The grab for your money is about to begin. The federal government’s falling revenue base has given rise to some big tax changes that will come into effect on July 1 and they will hit investors, small business owners and large companies alike.
BRW explains 10 of the changes that will affect business and offers suggestions to help avoid being hit with hefty penalties.
For small business it’s not all bad, as some measures announced in this year’s federal budget will help small business owners minimise tax losses in the new financial year.
1. Carbon tax
Sunday, July 1, is carbon tax day – when the much-debated and highly controversial $23 a tonne carbon price for the top 500 polluters takes hold.
The leader of KPMG’s Australian Tax Centre, Grant Wardell-Johnson, says businesses must ensure they have proper documentation for any price increases caused by the change.
Big companies will be worst hit. Small businesses won’t be directly taxed on their emissions but like everyone they will face rising electricity costs. The government has promised assistance for small business and manufacturers including grants (for details see www.cleanenergyfuture.gov.au/small-business ), an information service for SMEs and increased asset write-offs.
2. Depreciation of business assets and loss carry-back
Small businesses lost the 1 per cent cut to the corporate tax rate in the May budget but were thrown some tax concessions instead.
First, for businesses with less than $2 million in turnover a year, the instant asset write-off threshold will rise to $6500 from $1000. That means small business owners may want to delay the purchase of business assets to the new financial year, CPA Australia’s head of business and investment policy, Paul Drum, says.
“If you’re a cafe or restaurant, it may be the purchase of a new coffee machine,” he says. “If you have a mowing business it could be a lawnmower and if you’re in a office it could be new computers or desks.”
Small businesses can also deduct the first $5000 of a new or used motor vehicle from July 1. Other changes include simplifying depreciation for small businesses by allowing them to write off assets in a single pool, deducting 15 per cent in the first year and 30 per cent in each subsequent year.
Finally, the company loss carry-back change takes effect on July 1 but it’s important to note that you can’t make claims until later financial years. A company’s tax losses incurred in the 2012-13 financial year may be carried back a year and tax losses in later years can be carried back two years. The concession is limited to $1 million of company income and applies only to incorporated companies. This could result in a tax benefit of up to $300,000 a year.
3. Entrepreneurs’ tax offset
The 2011-12 financial year is the final year in which eligible small businesses can claim the entrepreneurs’ tax offset – a measure that’s helped start-ups and micro-businesses. The tax offset is equal to 25 per cent of the income tax payable in business income if you have a turnover of $50,000 or less. Loss carry-back is intended to compensate for the end of the offset.
The contribution tax rate will double to 30 per cent for people earning more than $300,000 a year. In addition, the superannuation contribution cap is going down. Currently people aged over 50 can make up to $50,000 in before-tax contributions to their super fund but the 2011-12 financial year is the last in which they can do it.
From July 1, that cap will drop to $25,000. The other change is that those aged over 50 and earning less than half a million in super must wait two years now before they can make a $50,000 tax-deductible super contribution. That was meant to happen from July 1 but the government deferred it for two years.
Pitcher Partners tax partner Theo Sakell says super funds will have to do more paperwork and employers and employees will have to review salary sacrifice arrangements from July 1. “The employee can salary sacrifice only $25,000 so they will have to revisit their super strategy.”
5. Living Away From Home Allowance
The allowance will be now be restricted to domestic employees and is limited to those who maintain a home in Australia for their own use while they are living away from home for work. This means you can’t rent out your home and still get the allowance, which is payable for 12 months only.
Trustees of discretionary trusts must make and document trustee resolutions (as to how the income of such trusts for the 2011-12 financial year is distributed among beneficiaries) by June 30, 2012. If they don’t do it in time, they may be hit with higher tax rates, Drum says.
“The [ATO] is toughening its approach towards the 600,000 trusts out there .... there will be audits,” he says.
7. Higher tax on employment termination payments (or the “golden handshake”)
It is more difficult to qualify for an employment termination payment (ETP) tax offset. Until now, some “golden handshakes” have counted as an ETP and been given concessional tax treatment. The tax payable on employment termination payments (ETP) up to $165,000 in 2011-12 is a maximum of 15 per cent, or 30 per cent depending on the recipient's age. From July 1, if an ETP takes a person’s total annual income above $180,000, the ETP tax offset won’t apply to the part of the payment that took the annual income above that amount.
8. Withholding tax on managed investment trust distributions
The rate of withholding tax on certain managed investment trust distributions (listed and unlisted managed funds) will increase to 15 per cent from 7.5 per cent. The government says 15 per cent is internationally competitive but some in the industry warn it threatens Australia’s reputation as a safe place to invest. However, the 15 per cent tax applies only to foreign investors who live in an information exchange country (the government engages with these countries on matters such as money laundering and Singapore and Malaysia have recently been added to the list). “The withholding tax rate can be as high as 30 per cent but if a foreign investor is in one of these countries, then the rate is still 15 per cent,” Pitcher Partners’ Sakell says.
9. Bad debt deductions
Businesses can no longer claim a bad debt deduction on a written-off debt with a related party. “In these situations, the debtor will not be taxed on any gain that they may make on the debt written-off but the creditor will not be able to claim a bad debt deduction,” HLB Mann Judd tax partner Peter Bembrick says.
10. Capital gains tax (CGT) changes for foreign investors
Non-residents have lost the benefit of 50 per cent CGT discount on capital gains. Sakell says this may be an incentive to sell assets but it’s important to “get the highest possible market valuation to protect your tax position”.