Super Guarantee – What Happens When You Get It Wrong

The ATO receives around 20,000 reports each year from people who believe their employer has either not paid or underpaid compulsory superannuation guarantee (SG). In 2015-16 the ATO investigated 21,000 cases raising $670 million in SG and penalties.

The ATO’s own risk assessments suggest that between 11% and 20% of employers could be non-compliant with their SG obligations and that non-compliance is “endemic, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur.”

Under the superannuation guarantee legislation, every Australian employer has an obligation to pay 9.5% Superannuation Guarantee Levy for their employees unless the employee falls within a specific exemption. SG is calculated on Ordinary Times Earnings – which is salary and wages including things like commissions, shift loadings and allowances, but not overtime payments.

Employers that fail to make their superannuation guarantee payments on time need to pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement. The SGC applies even if you pay the outstanding SG soon after the deadline.

The SGC is particularly painful for employers because it is comprised of:
• The employee’s superannuation guarantee shortfall amount – so, all of the superannuation guarantee owing
• Interest of 10% per annum, and
• An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal superannuation guarantee contributions, SGC amounts are not deductible, even if you pay the outstanding amount. That is, if you pay SG late, you can no longer deduct the SG amount even if you bring the payment up to date.

And, the calculation for SGC is different to how you calculate SG. The SGC is calculated using the employee’s salary or wages rather than their ordinary time earnings. An employee’s salary and wages may be higher than their ordinary time earnings particularly if you have workers who are paid for overtime.

Under the quarterly superannuation guarantee, the interest component will be calculated on an employer’s quarterly shortfall amount from the first day of the relevant quarter to the date when the superannuation guarantee charge would be payable.

Directors are personally liable for unpaid SG. Where attempts have failed to recover superannuation guarantee from the employer, the directors of a company automatically become personally liable for a penalty equal to the unpaid amount. Directors who receive penalty notices need to take action to deal with this – speaking with a legal adviser or accountant is a good starting point.

What everyone selling a property valued at $750k or more needs to know

Every vendor selling a property needs to prove that they are a resident of Australia for tax purposes unless they are happy for the purchaser to withhold a 12.5% withholding tax. From 1 July 2017, every individual selling a property with a sale value of $750,000 or more is affected.

To prove you are a resident, you can apply online to the Tax Commissioner for a clearance certificate, which will remain valid for 12 months.

While these rules have been in place since 1 July 2016, on 1 July 2017 the threshold for properties reduced from $2 million to $750,000 and the withholding tax level increased from 10% to 12.5%.

The intent of the foreign resident CGT withholding rules is to ensure that tax is collected on the sale of taxable Australian property by foreign residents. But, the mechanism for collecting the tax affects everyone regardless of their residency status.

Properties under $750,000 are excluded from the rules. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they have a market value of less than $750,000. If the parties are dealing at arm’s length, the actual purchase price is assumed to be the market value unless the purchase price is artificially contrived.

If required, the Tax Commissioner has the power to vary the amount that is payable under these rules, including varying the amounts to nil. Either a vendor or purchaser may apply to the Commissioner to vary the amount to be paid to the ATO. This might be appropriate in cases where:

• The foreign resident will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
• The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
• Where they are multiple vendors, but they are not all foreign residents.

If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser.

The withholding rules are only intended to apply when one or more of the vendors is a non-resident. However, the rules are more complicated than this and the way they apply depends on whether the asset being purchased is taxable Australian real property or a company title interest relating to real property in Australia.

Main residence exemption removed for non-residents

The Federal Budget announced that non-residents will no longer be able to access the main residence exemption for Capital Gains Tax (CGT) purposes from 9 May 2017 (Budget night). Now that the draft legislation has been released, more details are available about how this exclusion will work.

Under the new rules, the main residence exemption – the exemption that prevents your home being subject to CGT when you dispose of it – will not be available to non-residents. The draft legislation is very ‘black and white.’ If you are not an Australian resident for tax purposes at the time you dispose of the property, CGT will apply to any gain you made – this is in addition to the 12.5% withholding tax that applies to taxable Australian property with a value of $750,000 or more (from 1 July 2017).

Transitional rules apply for non-residents affected by the changes if they owned the property on or before 9 May 2017, and dispose of the property by 30 June 2019. This gives non-residents time to sell their main residence (or former main residence) and obtain tax relief under the main residence rules if they choose.

Interestingly, the draft rules apply even if you were a resident for part of the time you owned the property. The measure applies if you are a non-resident when you dispose of the property regardless of your previous residency status.

