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.

Why Changing Your Business Structure Just Got Easier

New rules that apply from 1 July 2016 mean that small businesses can restructure their business operations without triggering adverse tax implications.

Before the introduction of the new restructuring rules, if a business restructured from say, a partnership to a trust, there was a possibility that the change in structure could trigger capital gains tax (CGT). That is, the tax law would treat the restructure the same way as a sale and the owners could be liable for CGT on their share of any gain based on the current market value of the assets being moved into the new structure.

While the existing CGT provisions already contain a number of roll-overs that can be utilised for business restructures, they generally only provide relief when assets are transferred to a company. Other concessions can potentially apply in a broad range of situations, but will not necessarily provide complete tax relief. This new form of roll-over relief can provide complete income tax relief when assets are transferred to a sole trader, partnership or trust if certain conditions can be met.

The conditions for accessing these new rules are fairly strict. Broadly, the key conditions are:

  • 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) 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 roll-over.
  • None of the entities involved in the transaction are a superannuation fund or exempt entity.

For many small business owners, the business structure they start with is not always the best structure over time. There are a lot of reasons why a business owner might need to restructure:

  • Risk & asset protection – separating assets from business activities will generally help protect the assets. Companies and trust structures offer greater protection then operating as a sole trader or partnership of individuals.
  • Tax – Your business structure determines the tax rate you pay and how it is paid. In addition, some structures offer greater tax concessions throughout the life of the business or on the sale of assets.
  • Compliance – some structures are more expensive to maintain and administer than others and provide less flexibility for succession, sale, and the introduction of investors.

If you are looking at changing your business structure, there are a few overarching principles you should think about:

  1. Keep it simple – Your structure should be as simple as possible and each entity should have a clear reason to exist. The more complex your structure the more expensive it becomes and the more likely that the Tax Office will start querying whether the entity exists for commercial or tax reasons. If reducing tax is the primary reason for structuring something in a particular way then the Tax Office can seek to remove the tax benefits the structure might provide.
  2. Think of the future – Your structure should facilitate future growth and should allow for flexibility.
  3. Start with the end in mind – You should be aware of your exit strategies from the business. Your structure can make a difference to how you are taxed and what concessions you can access when you eventually exit.
  4. The commercial considerations – different structures have different implications for how you run and manage your business. You need to be clear about the commercial reasons for adopting one structure over another.
  5. Separate business activities from valuable assets – Where possible, ensure that valuable passive, business, or private assets are not subject to the risks associated with your business activities.
  6. Protect retained profits – In some groups the use of a dormant holding company can help protect retained profits that have been generated by trading entities. The holding company can then operate as the banker for the group of entities, lending funds to operating entities as required (security could be taken over assets of the operating entity).
  7. Separate risk between individuals – Within a family group, consider providing some additional asset protection by ensuring that only one spouse is a director of an operating company.
  8. Corporate trustees for a trust – The use of a corporate trustee is generally prudent to protect from the risk of being personally liable for the debts of the trust.

Capital gains & property: The top questions and answers

The thought of the Australian Tax Office (ATO) sharing up to 50% of any gain you make on an investment decision is enough to strike fear into the hearts of most people. Given Australia’s love affair with property, it is little wonder that we are often asked about the impact of capital gains tax (CGT) on property. This month, we explore the most frequently asked questions.

In general, CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect.

Most questions about CGT on property are based on the main residence exemption that exempts your home (your main residence) from any CGT exposure when you sell the property.

I jointly own an investment rental property with my elderly mother. Neither of us has ever lived in the property. We’ve recently updated our wills. The lawyer says that if Mum’s will gifts her half of the property to me then this ‘gift’ will not attract capital gains tax. Is this correct?

Kind of. Tax law tends to work on the basis that if looks like a duck and walks like a duck then it’s a duck, not whatever your legal document calls it. Exposure to capital gains tax is a matter of fact and substance.

If you inherit your mother’s share of the property, there would generally be no tax liability until you sell the property. What is important here is how the CGT is calculated when you ultimately sell.

When the rental property transfers to you from your mother’s estate, the tax rules determine how CGT is calculated when you eventually sell. Basically, if the property was bought on or after 20 September 1985 then when you sell the property your taxable profit will be based on the original purchase price. That is, you will end up being taxed on the increase in value of the property since it was acquired, including the portion that accrued while your mother was still alive.

In general, if you jointly own an investment property, your individual exposure to CGT will depend on how the property is owned. If the property is held as tenants in common then any CGT exposure is in line with your ownership interest. For example, in your case, it is 50% owned by your mother and 50% by you but different people can own different ownership interests. If the property is owned as joint tenants then any CGT exposure is equally shared by the owners.

