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Recent Changes in Small businesses

The main changes for small businesses include:

1. Company tax rate reduction

It appears that the reduction in the company tax rate from 30% to 28% from 1 July 2012 will apply to small businesses as currently defined (i.e. companies with an annual turnover, including the turnover of associates) of less than $2m. For other companies, the tax rate reduction will be phased in from 1 July 2013 to 1 July 2014.

As there is no suggestion that the maximum personal rate will be reduced, it will result in further planning for privately owned businesses to limit the effective tax rate on business income to the 28% rate.

In the coming financial year (2010 – 2011) it will also result in such businesses considering ways to optimise the use of franking account balances and means by which income can be legitimately deferred to the following year.

2. Asset write-offs

From 1 July 2012 the proposed simplification and acceleration of capital expenditure write-offs for small businesses will provide administrative and tax benefits. Small businesses will be able to immediately write off assets valued under $5,000 and will be able to write off all other assets (except buildings) in a single depreciation pool at a 30% rate. This will do away with the need for them to maintain detailed depreciation schedules, at least for tax purposes.

3. Capital gains tax on earn-outs

An earn-out is a concept related to the sale of a business. As part of an earn-out, the purchaser agrees to deliver something (usually money) at a later time provided some contingency (such as profit) is met. The vendor is motivated to use an earn-out to maximise the sale price whereas the purchaser uses it to reduce the risk of paying for a business that does not perform as expected.

Clarification of the CGT treatment of earn-out payments on business sales removes doubt surrounding this area of tax law in a manner favourable to business owners. It means that business owners can structure the sale of their business in a commercially realistic way without adverse CGT consequences.

Broadly, the proposal is to treat all consideration on sale of a business, including earn-outs, as attributable to the business itself rather than being treated as a separate asset. This means that all of the consideration, including earn-outs, may qualify for the CGT 50% discount and also the small business CGT concessions.

As there will be transitional provisions for certain cases with effect from 17 October 2007, it will be necessary to review any business sales made from then, once the provisions are released.

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Claiming Losses From Share Trading

Between now and the end of the tax year, investors who have crystallised losses in their share portfolio since 1 July 2008 should check to see how they can use them to minimise their tax position.

The massive decline in equity markets means that many investors have realised losses on any sale of shares, and unrealised losses in the shares still held. Unfortunately, such investors are not able to deduct these losses from their income because they are taxed under the capital gains provisions.

However, some investors may be able to claim the status of ‘trader’, meaning that the losses, both from sales and from unrealised losses, may be tax deductible from income.

A trader is someone who can show that they have been carrying on a business of share trading. As a result, they are taxed under the rules that apply to business income. Traders are taxed on the entire amount of gains on share sales, but losses on sales can be deducted from other income such as salary and wages.

Traders can also deduct unrealised losses on shares held at year end from other income. This could provide significant tax benefits and possibly equally large tax refunds.

Whether an investor can be treated as a share trader can be quite subjective, but someone who regularly buys and sells shares with the intention of making a profit can argue they are a share trader. This is likely to be accepted if shares are turned over within a reasonably short time and there is a reasonable volume of trades within a year.
The ATO considers the following factors as indicating share trading:

Profit making motive
Complexity and magnitude
Regular trading
Operating in a business-like manner.

On the other hand some of the factors that indicate investing include:

Reliance predominantly on professional advice to make decisions
Limited time spent on the activity
A simple method of operation
No trading plan.
Investors who wish to be considered as traders should make sure they have satisfied the ATO’s requirements. Be aware that the ATO is alert to the possibility of taxpayers attempting to take advantage of losses arising from the fall in equity markets and may question any change in status.

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Super Choice- Choosing a Right Super Fund:

Since the introduction of Super Choice in July 2005, Australian workers have had the option to choose where to put their super. Now you have the freedom to choose what to do with your superannuation but are you really taking advantage of this freedom? When you started your current job, it’s likely that you just ticked a box and chose an investment option for your super. But how closely did you look at your options? Is the option you ticked really suitable for you?

