Some key business issues which may be relevant prior to the end of the financial year include the following.
Reduced company tax rate
As currently enacted, a base rate entity will be entitled to pay tax at a corporate rate of 27.5% for the year ended 30 June 2018 if it is carrying on a business and its aggregated turnover is less than $25 million. Furthermore, as currently legislated, eligibility for the lower corporate tax rate of 27.5% will be expanded in the year ended 30 June 2019 to include a company carrying on a business whose aggregated turnover is less than $50 million. Accordingly, some companies whose aggregated turnover is over $25 million but less than $50 million will need to recognise that their corporate tax rate will be cut from 30% to 27.5% in the 2019 year and determine the related impact of the reduced tax rate on their cash flow management, dividend repatriation policy and other business strategies. Companies which do not satisfy the relevant aggregated turnover threshold in the applicable years and/or who do not carry on a business will continue to apply the standard company tax rate of 30%.
Changed imputation rate
The cut in the company tax rate for a company which is a base rate entity has also resulted in changes to the maximum franking credit which can be passed on to shareholders which is based on a company tax rate determined according to the aggregated turnover made by the company in the immediately preceding year. Hence, a company which is a base rate entity must work out its company tax rate for franking purposes in the 2018 year as if its aggregated turnover for the 2017 year had been notionally derived in the 2018 year. Accordingly, if a company which is a base rate entity for the 2018 year derived an aggregated turnover which is less than $25 million in the 2017 year it will frank any dividend it makes during the year ended 30 June 2018 at a rate of 27.5% on the basis that its 2017 aggregated turnover is taken to apply in the 2018 year albeit for franking purposes only. However, if a company’s aggregated turnover threshold for the 2017 year is equal to or exceeds $25 million the maximum franking credit that can be attached to a dividend paid in the 2018 year will be based on a 30% company tax rate. It is therefore important that a company which is a base rate entity for the year ended 30 June 2018 apply the correct tax rate in applying the franking provisions especially as there may be a difference between the rate at which it pays tax during the year ended 30 June 2018 and the company tax rate which is used in determining the maximum franking credits that can be on-passed.
Proposed corporate tax rate changes
To further complicate the complexity of the lower company tax rate and related imputation changes the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill (2017) proposes to replace the requirement that a company must be carrying on a business in order to be a base rate entity with the requirement that the company’s assessable income must be comprised 80% or less of passive income in the relevant income year. If enacted this change is currently proposed to apply from the year ended 30 June 2018 onwards and may change whether certain companies are base rate entities for tax rate and franking purposes for the 2018 year and for subsequent years.
Small business tax offset
An individual is entitled to the small business income tax offset for the year ended 30 June 2018 being 8% of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’. This offset is available to sole traders who would meet the requirements of being a small business entity, and to individuals who are not a small business entity, but who are assessed on a share of the income of a small business entity in that they are a partner in a partnership that is a small business entity or a beneficiary of a trust that is a small business entity. An entity is a small business entity for these purposes if it carries on business and its aggregated turnover for the 2018 year is less than $5 million. An individual is only able to claim one small business tax offset for an income year irrespective of the number of sources of small business income derived by that individual and the maximum amount of the offset is capped to $1,000 per year.
Small business entity (SBE) concessions
A small business entity is entitled to a range of concessions for the year ended 30 June 2018 which potentially offer a range of tax savings to eligible entities. To recap an entity will be regarded as an SBE for the year ended 30 June 2018 if it carries on business in the 2018 year and its aggregated turnover is less than $10 million for that year. It is important to recognise that the aggregated turnover test not only requires the calculation of the taxpayer’s annual turnover but also that of any affiliate or entity connected with the taxpayer at any time during the year. Aggregated turnover can be calculated under the look back, look forward or actual results tests. Care should therefore be taken in certain cases to confirm that an entity is an eligible SBE where it is part of a group with related entities.
The specific concessions available include:
- simpler depreciation rules including access to the immediate deduction for any depreciating asset costing less than $20,000 provided the asset was acquired after 12 May 2015 and is used or installed ready for use by 30 June 2018. Depreciating assets costing more than $20,000 acquired during the 2018 year can also be depreciated as an addition to the general small business pool at 15% (regardless of the date of acquisition) if used or installed ready for use by 30 June 2018 (and at 30% in subsequent years). The opening balance of prior year pooled assets is similarly depreciated at 30%. It is important to recognise that the Federal Government proposed in the 2017-18 Federal Budget on 8 May 2018 to extend the $20,000 threshold for a further 12 months until 30 June 2019 which should be factored into your future investment decisions assuming this change is legislated.