I bought a house in 2000, and lived in it until 2003. I was posted overseas with my job between 2003 and 2011. During that time my brother lived in the house rent free – he just paid for utilities. In 2011 to 2012, I rented the house out (no one I knew). I moved back into the property in 2012 and have just sold the house. Do I have to pay capital gains tax on the property?

The capital gains tax rules are more understanding about how people live their lives than other laws and in some circumstances allow you to continue to treat your home as your main residence even if you are not actually living in it.

While you are away overseas, if you leave the property vacant or let a friend or relative live in the property rent-free, assuming you do not claim any other property as your main residence, then you can continue to treat the property as your main residence for CGT purposes indefinitely.

If you rent the property out while you are away, the tax laws allow you to still claim the property as your main residence as long as the period you rent it for is not more than a total of 6 years. This 6 year period can actually be reset by moving back into the property again.

Effectively, you can move out and move back in as many times as you like and still claim the property as your main residence as long as it is your only main residence during that time and if you are renting it out, you do not rent it out for more than a total of 6 years across the period you are claiming the property as your main residence.

During the rental period you can also claim deductions against the rent, even though the property might still be exempt from CGT during this period.

I bought a property in 2008 and expected to move in straight away, but there were tenants still in the property and their lease still had 8 months to go. I waited for the lease to expire and then moved in. I have lived there ever since and plan to sell later this year. Can you just confirm that I would still qualify for a full CGT exemption on the sale as the property has significantly increased in value?

This is a very common situation but is probably overlooked much of the time. Unfortunately, you would not qualify for a full exemption in this case.

The main residence rules allow you to treat a property as if it has been your main residence since settlement date as long as you actually move into the property as soon as practicable after settlement. This is intended to cover situations where there is some delay in moving into the property due to illness or some other “reasonable cause”. The ATO’s view is that this rule cannot apply if you are waiting for existing tenants to vacate the property.

This means that you would only qualify for a partial exemption under the main residence rules. We will need to calculate your gross capital gain and then apportion it to reflect the period of time when it was actually your main residence (i.e., from when you actually moved in).

As long as you are a resident of Australia and have owned the property for more than 12 months we can also apply the 50% CGT discount to reduce the leftover capital gain.

It will be important in this case to gather as much evidence as possible of non-deductible costs that you have paid in relation to the property such as stamp duty, legal fees, commission paid to real estate agents, interest, rates, insurance, etc. This will help to reduce the gross capital gain that is subject to tax.

Treasurer raises ‘idea’ of personal tax cuts

Who doesn’t like a tax cut when they personally benefit from it? In a recent speech, the Treasurer said that personal tax cuts were required to prevent ‘bracket creep’ – that’s jargon for what happens when the tax rate thresholds don’t keep pace with inflation and more people are pushed into a higher tax bracket (they get taxed more and potentially lose access to benefits but are economically standing still).

The last change to the tax brackets was in 2012 to increase the tax-free threshold. The Government estimates that in the next two years, 300,000 Australians will move into the second highest tax bracket. And, by 2025, 43% of taxpayers will be in the top two tax brackets. The political problem is that because personal tax rates are a percentage, any cut to personal tax rates benefits higher income earners – they earn more therefore the dollar value of the cut is more. As it stands, the top 10% of income earners pay almost half of all personal tax collected – in the 1990s it was closer to 25%.

The Treasurer also points out that in many cases, women returning to work after being on maternity leave are often worse off or no better off once you factor in the cost of childcare. It’s a big issue for many families and prevents women contributing in the workforce.

So, the Treasurer has identified problems that most people would be aware of from personal experience, but what about solutions? That it seems is for another time. The Options Paper on tax reform is due out before the next election.

What now for the GST?

Fifteen years after the introduction of the GST in Australia debate still rages over what should be taxed and whether the GST rate should increase.

Unless the Government changes the GST Act, any change requires the approval of the States and Territories. The Treasurers’ workshop in August resolved to keep the GST rate at 10% but enable a series of other changes. We look at the key areas of change:
GST on online products
From 1 July 2017, the GST will be broadened to apply to all goods purchased online and imported from overseas. Currently, GST does not apply to inbound goods under $1,000.

The latest NAB Online Retail Sales Index estimates that Australians spent $17.3 billion on online retail in the 12 months to June 2015 – around 7% of traditional bricks & mortar retail. It’s difficult to find an accurate measure of how much of this online trade goes to overseas retailers but the Productivity Commission report in 2011 estimated 7.5% – the rest is spent with Australian retailers. According to the same report, around 76.5% of all online sales are for goods made up of low value purchases under $100.

