One of many or just one…

This one is for my Quantity Surveyor friends who love to put together depreciation schedules…

The Commissioner has released a draft Taxation Ruling that considers whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets.

And this is a great question. How far down do we break something down before we start claiming depreciation on it? Part, compound, element, proton, quark?

The Commissioner states that for a component of a composite assets to be considered to be a separate depreciating asset, it is necessary that the component is capable of being separately identified as having commercial and economic value.

The main principles that need to be taken into account in determining whether a composite item is a single depreciating asset are:

  • Whether the depreciating asset will tend to be the item that performs a separate identifiable function;
  • Whether the asset is an item that performs a discrete function;
  • Whether there is a high degree of physical integration of the components;
  • Whether attaching the item to another asset, varies the performance of that asset; and
  • Whether the item is purchased as a system to function together as a whole and which are necessarily connected in their operation.

The draft ruling has a series of examples that use these factors. For example, the draft Ruling concludes that:

  • Connected warehouse storage racks are a single depreciable asset but unconnected racks are not;
  • A desktop computer package, including a monitor, keyboard and a mouse, is a single depreciable asset but an additional printer is not;
  • A mainframe and 50 slave terminals is a single depreciating asset;
  • A built-in GPS unit in a car is a part of the car but a portable GPS unit is not; and
  • A solar system is a single depreciable asset.

However, it is worth noting that in many cases adding a new component is a separate depreciable asset and not a modification to the existing asset. For example, adding additional solar panels to a current system will see the new panels treated as a separate depreciable asset.

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Excuses, excuses…

These are the best 10 excuses for not lodging an individual tax return given to the UK Revenue and Customs in 2016:

  1. My tax return was on my yacht, which caught fire.
  2. A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed.
  3. My wife helps me with my tax return, but she had a headache for ten days.
  4. My dog ate my tax return…and all of the reminders.
  5. I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant.
  6. My child scribbled all over the tax return, so I wasn’t able to send it back.
  7. I work for myself, but a colleague borrowed my tax return to photocopy it and lost it.
  8. My husband told me the deadline was the 31st March.
  9. My internet connection failed.
  10. The postman doesn’t deliver to my house.

So make sure in any divorce you get the accountant!

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The End of Salary Packaged Super

From 1 July 2017 I cannot understand why anyone would salary package super in addition to the 9.5% SG their employer is required to pay for them.

Now I am not saying that it is not worth using up an employee’s entire $25,000 concessional cap (2017/18 cap amount), but I am saying you are crazy if you attempt to get to $25,000 by salary packaging super… There is a much easier way.

From 1 July 2017 anyone, including employees, can make deductible contributions straight to super in addition to their employer’s SGC amounts. This means they need not enter into a valid salary sacrifice agreement with their employer to sacrifice salary into super anymore. They can just make the contribution any time during the year.

This is much easier than making sure the salary sacrifice agreement is”effective” as defined by the 145 paragraphs of  Taxation Ruling TR 2001/10. Especially, this Ruling states clearly that an employee must agree to receive part of their remuneration as superannuation before they have an entitlement to receive that part of their remuneration as salary or wages. This has caused problems for bonuses, leave, payouts…

But all these rules can easily be avoid. And you can avoid all the negotiating with your employer, completing forms with payroll to get the sacrifice set up, remembering to change the amount when circumstances change, and even finding that your employer may have LEGALLY stopped paying your 9.5% SG as your salary packaged super is greater than the required 9.5% and your have a dodgy salary sacrifice agreement!

For example, if an employee wants to salary sacrifice a bonus into super they need to agree with the employer before they have derived the bonus that, whatever the amount will be, will be salary sacrificed. They need to ensure the agreement states this super is in addition to the 9.5% the employer remitted before the salary package. They need to complete any forms needed by payroll and then ensure payroll actually execute the package correctly. So when did the employee derive the bonus? the Taxation Ruling states “it depends” (have a look at paragraphs 97 & 98)

Under the new rules from 1 July 2017, the employee can merely wait until they have received the bonus, contribute it to super, notify the fund on a very simple form and claim a deduction. Yes, the bonus will have tax withheld from it when it is paid but that tax will be returned when the employee lodges their tax return.

So is this the end of salary packaged super. I cannot see why not. But I am sure you will all tell me I have missed something.