Special amendments are also being introduced to apply the new rules consistently to deceased estates and special disability trusts to ensure that property held by non-residents is excluded from the main residence exemption.

The rules have also been tightened for property held through companies or trusts to prevent complex structuring to get around the rules. The draft amends the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to circumvent the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.

Superannuation Changes from 1st July 2017

There are a lot of changes to superannuation coming into effect on 1 July.  The information below relates to the changes to annual contribution caps.

How will the concessional contributions cap change?

Concessional (pre-tax) contributions to your super include:

  • employer contributions
  • any amount you salary sacrifice (pre-tax) into super
  • personal contributions you claim as a personal super contribution deduction

From 1 July 2017, the 10% maximum earnings condition for personal super contributions deductions no longer applies. 

As concessional contributions are paid before tax is applied, it means that your super fund pays tax on the contributions at 15%.

From 1 July 2017, the concessional contributions cap will be $25,000 for everyone. Previously, it was $35,000 for people 49 years and older at the end of the previous financial year and $30,000 for everyone else.

How has the non-concessional contributions cap changed?

Non-concessional (after-tax) contributions include:

  • personal contributions for which you do not claim an income tax deduction, and
  • spouse contributions.

If you have more than one super fund, all non-concessional contributions made to all of your funds are added together and counted towards the non-concessional contributions cap.

From 1 July 2017, the annual non-concessional contribution cap will be reduced from $180,000 to $100,000 per year. This will remain available to individuals aged between 65 and 74 years old if they meet the work test.

From 1 July 2017, your non-concessional cap will be nil for a financial year if you have a total superannuation balance greater than or equal to the general transfer balance cap ($1.6 million in 2017–18) at the end of 30 June of the previous financial year. In this case, if you make non-concessional contributions in that year, they will be excess non-concessional contributions.

Investment Property: Pre And Post 30 June

Anyone with an investment property in Australia is probably feeling a little edgy with all the recent media attention on deductions, affordable housing, and negative gearing.  We take a look at some of the key tax issues for investors pre and post 30 June:

No more deductions for travelling to and from your investment property

The days of writing-off the costs of travel to and from your residential investment property are about to end. From 1 July 2017, the Government intends to abolish deductions for travel expenses related to inspecting, maintaining, or collecting rent for a residential rental property.

Depreciation changes and how to maximise your deductions now

Investors who purchase a residential rental property from Budget night (9 May 2017, 7:30pm) may not be able to claim the same tax deductions as investors who purchased property prior to this date. In the recent Federal Budget, the Government announced its intention to limit the depreciation deductions available.

Investors who directly purchase plant and equipment – such as ovens, air conditioning units, swimming pools, carpets etc., – for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. If you are not the original purchaser of the item, you will not be able to use the depreciation rules to your advantage.  This is very different to how the rules work now with successive owners being able to claim depreciation deductions.

Investors will still be able to claim capital works deductions including any additional capital works carried out by a previous owner. This is based on the original cost of the construction work rather than what a subsequent owner paid to purchase the property.

There are very limited details about how this Budget announcement will work but we will bring you more as soon as we know.

Business as usual for pre 9 May investment property owners

If you bought an investment property recently, are about to renovate, or have not had a depreciation schedule completed previously, you should consider having one completed. 

As a property gets older the building and items within it wear out. Property owners of income producing buildings are able to claim a deduction for this wear and tear. Depreciation schedules are completed by quantity surveyors and itemise the depreciation deductions you can claim.

Higher immediate deductions for co-owners

It’s not uncommon to have multiple owners of an investment property.  Co-ownership can, in some circumstances, quicken the rate depreciation deductions can be claimed for the same asset. This is because depreciation is claimed on each owner’s interest. If an owner’s interest in an asset is less than $300, they can claim an immediate deduction. In a situation where there are two owners split 50:50, both owners could potentially claim the immediate deduction, bringing the total immediate deduction available up to $600 for a single asset.

The same method can be used when applying low-value pooling. Where an owner’s interest in an asset is less than $1,000, these items will qualify to be placed in a low-value pool. This means they can be claimed at an increased rate of 18.75% in the first year regardless of the number of days owned and 37.5% from the second year onwards.

In a situation where ownership is split 50:50, by calculating an owner’s interest in each asset first, the owners will qualify to pool assets which cost less than $2,000 in total to the low-value pool.