The Treasurers have opted for a vendor registration model which means that they are relying on businesses based overseas and selling into Australia to register and comply voluntarily with Australian tax law. The problem is how to collect the tax from businesses that have no obligation to comply and the Government has no jurisdiction to pursue tax owing. It is almost impossible to bring all but the largest of providers into the GST net.

An OECD report at the beginning of the year recommended that foreign suppliers register in the country they are supplying to – Apple for example, already does this in Australia. It will be interesting to see if, over time, this becomes the norm. While protecting the tax base it would be a major competitive disadvantage for small business looking to explore new markets.
The ‘Netflix tax’: GST on digital goods
Draft legislation released on Budget night broadens the GST to digital products and other imported services supplied to Australian consumers by foreign entities in a similar way to equivalent supplies made by Australian businesses.

Expected to generate $350m over 4 years, the tax treats streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services in a similar way to local suppliers. In some cases the GST liability might shift from the supplier to the operator of an electronic distribution service where those operators have responsibility for billing, delivery and terms and conditions.

GST on digital products is intended to apply from 1 July 2017.

Dont get caught out by tax time scams!

At this time of year, it is more important than ever to be vigilant about online threats, spam emails and phishing (phishing is the process of attempting to acquire sensitive information such as usernames, passwords, tax file numbers, and credit card details by masquerading as a trustworthy entity in an email.)
The end of financial year tends to bring an increase in phishing attempts aimed at obtaining your financial details. These can often take the form of fake emails purporting to be from your bank or other financial institution, government agencies or from the ATO.
The emails can look very convincing as they often contain actual graphics and logos from the institution they are purporting to be, and wording in the subject line and email body that seems legitimate (e.g. ‘benefits of e-tax’, ‘eligibility requirements’ and ‘click here to get tax refund’) . They also contain links that appear to be genuine and will typically be very similar to the actual institutions web address/email addresses (e.g. “ refund@ato.gov.au” or “Australian Taxation Office” support@ato.gov.au). A big give away is often that the wording and grammar is often not quite right because these emails are typically generated from foreign countries where English is not their first language, or by people with no expertise in the areas of finance etc. The attempts to make these emails look real though is referred to as social engineering, and it is becoming more refined, and harder to distinguish all the time.

One of the biggest things to keep in mind when receiving emails is that the bank, ATO etc will never ask you for your passwords or any other confidential information via email.

The ATO will never:

  • threaten you with immediate arrest
  • ask you to pay money to receive a refund or payment from us
  • ask you to pay a debt via iTunes vouchers, or pre-paid credit card or store gift cards
  • ask you to provide personal information, such as your tax file number (TFN) or credit card number, via email or SMS
  • ask you to pay money into a personal bank account
  • direct you to download files from the internet, or open attachments in unsolicited emails.

So, what do you do if you get an email that doesn’t look quite right?

  • Don’t click on any links in the email. The best thing you can do to confirm whether it really is the bank, ATO etc who is asking for your details is to close the email, start your web browser and type in the address for the bank yourself. This way you are assured you will get to the proper website, and not a fake version that a link on the email may take you to. Once there, look for alerts or security warnings about current phishing activities, which may describe the fake email you received or look for an article on the website about what the email had been detailing. If the institution really does want you to update details, then there will definitely be a note about it on their website, as you won’t be the only customer affected.
  • Once you are sure the email is a fake, advise the bank, etc so they can be aware of how widespread the threat is. Typically they will have a link on their website related to security that will allow you to do this.
  • Delete the email.
  • Make sure Windows is up to date.
  • Make sure your virus scanner is up to date.
  • Remember the old adage, “if it sounds too good to be true, it usually is”. Many scam emails will offer promises of monetary rewards, prizes, holidays, or some get rich quick scheme. While these may be especially appealing around tax time, don’t be tempted to give them any details.
  • Always be suspicious of any unsolicited email, regardless of who it is supposed to have come from.
  • NEVER open any attachments on these emails. They will typically be viruses or some other sort of bad software, designed to steal your details or to wreak havoc on your system.
  • Contact the ATO, bank, energy company, etc and report the email to their fraud department. They will advise any further action you can take, and it will also allow them to build a knowledge-base of information about how and where scams are spreading.
  • Visit the ACCC Scamwatch website to see what the latest scams being reported are.  https://www.scamwatch.gov.au/

Finally, always make sure you have multiple good backups of your data, preferably stored off site. This will help restore your system quickly if you happen to fall victim to a ransomware attack. Ransomware attacks make your files inaccessible by encrypting them, and then requiring the victim to pay a ransom to obtain the key to unlock their files. 

If you have any questions about this article, or if you would like further advise about security measures and safety online, please do not hesitate to contact me.

Wayne Comber
IT Administrator
Christies Accountants and Advisors