PS. If you can convince your client to use the additional tax refund they get each year for topping their employer’s SG contributions up to $25,000 as additional super contribution you might find it easier to convince them that putting money away in super is a good idea…

 

 

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More rubbish about Evil Apple and Taxes

By now most of us have heard that the European Commission has ordered Apple to pay 13 billion Euros. But the money does not go to the EU, but rather the order is that Ireland has to collect the amount from Apple… But Ireland does not want to. Ireland has argued that Apple have paid the right amount of tax, at the right time, exactly as the Irish law states. The Irish Tax Commissioner has confirmed Apple has been totally transparent and met all its obligations

So what is going on here???

The European Commission does not like the Irish tax system as it encourages businesses to invest through Ireland (rather than the other European countries that have higher tax rates). Therefore it has stated that Ireland granted undue tax benefits to Apple which it claims is illegal under EU state aid rules. SO it is not Apple that has done anything wrong according to the EU (as shown by the fact that it clearly states there is no penalty on Apple), but rather the EU thinks Ireland has been naughty by having low tax rates.

So it appears that even though Apple complied with all of Ireland’s tax laws, and Ireland does not want the additional tax from Apple, the EU are requiring Ireland to get the additional tax from Apple.

That’s easy to understand?!?!?!

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Tax laws are back

Sorry about not blogging for a while. But nothing has happened… almost.

But now we have a parliament again, tax policy has started and I promise to keep up. So here are what the Government has provided in the last week…

Treasury Laws Amendment (Income Tax Relief) Bill 2016

Boring… In this Bill the threshold at which the 37% individual tax rates starts increases on 1 July 2016 from $80,001 to $87,000.

The Commissioner has also released new PAYG withholding tax schedules that employers must be using by 1 October 2016. But if the employers forget, employees who don’t understand the withholding system will be happy at tax return time as they get a larger refund. I have always wondered if a varied a taxpayer’s withholding to 100% if they would finally work out a tax refund when you lodge your return is because you made an interest free loan to the Government???

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

This is huge as it increases the turnover threshold for a small business entity from $2 million to $10 million (the SBCGT threshold stays at $2 million… Darn). This means more entities can use the small business Rollover or the $20,000 instant asset write off. Awesome!

This Bill also reduces the company tax rate over a series of years. from July 2016 the company tax rate for all small business entities is 27.5%. But note that it is not just a turnover test, the company needs to be carrying on a business.

And this is the mistake in the law. Each year going forward the turnover test for accessing the 27.5% rate increases. For example, the turnover test is under $1 billion in the 2022/23 year. BUT THE BUSINESS TEST IS RETAINED.

This means if your listed company has turnover of $900 million in 2022/23 your tax rate is 27.5% but if my small investing company with seven woolworth shares only that my Dad gave me is taxed at 30% as it is not carrying on a business. What were they thinking?

 

Franking is a bit weird as well. All franking is at 27.5% unless in the turnover in the prior year is greater than the current year threshold. If this is the case you can frank at 30%. Effectively, 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.

The Bill also changes the rate of the small business income tax offset to take into account of the reduction in the company tax rate. From 1 July 2016 the rate of this offset increases to 8%. But by 2026/27 the rate of the offset is 16%. This is ridiculous when you realise the offset is capped at $1,000. So if I am a sole trader and I earn more than $6,250 from my business (a massive amount), 16% of this is more than $1,000 and the cap limited the benefit of the offset.

Budget Savings (Omnibus) Bill 2016

This Bill reduces the rate of the R&D Tax Incentive by 1.5%. As a result, for large companies (greater than $20m turnover) the benefit of the offset is only 8.5% of the R&D expenditure. At its worst the R&D Tax Concession was worth 7.5% (125% x 30%) but you could claim so much more then

The second change in the Bill is “Single Touch Payroll”. this will require you, from 2018, to tell the Commissioner:

  • Withholding amounts on payments to these employees on or before the day by which the amount is required to be withheld;
  • Salaries and ordinary time earnings amount on or before the day on which the amount is paid; and
  • Superannuation contribution information on or before the day on which the contribution is paid.

When this information is provided the employer will not need to report these amounts, or summaries of these amount, at any other time of the year.

This Bill also will allow employees to make choice of superannuation fund or request a TFN on the ATO website, and the ATO will inform the employer – Excellent.

 

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Vote “1” for tax

When I was interviewed for a job with the Labor party  I was asked whether I had ever voted for John Howard. It was a joke question and they did not expect me to answer, but I did.

