Small business tax changes and franking

The changes to the company tax rates for small and medium businesses also means a change in franking… and the rules are…

The maximum franking credit that can be allocated to a frankable distribution paid by a corporate tax entity will be based on a tax rate of 27.5 per cent.

However, if the entity’s aggregated turnover for the prior income year is equal to or exceeds the aggregated turnover threshold for the current income year, then the maximum franking credit that can be allocated to a frankable distribution paid by the entity will be based on the headline corporate tax rate of 30 per cent.

So the first rule is that if your company tax rate for a year is 27.5% you can frank at 27.5%. But what if in previous years the tax rate was 30%? Won’t that mean we have trapped franking credits?

To solve this problem the Government put in the second rule. and to solve this rule the Government makes an amazing assumption…

1.71 Consequently, from the 2016-17 income year, the operation of imputation system for corporate tax entities will be based on the company’s corporate tax rate for a particular income year, worked out having regard to the entity’s aggregated turnover for the previous income year. This is necessary because corporate tax entities usually pay distributions to members for an income year during that income year.

We always pay out year one profits in year two is this amazing assumption. No business ever buys capital assets or pays down debt or loses money with their profits…

With this ridiculous assumption they offer a solution to the situation where a company previously paid tax at 30% but not has a tax rate of 27.5% and if they can only pay out franking credits at 27.5% they will have trapped franking credits.

Have a look at the only example they give and weep…

In the 2015-16 income year, Company A has an aggregated turnover of $18 million. In the 2016-17 income year, its aggregated turnover increased to $20 million.

Therefore, for the 2016-17 income year, Company A will have:

  • a corporate tax rate of 30 per cent (having regard to its aggregated turnover of $20 million in the 2016-17 income year);
  • a corporate tax rate for imputation purposes of 30 per cent (based on aggregated turnover of $18 million in the 2015-16 income year); and
  • a corporate tax gross-up rate of 2.33 — that is, (100% — 30%)/30%.

    As a result, if Company A makes a distribution of $100 in the 2016-17 income year, the maximum franking credit that can be attached to the distribution is $42.86 — that is, $100/2.33.

    In the 2017-18 income year, Company A will work out its corporate tax rate for imputation purposes based on its aggregated turnover for the 2016-17 income year — that is, $20 million. Therefore, for the 2017-18 income year, Company A will have:

  • a corporate tax rate for imputation purposes of 27.5 per cent; and
  • a corporate tax gross-up rate of 2.64 — that is, (100% — 27.5%)/27.5%.

    As a result, if Company A makes a distribution of $100 in the 2017-18 income year, the maximum franking credit that can be attached to the distribution is $37.88 — that is, $100/2.64.

The example shows their proposed solution does not work. Look at the example above. In the 2015/16 year their tax rate is 30%, and in the 2016/17 their tax rate is 30%. So they have lots of franking credits based on this 30% tax rate. In the following year they want to pay out all their retained profits (all taxed at 30%) but the example states in the 2017/18 year they can only frank at 27.5%.

How can they write law that is proven to be ineffective in the only example.

This is a mess.

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Small Business tax changes passed

Just the headlines please Ken…

The company tax rate for corporate entities with turnover less than $10 million in the 2016/17 year will be 27.5%.

The company tax rate for corporate entities with turnover less than $25 million in the 2017/18 year will be 27.5%.

The company tax rate for corporate entities with turnover less than $50 million in the 2018/19 year will be 27.5%.

The small business turnover test will increase to $10,000,000 from 1 July 2016!!!!! Therefore in the 2016/17 year businesses with a turnover between $2-10m will be able to use small business concessions they have never used before… like the $20k instant asset write-off that ends on 30 June 2017!

The unincorporated small business tax offset increases from 5% to 8% but as it is capped at $1,000 this will make almost no difference.

 

 

Still working out how the franking rules have changed…

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Taxpayer Alerts for R&D

The Commissioner has just released two taxpayer alerts that relate to the R&D Tax Incentive…

TA 2017/2 Claiming the Research and Development Tax Incentive for construction activities
TA 2017/3 Claiming the Research and Development Tax Incentive for ordinary business activities

These Taxpayer Alerts “provide a summary of our concerns about new or emerging higher risk tax or superannuation arrangements or issues that we have under risk assessment.”

So what are these concerns?

Some or all of the activities registered are broadly described and non-specific. For example, projects may be registered instead of the specific activities undertaken.

Some or all of the activities registered are ordinary business activities that are not eligible for the R&D Tax Incentive.

Some or all of the activities were undertaken in the course of their ordinary business activities and recharacterised as R&D activities at a later time.

So the concern the Commissioner has is that taxpayer’s are incorrectly claiming the R&D Tax Incentive in relation to activities that are not R&D…

So the next time an “R&D advisor” tells you that activities are R&D activities, ask them what will happen if the Commissioner concludes these activities are just “ordinary business activities”. Then read the project description they write as see if you think some or all of the activities in the description “are broadly described and non-specific.”

R&D advisors need to pick up their game or the Commissioner will start asking the Government to limit access to this incentive even more.

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SMSF and accountants… what can they do?

The easy answer is… lots.

ASIC have a great information sheet on this, but in summary and accountant without any AFSL can…

You may provide advice on establishing, operating, structuring and valuing an SMSF, as long as you give your client the appropriate warnings. This includes [stating that the] advice [is] provided for the sole purpose of, and only to the extent reasonably necessary for, ensuring compliance with the superannuation legislation [and the document includes] advice on the process of winding up or exiting an SMSF. You may not recommend that your client acquires or disposes of an interest in an SMSF.

