How Is your business positioned to weather the economic and financial storm that the next two to four years will bring?

Does your business and management style need a fundamental shift from being tax focused and debt fueled to being focused on profit and cash flow growth?

See the below Tax Tips to help you move forward,

Accelerated Depreciation.

Following the 2021-2022 Federal Budget the TFE (Temporary Full Expensing/100% write off) of depreciable assets was extended from 30^th June 2022 to 30^th June 2023.  Keep in mind that there are rules and limitations.  The most common being the depreciation limit for motor cars being $64,741.

So, before you make a material purchase call us to discuss and ensure that your business and the asset you are buying qualifies.

 

Lower Base Rate Tax for Companies.

Companies that have less than 80% of their assessable income made up of “base rate entity passive income” will be taxed at 25% and not 30%.  This represents a 5% savings, so it is ideal to ensure your company qualifies.  Some traditional structures with corporate beneficiaries will not qualify but there are solutions to secure the 25% tax rate.

If you would like to know if you company qualifies for the lower tax rate call the team at Journey2.

 

Payments made to Contractors.

If your business makes payments to certain contractors, you are required to keep appropriate records and lodge a Taxable Payments Annual Report (TPAR) to the ATO by the 28^th of August each year.  A very simple example is if you use and pay a contract cleaner in your business. More broadly, Contractor payments to the following industries are specifically included:

• Building & Construction
• Courier
• Cleaning
• Information Technology
• Road freight
• Security, investigation, or surveillance

The ATO’s definition in each of the industries is quite broad.  For example in the building and construction industry it can include any of the activities listed below if they are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface > alteration; assembly; construction; demolition; design; destruction; dismantling; erection; excavation; finishing; improvement; installation; maintenance; management of building and construction services; modification; organisation of building and construction services; removal; repair, excluding the service or repairs of equipment and tools; site preparation.

As you can see the industries are many and the definitions of what type of contractors are included are also many so if you require our assistance to perform your annual audit of contractors and your potential obligations or prepare your TPAR call us. 

 

Director Penalty Notices.

As a new, current, or past director you immediately become personally liable for your company’s, or trust’s  unpaid amount for

• PAYG withholding tax
• Goods and Services tax
• Superannuation Guarantee Charge

If and when the ATO issues you with a directors’ penalty notice (DPN) you have just 21 days to either pay the amount in full or enter in to a payment plan (Note: If you enter a payment plan the ATO may still offset your personal credits/refunds against the debt).

The team at Journey2 provide interim tax planning services which allow us to review and notify Directors of any potential DPN’s. If you have received a DPN and need assistance in negotiating a payment plan please call our office.

 

Directors/Shareholders (Debit) Loan Balances.

Simply put this is where you have borrowed or taken money out of the company without paying tax on it and that amount is not repaid by the 30^th of June. The ATO calls these Division 7A Loans and views them as untaxed, unfranked dividends/drawings if not repaid in time.  Where such amounts have not been repaid in full by the required date the ATO requires:

• a formal Division 7A Loan agreement must be entered into,
• the term of the loan must not exceed 25years,
• loans over 7 years, the whole of the loan amount must be secured by a registered mortgage,
• certain loan to value ratios apply,
• if the loan is not secured by a registered mortgage, then the maximum period of the loan is 7yrs.
• Whether the loan period is 1 year or 25 years, the loan will be charged with interest at the Div 7A benchmark interest rate, which is currently, 4.77% pa for the 2023 tax year.
• the Div 7A loan must be formally documented in writing.

Because of the way the tax law is written a separate Div 7A loan agreement is established for any new Div 7A loan amount each financial year, so you could end up with multiple loan agreements for each year’s drawings. Another important point to keep in mind is that if you start off with a 7 year loan but don’t repay it by the seventh year you can then convert to the fully secured 25 year loan but will only have 18 years left to repay it.

We provide interim tax planning services and will advise you of any potential Div 7a loans after the end of each quarter otherwise as part of our year end letter of recommendation to you. Where a Div 7A loan does exist we will, as a matter of course discuss with you, your options, and where instructed prepare the required loan agreement and assist you to structure a repayment program.

 

Is your Contractor really an Employee?

