New rules, reviews and proposed changes to tax legislation mean the owners of small and medium-sized enterprises will need to take particular care if they are to minimise their tax liabilities this year and avoid creating a significant tax burden for the future.
New rules, reviews and proposed changes to tax legislation mean the owners of small and medium-sized enterprises will need to take particular care if they are to minimise their tax liabilities this year and avoid creating a significant tax burden for the future.
Key issues to look at include:
Division 7A deemed dividend rules
Those using private companies for business or investment should be aware of two important issues relating to the Division 7A rules. Firstly, proposed legislation is due to be introduced this financial year (with effect from 1 July 2009), which will seek to tax shareholders, their family members, and associated entities such as trusts on their use of the company's assets. The changes are mainly aimed at 'lifestyle assets' such as holiday homes, boats and cars, but can also apply more broadly, and come into effect if the assets are being used without a market value rent being paid to the company. There are exceptions to the rules, including 'minor benefits'; 'business use' assets; and use of a residence integral to a business. Solutions to this issue include paying market value rental for the right to use the asset, or transferring the assets out of the private company to another entity such as a trust.
The second issue is a draft Australian Taxation Office (ATO) ruling that seeks to treat withheld trust income as a loan back to the trust. This will apply where the income has been allocated to beneficiaries, but the funds have not actually been paid. The loan would then be subject to the deemed dividend rules in Division 7A, and would need to be either repaid in full, or put on a commercial footing via a complying loan agreement. The draft ruling has generated great concern since its release in late December 2009, and the ATO is currently considering its position before issuing the final ruling some time prior to 30 June. It is important to note that the draft ruling is likely to apply to most typical situations only from the 2010 year onwards, although in certain cases the ATO has said that it would seek to apply its views retrospectively.
Use of family trusts
Those who run a small business through a trust (or invest via a family trust) generally have the opportunity to allocate income to other family members to help manage tax.
However, anyone using a trust structure, especially a discretionary trust, should watch out for the final decision in Bamford's case, which started in the High Court on 2 March. This case involves fundamental issues regarding the way that trust income and capital gains can be distributed among different beneficiaries for tax purposes, and the way in which the trust deed is able to define trust income. Depending on the outcome of the case, it may be necessary for taxpayers and their advisers to review all trust deeds and trustee resolutions to ensure that they operate as intended.
Small business CGT concessions
The small business CGT concessions offer significant opportunities for restructuring with little or no immediate tax cost, including transferring assets between related entities; facilitating succession planning by transferring ownership of business entities or business assets to the next generation of family members; and unlocking equity in business assets by borrowing to fund an asset transfer. There are a number of conditions that must be satisfied when applying the concessions. One important change to the 'grouping' rules was legislated in 2009, with effect back to 2007, which applies when an asset is owned by one entity and used in the business of another entity, and business owners should ensure they fully understand these rules in order to claim the concessions. Also, while the CGT may be minimised or eliminated using these conditions, restructuring in these circumstances often involves a stamp duty cost that should be considered.
Government tax break
Depreciable assets that were ordered before 30 June 2009 and are first used early in the 2010 tax year should be considered for a tax deduction. Under the federal government's economic stimulus package, businesses (other than small businesses) are eligible for a 30 per cent tax deduction on assets costing at least $10,000; ordered between 13 December 2008 and 30 June 2009; and ready for use by 30 June 2010. This also applies to an improvement to an existing asset. A 10 per cent tax deduction is available in the 2010 year for assets ordered between 1 July 2009 and 31 December 2009.For a small business entity the rules are even more generous, with the limit reduced to $1000 and a 50 per cent tax deduction for assets ordered up to 31 December 2009 and ready for use by 31 December 2010.
Non-commercial loss rules
An individual or partnership carrying on a small business separately to their main income may be able claim a business loss against other income if they satisfy one of the four tests in the non-commercial loss rules. The non-commercial loss rules were introduced to restrict the ability of individuals to claim business losses from what are really hobbies. A common example is professionals on high salaries who are 'weekend farmers' and wish to claim losses in the farm business against their main salary. From 1 July 2009, an additional rule has been introduced for individuals whose 'adjusted taxable income' exceeds $250,000. For these people, the losses cannot be claimed even if one of the tests is satisfied unless the individual is able to obtain a private ruling from the ATO on the basis that there are 'unusual circumstances'. Adjusted taxable income includes taxable income, reportable fringe benefits and 'salary sacrifice' super contributions, and excludes the effect of negatively geared investment losses. This change will make it much harder for high income earners to claim business losses and is likely to generate a spate of private ruling requests.
Top five tips
The overall approach is to defer income until the next tax year, but claim expenses in the current year in order to postpone the payment of tax for another year.
- Review PAYG instalments and the estimated income tax payable for the year to determine whether the instalment for the June quarter can be varied.
- If money has been borrowed from the company, minimum payments must be made before 30 June. If payments aren't made, the ATO may classify the entire amount as a dividend and tax the sum accordingly.
- Pay employee super guarantee contributions before 30 June so they can be included as a deduction in this year's tax return.
- Businesses with a turnover of less than $2 million should consider prepaying expenses for up to 12 months, as the amounts are then deductible in the year
of the prepayment. - Write off any bad debts before 30 June, and claim a GST refund for any amount already remitted to the ATO for the debts.
