing tests for the tax residency of individuals with a primary “bright line” test under which a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.

People who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.

The new residency rules are based on recommendations made by the Board of Taxation in its 2019 report Reforming individual tax residency rules: a model for modernisation.

Child care subsidies to change 1 july 2022

The Budget confirmed that the Government will make an additional $1.7 billion investment in child care. The changes will commence on 1 July 2022 (that is, not in the next financial year). This measure was previously announced on 2 May 2021.

Commencing on 1 July 2022, the Government will:

  • increase the child care subsidies available to families with more than one child aged 5 and under in child care by adding an additional 30 percentage point subsidy for every second and third child (stated to benefit around 250,000 families); and
  • remove the $10,560 cap on the Child Care Subsidy (which the Government expects to benefit around 18,000 families).

BUSINESS TAXATION

Temporary full expensing: extended to 30 June 2023

The Government will extend the temporary full expensing measure until 30 June 2023. It was otherwise due to finish on 30 June 2022.

Other than the extended date, all other elements of temporary full expensing will remain unchanged.

Currently, temporary full expensing allows eligible businesses to deduct the full cost of eligible depreciating assets, as well as the full amount of the second element of cost. A business qualifies for temporary full expensing if it is a small business (annual aggregated turnover under $10 million) or has an annual aggregated turnover under $5 billion. Annual aggregated turnover is generally worked out on the same basis as for small businesses, except that the threshold is $5 billion instead of $10 million.

There is an alternative test, so a corporate tax entity qualifies for temporary full expensing if:

  • its total ordinary and statutory income, other than non-assessable non-exempt income, is less than $5 billion for either the 2018–2019 or the 2019–2020 income year (some additional conditions apply for entities with substituted accounting periods); and
  • the total cost of certain depreciating assets first held and used, or first installed ready for use, for a taxable purpose in the 2016–2017, 2017–2018 and 2018–2019 income years (combined) exceeds $100 million.

If temporary full expensing applies to work out the decline in value of a depreciating asset, no other method of working out that decline in value applies.

Assets must be acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.

Loss carry-back extended by one year

Under the temporary, COVID-driven restoration of the loss carry-back provisions announced in the previous Budget, an eligible company (aggregated annual turnover of up to $5 billion) could carry back a tax loss for the 2019–2020, 2020–2021 or 2021–2022 income years to offset tax paid in the 2018–2019 or later income years.

The Government has announced it will extend this to include the 2022–2023 income year. Tax refunds resulting from loss carry-back will be available to companies when they lodge their 2020–2021, 2021–2022 and now 2022–2023 tax returns.

This is intended to help increase cash flow for businesses in future years and support companies that were profitable and paying tax but find themselves in a loss position as a result of the COVID-19 pandemic. Temporary loss carry-back also complements the temporary full expensing measure by allowing more companies to take advantage of expensing, while it is available.

Employee share schemes: cessation of employment removed as a taxing point

The Government will remove the cessation of employment as a taxing point for tax-deferred employee share schemes (ESSs). There are also other changes designed to cut “red tape” for certain employers.

Cessation of employment change

Currently, under a tax-deferred ESS and where certain criteria are met, employees may defer tax until a later tax year (the deferred taxing point). In such cases, the deferred taxing point is the earliest of:

  • cessation of employment;
  • in the case of shares, when there is no risk of forfeiture and no restrictions on disposal;
  • in the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restriction on disposal; and
  • the maximum period of deferral of 15 years.

The change announced in the latest Budget will result in tax being deferred until the earliest of the remaining taxing points.

Other regulatory changes

The Government will also:

  • remove disclosure requirements and exempt an offer from the licensing, anti-hawking and advertising prohibitions for ESS where employers do not charge or lend to the employees to whom they offer the ESS; and
  • increase the value of shares that can be issued to an employee utilising the simplified disclosure requirements (and exemptions from licensing, anti-hawking and advertising requirements) from $5,000 to $30,000 per employee per year (leaving unchanged the absence of such a value cap for listed companies) – this will apply to employers who do charge or lend for issuing employees shares in an unlisted company.

TAX COMPLIANCE AND INTEGRITY

Allowing small businesses to pause disputed ATO debt recovery

The Government will introduce legislation to allow small businesses to pause or modify ATO debt recovery action where the debt is being disputed in the Administrative Appeals Tribunal (AAT). Treasurer Josh Frydenberg had earlier announced this measure on 8 May 2021.

