Tax Rambling

Mr Koutsantonis (SA Treasurer) and Mr Weatherill (SA Premier) are not backwards in making this claim…

“Reports show that financial services are significantly undertaxed by more than $4 billion per annum because their GST treatment differs from other industries,” he said.

“States previously applied taxes to banks and the financial sector, yet gave those revenue streams up as part of the introduction of the GST.”

So if the South Australian government wants to increase revenues by adding a bank tax as they don’t get enough GST from the banks, if they want to place a “proxy GST” on financial supplies, then please banks, remember that the GST is a tax on consumers… So as all other businesses do, pass on the tax onto your consumers. That is how the GST works!

BUT, as only the South Australian government is getting this tax, this extra GST replacement, then the banks should only pass on the tax to the residents of South Australia.

Please banks, raise the home loan interest rates of those residences in South Australia. Please banks, reduce the deposit interest rates for South Australians. Please banks, do not reduce dividends as that would be passing the tax onto residents of other states (and I have lots of bank shares…).

Not only does this passing on the bank tax to the residents of South Australia create the correct incidence of tax to mimic the GST, but it also would be really, really funny seeing how the SA Treasurer and Premier are going to splutter about the banks doing this…

On Budget night the Government announced the following, at least the parts in the quotations that follow. This is easily the biggest business risk to the tax depreciation industry ever.

While no real clarity as to what changes the Government will make can be achieved until we see the legislation, based on what is in the Budget papers, there may not be much of a tax depreciation industry left…

“From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. “

So why are they doing this?

“This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. “

This occurs when I buy a $1,000 dishwasher for my rental property, depreciate it to zero and sell my rental property to you for $1 million. I treat the whole sale price as a payment for the rental property, and none of it for the dishwasher. I do this as the gain rental property is concessionally taxed under the 50% CGT discount while there is no such concession on the balancing adjustment that arises if I sell you a depreciable asset greater than its written down value.

You call in a tax depreciation specialist who states in the prepared tax depreciation schedule you purchased the building for $999,500, and the dishwasher for $500. You claim $500 in depreciation.

This dishwasher has now been depreciated 1.5 times… and this can happen again and again…

“Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.”

If you owned the property before the budget, there will be no change to your depreciation claims.

But many of these owners already have their tax depreciation schedules. So not a lot of new work here, and much less over time.

“Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset.”

Irrespective of when you bought your rental property (before or after Budget night), if you go out and buy a dishwasher from Harvey Norman for your rental property, you can depreciate it.

But as I have an invoice and a debit in my bank account as I bought the dishwasher I don’t need a tax depreciation schedule to work out what to claim for these depreciable asset. Arguably, I can’t even use an estimate of the cost in a depreciation schedule for this dishwasher I personally bought as I know the actual price, and I am going to need to keep the invoice to show I personally bought it to be able to claim any deductions at all.

“However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.”

If I buy a property that has depreciable assets in it that someone else paid for, including the developer of new residential property who purchased the item and is the previous owner of the property, then I can’t depreciate these items so I don’t need a tax depreciation schedule.

Reading the words of the announcement literally, and that is all we can do until we see any legislation, unless you are the owner/builder, or you own the land and you pay the builder to build on your land, or doing renovations, including a knock down/rebuild to the rental property you own, or you owned the property before the budget, then you can’t claim depreciation so you don’t need a tax depreciation schedule.

Even if you are an owner/builder or building on land you own or you are doing a renovation you need to show you personally bought the depreciable asset to be able to claim depreciation. The only way to prove this is to show that you paid for it, which means you know the actual price. Once again, if I know the actual price, I can’t use an  estimation in tax depreciation schedule instead. So even owner/builders and renovators will not need a tax depreciation schedule.

So, unless you bought the property before budget night, then all you need in a tax depreciation schedule is just the Div 43 deduction, being 2.5% of the undeducted construction expenses. I am pretty sure that the fee for estimating this one number number (the undeducted construction expenses) is not not going to be enough to keep all the current industry going as the pre budget properties work starts to wind down.

As promised to all those attending the Centrepoint master class tomorrow, below are the slides and technical paper.

Small Business Restructures and Super Paper

Small Business Restructures and Super Presentation

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

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…

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…

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.

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…

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.

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…