Category: Income Tax & FBT

Rental Property Owners – New Rules!

Housing affordability was a major focus of the 2017 Federal Budget. Among the measures announced was a tightening of some of the deduction rules around rental properties as follows:

Rental Property Travel
Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental propety will be disallowed from 1 July 2017. Before this date, the rules were very generous and allowed an owner to claim everything from airfares, accommodation, overseas travel (in certain circumstances) and car expenses incurred when:
  1. Preparing a property for new tennants
  2. Inspecting the property during or at the end of tenancy
  3. Undertaking repairs, where the repairs are because of damage or wear and tear incurred while you rented out the property
  4. Maintaining the property (e.g. cleaning or gardening) while it is rented or available for rent
  5. Collecting the rent, and
  6. Visiting your agent to discuss your rental property.

In light of these changes, there are a few important take away points for property owners as follows:
  • Category (a), (c) and (f) expenses appear to be still claimable under the new rules (we will need to await the final legislation to confirm this)
  • This measure will not prevent investors from engaging third-parties such as real estate agents for property mamagement services. These expenses will continue to be deductible. Indeed, if the travel is costly (e.g interstate) then you may wish to engage third parties to undertake Category (b), (d) and (e) expenses from 1 July 2017 rather than you personally.

Restriction on Depreciation Claims
From 1 July 2017 “plant and equipment” depreciation deductions are now limited to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property such as dishwashers and ceiling fans. This change was made to address concerns that some “plant and equipment” items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors…….

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Tax Relief on Changing Business Structures

Whilst the ability for a small business to change their legal structure without attracting a tax liability has been available for a little over 15 months, it may be one of those areas that small business and tax practitioners are still coming to terms with. This tax tip considers:
The eligibility criteria;

  • How the provisions work; and
  • What are the impacts. 

Is My Business Eligible 

To be eligible and to gain access to the rollover provisions, a number of tests must be satisfied as follows: 

  1. Both the transferor and the transferee must be small businesses 

This means that both the transferor and the transferee must be businesses each with an aggregated turnover of less than $10 Million.  Note that this aggregated turnover not only relates to the subject entity, but also to entities that may be affiliated or connected with the subject entity. Care is required in determining the applicability of this test as the affiliated or connected with test can be quite complex. 

  1. The restructure must be part of a genuine restructure and not part of a tax driven scheme 

Whether or not a restructure is “genuine” will depend on the specific circumstances surrounding the restructure. The guidelines that accompanied the restructure legislation provide some details on what may be considered a “genuine restructure” and include:

  • A bona fide commercial arrangement has been undertaken to enhance business efficiency;
  • The business continues to operate following the transfer, through a different entity structure;
  • Transferred assets continue to be used in the new business structure;
  • The new structure that has been adopted has taken professional advice when setting up the business;
  • The restructure is not artificial or unduly tax driven; and
  • The restructure is not a divestment of assets or a preliminary step to facilitate the disposal of assets outside the business. 
  1. Ultimate economic ownership must be maintained before and after the restructure 

The ultimate economic owners of an asset are the individuals who, directly or indirectly, own an asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership be maintained. Where a discretionary trust is involved, this means that there is no practical change to the individual beneficiaries who ultimately benefit from the assets before and after the transfer. 

How The Provisions Work 

A business can be operating either as a sole trader, a partnership, a company or as a trust. There may be a time when the business owners believe that they have “outgrown” their current trading structure and that the structure no longer meets their needs. This could involve asset protection issues, commercial requirements, public perception, etc.  The Rollover Provisions provide opportunities for a business to restructure from one legal entity to another without incurring a range of tax liabilities that would normally arise when such a transaction is performed. 
It is important to note however that the rollover provisions only apply to certain “active assets” of a business. Such assets are normally CGT assets, depreciating assets, trading stock and other assets that form part of the operating business being restructured.  The rollover does not apply to certain assets such as shareholder or beneficiary loans or  passive assets held in a structure. 

What Are The Impacts 

There are a number of impacts that you should consider before applying the restructure rollover measures including:

  • Assets are taken to be transferred at their tax cost and as such will not result in an income tax liability to either the transferor or the transferee.
  • There is no requirement for any consideration (market value or otherwise) to be provided by the transferee in exchange for those assets.
  • In relation to specific asset classes, the following should be considered:
  • Pre-CGT assets retain their pre-CGT status.
  • Post-CGT assets are taken to be acquired by the transferee at the date of transfer for their cost at that time. This means that to be eligible to claim the CGT discount on any subsequent sale from the new structure, you will need to wait at least 12 months.
  • Access to the 15 year exemption however as part of  the small business CGT concessions is not affected as the transferee will be taken to have acquired the asset when the transferor acquired it (different to the CGT discount).
  • Trading stock can either be transferred at the transferor’s cost or at the market value of that stock held by the transferor at the start of an income year.
  • Revenue assets take the cost which will result in no profit or loss to the transferee.
  • Depreciating assets will be transferred at the written down value of those assets at the date of the transfer and then continue to depreciated using the same method and effective life that the transferor was using. 
  • There may also be issues to consider in relation to GST or stamp duty on the restructure so professional advice should be sought when utilising the rollover measures. 
  • The restructure provisions can have a very positive outcome for small businesses looking to restructure their affairs, but ensure you seek appropriate professional advice as there may also be some other implications that result in unwanted outcomes..

ATO Debt Alert

From 1 July 2017 the ATO is cracking down on businesses with large debts owed. This could have far-reaching consequences for affected businesses. As a result, action may need to be take before this deadline.

