What changed on 1 July 2013

Here’s a brief summary of what changed on 1 July:

  • The minimum rate for superannuation guarantee contributions increases from 9% to 9.25%. The rate will continue to increase steadily until it reaches 12% from 1 July 2019 onwards.
  • The upper age limit for super guarantee has been removed. That means eligible employees aged 70 and over will receive super guarantee.
  • For those aged 60 and over, you will be able to contribute more to superannuation with the concessional contributions cap increasing to $35,000 (up from $25,000). The concessional contributions cap for those aged 50 and over will increase to $35,000 from 1 July 2014.
  • An increased tax rate applies on contributions made by high-income earners with a ‘total income’ in excess of $300,000.
  • The net medical expenses tax offset (NMETO) will be abolished although there will be a transitional period for those currently claiming the offset. The NMETO previously allowed you to claim a tax offset for medical expenses above the threshold.
  • For the 2013 income year, companies will be able to carry back up to $1m of tax losses incurred in the 2013 income year to recoup tax paid for the 2012 income year. This change assumes the legislation makes it through Parliament. The refundable tax offset that can be claimed is limited to the company’s franking account balance for that year.

Time to Start Thinking About Tax time

The countdown to the end of the financial year is on and that means you should start to focus on your end of financial year position and any tax planning that is appropriate for you. Don’t leave it till the last minute. No decision, or rushed decisions, can lead to the wrong outcome. Here is the starting point of the process:

1. Get your health & hygiene tax list together

There are lots of little things that need to be attended to that can add up to tens of thousands of dollars in tax savings. Writing off bad debts, maximising stock valuation outcomes, declaration of bonuses and director fees, prepayments, income deferrals, trustee resolutions to appoint income, maximising depreciation charges, superannuation payments.

2. Where are the bigger tax planning opportunities

Beyond these health and hygiene opportunities there may be larger tax planning opportunities that should be considered. This could include being eligible to claim R&D tax concessions, taking advantage of the loss carry back rules to get a refund of company tax paid in the last year, and export market development grant eligibility. All of these opportunities are time sensitive and time limited. The things you do between now and June 30 could make a significant difference in the benefit obtained.

3. Are you creating permanent benefits or simply a timing advantage?

Consider whether your decisions are creating a permanent benefit or simply deferring the tax liability to a later date. Both can be valuable however permanent benefits will always be more valuable. This is relevant if you have to create a hierarchy of the options. You may not be able to do everything possible.

4. Are there cash flow implications?

An essential consideration. Some of the options will require you to spend money, bring forward expenditure or defer income. These will all have cash flow impacts and you need to ensure that creating the best tax outcome does not cause a short-term cash flow problem. Calculate the funding impact of your choices and if you need funding support from your bank, then talk to them early. You need to map out how much you need, how long you’ll need it for, and what is being covered.

5. Are there any risks?

Keep in mind that there could be some risks with the decisions being taken. These could include tax risks, funding risks and business risks. Tax benefits always need to stack up on the risk to reward matrix. Quantify the benefit and assess any risks.

You should take advice on your tax planning. Spend some time with your accountant and map out a plan that works for you.

If you feel like you need support in making your way through the uncertainties and tough times ahead, or simply have a question or want more information, please contact PJS Accountants on (07) 33903177 or click here to contact us.

The Pitfalls of Accessing your Company Profits

One of the benefits of operating a business through a private company is the ability to access a flat 30% tax rate on profits. However, shareholders often forget that the 30% corporate tax rate is only intended to apply while the profits are being used in the company’s business or investment activities. The Government and ATO’s expectation is that top-up tax (if any applies) should be paid by shareholders at their marginal tax rates once they have access to these profits.

Even though accessing company profits is an issue affecting all shareholders of private companies, the tax rules can be extraordinarily complex and can lead to some very harsh tax outcomes.

Take the example of a private company with one shareholder and makes a profit of $100,000 in the 2013 income year. The company pays tax of $30,000, leaving $70,000 of after-tax profits. Let’s say the shareholder takes $70,000 from the company bank account during the 2013 income year to do some renovations on their home.

One option to access these profits is for the company to pay a fully franked dividend of $70,000 to the shareholder. Assuming the shareholder is on the top marginal tax rate of 46.5%, top-up tax of $16,500 will need to be paid by the shareholder after they have claimed the benefit of the franking credits attached to the dividend (i.e., representing the tax already paid by the company on its profits). This means that the $100,000 profit originally made by the company has been reduced to $53,500 by the time all the tax has been paid by the company and shareholder.

Another way of accessing the funds is to simply treat the arrangement as a loan from the company to the shareholder. However, unless a complying loan agreement is put in place by the earlier of the time the company lodges its 2013 tax return and the due date for lodging that return, the tax rules treat the shareholder as having received a $70,000 unfranked dividend. Assuming a marginal tax rate of 46.5%, an additional $32,550 in tax will be paid by the shareholder. The end result is that the $100,000 profit originally made by the company has been reduced to $37,450 by the time all the tax has been paid by the company and shareholder. This is an effective tax rate of 62.5% – ouch!