Deductions for older properties

Investors in older properties may still be able to claim depreciation costs. This is because a lot of the items in the house will not be the same age as the house or apartment. Hot water systems, ovens, carpets, curtains etc., have probably all been replaced over time.  Additional works, extensions or internal refurbishments may also be deductible. 

Fast Growing And Start Up Businesses – What Are You Missing Out On?

It’s always difficult for Governments and regulators to keep pace with changing business models, funding approaches, and technology.  But, recent reforms and a series of new initiatives seek to free up entrepreneurs from excessive regulation, inflexible tax regimes, and unintended outcomes.  Unfortunately, few entrepreneurs are aware of what is available to them and risk limiting their options for growth. We take you through what’s available and some of the tax implications of capital raising outside of the mainstream.

Tax relief for business changing structures

It is common for a business to outgrow its business structure. Alternatively, changes in circumstances over time might mean that a business structure is no longer as effective as it could be.  Small business entities can now rollover from one business structure to another without triggering adverse implications under the income tax system.

Under new rules that apply from 1 July 2016, if your business genuinely needs to move from one structure to another for commercial reasons, you can do this without triggering a tax bill if certain conditions are met. This new form of rollover relief can provide complete income tax relief when assets are transferred to any business structure (e.g., sole trader, partnership, company or trust) if the following key conditions are satisfied: 

  • The transaction is a genuine restructure of an ongoing business.  So, the concessions can’t be used for winding down or selling a business. 
  • Each of the parties to the transaction is a small business entity (revenue under $2m, although this might be increased to $10m) or is related to a small business entity in the year the transaction occurs. The turnover test is subject to some grouping rules.
  • The business owners (the people who have ultimate economic ownership of the assets) and their share in those assets doesn’t materially change.
  • The asset being transferred is currently being used in a business carried on by the current owner or certain related parties.
  • Both the original entity and the entity the business is being transferred into need to be Australian residents.
  • The parties involved in the transaction must choose jointly to apply the rollover.
  • None of the entities involved in the transaction are a superannuation fund or exempt entity.

Employee share schemes to help fast growth companies attract talent

Employee share schemes, if structured correctly, can be an effective way of incentivising staff by linking personal reward to company growth.  They are also very useful for fast growth start-up and innovative companies that want to attract top talent but lack the capital to compete on salary alone.

Recent changes to how Employee Share Schemes (ESS) are taxed make the schemes more attractive with a common sense approach to how they are taxed.
 
Under an ESS, employers issue shares (an ownership stake) and/or options (a right to acquire shares at a later date) to their employees at a discount to the market value of the shares or rights.  In general, when an employee receives shares or rights under an ESS they are taxed on the discount they have received.  Under the new rules, it is now easier to defer the taxing point until it’s clear that the employee will actually derive an economic benefit from the shares or options they have received (this is possible under the old rules but in a narrower range of situations).

In addition, special rules exist for start-ups that allow relatively small discounts received by employees in relation to shares or rights not to be taxed at all under the ESS rules if the relevant conditions are met.  

Imminent changes to crowdfunding

Crowdfunding uses internet based platforms and other forms of social media to raise funds for projects or business ventures. Generally, the party trying to raise the funds (the

promoter) will engage an intermediary (the platform) to collect funds from contributors. There are different ways this can be done and how the crowdfunding is raised will determine the tax treatment of any funds received:

  • Donation-based – The contributor does not receive anything in return other than an acknowledgement
  • Reward-based – The promoter provides something in return for the payment (e.g., goods, services, rights, discounts etc.,)
  • Equity-based – The contribution is made in return for shares in a company
  • Debt-based- The contribution is made in the form of a loan with the promoter making interest and principal payments

A Bill that has just passed Parliament seeks to create a regulatory framework for crowdfunding. The popularity of crowdfunding as an alternate to mainstream finance has increased dramatically and at present, the Government has no viable way of protecting investors or regulating how crowdfunding is raised. These new rules bring crowdfunding under the Corporations Act while attempting to avoid onerous regulatory commitments that will stifle the flow of funds. Despite simplified reporting obligations, the changes will invariably add a layer of complexity for promoters and platforms. The rules also restrict how much Mum and Dad investors (retail clients) can invest in a single company in any one year to $10,000, and provide a cooling off period of 5 days. You can expect these changes to start coming into effect this year.

From a tax perspective, funds from crowdfunding are treated like any other form of income – the funds are likely to be taxable if:

  • The crowdfunding relates to employment activities (e.g., raising money to fund a project that is linked to existing employment duties);
  • The promoter enters into the arrangement with the intention of making a profit or gain and the project is operated in a business like way; or
  • The funds are received in the ordinary course of a business.