Superannuation – Your Second Largest Lifetime Asset
Most of us don’t give our superannuation much consideration. You don’t really notice the money going in and for most people there is no way of accessing it until you’re retired or preparing to retire (for more information on Transition to Retirement, click to download our free TTR Ebook). But the fact is that your superannuation is likely to be the second biggest asset you accumulate in your lifetime (second to the family home), and the decisions you make now will make a big difference to where you’ll end up later. Thinking about your super when you’re retiring is usually too late, you need to be making the right decisions now.

Choosing a super fund
If you’re starting a new job, it’s very important that you take the time to choose a super fund that’s the right fit for your situation. It’s very tempting to just accept the default super fund offered by your employer, but you risk lower returns and higher fees. Also, it’s likely that you’ve still got a fund that you had from your last job— do you really want to have two super funds? It is easy to lose track when you have more than one fund.

Super Fund Consideration #1 – Fees
The first thing to consider when trying choosing a super fund is fees. How much is too much? If you only have a small account balance, paying less fees will be more important than making good returns. But as your super balance grows, you’ll want to start looking at where you’re investing your money for greater returns. But will your current superannuation fund allow you to have the level of control over your money that you want? Do you need more flexibility? Flexibility gives you choice and control, but it also comes at a cost.

Super Fund Consideration #2 – Investment Options
The added complexity about choosing a super fund is that once you’ve decided on one, you then need to elect your investment options within that fund (provided you have the flexibility in that fund to do so). Should you invest into high growth or balanced? Should you have more or less Australian shares? What about international exposure? There are some standard options that many investment managers tend to suggest on where to invest your super, but ultimately you need something that is just right for you and suits your needs. Of the thousands of options out there, there is at least one right option waiting for you

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Superannuation Planning for 2010-11:

Planning and monitoring contributions

Individuals should be planning to maximize the annual concessional (tax deductible) and non-concessional (undeducted or after-tax) contributions to superannuation for the year ending 30 June 2011.

In addition to planning to maximize super contributions, individuals should also be reviewing and monitoring superannuation contributions made personally or made by their employer on an on-going basis to ensure that they do not exceed the relevant contributions cap. Excess contributions are a major focal point of ATO compliance.

If a person has over-contributed and is issued with an excess contributions assessment, it is very difficult to have the assessment overturned, even where the excess contribution was unintentional or caused by mistake.

For the year ended 30 June 2011, the maximum (“capped”) amount that can be contributed to superannuation for a person is summarized in the table below.
(Deductible) (Undeducted)
$ $ $

Under 50 25,000 *150,000 175,000
50 to 64 50,000 *150,000 200,000
65 to 74 50,000 150,000 200,000
75 & Over Nil Nil Nil

* $450,000 may be contributed over a rolling three year period for persons aged under 65 on 1 July 2010.

Finally if an employee has entered into a salary sacrifice agreement with their employer, they need to make sure it is current and does not cause them to exceed the contributions cap.

New super fund borrowing rules introduced

New rules apply for super fund borrowings made after 6 July 2010. These new rules differ from the old super fund borrowing rules in 3 main areas:

The borrowing can only be for a single asset or a collection of like assets. This will restrict the ability to undertake a single borrowing to purchase shares in different companies;
the new rules allow refinancing; and
The new rules allow borrowings to be used to pay the initial purchase costs of an asset, such as conveyancing and establishment fees.

Minimum super fund pension rate

The Government has announced that the 50% reduction in the minimum drawdown requirement for super fund account-based pensions will be extended to the 2010-11 financial year.

This means that the minimum pension rates for 2010-11 are as shown in the following table:

Age % of Account Balance

55–64 2
65–74 2.5
75–79 3
80–84 3.5
85–89 4.5
90–94 5.5
95+ 7

The 50% reduction in the minimum pension rate will assist super fund pension recipients in preserving their retirement savings which may have been eroded by losses caused by the GFC.

This concession may also provide an opportunity for those aged 55 and over and still working to consider commencing a transition to retirement pension from their super fund for the tax benefits.