A common method of managing loans from the company and deferring the top-up tax liability is for the shareholder and company to enter into a complying loan agreement with a 7 year loan term and with the interest rate linked to the ATO’s benchmark rates each year. While this might defer paying some additional tax in the short-term, it may not lead to the best outcome over the term of the loan.

This is because interest will accrue on the loan each year. For every dollar of interest that accrues on the loan, 30% needs to be paid to the ATO in tax by the company. Then, when the shareholder wants to access those funds again there can be further top-up tax of up to 16.5% when dividends are paid.

In some cases, using a loan agreement between the company and the shareholder may still be the best option from a tax perspective. If so, the loan needs to be managed carefully on a year to year basis to ensure that minimum annual repayments are being met. Also, shareholders should look to make repayments as early as possible each year to minimise the interest that accrues on the loan. Every dollar of interest saved can represent a cash saving of up to 46.5c to the shareholders when the funds eventually come back to them.

These scenarios only cover a fraction of the tax issues that can be triggered when shareholders want to access company profits. The general rule is, if something belongs to a company (including cash, boats, holiday homes etc.,) and is used by a shareholder (or a family member or other related entity), then there might be some tax to pay unless the situation is managed very carefully.

Given the complexity of the tax system and the significant tax liabilities that can be triggered when a shareholder or other related party accesses company profits or assets, it is important to seek advice and explore the alternatives available. In some cases shareholders may actually be better off triggering an up-front tax liability by declaring franked dividends and then borrowing funds from a bank to fund the top-up tax rather than trying to access company profits in the form of a loan.

Let us know if you would like to explore better ways of dealing with this common problem!

On the Fringe: Top FBT Myths & Opportunities

Fringe benefits tax (FBT) exists to ensure that employees are not getting income disguised in another form and avoiding income tax. But such a broad concept has its problems. With the FBT year ending on 31 March, it’s a good time to explore the myths and realities of fringe benefits and why so many employers get it wrong.

Myth 1 Motor Vehicles

You don’t pay FBT on company cars. As soon as your team start taking the company car home at night, use it to travel to and from work, use it on weekends, or generally use it for their own purposes, then FBT will apply. Even if the team member doesn’t actually use the car on weekends and it stays in their garage, the fact that it is available for their use would generally mean that FBT applies. Similarly, if the place of business is the same as your place of work, fringe benefits tax generally applies.

FBT also generally applies to road tolls paid by the business and incurred by team members travelling to and from work, or when travelling for private purposes.

The ATO has recently announced a new data matching program for high value vehicles. We presume they are trying to identify luxury vehicles within business where no FBT has been declared on their use.

Myth 2 Directors

FBT does not apply to directors who are also shareholders. If you receive benefits in connection with your role as a director then the FBT rules treat you just like any other employee. If you take a company car home or one is available to you, then FBT applies. If you don’t pay for the business’ products and services that you use or pay a discounted rate, then FBT applies. Don’t forget, even though you might own the company, if you are employed by the company, then the same rules apply to you.

The same goes for associates of Directors. If you pick up expenses for your spouse, kids or relatives, or they benefit from discounted goods and services sold by the business, then FBT will apply.

In some situations you might be able to argue that you have received a benefit in your role as a shareholder of the company rather than as a director. While this might stop FBT from applying, it will trigger another set of rules which will tax you personally on the value of the benefit you have received.

Myth 3 Staff benefits

You don’t pay FBT if something is salary packaged. While salary is not subject to FBT, additional benefits such as health insurance packaged into an employee’s salary can trigger FBT. This is even in industries where employees are required to undergo medical testing. In fact, pretty much anything given to staff with a value of $300 or more is likely to incur FBT. There are a number of exceptions but these are very limited.

Salary packaged in-house fringe benefits, where businesses supply staff and their associates with discounted goods and services that are the same as those provided to the customers of the business – such as private schools providing discounted school fees for teachers’ kids or retailers packaging employee discounts – have traditionally been subject to more favourable FBT treatment. However, in the Federal Budget the Government announced they were scrapping the FBT concessions that apply to these benefits. In changes before Parliament, salary sacrificed in-house fringe benefits will be subject to FBT based on the full value of the goods or services from 22 October 2012. The changes are not yet law.

Myth 4 Loans

Advances and loans given to staff don’t incur FBT. Let’s say an administrative error means that a team member has been overpaid by quite a large amount for the last 12 months. The employee can’t afford to repay the whole amount in one go so a repayment plan is agreed to. No interest is charged as it wasn’t the employee’s fault and this wouldn’t be fair. The ATO would consider the overpayment a loan. The fact that no interest is being charged means that FBT would apply. Loans need to be charged interest of at least the ATO’s published interest rate, for 2012/2013 its 7.40%, to avoid paying FBT.

Advances in pay can also be considered a loan fringe benefit.

