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Are you considering a change to your business structure? Have you considered the potential of Capital Gains Tax (CGT) of that change? If you are, then read this.

If your small business has not only survived but thrived during the pandemic, you may be considering a change of business structure, typically from sole trader to more complex arrangements such as a company or trust structures. Any changes should be well thought-out and carefully implemented to avoid costly mistakes.

Most small businesses are sole traders with the individual as the owner and controller of the business. While it is the simplest and cheapest business structure, sole traders are legally responsible for all aspects of the business. This means that debts and losses cannot be shared with other individuals, and while you can employ workers in your business, you cannot employ yourself. Hence, as a sole trader you cannot claim deductions for money taken from the business as “wages” even if you think of them as wages.

Usually, as a sole trader, you would use your individual tax file number when lodging your income tax return, and report all your income using the section of business items to show your business income and expenses. The tax you pay will be at the same income tax rates as individual taxpayers although you may be eligible for the small business tax offset.

If your business is ready to move to a more complex structure, a company structure may be for you. A company is a legal entity within itself and pays tax at the company rate which may be lower than the personal tax rate you would pay as a sole trader. It may also be eligible for small business concessions and provides some asset protection. The downside of a company structure includes higher set-up and administration costs and additional reporting requirements.

Some of the common mistakes made by sole traders moving to a company structure include reporting income for the wrong entity (ie continuing to report income as a sole trader) and personal use of business bank accounts. As the company is a separate legal entity the money that the company earns belong to the company and individuals that control the business cannot take money out of the business except as a formal distribution of the profits or wages.

If you decide to convert your sole trader structure into a company structure, you should be aware that if you use company assets as a director or shareholder, it must be treated as a benefit. Div 7A or FBT provisions could apply if you do not treat these benefits correctly.

Setting up a trust is perhaps the most expensive option when considering a change in business structure as a formal deed is required outlining how the trust will operate and there are formal yearly administrative tasks for the trustee. Note a trustee is legally responsible for the operation of the trust and can be an individual or a company, but you opt for a company as a trustee, there will be additional set up costs.

However, the benefit of a trust is the flexibility it affords the trustee to distribute income amounts to adult beneficiaries depending on the trust deed. In addition, if all trust income is distributed, the trust is not liable to pay tax and each beneficiary reports the income in their own tax return which may be advantageous if one or more beneficiaries are on a lower tax bracket. 

Are you allowing your employees to garage your business vehicles at their homes? There is a potential Fringe Benefits Tax (FBT) implication here. Read on.

 

With people spending more time at home than ever before, one unintended consequence is the garaging of work cars at home which may lead to FBT obligations for the employer. Generally, a car fringe benefit will occur where a business makes a car that it owns or leases available to employees for private use. Usually, if your employee is garaging a work car at home, you would be deemed to be providing them with a car fringe benefit.

The ATO understands that during this period, unintentional garaging of the car at an employee’s residence may create perverse FBT outcomes for businesses. As such, it noted that where a car has not been driven at all during the period that it was garaged at the employee’s residence, or has only been driven briefly for the purpose of maintaining the car, it will accept that you do not hold the car for the purpose of providing fringe benefits to your employee.

In these situations, according to the ATO, provided you elect to use the operating cost method, there will be a nil taxable value for the car and no FBT liability. Remember, to use the operating cost method, you will need to elect the method in writing before you lodge your FBT return for the year. Odometer records also need to be maintained to show that, during the period the car was garaged at the employee’s residence, it has not been driven, or has only been driven briefly to maintain the car.

If you do not elect to use the operating cost method, or don’t have odometer records, the statutory formula method would apply, and you may have an FBT liability for the year. The ATO notes that this is because the car was garaged at the employee’s home and is taken to be available for private use regardless of whether or not it was actually used.