BACKGROUND
The ATO is currently owed more than $19 billion in overdue tax. Of this, approximately two-thirds is owed by small businesses (those with a turnover of less than $2 million). This presents a delicate balance for the ATO and Government with the need to protect Government revenue coming up against the desire not to send businesses ‘to the wall’ and the flow-on costs that come with that (unemployed staff etc).
However, in the Mid-Year Economic and Fiscal Outlook (MYEFO) it would seem that the Government has had enough, announcing a rather dramatic debt measure that all business taxpayers should take note of.

DETAILS
In MYEFO,which is the Government’s mid-year Budget update in December, it was announced that where an entity meets the following criteria in relation to an ATO debt, the ATO will be permitted to disclose this debt to Credit Reporting Bureaus:
  • You or your business has an ABN
  • Your debt is more than $10,000
  • Your debt is more than 90 days old and
  • You have not engaged the ATO in respect of repaying the debt.

This is a big shift from current practice where the consequences of not paying ATO debt have no real tangible impact on your day-to-day operations other than the incurring of a General Interest Charge (currently 8.75% compounding daily) and the issuance of a Director Penalty Notice requiring company directors to personally pay outstanding PAYG Withholding and Superannuation Guarantee Charge. By contrast, the implementation of this new policy (which at the time of writing (March) is set to go ahead) could have profound effects for a small business. Credit default ‘black marks’ last for five years. In the worst of cases, support from financiers may be withdrawn and supplier credit stopped.

ACTION POINTS

This change does not require legislative passage through the Parliament. As such the ATO is free to implement this policy from 1 July without Parliamentary approval. Given the profund consequences of a 5-year credit ‘black mark’ on a business (potentially drying up finance) we would strongly recommend that businesses who meet the above criteria with respect to a current ATO debt either (a) repay the debt to at least below the $10,000 threshold or (b) enter into a payment arrangement with the ATO before 1 July 2017. Indeed, irrespective of whether the above conditions are met, it’s always best practice to engage with the ATO by entering into a payment arrangement. Having a record of cooperation and compliance can assist in future ATO dealings in respect of extensions/leniency etc.

The good news is that the ATO is very flexible with payment arrangements – they will generally make every effort to accommodate your requirements. The ATO can also offer interest-free repayment plans to some small businesses in relation to Activity Statement debt. To enter into a payment arrangement, you should phone the ATO on 13 28 66 or get your Accountant to contact them on your behalf.
The ATO provide further guidance on help with paying debts at https://www.ato.gov.au/general/paying-the-ato/help-with-paying/ 

To read this entire article log into the ATR members area here //taxreporter.com.au/wp/wp-login.php see Bi Monthly update May/June page 9.

https://www.ato.gov.au/general/new-legislation/in-detail/other-topics/improve-the-transparency-of-tax-debts/

It’s FBT TIME

31 March marks the end of the Fringe Benefits Tax year. This article aims to assist employers to get their affairs together with a view to ascertaining and minimising their 2016/2017 FBT liability.

COLLATION AND SOFTWARE FILE
While it will generally fall to your Accountant to:
  • Determine whether a fringe benefit has been provided by you to an employee or their associate (e.g. spouse)
  • Determine whether an FBT exemption applies
  • Determine the taxable value of your fringe benefits
  • Ascertain your FBT liability
  • Complete and lodge your FBT return….

… there is something you can do to assist with this process.You may wish to collate/detail all the instances where a private expense of an employee has been paid for by the business. If you or one of your employees is responsible for maintain the accounting software file (entering and coding each transaction undertaken by your business) ensure that the file is in good order. From an FBT perspective this involves coding personal expenses paid by the employer to an “employee benefits (FBT)” account in the management accounts. This will alert your Accountant to the existence of a potential fringe benefit.

CAR FRINGE BENEFITS
Operating Cost Method
If you use the Operating Cost Method to calculate FBT on motor vehicle usage, in order to calculated the private use percentage (and therefore the FBT payable), you will need to maintain a valid log book recording your usage of the vehicle over a 12-week sample period. Failure to do so, will result in the entire use of the vehicle being subject to FBT (therefore, it’s vital to have a valid log-book). Provided there has been no substantial change in the usage of your vehicle (in terms of the mix between work and personal use) a new log book mush be prepared it one was not prepared for any of the previous four years.

Therefore, if you first kept a log book for 2011/2012 FBT year, you are required to have kept a new log book for the current 2016/2017 FBT year. Leading up to the end of March, if you do not yet have a valid 2016/2017 log book, don’t panic! Although we are now right at the end of the FBT year, it is not too late to keep a log book to substantiate the private use of the vehicle for 2016/2017.

Log books can commence as late as right at the end of the FBT year even though the end of the 12-week period for which it needs to be maintained may extend beyond the end of the FBT year in which the log book commenced. You can purchase a log book from you local Newsagent or you can download one of the innumerable log book apps on the market, either from the AppStore or Googleplay as the case may be.

Upon completion, ensure the log book contains the following information, in English:
  • Car details, including registration number
  • The date the journey began and the date the journey ended
  • Odometer readings at the commencement and conclusion of each journey
  • Number of kilometres travelled by the card in the course of the journey
  • A description of the purpose or purposes of the journey (generic descriptions such as ‘business trip’ are not adequate)
  • Business and private kilometres travelled (although this is not a legislative requirement, it may help with collating data for FBT purposes).

Also ensure that if using the Operating Cost method, you capture the odometer reading at every 31 March. Furthermore the Statutory Formula Method is the default option therefore to use the Operating Cost Method the employer should have an election in place.

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