You need to keep in mind that what your definition of what is an employee and what is a contractor may be very different for and  may not necessarily be the same for:

• Income Tax
• PAYGW
• Superannuation
• Payroll Tax
• Workers Compensation

If  what you call a “contactor” is actually an employee, or under the various definitions used in the above, are “deemed” to be an employee then your compliance obligations and the cost to your business increases dramatically as you are now responsible for:

• calculating and deducting PAYGW tax and then remitting this to the ATO
• calculating superannuation guarantee levy obligations and then paying this to their nominated superannuation fund
• calculating payroll tax and then remitting this to the OSR
• paying workers compensation
• and depending upon the industry you could also have to contribute to a Long Service Leave Fund
• record keeping and depending on the services they are providing, preparing and lodging Taxable Payments Annual Report (TPAR)

These additional overheads could add from 15% to 35%, to your human resource costs depending on your industry.

It’s for this reason, in order to save these costs and avoid these obligations, that many SME businesses focus on engaging human resources under the banner/guise of a contractor. However, if audited by the ATO or Workcover or the OSR etc, and the contractor is deemed to be an employee, this is where they will come unstuck often ending up with huge bills for past unpaid obligations not to mention the hefty fines and penalty interest for getting it wrong.

Generally speaking, although we recommend it, we are not normally engaged by clients to audit and determine whether if a contractor is actually an employee. However, if in the general course of our work it comes to our attention that someone whom is paid as a contractor is for all intents and purposes an employee we will bring it to your attention.

If you are concerned as to whether you are getting it right or not we can assist you in your assessment of new employees and perform an audit of existing employees.

 

Reportable Fringe Benefits (RFB) & Fringe Benefits Tax (FBT).

RFB’s and FBT are, in my opinion, the most ignored compliance tax by SMEs.  Some of the more common RFB’s we see as being ignored include things like use of motor vehicles, corporate boxes from sponsorships, parking, lunches and coffee consumed whilst meeting clients/customers or the provision of meals that are not part of a training program or award based afterhours meal.

As an employer, the ATO requires you to record the value of fringe benefits provided to each and everyone of your employees. If the value of certain fringe benefits provided exceeds $2,000 in a fringe benefits tax (FBT) year (1 April to 31 March), you must record the grossed-up taxable value of those benefits on your employee’s payment summary or in STP by the due date for finalisation for the corresponding income year (1 July to 30 June). You may also have to report the notional value of certain exempt benefits.

Each year, for MSA clients, we perform an annual review of your profit and loss and balance sheet to see if we can identify any potential fringe benefits you may be providing. We bring these to your attention to act on so that the above compliance requirements are met. If you so choose, we can  assist to set up a system and processes to identify, record and report your RFBs

 

Tax Planning & Management.

In my opinion, tax planning & management for SME’s, has three functional objectives:

1. To regularly and progressively identify, calculate, monitor and report what your liabilities are for income tax, GST, PAYGW, FBT, Payroll tax and SGL Super.
2. Implement strategies that will manage and reduce your tax debt well in advance, if not the beginning of each financial year.

• Determine the cashflow timing and economic impact on your business of implementing those strategies. Now more than ever, given the cash flow impact of the long economic COVID, understanding the timing of when the various taxes need to be pai and what strategies need to be put in place to provide for the required cash to pay the debt.

Historically, our interim tax planning service mainly focused on the implementation of tax minimisation strategies after reviewing your tax status to the end on March along with a more accurate forecast and tax projection to the end of June.

Four or five years ago, we introduced a January tax review to monitor your tax compliance at end of December with rough projections to June.

This year, for the first time, we have reviewed your tax compliance and liability for the first three months trading to September with rough projections to June and our review being sent to you in October.

The third and final part of tax planning is understanding the timing of payments for PAYG quarterly instalments and your final tax bill.

This year, for the first time, as part of the full year tax planning report, we will be providing our ITP clients a tax cashflow forecast to 30/06/2024.  This should prove to be a big help in managing cashflow.

So now our comprehensive tax planning & management program meets all of the three functional objectives by delivering the service over four different stages:

1. September Quarter tax review issued mid-October

2. December Half Year tax review, because of Xmas, issued late January, early February

3. March ¾ Year tax review issued mid-April

4. Full year to 30 June tax review to include a full year:

   1. Income tax projection, and

   2. Tax compliance review report, and

   3. Schedule of proposed and proposed strategies, and

   4. Client meeting to deliver and discuss the outcome of the review and the selection of proposed tax deferral and tax reduction strategies to be implemented.

   5. Preparation of the final tax planning & management report inclusive of tax estimates, schedule of strategies to be adopted and when, and the tax cashflow forecast to 30/06/2024. This report will be issued in April or May following the meeting.

Tax Losses Carry Back Offset.

Like the 100% full depreciation write off, the 2023 income year will be the last year this tax gem is available.  In a nutshell, if your company made a loss in either the 2020-21, 2021-22, and the 2022-23 income years you can carry back those losses to earlier years in which taxes were paid as a refundable tax offset resulting in a refund or reduced tax liability.