Therefore, it may be beneficial for businesses currently using the statutory method to switch to the operating method for the 2020-2021 FBT year as it may reduce the taxable value of any car fringe benefits and any associated FBT liability. Particularly if the employees are driving the cars garaged at their residences for business purposes. However, to use the operating cost method, remember you will need to have logbook and odometer records for the period in question, the requirements of which vary depending on whether you’re electing to use the operating cost method for the first time.

Is your business hiring contractors? The ATO has expanded TPAR net. Read on to see if your business is affected

With the ultimate distraction of the pandemic, many businesses around Australia may not be aware that they will be required to lodge a Taxable Payments Annual Report (TPAR) for the first time this year.

Not only has the TPAR expanded to include road freight, information technology, and security, investigation or surveillance services this year, due to COVID-19, businesses such as restaurants, cafés, grocery stores, pharmacies or other retailers that have hired contractors to deliver goods to customers may also be captured under the regime.

Are you a company director? Then this is for you.

In an effort to reduce the instances of phoenixing, where the controllers of a company deliberately avoid paying liabilities by shutting down indebted companies and transferring assets to another company, a new initiative of director identification numbers (DINs) has been passed and will come into effect in the near future.

Currently, while the law requires that directors’ details be lodged with ASIC, it is not a requirement that the regulator verify the identity of directors, which could lead to fraudulent use of stolen identities as well as other illegal activities. It is estimated that black economy and phoenixing activity in particular costs the economy between $2.9bn and $5.1bn annually.

This includes creditors not receiving payment for goods and services, employees not receiving back wages or superannuation entitlements and the general loss of tax revenue for the government.

The new DIN will require all directors to confirm their identity and will be a unique identifier for each person who is a director or elects to become a director. The identifier is permanently linked to the individual even if they cease to be a director, in other words, the DIN is not intended to be re-issued to another person and each person will only be issued with one DIN.

It is intended that the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and prevent the use of fictitious entities. This will allow regulators with ASIC and external administrators to investigate a director’s involvement in what may be repeated unlawful activity including illegal phoenixing.

In addition to illegal phoenixing, the new DIN regime will also offer other benefits such as simpler more effective tracking of directors and their corporate history to reduce time and cost for administrators and liquidators, improving overall efficiency of the insolvency process, improve data integrity and security.

Under the new regime, any individual wishing to become a director must apply for a DIN with the appropriate registrar before they are appointed as a director. However, under certain circumstances, such as a transitional time period, there will be additional time allowed for directors or potential directors to apply for the DIN.

For example, during the first 12 months of the operation of the DIN regime, an individual that is appointed as a director has an additional 28 days to apply for a DIN. If a DIN is not applied for within the applicable timeframe, civil and criminal penalties may be imposed on directors. Further, any conduct that would be considered to undermine the DIN requirement will also be subject to civil and criminal penalties (eg deliberately providing false identity information, intentionally providing a false DIN, or intentionally applying for multiple DINs). 

For current directors, don’t fret, there appears to plenty of time to get ready for this change. The legislation is currently not set to commence for nearly 2 years, although an earlier date may be proclaimed by the Governor-General so watch this space.

Director Identification Numbers (DIN) now law

In an effort to reduce the instances of phoenixing, where the controllers of a company deliberately avoid paying liabilities by shutting down indebted companies and transferring assets to another company, a new initiative of director identification numbers (DINs) has been passed and will come into effect in the near future.

Currently, while the law requires that directors’ details be lodged with ASIC, it is not a requirement that the regulator verify the identity of directors, which could lead to fraudulent use of stolen identities as well as other illegal activities. It is estimated that black economy and phoenixing activity in particular costs the economy between $2.9bn and $5.1bn annually.

This includes creditors not receiving payment for goods and services, employees not receiving back wages or superannuation entitlements and the general loss of tax revenue for the government.

The new DIN will require all directors to confirm their identity and will be a unique identifier for each person who is a director or elects to become a director. The identifier is permanently linked to the individual even if they cease to be a director, in other words, the DIN is not intended to be re-issued to another person and each person will only be issued with one DIN.