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Avoiding Excess Super Contributions:

For the 2007/08 year, the Australian Taxation Office issued as many as 24,000 letters to people who have exceeded their super contributions cap.

This number is likely to increase in the 2009-2010 financial year as the concessional contribution caps were halved from 1 July 2009, making it more likely that people will inadvertently exceed the caps.

The super contribution caps are the maximum amounts a person may contribute to superannuation each year (or have contributed on their behalf) as shown in the table below.

Any contributions made in excess of the cap are levied with an additional penalty tax. Excess concessional contributions are taxed at 31.5%, on top of the standard 15% tax on superannuation.

Non-concessional contributions, which are personally-made after-tax contributions, are not taxed in the super fund. Excess non-concessional contributions are taxed at 46.5%. People under age 65 may contribute a maximum $450,000 non-concessional contribution over a rolling three year period.

Non-concessional contributions also include a person’s excess concessional contributions. So if a person has exceeded both their concessional and non-concessional contributions cap, the tax on the excess contributions could amount to 93%.

Common traps

The large number of people identified by the ATO as exceeding the caps shows that it can be quite easy to breach the contribution caps.

Some of the common traps to be aware of include:

Employees directing their employer to make a one-off employer super contribution at year end based on their maximum concessional cap, without taking into account the compulsory nine percent super guarantee payments their employer has made during the year
not updating current year salary sacrifice arrangements to reflect the lower concessional contribution cap
maximising one’s personal non-concessional and concessional contributions for the year up to the cap and then finding that the amount of your personal concessional contribution is limited by your income, thereby creating an excess non-concessional contribution.
For those over 65 at the start of the year, making a non-concessional contribution of $450,000 for the year not realising that, because of their age, they are not eligible for the bring-forward rule.

People who receive an excess contributions tax assessment can apply to the ATO to have contributions disregarded or re-allocated to another financial year, but only if there are special circumstances involved.

Also, if the super fund has identified or become aware that an excess non-concessional contribution has been made, they can return the excess amount within 30 days of the date it became aware of the situation.

But as always, prevention is better than cure so people really need to keep a watchful eye on their super contributions to ensure that they don’t exceed their caps.

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Common Mistakes By SMSF Trustees

The ATO has recently announced that it will be stepping up its compliance program for trustees of self managed superannuation funds (SMSF’s).
Accordingly trustees should check their policies and procedures to make sure they are not inadvertently in breach of the rules. Trustees that are found to be in breach may be fined or the fund could lose its favourable tax status and be taxed at the top marginal rate. 75% of all SMSF contraventions fall into six categories:

Loans to members or relatives (19%)
SMSF’s are prohibited from lending money or providing any financial assistance using the fund’s resources to a member or a member’s associate. For example, payment of personal expenses by the fund.
Breaches of in-house asset rules (16%)
The fund cannot acquire or hold in-house assets that are valued at more than 5% of the market value of total assets. In simple terms, an in-house asset is a loan, investment, or lease arrangement with a related party. If a fund has in-house assets, a review is required on a yearly basis to determine if the assets remain below the 5% level.
Assets not in the name of the trustee (14%)
The fund’s assets cannot be held in the name of individual or corporate trustees in their own capacity, but must be held in their capacity as the trustee of the fund. If the assets are not in the correct name, the fund’s assets are placed as risk as they are not identified as being owned on behalf of the fund.
Documents requested by auditor not provided (11%)
If the auditor requests a document in writing from the trustees, each trustee must ensure that the document is given to the auditor within 14 days of the request being made. This applies only to documents that are relevant to the preparation of the audit report.
Breaches of sole purpose test (8%)
A SMSF must be maintained solely for the purpose of:
each member on or after their retirement; or
A member’s legal personal representative or the member’s dependants after the death of the member.
The fund is not permitted to provide any benefits to a member or their associate (e.g. renting a residential property owned by the fund to a member, or hanging artwork owned by the fund on the member’s wall).
Unauthorised borrowings (7%)
A SMSF is generally prohibited from borrowing money or maintaining an existing borrowing of money.
An exception is instalment warrants, and even with these, trustees must ensure they comply with the very strict rules.