- immediate deductibility for capital expenditure incurred in the 2018 year in relation to a proposed business structure including legal and accounting advice on how the business can best be structured and implemented.
- simplified trading stock rules which relieve entities from undertaking a year-end stocktake where the value of trading stock $5,000 or less.
- roll-over relief for restructures of small businesses which potentially allows small business owners to restructure their operations without triggering any adverse tax consequences upon the transfer of CGT assets, depreciating assets, revenue assets and trading stock between entities sharing the same ultimate economic ownership. This could be advantageous where the businesses evolved and should now be conducted in a different and more appropriate form of legal entity. However, care must be taken to ensure that the various eligibility conditions required to access the rollover are satisfied.
- immediate deductibility for certain prepaid business expenses which may accelerate the timing of certain deductions with related cash flow savings.
- accounting for Goods and Services Tax (GST) on a cash basis.
- annual apportionment of input tax credits for acquisitions and importations that are partly creditable.
- paying GST by quarterly instalments.
- Fringe Benefits Tax (FBT) car parking exemption which may reduce an employer’s FBT liability as well as its compliance obligations.
- Pay As You Go (PAYG) instalments based on gross domestic product (GDP) adjusted notional tax.
CGT small business concessions
Very broadly, there are significant tax savings potentially available where an eligible active asset used in a business is sold at a capital gain, and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2018 year. However, the Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 proposes to introduce additional basic conditions that will be required to be satisfied in respect of capital gains arising from the disposal of an active asset being shares in a company or interest in a trust effective from 1 July 2017. These extra new conditions are essentially designed to ensure that the small business concessions are only available for CGT assets that are either used or held ready for use in the course of carrying on the small business or are shares in a company or an interest in a trust which is itself a small business. As the proposed changes take effect from 1 July 2017 it may be necessary to review any sales that have occurred during the year ended 30 June 2018 of an active asset being either a share in a company or an interest in a trust to make sure that the eligibility conditions are satisfied if this Bill is enacted. In addition, the Federal Government also proposed in the 2018-19 Federal Budget on 8 May 2018 that partners in a partnership who alienate their rights to future income arising from their interest in the partnership to a related entity will not be able to shelter any capital gain arising on the assignment or creation of such rights under the small business CGT concessions effective from 8 May 2018. Given these complex proposed amendments to a set of already complicated provisions specialist advice should be obtained on the application of the CGT small business concessions in relation to a business sale or restructure especially in respect of the proposed changes.
The trustee of a non-fixed trust should document the exercise of any discretion regarding distributions of trust income by 30 June 2018 (or any earlier date required under the trust deed) to ensure that beneficiaries are presently entitled to all trust income and therefore ensure that the trustee will not be potentially subject to tax at a penalty rate of 47% in respect of trust income to which no beneficiary has been made presently entitled. Such distributions should be made in accordance with the definition of trust income set out in the relevant trust deed. Prior to making such beneficiaries present entitled it may also be prudent for the trustee to determine whether any beneficiaries should be made specifically entitled to capital gains or franked dividends from a tax planning perspective with only the balance of trust income been distributed to presently entitled beneficiaries. Care should be taken to ensure that any exercise of the trustee’s discretion to make beneficiaries specifically entitled to such amounts is permitted under the trust deed and satisfies all the requirements imposed under the tax law.
It is prudent to determine whether any payments, loans or debt forgiveness made by a private company to a shareholder (or an associate of a shareholder) have been made during the year ended 30 June 2018. Where this has occurred during the year it should be determined whether any exemptions potentially apply, and if not, what strategies which could be employed to ensure that a deemed dividend does not arise in the 2018 year in respect of any such payment, loan or debt forgiveness. It is particularly important to recognise that an unpaid present entitlement which is owed by a trust to a related private company beneficiary who effectively lends those funds back to the associated trust will be treated as a loan for Division 7A purposes which was again confirmed by the Federal Government in the 2018-19 Federal Budget on 8 May 2018.