You can combine this with the 100% write off rules to create a tax loss which then could be used to draw back prior years’ taxes paid.

As this is the last year, we will be considering each clients circumstances to determine if there are any viable opportunities to take advantage of the loss carry back rules.

 

Varying Quarterly Tax Instalments.

Quarterly tax instalments, are more commonly known as PAYG Instalments.  You can elect to pay PAYG instalments voluntarily or the ATO will automatically enter you if the following occurs:

If you are an individual (including a sole trader), you will automatically enter the PAYG instalments system if you have all of the following:

• Instalment income from your latest tax return of $4,000 or more
• tax payable on your latest notice of assessment of $1,000 or more
• estimated (notional) tax of $500 or more.

A company or super fund will automatically enter the PAYG instalments system if any of the following apply; it:

• has instalment income from its latest tax return of $2 million or more
• has estimated (notional) tax of $500 or more
• is the head company of a consolidated group.

As the instalments are based on an estimated uplift of 10% on the prior year, it may be appropriate to vary the quarterly instalment amount up or down if the ATO’s estimates are far from actuals.  In practice I have yet to see anyone vary their quarterly instalment up.  They are generally varied down to slow down cash out flow to the tax office.

As stated above, you can vary the instalments.

If you decide to vary your PAYG instalments, it is important to not underestimate your instalment amount or rate. When the ATO receives your tax return, the ATO will compare your actual instalments to the total tax payable on your instalment income for the income year. If your varied instalments are less than 85% of your total tax payable, the ATO may charge you a general interest charge on the difference, in addition to paying the shortfall. Depending on the circumstances there may also be penalties. Our normal practice and recommendation is, if you are not sure, it is best to not vary your instalments. Keep in mind that any overpaid instalments will be refunded to you after you lodge your tax return.

As part of our basic role, when we get your PAYG Instalment notice from the ATO we check it and then send it to you with a covering letter which also asks if your circumstances have changed and if so do you want to vary your PAYG Instalment amount or rate.

 

New Tax Restrictions for Professionals & Consultants.

The ATO’s Practice Compliance Guideline PCG 2021/4 (how the ATO views the law) is the biggest threat to tax structures and arrangements by professionals and consultants in years disseminating the ability of professionals to “move” taxable income away from themselves to low tax rate entities and individuals. It is important to understand that the ATO’s definition of “professional” is VERY broad and will capture anyone who works in a consultancy role, even part time or casual. Not only that but it will most likely force professionals to take full commercial salaries PLUS the profit they, as the professional, generate for the business. This is effective from any return lodged after 01/07/2022 !!!!!

The ATO will be using its vast data matching ability to identify professionals & consultants who, in their opinion, are not earning enough (in other words paying enough tax) and simply audit them with the aim of dissolving their structures and strategies and reassessing the professional earnings plus penalties plus interest etc.

In PCG 2021/4 (some 36 pages) the ATO sets out the basis on which taxpayers can assess their own status/likely hood of being audited. The self-assessment gets you to give yourself a score from 0 to 13+.

Simplifying it if your assessment comes up:

13 or above you are “HIGH RISK RED” and you can be almost sure the ATO will audit you soon. It’s just a question of when and not if.

10 to 12 you are “MODERATE RISK AMBER”  and still very likely to be audited

0 to 10 you are “LOW RISK GREEN” and it is unlikely you will be audited.

What does this mean for YOU?

It means that you have to do what is necessary to avoid being Red or Amber. You must:

1. Assess yourself to see if your current arrangements make you Red or Amber
2. If you are Red or Amber, then review and modify your current structures and arrangements to meet ATO guidelines and become GREEN
3. Ensure and be able to show that you have all the formal documents to support your current (green) arrangements and strategies that are in place, and
4. Review yourself annually to ensure you continue to comply.

The process of self-assessment is not simple, in fact it is quite complex, so much so that I am almost certain that you, like most other taxpayers, will need the assistance of their accountant to comply with the above 4 step process. If you require assistance in identifying your potential to  be audited under the new Practice Compliance Guidelines call the Journey2 team.

 

Single Touch Payroll (STP).

Single Touch Payroll (STP), is an Australian Government initiative to reduce employers’ reporting burdens to government agencies. With STP, you report employees’ payroll information to the ATO each time you pay them through STP-enabled software. As you may be aware there are changes to the ATO’s STP (single touch payroll) this year.

Stage 1

This stage is the process of transitioning all existing and new employee profiles to the STP Phase2 compliant.   Using an appropriate  employee transition tool, you will be able to update existing employee records to the relevant STP2 items eg if they are an employee or contractor.  Any new employees after this date will be automatically STP2 compliant.