It is intended that the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and prevent the use of fictitious entities. This will allow regulators with ASIC and external administrators to investigate a director’s involvement in what may be repeated unlawful activity including illegal phoenixing.

In addition to illegal phoenixing, the new DIN regime will also offer other benefits such as simpler more effective tracking of directors and their corporate history to reduce time and cost for administrators and liquidators, improving overall efficiency of the insolvency process, improve data integrity and security.

Under the new regime, any individual wishing to become a director must apply for a DIN with the appropriate registrar before they are appointed as a director. However, under certain circumstances, such as a transitional time period, there will be additional time allowed for directors or potential directors to apply for the DIN.

For example, during the first 12 months of the operation of the DIN regime, an individual that is appointed as a director has an additional 28 days to apply for a DIN. If a DIN is not applied for within the applicable timeframe, civil and criminal penalties may be imposed on directors. Further, any conduct that would be considered to undermine the DIN requirement will also be subject to civil and criminal penalties (eg deliberately providing false identity information, intentionally providing a false DIN, or intentionally applying for multiple DINs). 

For current directors, don’t fret, there appears to plenty of time to get ready for this change. The legislation is currently not set to commence for nearly 2 years, although an earlier date may be proclaimed by the Governor-General so watch this space.

Changes to JobKeeper payments are coming. See how you will be affected.

Businesses nervous about the state of the economy in the wake of a potential second wave can breathe a sigh of relief. The government has confirmed its intention extend the JobKeeper beyond the current legislated end date of 27 September with a few tweaks to eligibility and payment rates.

While the government has extended the JobKeeper from 28 September 2020 to 28 March 2021, not everyone currently on the JobKeeper will be treated the same. Part of the changes include the introduction of a part-time rate to “better align the payment with the incomes of employees before the onset of the COVID-19 pandemic”.

The rates per fortnight for the following periods are:

  • 28 September 2020 to 3 January 2021: full rate – $1,200; less than 20hrs worked (part-time rate) – $750.
  • 4 January 2021 to 28 March 2021: full rate – $1,000; less than 20hrs worked (part-time rate) – $650.

Employees who were employed for less than 20 hours a week on average in the four weekly pay periods ending before 1 March 2020 will receive the part-time rate from 28 September 2020. Businesses will therefore be required to nominate which payment rate they are claiming for each of their eligible employees. Payment by the ATO will continue to be made in arrears, and alternative tests are available where the employees’ hours were not usual during the February 2020 reference period.

In addition to the change in payment rates, businesses that want to continue claiming the JobKeeper payment beyond 27 September 2020 will be required to reassess their eligibility with reference to their actual turnover in the June and September quarters as well as satisfying existing eligibility requirements.

To be eligible for the JobKeeper for the period 28 September 2020 to 3 January 2021, businesses will be need to demonstrate that their actual GST turnover has significantly fallen in both the June quarter 2020 (April, May and June) and the September quarter 2020 (July, August, September) relative to comparable periods (generally the corresponding quarters in 2019).

Similarly, to be eligible for the second JobKeeper extension from 4 January to 28 March 2021, businesses will again need to demonstrate that their actual GST turnover has significantly fallen in each of the June, September and December 2020 quarters relative to comparable periods (generally the corresponding quarters in 2019). A 30% decline is considered significant (in line with existing eligibility requirements) for most businesses not including not-for-profits. 

As the deadline to lodge a BAS for the September quarter or month is in late October, and the December quarter (or month) BAS deadline is in late January for monthly lodgers or late February for quarterly lodgers, businesses will need to assess their eligibility for JobKeeper in advance of the BAS deadline in order to meet the wage condition (which requires them to pay their eligible employees in advance of receiving the JobKeeper payment in arrears from the ATO).

ATO request to delay lodgement of your 2020 tax return, and here’s why.