Specifically, the changes will allow the Small Business Taxation Division of the AAT to pause or modify any ATO debt recovery actions – such as garnishee notices and the recovery of general interest charge (GIC) or related penalties – until the underlying dispute is resolved by the AAT. This measure is intended to provide an avenue for small businesses to ensure they are not required to start paying a disputed debt until the matter has been determined by the AAT.

Small business entities (including individuals carrying on a business) with an aggregated turnover of less than $10 million per year will be eligible to use the option. The AAT will be required to “have regard to the integrity of the tax system” in deciding whether to pause or modify the ATO’s debt recovery actions.

Changes welcomed

The Australian Small Business and Family Enterprise Ombudsman has welcomed the changes. The Ombudsman, Mr Bruce, stated that small businesses could save “thousands of dollars in legal fees”, as well as up to two months waiting for a ruling. The Ombudsman also noted this measure was a key recommendation in its report A tax system that works for small business.

SUPERANNUATION

Superannuation contributions work test to be repealed from 1 July 2022

The superannuation contributions work test exemption will be repealed for voluntary non-concessional and salary sacrificed contributions for those aged 67 to 74 from 1 July 2022.

As a result, individuals under age 75 will be allowed to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice contributions from 1 July 2022 without meeting the work test, subject to existing contribution caps. However, individuals aged 67 to 74 years will still have to meet the work test to make personal deductible contributions.

Currently, individuals aged 67 to 74 years can only make voluntary contributions (both concessional and non-concessional), or receive contributions from their spouse, if they work at least 40 hours in any 30-day period in the financial year in which the contributions are made (the “work test”). The work test age threshold previously increased from 65 to 67 from 1 July 2020 as part of the 2019–2020 Budget.

Non-concessional contributions and bring-forward

The Government confirmed that individuals under age 75 will be able to access the non-concessional bring forward arrangement (ie three times the annual non-concessional cap over three years), subject to meeting the relevant eligibility criteria. However, we note that the Government is still yet to legislate its 2019–2020 Budget proposal to extend the bring-forward age limit so that anyone under age 67 can access the bring-forward rule from 1 July 2020. The proposed legislation for the 2019–2020 Budget measure is yet to be passed by the Senate.

The Government also noted that the existing restriction on non-concessional contributions will continue to apply for people with total superannuation balances above $1.6 million ($1.7 million from 2021–2022).

Downsizer contributions eligibility age reduced to 60

The minimum eligibility age to make downsizer contributions into superannuation will be lowered to age 60 (down from age 65) from 1 July 2022.

The proposed reduction in the eligibility age will mean that individuals aged 60 or over can make an additional non-concessional contribution of up to $300,000 from the proceeds of selling their home. Either the individual or their spouse must have owned the home for 10 years.

The maximum downsizer contribution is $300,000 per contributor ($600,000 for a couple), although the entire contribution must come from the capital proceeds of the sale price. As under the current rules, a downsizer contribution must be made within 90 days after the home changes ownership (generally the date of settlement).

Downsizer contributions are an important consideration for senior Australians nearing retirement as they do not count towards an individual’s non-concessional contributions cap and are exempt from the contribution rules. They are also exempt from the restrictions on non-concessional contributions for people with total superannuation balances above $1.6 million ($1.7 million from 2021–2022). People with balances over the transfer balance cap ($1.7 million from 2021–2022) can also a make a downsizer contribution; however, the downsizer amount will count towards that cap when savings are converted to the retirement phase.

First Home Super Scheme to be extended for withdrawals up to $50,000

The Budget confirmed that the maximum amount of voluntary superannuation contributions that can be released under the First Home Super Saver (FHSS) scheme will be increased from $30,000 to $50,000. The Treasurer previously announced this measure on 8 May 2021.

Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released (which includes voluntary concessional and non-concessional contributions).

Currently, the FHSS scheme allows for future voluntary contributions up to $15,000 per year (and $30,000 in total) to be withdrawn for a first home purchase. To be eligible, a person must be 18 years or over, have not used the FHSS scheme before and have never owned real property in Australia. Withdrawals of eligible FHSS contributions (and associated earnings) are taxed at the individual’s marginal rate less a 30% tax offset. Effectively, the scheme provides a 15% tax saving on money channelled via super for a first home purchase.