If funds are received for a personal project where there is no intention of making a profit (e.g., the project relates to a hobby), these funds are generally not taxable for the promoter.

When funds are received under an equity based crowdfunding model the funds would generally form part of the share capital of the company that is undertaking the project. If so, the funds should not be included in the assessable income of the company. If payments are made by the company to contributors then these would generally be treated as either dividends (it may be possible to attach franking credits to the dividends) or a return of share capital.

Likewise, when funds are received under a debt based crowdfunding model the funds would not be assessable to the company as they would simply be treated as a loan. When payments are made by the promoter to contributors the interest component might be deductible in some circumstances.

Managing the Debt Drain – the critical issues for small business

February and March are traditionally the worst cashflow months for small business – the Christmas rush is over, the Business Activity Statement is due, and payments slow down with a dip in consumer spending. You might be ok but your customers could be under pressure and often whoever wields the most influence gets paid first.

No one likes a late payer and two Government measures tackle the small business debt issue from different ends of the spectrum. We take a look at the issues and their impact on business, and what you can do about managing obstinate debtors.

ATO adding tax debt to your credit record
From 1 July 2017, the Australian Taxation Office (ATO) will inform credit rating agencies of businesses that have outstanding tax debts. Given 65.2% ($12.5 billion worth) of these late payers are small businesses, the move will put significant pressure on business operators to prioritise tax debt above other creditors.

Announced in the Mid-Year Economic and Fiscal Outlook (MYEFO), the plan will see the ATO disclose the tax debt information of businesses that have “…not effectively engaged with the ATO to manage these debts” to credit agencies. This means that if your business has a tax debt and you have not taken steps to work with the ATO, they will ensure that you cannot access new finance or potentially maintain existing finance levels without first addressing the debt to the ATO. There are two problems with this approach. The first is that once your credit rating is downgraded, it’s very difficult to repair. The second is the legitimacy of the ATO’s tax debt claim – what if the ATO is incorrect?

The measure will initially only apply to businesses with Australian Business Numbers and tax debt of more than $10,000 that is at least 90 days overdue. We have little doubt however that this measure will eventually extend to all tax payers.

The important thing is that anyone with an outstanding tax debt engage with the ATO. This will prevent the credit agency threat being triggered. If you are in this scenario, we can help by engaging the ATO on your behalf.

Why big businesses don’t pay small business on time
At the other end of the spectrum is the Payment Times and Practices Inquiry by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The inquiry’s issue paper reveals that collectively, Australian small businesses are owed around $26 billion in unpaid debts at any one time. In the last financial year, late payments have increased for six out of ten SMEs with one in four businesses experiencing an average payment delay of 31 to 60 days past agreed terms.

Debt plays a significant factor in a business’s cashflow and survival. If larger businesses don’t pay smaller suppliers within the terms of trade, the small business often has to resort to external funding to manage the cashflow requirements of the business.

The inquiry is looking at options to improve the payment times of large business. Some of these solutions are already in play in some States such as a requirement for large projects to use supply chain finance where project bank accounts hold funds in trust to ensure supply chain participants are paid. Other solutions are in the ‘naming and shaming category’ where large businesses would be obliged to report their current payment times or for smaller businesses to report late payments.

The inquiry is expected to deliver its final report to Government in March 2017.

What to do about debt
Dealing with delinquent debtors is painful, particularly when you can’t afford to lose the customer. The most obvious tactic is to stay on top of debtors: Ensure that your contracts and invoices have clear payment terms, and you have a procedure to follow through once a customer breaks these terms. Importantly, ensure you keep a record of actions you take to recover debt. This record will come into play if you have to use a more formal resolution mechanism.

Ultimately, some customers will not pay you even if your terms are clear and you have done everything in your power to recover the debt. Often small businesses just give up and don’t deal with the customer in question again. Some of the other options available to you are:

• Final letters of demand with the relevant court documents attached. Sometimes the letter will be enough to trigger action from the debtor to pay but you must have the intent of following through.
• Engage a debt recovery agency. Commission rates for debt collection services vary between 5% and 30% of the value of the debt.
• Sell the debt for a small percentage of the owing value.

Penalty rates and the impact of change

The Fair Work Commission (FWC) has moved to cut Sunday and public holiday penalty rates.

The changes to penalty rates are not yet in force – see When will the changes take effect?