The most common scenario however, is shareholders being loaned money by the business. In other words, when one of the business owners or their associate (for example a spouse), need some cash and take it out of the business. There are two ways these loans are treated. If the loan is made in connection with the person’s role as a shareholder of a company, then as long as the loan is repaid before the company is due to lodge its tax return for that year, then there are generally no carry over tax issues. However, in some situations these loans can be subject to FBT if they are made to a business owner in their role as an employee regardless of whether they are paid back by the end of the financial year.

Another problem area is when debts are not required to be repaid. If the employer agrees to forgive a loan, then this can also trigger FBT.

Myth 5 Meals

Meals provided to employees are not subject to FBT. While there are some exceptions that apply to meals provided to employees, there are many situations where the provision of food and drink to an employee or their associate is subject to FBT.

The risk of FBT applying increases when you are entertaining, rather than just proving sustenance. For example, food and drink provided at a social function or in a restaurant generally has the character of entertainment and will normally be subject to FBT.

The main exceptions from FBT in relation to food and drink are where the meal is consumed by an employee while travelling for business purposes or where the meal is consumed on the employer’s business premises (for example, a working lunch in the office). Food and drink provided to employees and their associates at a Christmas party or other special occasion can be exempt from FBT if the cost per head is under $300.

The advantage of having food and drink being subject to FBT is that the costs are generally deductible and GST credits can be claimed. Food and drink that gives rise to entertainment but is not subject to FBT is not deductible to the business.

FBT opportunities

On the flip side of FBT compliance are the opportunities that exist:

Relocation expenses

Moving an employee from one location to another? Then, there are some FBT breaks to help. There are a number of items that are completely excluded from FBT or where the taxable value is reduced if certain conditions are met:

  • Relocation consultants to help employees move to a new location by organising removalists, finding accommodation, providing school information etc.
  • The costs of removal and storage of household effects.
  • The incidental costs of selling the employee’s home and buying a new one in the new location such as stamp duty, advertising, legal expenses, agent commission, discharge of a mortgage, borrowing expenses and other similar capital expenses.
  • The costs of connecting or reconnecting gas, electricity and telephone services to the new place of residence or the former place of residence.
  • Temporary accommodation, including the costs of acquiring household goods.
  • Visa application fees and associated medical examination costs.

A number of conditions apply but if they are met, the tax savings can be well worth the effort. Make sure you get advice before acting.

Bringing your spouse to conferences

If your spouse comes with you to a work conference, the cost of the conference accommodation is not subject to FBT as long as there are no additional charges. For example, where the hotel room is sold on a per room basis. If however, there is an additional person charge, FBT applies to just that additional room cost.

FBT exempt utes

While FBT generally applies to work vehicles, if the motor vehicle is a ute, panel van, or any other vehicle designed to carry less than one tonne and not designed principally to carry passengers, then it might be exempt from FBT. For example, a ute could be garaged at an employee’s home without incurring FBT if the personal use of the ute was only incidental.

Laptops, iPads & computers

Employees can salary sacrifice the cost of a laptop computer and software as long as it is predominantly used for work purposes without incurring FBT. The exemption is limited to one laptop per employee per year and means that the laptop is purchased using pre tax income.

If you feel like you need support in making your way through the uncertainties and tough times ahead, or simply have a question or want more information, please contact PJS Accountants on (07) 33903177 or click here to contact us.

Pension Deeming Rates to be Reduced

Clients on full or part government pensions will be pleased to know that the government will reduce pension ‘deeming rates’ from 20 March 2013 to better reflect returns available to them from their financial investments.

Deeming rates reflect the standard rates of return that pensioners can earn from their financial assets. They are used to determine how much pension they are entitled to receive under the means test.

The ‘lower deeming rate’ will decrease from 3% to 2.5% for financial investments up to $45,400 for single pensioners or $75,600 for a couple.

The ‘upper deeming rate’ will decrease from 4.5% to 4% for balances over these amounts.

Payments affected by the deeming rate include means tested payments, such as the Age Pension, Service Pension, Disability Support Pension and Carer Payment, income support allowances and supplements such as the Parenting Payment and Newstart.

If you feel like you need support in making your way through the uncertainties and tough times ahead, or simply have a question or want more information, please contact PJS Accountants on (07) 33903177 or click here to contact us.

Help for taxpayers – Bushfires and floods

The government and the ATO have announced help for taxpayers affected by the recent floods and bushfires that have been plaguing the country for the past weeks.

The government has announced that it will provide tax deductible status to relief funds established to help Australians affected by bushfires and floods. In addition, the ATO will automatically make arrangements to defer the following taxation obligations for taxpayers in the affected areas:

  • Lodgment and payment of the monthly
    December, January and February activity
    statements to 29 April 2013; and
  • Lodgment and payment of December
    quarterly activity statements from the
    original due date of 28 February 2013 to
    29 April 2013.

Taxpayers do not need to apply for a deferral. There are some exclusions, particularly for large withholders and for super guarantee payments generally

If you feel like you need support in making your way through the uncertainties and tough times ahead, or simply have a question or want more information, please contact PJS Accountants on (07) 33903177 or click here to contact us.