With the right disclaimer I am setting these SMSF beasts up if my client asks me to

You may provide a recommendation or statement of opinion on how your client should distribute their available funds among different categories of investments. You may not advise your client to make particular investments through the SMSF.

I am telling them if they want to image it themselves they need to have a balanced portfolio but not telling them what exact investments to buy.

You may provide tax advice on financial products, such as an interest in an SMSF and underlying investments held by the SMSF, as long as you do not receive a benefit as a result of your client acquiring a financial product (or a financial product that falls within the class of products) mentioned in the advice.

I am telling them what will be the tax consequences of the assets they decide to hold.

So if they come to me and say they want to put their business real property into their SMSF I can pretty much do it all for them.

But also remember, if you do send them off to an AFSL holder, you need to disclose any commission you are getting…

 

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Tax Breaks for Big Business

Every time I have a conversation about tax policy someone always tells me that before I make the changes I want I have to “stop all the tax breaks for big business”.

So what are these “tax breaks for big business” that I need to get rid of first?

Fortunately, each year the Government releases a list of all of its “Tax Expenditures”. And for all the normal people who have no idea what a tax expenditure is, the Government defines it as…

Tax expenditures typically involve tax exemptions, deductions or offsets, concessional tax rates and deferrals of tax liability.

So lets go through the top 25 of these exemptions, deductions or offsets, concessional tax rates and deferrals of tax liability and see what “tax breaks” those big businesses have. This list can be found at page 9 of this document.

  • By far the biggest is the CGT exemption for individuals on their main residence ($63 billion a year).
  • Next is the superannuation exemptions of just over $30 million, which again only apply to individuals as super belongs to individuals.
  • GST-Free food, education, aged care and health cost over $17.5 billion a year, which exists to help individuals with important costs.
  • The 50% CGT discount for individuals and trusts is next at just under $10 billion and again this  cannot be used by almost all big business.
  • Family Tax Benefit exemption, Child Care benefit exemptions, Medicare levy reductions combined cost $8.5 billion a year.
  • Tax concessions for charities, not for profits, and donations to these organisations costs $4.5 billion a year.

As yet, not a single “tax break” for big business. Actually, in the top 25 tax expenditures all big business gets is:

  1. Exemption from interest withholding tax on certain securities at $2.3 billion a year (but most of this relates to people buying Government debt);
  2. Concessional rate of excise levied on aviation gasoline and aviation turbine fuel at $1.2 billion a year; and
  3. Capital works expenditure deduction at $1.1 billion a year

I did not include lower company tax rate and simplified depreciation as they only apply to businesses with turnover less than $2 million – hardly big business.

So while the tax system is littered with tax breaks for individuals, you would be trying hard to find any substantive tax breaks for big business in our tax system. If you don’t borrow overseas, don’t own aircraft and lease your buildings there is nothing in this list for your big business at all.

 

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Fairfax journalist spinning a tax story again…

Why do Fairfax journalist have to exaggerate every tax story they have to push their ideology?

Peter Martin is at it again today when he writes…

 Revealed: how the Tax Commissioner was leant on to deliver high-end tax cuts
Mr Martin again is going to show us how the current Government is a friend of big business and wants to keep the workers down by offering only tax cuts to the “high-end”… 

But hang on. I don’t remember any “high-end” tax cuts recently. So what is he talking about?

He intensionally leaves it to the last paragraph, where he writes…

The tax cut, for Australians earning between $80,000 and $87,000 would be delivered on October 1…

“High-end”?!? Peter, let me show you what the Budget papers say about why this change has been made to the individual tax rates...

This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37 per cent to 32.5 per cent, preventing around 500,000 taxpayers facing the 37 per cent marginal tax rate. This will ensure that the average full‑time wage earner will not move into the second highest tax bracket in the next three years. In the absence of this action, they would move into the second highest tax bracket in 2016‑17.

This “high-end” tax cut is to stop average full time wage earners having to pay any tax at the 40% tax rate. Since when is the “average full time wage earner” “high-end”? Come on Peter.

But it would not have served Peter’s ideology if he had have written an accurate article that was titled “Government pushes for average worker not to be overtaxed.”

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What has happened to ATO Interpretative Decisions?

According to the Commissioner, an ATOID is a “summarised version of a decision we have made on the application of the law to a particular situation.” (See PSLA 2001/8)

These have been around since 2001 and have been an amazing insight into the types of private rulings that the Commissioner has been giving to specific taxpayers.

In 2003 the Commissioner made over 1,200 of these decisions. And you can understand how there can be so many ATOIDs in a year. As PSLA2001/8 states…

… an ATO ID may be prepared for each decision on an interpretative issue where:

· there is no precedential ATO view on the issue, or

· there is an existing precedential ATO view however an ATO ID will improve the clarity or certainty of the ATO’s interpretation of the particular area of the law.

But it appears that there are no areas left that the Commissioner has not ruled on. Also, all the areas he has ruled on are perfectly clear.

Why? In 2016 the Commissioner released one ATOID. And that one was on what is the GST registration threshold for body corporates (booorrring).

The reason for ATOIDs was so that taxpayers could see what the Commissioner is saying to other taxpayers. Is he giving favourable ruling to some (as was suggested back in the 1990’s)?

Simply, ATOIDs serve a purpose as a resourse for taxpayers that the register of private rulings will never be (given its size). Also, it creates confidence in the private ruling system.

So if the Commissioner has decided to end ATOIDs, then what is he going to replace it with so taxpayers have both the resources and the confidence in the private ruling system?

Lets see how many are issued in 2017?

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