Flagged back in 2014, the review into penalty rates was part of the FWC’s four yearly review of all Modern Awards. Hearings, submissions and reviews have been ongoing since 2015. The outcome of that process (see AM2014/305 Penalty rates case) is to reduce Sunday and public holiday rates in the following Modern Awards:

• Hospitality Industry (General) Award 2010 [MA000009]
• Registered and Licensed Clubs Award 2010 [MA000058]
• Restaurant Industry Award 2010 [MA000119]
• Fast Food Industry Award 2010 [MA000003]
• General Retail Industry Award 2010 [MA000004]
• Hair and Beauty Industry Award 2010 [MA000005]
• Pharmacy Industry Award 2010 [MA000012]

When will the changes take effect?
The public holiday penalty rate reduction will come into effect from 1 July 2017 with the exception of the Clubs Award, which remains unchanged.

For the reduction in Sunday penalty rates, transitional measures will be put in place from 1 July 2017. The FWC has flagged that the reduction may be via a series of annual instalments so the full impact of the reduction will be graduated. The decision on how penalty rates will be reduced and over what time period won’t be known until May 2017.

Not everything is as simple as it seems with some penalty rate changes only impacting on employees at certain levels. For example, in the Fast Food Industry Award, Sunday penalty rates for Level 1 employees will decrease from 150% to 125% for full and part-time employees, and from 175% to 150% for casual employees. Level 2 and Level 3 employees are unaffected.

There are also some minor variations to the early/late night work loadings in the Restaurant and Fast Food Awards that will take effect in late March 2017. These variations don’t change the loading but do change the spread of hours; changing it from midnight to 7am to midnight to 6am.

It will be important for all employers affected by the Award changes to not only understand what Award their employees are covered by, but also at what level. While nothing needs to be done now, keep an eye out for the finalised Awards and other changes from May.

End of the Instant Asset Write-off (i.e. the $20k depreciable asset write-off)

We have mentioned previously that the immediate deduction for the purchase of depreciable assets costing less than $20,000 will come to an end on 30 June 2017. The measure was first introduced in May 2015 to help provide economic stimulus.
The deduction is only available to small businesses that use the small business pooling method to calculate depreciation. If you have any doubt about your eligibility, please contact us for clarification.

What happens after 30 June 2017?
The instant asset write-off limit will revert to the previous limit which was $1,000. This means that any purchases over this amount will be subject to the normal rules of small business pooling depreciation.
Keep this in mind if you are considering any depreciable asset purchases for your business over the next four months because the taxation treatment will vary substantially for assets purchased before and after 30 June.

Paid parental leave. Where are we up to?

How did paid parental leave get to be so contentious? The current debate is not about parental leave in general; the entitlement to 12 months with a potential for 24 months of unpaid leave with your job guaranteed (or an equivalent position) remains. It’s about who pays for paid leave.

In Australia, paid parental leave is available for up to 18 weeks for eligible parents paid by the Government at the minimum wage. Eligible working dads and partners also get access to two weeks paid leave at the minimum wage.

At the moment, if your employer provides paid parental leave then you can still claim the Government scheme. One is unaffected by the other.

According to the OECD, across the board, Australian mothers receive 42% of their previous earnings while on parental leave. This is largely eligible public sector employees who receive employer funded paid parental leave up to their ordinary rate of pay, and corporates. Of those who receive both employer sponsored paid parental leave and claim the Government’s paid parental leave scheme, 60% are employed by the public sector and 40% are corporates.

Reforms currently before Parliament seek to curb the capacity for parents to receive both employer and Government funded parental leave payments instead moving to a ‘top up’ system. In effect, the reforms remove the capacity for private and public sector parental payments to co-exist. That is, if someone is entitled to paid employer leave of less than 18 weeks, then the Government will top up this payment to reach the maximum 18 week entitlement at the minimum wage. Senate figures reveal that only 6% of women who claimed the Government funded paid parental leave were on salaries above $100,000. The median income of those claiming the scheme was $47,730.

The proposed 1 January 2017 implementation date of the reforms is also contentious, as it would leave women who are currently pregnant in potentially very different circumstances to what they believed when they fell pregnant. However, it is unlikely that this date will be agreed by the Senate.

The reforms also amend how employers interact with paid parental leave. At present, paid parental leave is paid via the employer. Under the reforms, parental leave would be paid by the Government unless the employer opts-in to make the payments.

The reforms are expected to save around $1.2 billion across the forward estimates.