We all would like to reduce our tax exposure and minimise the risk of an audit by the regulators. This end of financial year update series outlines the actions you can take to do exactly that! This particular blog is targeted for those that have a Trust entity.
ATO focus areas
Has your trust lodged TFN reports for all beneficiaries?
Trustees of closely held trusts have some additional reporting obligations outside the lodgement of the trust tax return each year. The Australian Taxation Office (ATO) is currently reviewing trustees to ensure their compliance with these obligations, particularly the requirement to lodge TFN reports for beneficiaries.
Where TFN provided
Where beneficiaries have quoted their TFN to the trustee, trustees are required to lodge a TFN report for each beneficiary. The TFN report must be lodged by the end of the month following the end of the quarter in which a beneficiary quoted their TFN. For example, if the trustee receives a beneficiary’s TFN in April, they must lodge a TFN report by the end of July.
Where TFN not provided
Where a TFN has not been provided by a beneficiary, the trustee is required to withhold tax at a rate of 47% and pay this to the ATO. The trustee must also lodge an annual report of all amounts withheld.
Failure to comply with the TFN reporting and withholding requirements may incur penalties.
- To stream franked dividends and capital gains, you will need to actually make resolutions by 30 June 2019.
- To stream franked dividends, you will need to record in the accounts or records of the trust (‘records’ includes distribution minutes) that a beneficiary is ‘specifically entitled’ to an amount of a franked dividend on or before 30 June 2019.
- To stream capital gains, you will need to record in the accounts or records of the trust that a beneficiary is specifically entitled to an amount of a capital gain by 30 June 2019.
- The priority issue is to check your Trust Deed to ensure that it enables the trustee to classify amounts of income by their source and make distributions of that classified income: this will be critical if a beneficiary is to be ‘specifically entitled’ to a capital gain or franked dividend, upon which the streaming amendments depend. It may or may not require amendment, and there are alternative strategies.
- Be wary of dealing with franking credit gross up amounts and non-deductible expenses, including under a ‘section 95’ income equalisation clause Draft Taxation Ruling TR 2012/D1.
- Under 18 – NOT Disabled or Receiving the income from a Testamentary Trust or Will
This distribution is used for Beneficiaries under the age of 18 that are not suffering a disability or receiving the income from a Testamentary Trust or Will. The sum of $416 should be applied as it is the maximum amount of non-excepted income for under 18 Australian residents and is usually received free of income tax.
- Under 18 – Disabled or Receiving the income from a Testamentary Trust or Will
This distribution is used for Beneficiaries under the age of 18 that suffering a disability or are receiving the income from a Testamentary Trust or Will. There is no restriction on the amount of income distributed for under 18 Australian residents and is taxed at rates applicable to over 18’s.
- Use percentages and ‘balance’ distributions to ensure all of the income and capital gains of the trust are effectively distributed by 30 June 2019.
- Do not make resolutions which change ‘in the event of a future amended assessment by the Commissioner of Taxation…’
- If the trust has a discount capital gain, make sure the total gross amount (i.e. the discount and non-discount parts) of the gain is distributed to the beneficiaries who are intended to be assessed on the capital gain.
Timing of resolutions
Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2019 at the latest (the trust deed may actually require this to be done earlier). Decisions made by the trustees should be documented in writing, preferably by 30 June 2019.
If valid resolutions are not in place by 30 June 2019, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).
Low-income tax offset and minors reminder
The low-income offset has not been available to minors who only receive ‘unearned’ income (e.g. distributions from a discretionary trust) since the 2013 income year. Minors who only receive ‘unearned’ income will normally be subject to penalty rates of tax on income that exceeds $416.
Normal marginal tax rates can potentially still apply to minors who receive distributions from a deceased estate or testamentary trust.
Streaming of franked dividends and capital gains
Trustees are only able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the beneficiary’s entitlement to the franked dividends is recorded in writing by 30 June 2019. For streaming of capital gains to be effective for tax purposes, the beneficiary’s entitlement must be recorded in writing by 30 June if the capital gains form part of trust income for the year or 31 August if the capital gains do not form part of trust income.
We can assist you with this process if you do wish to stream franked dividends or capital gains to specific beneficiaries.
If a trustee resolves to distribute income to a tax-exempt entity, the trustee will be assessed on that income at the top marginal tax rate unless:
- The trustee actually pays the entire distribution within 2 months of the end of the income year; or
- The trustee notifies the entity in writing of its entitlement within 2 months of the end of the income year.