Stage 2

There will be a pay item transition tool so you can identify and replace non-compliant pay items with the new earnings categories for STP2. Directors fees, Bonuses and Commissions are already available if you want to get a head start. Xero users have until 31 March 2023 to start reporting the additional information required for ATO STP Phase 2.

Stage 3

This is the final step and will break down paid leave into additional categories.  There will be a leave transition tool to help update existing leave categories to meet new reporting requirements.

It is likely you will require assistance with implementing some or all of the above stages in your business’s payroll app, so contact your team at Journey2.  

 

ATO Tax Debt Repayment Plans.

Did you know that your Credit History could be Ruined without an ATO Tax Debt Repayment Plan if your business currently has a tax debt owing to the ATO?

New debt reporting powers given to the ATO could see businesses that owe more than $100,000 in tax and are more than 90 days in arrears without a payment plan, be reported to credit agencies. This will affect your future capacity to borrow from a bank from both a business and personal capacity. It may also affect your credit capacity with suppliers.

It’s important that you communicate with the ATO and arrange for any unpaid debt to be on a repayment plan. The result is the ATO will not be chasing you and you can pay off all ATO debts over time without it building up to an unmanageable situation. Even if your tax owing is less than $100,000, it is vital that you are proactive and put in place a plan now. This will give you peace of mind that the ATO will not put a black mark against your name and start taking debt recovery action against you.

You could do it yourself or we could help you negotiate a tax repayment plan with the ATO. Our plan to help you negotiate a payment plan consists of the following three steps:

1. Discuss with you your current cashflow situation and agree on an up front amount and an ongoing monthly amount that you can budget for to make ATO repayments.

2. Negotiate a tax repayment plan with the ATO giving you the most favorable terms possible.

3. Provide you with a “Tax Flow” report which outlines all your GST and PAYG and tax debt repayment amounts over the next 18 months so you can properly plan for all tax payments.

If you have been carrying a tax debt that you have struggled to pay down and have now decided to enter a payment plan, please simply call or email us and let us know that you would like us to prioritise negotiating a tax debt repayment plan with the ATO and we will get on to it right away.

You could do it yourself or we could help you negotiate a tax repayment plan with the ATO. Our plan to help you negotiate a payment plan consists of the following three steps:

1. Discuss with you your current cashflow situation and agree on an up front amount and an ongoing monthly amount that you can budget for to make ATO repayments.

3. Negotiate a tax repayment plan with the ATO giving you the most favourable terms possible. 

4. Provide you with a “Tax Flow” report which outlines all your GST and PAYG and tax debt repayment amounts over the next 18 months so you can properly plan for all tax payments.

If you have been carrying a tax debt that you have struggled to pay down and have now decided to enter a payment plan, please simply call or email us and let us know that you would like us to prioritise negotiating a tax debt repayment plan with the ATO and we will get on to it right away.

 

Trust Distributions MUST now be acceptable to the ATO.

The ATO has now released its final ruling TR2022/4 setting out what the ATO considers to be acceptable distributions, and in the process identifies trust distributions the ATO considered to be tax avoidance.

Broadly speaking, where a beneficiary, who is presently entitled to a share of trust income, is not the person who actually benefits from that income the ATO will apply / assess the distribution under S.100A. If S.100A applies, the distribution will be deemed invalid for tax purposes, and the trustee will be liable to pay tax on the distribution at the top marginal tax rate of 47%.

There are certain exclusions available under S.100A, including agreements entered into in the course of an ‘ordinary family or commercial dealing’. The ATO’s new view and implementation of section 100A has the hallmarks of anti-avoidance as they scrutinise

• Trust distribution made to natural persons under questionable financial arrangements
• Trust distributions to bucket companies that fails to meet six criteria
• Trust distributions to certain loss entities that fails to meet three criteria

Initially these new rules were going to be implemented retrospectively to distributions made on or after 1^st July 2014. Fortunately, the ATO has expanded the transitional relief for trust distributions made prior to 1 July 2022 (and on or after 1 July 2014) in its final version of its compliance guideline.

More specifically the ATO states that it will not dedicate compliance resources to consider the application of S.100A to an entitlement arising before 1 July 2022 (and on or after 1 July 2014), where the taxpayer can demonstrate they took reasonable care in applying the ATO S.100A factsheet to determine that S.100A does not apply to that arrangement. This is significant as it opens up a ‘reasonable care’ argument should the ATO seek to look into trust distributions made during this period.