“Of course”, I said confidently, “he has had a better tax policy for some time.”

This Saturday I will vote based on tax policy. Sounds a bit strange. I think that if you fix the revenue side of the income statement, the expenditure side will fix itself (I hope). If you have a simple, efficient, adequate and equitable tax system, you will have the money to pay for what is important, and you won’t have the money to pay for what is not important so soon enough people will stop borrowing to pay for unimportant things (I hope).

So what do we have for this election. Lets summarise the tax policies of the two real options.

What they both agree on…

  • All the Super changes in the recent budget.

Yes, while they won’t admit it, the Labor party have taken all the savings in the recent budget made from the super changes… Every single dollar. They say they “might” vary them but only if they raise the same amount of money. So you could vote on who is more likely to back down and remove the retrospective nature of the $500,000 lifetime cap but I am unsure who that would be.

  • Company tax cuts for businesses under $2 million.
  • Reducing the R&D tax offset by 1.5%
  • Minor changes to the personal tax rates at $80k
  • Employing more ATO officers to go after multinationals

What Labor is offering…

  • Negative gearing (offsetting the interest losses against slurry and wage income – not other income) gone for all new assets unless they are new residential property.

Yes that means if you borrow, buy shares and the shares pay no dividends in a year you can’t claim the interest as a deduction.

  • 50% discount become a 25% discount

What I love about the Labor policy to limit negative gearing and the 50% discount is they say it will fix housing affordability and is not just a money grab. So how will reducing the 50% discount on shares and stopping negative gearing on shares fix housing prices? This is just a money grab.

  • Keeping the temporary deficit levy so that the highest marginal rate remains at 49%

Lets hope they keep the name so we have a “temporary” deficit levy for many decades to come.

  • Capping of tax deductions for managing tax affairs

What the Coalition is offering…

  • Company Tax rate changes

But don’t trust any promise more than 3 years away as there will be another election before then. However, the Coalitions company tax rate changes will mean small businesses with less than $10 million turnover benefit, rather than $2 million for Labor.

  • Change to SBE definition to $10 million

Not for the Small Business CGT Concessions but this will increase who can get the $20,000 instant asset deduction for one year.

  • Div 7A changes

This will be amazing but won’t happen till 1 July 2018 (10 year loans, repayments and interest only due at 3,7 and 10th year, UPEs not loans…)

  • GST on all low value imported goods
  • Simplified BAS for small businesses (just two labels)

Summary

So almost no difference at all other than the discount and negative gearing changes. But I am tempted to vote for the Coalition just on the Division 7A changes, but this is more an administration issue rather than fixing the revenue side of the income statement.

So I might just buy a sausage sandwich before I go in to vote and see where the tomato sauce lands…

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R&D concessions go full circle

In the 2014/15 Budget the Government announced they would reduce the tax offset rate for the R&D Tax Incentive by 1.5%. This Bill was introduced in 2015 and has since been blocked by Labor and the cross benchers in the Senate.

But, over two years later, Labor has just announced if it wins the election it will pass this reduction to the rate of the offset.

And a timeline…

  • When I first claimed the R&D concessions it was a 150% deduction for R&D expenditure – which at a 30% company tax rate is a 15% return on any R&D expenditure.
  • It then got reduced to a 125% deduction for R&D expenditure – which at a 30% company tax rate is a 7.5% return on any R&D expenditure.
  • It then got changes to, for the big end of town, a 40% tax offset, which at a 30% tax rate is a 10% return on any R&D expenditure.
  • It then got capped to only $100 million of R&D expenditure per group per year.
  • And now, irrespective of who wins the election, for the big end of town it will be a 38.5% tax offset, which at a 30% tax rate is an 8.5% return on R&D expenditure.

But it is worth remembering the policy for the 1.5% reduction in the 2014/15 budget was due to the company tax rate dropping by 1.5% to 28.5% for small businesses (which happened on 1 July 2015). If the Coalition wins the company tax rate for small businesses from 1 July 2016 will be 27.5%. So it is likely a coalition government will reduce the offset rate to by another 1%.

At its worst, the R&D Tax Concession was an uncapped 7.5% return of R&D expenditure. Soon it will be a capped 8.5% return on R&D expenditure, and there is a good chance it will drop again to a capped 7.5% return on R&D expenditure…

Around in circles we go.

FYI, for the small end of town, for companies with a turnover of less than $20 million, the current rate is an offset of 45% but this will reduce to 43.5%.

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