Also, anti-avoidance rules tax the trustee on a portion of the income distributed to a tax-exempt entity where there is a mismatch between the net financial benefit to be received by the entity and the tax treatment of the distribution.
Extension and increase to the instant asset write-off
The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended (again) and expanded. The new laws:
- increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) firstly to $25,000 and then to $30,000; and
- enable businesses with an aggregated turnover of $10 million or more but less than $50 million to access the instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.
|Instant asset write-off thresholds||Small Business*||Medium business**|
|1 July 2018 – 28 January 2019||$20,000||–|
|29 January 2019 – 2 April 2019||$25,000||–|
|2 April – 30 June 2020||$30,000||$30,000|
* aggregated turnover under $10 million
** aggregated turnover under $50 million
Assets will generally need to be used or installed ready for use from Budget night (7:30pm AEDT, 2 April 2019) and by 30 June 2020 to qualify for the higher threshold. Anything previously purchased does not qualify for the higher rate but may qualify for the $20,000 or $25,000 threshold. Similarly, anything purchased but not installed ready for use by 30 June 2020 will likely be subject to a $1,000 threshold.
The instant asset write-off only applies to certain depreciable assets. There are some assets, like horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc., that don’t qualify although this can depend on the size of the business.
If you are concerned about whether a purchase you are contemplating (or have purchased) qualifies for an immediate deduction, please call us to clarify.
For assets costing $30,000 or more
For small businesses (aggregated turnover under $10m), assets costing $30,000 or more can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $30,000 at the end of the income year, then the remaining pool balance can be written-off as well.
The ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out) will continue to be suspended until 30 June 2020.
Pooling is not available for medium sized businesses which means that the normal depreciation rules based on the effective life of the asset will apply to assets that don’t qualify for an immediate deduction.
Single touch payroll extended to all employers
From 1 July 2019, single touch payroll – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – will apply to all employers. What employers need to report will also be extended to include certain salary sacrificed amounts.
Employers with 20 or more employees have been required to use single touch payroll since 1 July 2018. The new rules push all businesses with employees into the single touch payroll system. While this would generally include the situation where payments are made to the owners of the business in the form of salary, wages or directors fees, the ATO is providing some leniency around this for a limited period of time.
A number of software providers have now released low cost payroll options for micro employers (1-4 employees). MYOB and Xero have announced new $10 per month offerings (limited to 4 employees) with other software houses following suit.
The ATO also states that to assist micro employers there will be, “a number of alternate options that are not available to employers with 20 or more employees – such as initially allowing your registered tax or BAS agent to report quarterly, rather than each time you run your payroll.”
While the start date for small employers will technically start on 1 July 2019, the Commissioner of Taxation released a statement indicating that small employers can actually start reporting through single touch payroll any time from 1 July 2019 until 30 September 2019. No penalties will be applied to mistakes, missed or late reports for the first year.
Plus, if your business is in an area with no viable internet connection, such as some rural and remote regions, then exemptions may apply.
Reporting payments to contractors
From 1 July 2019, security providers and investigation services, road freight transport, and computer system design and related services businesses will need to collect specific information in relation to payments made to contractors (individual payments and total for the year). These businesses will need to lodge an additional report to the Australian Taxation Office with this information. The first report will be due by 28 August 2020.
Businesses within the building and construction industry, cleaning, and courier services need to report payments to contractors in the year ending 30 June 2019 by 28 August 2019.
No tax deductions if you don’t meet your tax obligations
From 1 July 2019, if taxpayers do not meet their PAYG withholding and reporting obligations, they will not be able to claim a tax deduction for payments:
- of salary, wages, commissions, bonuses or allowances to an employee;
- of directors’ fees;
- to a religious practitioner;
- under a labour hire arrangement; or
- made for services where the supplier does not provide their ABN.
The main exception is where you realise there is a mistake and voluntarily correct it before the ATO begins a review or audit. In these circumstances, a deduction may still be available if you voluntarily correct the problem but penalties may still apply for the failure to withhold the correct amount of tax. There is also an exception for situations where you make payments to a contractor but then later realise that they should have been paid as an employee, as long as the worker has provided an ABN.
Before you roll-over your software…
Before rolling over your accounting software for the new financial year, make sure you:
- Prepare your financial year-end accounts. This way, any problems can be rectified and you have a ‘clean slate’ for the 2019-20 year. Once rolled over, the software cannot be amended.