As we approach June 2023 our tax planning strategies will now require us to ensure that any proposed trust distributions fall within the accepted guidelines of the ATO. It goes without saying that our future advice on trust distributions will be within the ATO guidelines. For some clients this will mean a material change to the way trust distributions have been made in the past.

 

10 Ways to trigger a compliance audit and why you should have Tax Audit Insurance

The following are ten common ways to trigger an ATO audit.

NOTE: The material below is a cut down version of an article written by Greg Travers of William Buck

1. Have financial performance that is out of kilter with your industry

As a matter of course the ATO will statistically analyse tax returns. For business clients one of the aspects analysed is their performance compared to industry peers (based on the industry disclosed on the front page of the return). If your inconsistent with the industry, this can be an indicator of tax issues such as unreported (cash) income, transfer pricing and other issues.

2. Don’t pay the right amount of superannuation to your employees

If employees complain to the ATO that their employer has not paid them the right amount of superannuation, or not paid it on time, this is a sure-fire way to get a review or audit from the ATO. Often these types of audits can begin as a review of superannuation guarantee obligations, but quickly escalate to include income tax, GST and fringe benefits tax audits if the process isn’t appropriately managed.

3. Variances between tax returns and business activity statements

Reconciling the information reported on your business activity statements and tax returns is a crucial part of tax risk management. Large variances between the information reported in a tax return compared to the activity statements for the corresponding period is likely to trigger an ATO review or audit.

4. Have a poor record of lodging returns on time

It’s not just lodging annual income tax returns by the due date, but all compliance obligations (including activity statements, employee related reporting, fringe benefits tax, etc.) and the on-time payment of any tax liabilities. A good compliance history can be invaluable due to the way it improves the ATO’s perception of a business.

5. Consistently show operating losses

The ATO regards three loss years out of five as indicative of problems. There may be genuine reasons, but the ATO is likely to want to investigate these.

6. Own motor vehicles, but don’t lodge an FBT return

The ATO receive data from the state and territory motor vehicle registries (in NSW this is the Roads and Maritime Services) regarding individuals or businesses that have purchased vehicles (generally those with a value of $10,000 or more). For businesses, the ATO then match these purchases with information reported in tax returns, activity statements and fringe benefits tax returns, with an expectation that there will be at least some private use. If the company or trust fails to lodge an FBT return showing private usage or doesn’t include a ‘fringe benefit employee contribution’ in the income section of the tax return, an ATO review or audit is likely to be just around the corner.

7. Get the disclosure items wrong in your tax return

The tax return is the main way that ATO gathers information on your business. Making mistakes in the disclosure items can inadvertently cause that client to be flagged for a review. There are internal checks in the returns (superannuation, cost of goods and withholding tax are examples) and disclosures which are easily verifiable against publicly available or other information collated by the ATO (such as the existence of international transactions). Get these disclosures wrong and the ATO is likely to call.

8. Show big fluctuations between years

The ATO will compare your tax returns year on year. Big fluctuations in financial position or particular line items in the tax return can trigger an inquiry from the ATO.

9. Have international transactions

International transactions are a key area of focus for the ATO. Transactions with international related parties, transactions with tax havens, material funds transfers in and out of Australia are all examples of things that can raise a red flag at the ATO. Defensive strategies, such as transfer pricing documentation, can often be the best way to manage this risk.

10. Be in the papers

The old adage may be that all publicity is good publicity but when it comes to tax risk, being in the papers for the wrong things can easily bring you to the attention of the ATO. A major transaction or dispute that is reported in the media will undoubtedly be seen by the ATO. Many business owners are selected for an ATO review after the sale of a high value asset (often the family home) is reported in the paper.

What Can You Do to Minimise Risk

• You can proactively reduce the risk triggering an audit. There are simple, but invaluable ways of reducing audit risk such as reconciliation of a BAS and tax return, or benchmarking outcomes to those of industry peers.
• Engage your accountant annually to review your tax audit risk.
• Take out tax audit insurance. If you’re selected for an ATO audit, having audit insurance in place can take the pressure off by not having to worry not only about the ATO questions, but also the professional fees which will be incurred in dealing with the ATO. The cost of many audit insurance policies is minor relative to the likely professional fees incurred in handling an ATO audit.

The team and I have assisted many clients in dealing with ATO, OSR or other tax related audits that their clients may have. As a result of the many years of experience we have in handling these matters, we have developed numerous systems and processes to ensure the best outcomes are achieved with a minimum of time, fuss and costs.

If you would like to discuss any of the above tips in more details call us on 02 4228 4877, email us at Admin@Journey2.com.au or simply click this link