If you’re a retail or hospitality worker, 2020 has perhaps not been the best year. However, as with everything, there is a silver lining. With tax time just around the corner, you may be able to get a larger refund than usual. This is due to either being on reduced incomes or having the ability to claim a wider range of deductions, such as deductions for protective equipment (eg gloves, face masks, sanitiser or anti-bacterial spray), or for some, a combination of both.

With so many different types of incomes and expenses affecting tax obligations this income year, the ATO is taking a range of different approaches to support taxpayers and the community through tax time. In addition to updating published information on the website, the ATO is also encouraging taxpayers to search its online “ATO community” for any information that is not listed on its website. The community forum operates 24 hours a day and contains “ATO-endorsed” responses.

Remember also, for most people, income statements have replaced payment summaries. So, instead of receiving a payment summary from your employer, the income statements will be finalised electronically with the information provided directly to the ATO. The income statement can be accessed through myGov and the information is automatically included in your tax return if you use myTax. Tax agents will also have access to this information.

Although you may be eager to lodge as soon as possible, the ATO has warned against lodging your return too early (ie as soon as the new income year rolls around), as much of the individual information on income may not be confirmed until later. For example, the income statements which show year-to-date salary and wages, PAYG withholding tax, and employer super contributions may not be finalised by employers until 31 July.

According to the ATO, it is important to wait until the income statement is finalised before lodging a tax return to avoid either delays in processing or a tax bill later on. You income statement will be marked “tax ready” if it is finalised. Other information from banks, health funds and government agencies are also expected to be ready by the end of July and will be automatically inserted into your tax return.

If you still choose to lodge early, the ATO advises that you review any information that is pre-filled and confirm that it is correct and that you wish to use it. You will also be required to acknowledge that your employer may finalise your income statement with different amounts and that you may need to amend your tax return and additional tax may be payable. 

Thew ATO is about to commence activities COVID-19 support measures. How do you stack up?

With many Australian businesses taking part in the government’s COVID-19 stimulus package. The package includes the JobKeeper and the cash flow boost. The ATO has now commenced a compliance program to weed out those that are exploiting the stimulus. This will be done in order to level the playing field for the majority of businesses that are doing the right thing.

The ATO has noted that it will not tolerate illegal behaviour or development of schemes that are designed to deliberately exploit COVID-19 stimulus measures or seek to avoid tax. It says it has already seen some examples of fraud and fraudulent attempts or people developing schemes to try and “steal money from the community”.

Specifically, in relation to the JobKeeper, the ATO said it will be focusing its compliance efforts on the following:

  • business income eligibility requirements;
  • eligibility of employees;
  • ensuring eligible businesses are correctly making claims; and
  • ensuring entities are not manipulating their turnover in order to satisfy the decline in turnover test.

To recap, to be eligible for the JobKeeper, generally the business (with an aggregated turnover of $1bn or less) would have needed to experience a 30% fall in turnover. The business must also have had at least one eligible employee on 1 March 2020 who was currently employed by the business. Eligible employees usually have to be either Australian residents or holders of a Subclass 444 (Special Category) visa, and be employed either full time, part time or a long-term casual employee at 1 March 2020.

For the cash flow boost, the ATO is on the lookout for employers who have entered into a scheme which is designed to:

  • artificially restructure the business to gain access to the cash flow boost;
  • artificially changing the character of payments to salary or wages to maximise the cash flow boost;
  • inflating reported withholding amounts to maximise the cash flow boost;
  • resurrecting dormant entities or phoenixing.

Again, to recap, the cash flow boost was available to small or medium businesses, including sole traders, companies, partnerships or trusts (aggregated annual turnover of less than $50m) which held an ABN on 12 March 2020. In addition, the business must have made payments to employees subject to withholding (even if the amount required to withhold was zero), and the business lodged at least one tax return or activity statement/GST return for a specific period.

ATO warns that severe penalties can be applied to tax avoidance schemes or those found to be breaking the law, penalties for fraud can also include financial penalties, prosecution, and imprisonment for the most serious of cases.  

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