- Do not perform a Payroll Year End function until you are sure that your payment summaries are correct and printed. Always perform a payroll back-up before you roll over the year.
Single touch payroll
Where payments to employees have been reported to the ATO through single touch payroll, a finalisation declaration generally needs to be made by 14 July, although an extension to 31 July 2019 has been granted for businesses that started to report through single touch payroll for the first time in the 2019 financial year. Payment summaries do not have to be provided to employees. Instead, employees will be able to access their Income Statement through myGov.
PAYG payment summaries
If you have not used single touch payroll in 2018-19, you need to provide all of your staff with their PAYG Payment Summary on or before 14 July 2019. This includes any staff that left your employment during the 2018-19 financial year.
If we prepare your Payment Summaries for you, please provide us with the data file from your accounting software.
The ATO imposes penalties for the late lodgement of PAYG Payment Summary Statements.
The annual PAYG Payment Summary Statement for the year ending 30 June 2019 needs to be lodged with the ATO on or before 14 August 2019. However, if we are preparing your Payment Summary for you and you only employ family members in your business (closely held employees), you may be eligible for an extension.
The main exception to this is where payments to the employees have been reported to the ATO through single touch payroll, in which case a finalisation declaration generally needs to be made by 14 July 2019.
Reportable Fringe Benefits on PAYG Payment Summaries
Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount on their PAYG Payment Summary. This is referred to as a `Reportable Fringe Benefit’ (RFB) amount and a label is included on the PAYG Payment Summary for this purpose.
Do you need to do a stocktake?
Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business.
If your business has an aggregated turnover below $10 million you can use the simplified trading stock rules. Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000. You will need to record how you determined the value of trading stock on hand.
If you do need to complete a stocktake, you can choose one of three methods to value trading stock:
- Cost price – all costs connected with the stock including freight, customs duty, and if manufacturing, labour and materials, plus a portion of fixed and variable factory overheads, etc.
- Market selling value – the current value of the stock you sell in the normal course of business (but not at a reduced value when you are forced to sell it).
- Replacement value – the price of a substantially similar replacement item in a normal market on the last day of the income year.
A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year; you can choose the most tax effective option each year. The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock. This should give rise to a deduction even though the loss has not yet been incurred.
Reduce your risks & minimise your tax
1. Write-off bad debts
To be a bad debt, you need to have brought the income to account as assessable income and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.
2. Review your asset register and scrap any obsolete plant
Check to see if obsolete plant and equipment is sitting on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June. Small business entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.
3. Bring forward repairs, consumables, trade gifts or donations
To claim a deduction for the 2018-19 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.
4. Pay June quarter employee super contributions now
Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2019. However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.
Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Your personal or company sponsored contributions need to be received by the fund before 30 June to be deductible.
5. Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes. It may be possible to contribute assets with unrealised losses to superannuation in order to do this.
6. Raise management fees between entities by June 30
Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.
What we need from you
This is a general list of what to have ready when we next meet with you:
- Accounts data file (Quickbooks, access to Xero)
- Debtors & creditors reconciliation
- Stocktake if applicable (or, if your business is a Small Business Entity, use the simplified trading stock rules mentioned above)
- 30 June bank statements on all relevant loan documents
- Documents on new assets bought or sold, including the date you entered the contract and the date the asset was first used or installed ready for use
- Payroll reconciliation
- Superannuation reconciliation
- Cash book (if applicable)
- 30 June statements on any investment or operating accounts
And, if we are preparing your individual income tax return:
- PAYG Payment Summary
- Tax statements of managed investment funds
- Interest income from banks and building societies
- Dividend statements for dividends received
- For share sales or purchases, the purchase and sale contract notes
- For real estate sales or purchases, the solicitor’s correspondence for the purchase and sale
- Rental property statements from real estate agent and details of other expenditure incurred
- Work related expenses
- Self-education expenses
- Travel expenses
- Donations to charities
- Health insurance and rebate entitlement
- Family Tax Benefits received
- Commonwealth assistance notices
- Medical Expenses (if they relate to disability aids, attendant care or aged care services)
- IAS statements or details of PAYG Instalments paid
- Details of any transactions involving cryptocurrency (e.g., Bitcoin)
- Details of any income derived from participating in the sharing economy (e.g., Uber driving, rent from AirBNB, jobs completed through Airtasker etc.,)
If you’re not sure, please call us to discuss your options or book in online.
Best of luck for 2019!