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Greater Flexibility For Accessing Company Losses

 

The government plans to give companies greater access to prior year tax losses in a bid to stimulate business innovation. A new alternative to the “same business test” – the “similar business test” – will make it easier for companies that have experienced a significant change in ownership or control to carry forward their losses. While this will provide greater flexibility, companies will need to carefully weigh up a range of factors to determine whether they meet the test.

 

The ability to carry forward tax losses is important for business growth and innovation. A tax loss arises when a taxpayer has more deductions in an income year than assessable income. Being able to carry forward tax losses and deduct these against future assessable income encourages businesses to undertake entrepreneurial or innovative activities that may not initially be profitable.

 

Under the current law, a company that has experienced a significant change in ownership or control may only carry forward its tax losses to a later income year if the company meets the “same business test”. This test broadly requires that the company currently carries on the same business as it did before the change of ownership or control, and that it does not derive any income from a new kind of business or a new kind of transaction that it previously did not enter into. These rules are designed to prevent “loss trading” (ie selling tax losses by selling a loss company to new owners).

 

Recognising that these rules may be too strict and discourage some companies from legitimately innovating or adapting their businesses to meet changing economic circumstances, the government now proposes to introduce an alternative “similar business test” to make it easier to access prior losses.

 

Under the proposed new rules, a company that has experienced a significant change in ownership or control will be able to carry forward its losses if it meets either the existing “same business test” or the new “similar business test”.

 

The word “similar” is not defined in the proposed new rules, and whether a company carries on a “similar” business will be a question of fact. There is no limit on the factors that may be taken into account when determining this. However, the following four factors must be taken into account:

-the extent to which the assets (including goodwill) used in the current business were previously used in the former business;

-the extent to which the activities and operations of the current business match those of the former business;

-the “identity” of the current business compared to the former business – this is a broad-ranging enquiry into all of the characteristics of the business; and

-the extent to which any changes to the former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business – this looks at whether any changes are part of the natural organic development of the former business (suggesting similarity) rather than merely reasonable or commercially sensible changes (which would not necessarily support similarity).

 

The ATO has already published draft guidance on its view of the proposed test. It says that “similar” does not mean a similar “kind” of business. It further says that it will be more difficult to meet the test if “substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time”. On the other hand, new products or functions that develop from the business activities previously carried on are more likely to indicate a similar business.

 

If enacted by Parliament, the proposed new alternative test will apply for tax losses arising from the 2015–2016 income year onwards. The new test will also apply to net capital gains and deductions for bad debts.

 

Make the best use of prior losses

Utilising prior year losses is an important tax planning issue for many businesses. Contact us for advice on the company tax loss rules and to consider whether your business activities are likely to meet the new “similar business test”.

Catching Up On Superannuation Contributions

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The government’s new measure to allow those with less than $500,000 in superannuation to “catch up” on missed superannuation contributions is a great opportunity for anyone who takes time out of work or otherwise has “lumpy” income that means they have a varying capacity to make contributions from year to year. Individuals who want to fully take advantage of this strategy by making contributions up to their concessional cap plus additional catch-up amounts may need to consider strategies for how to fund those catch-up contributions.

 

Individuals with a total superannuation balance (TSB) below $500,000 are now able to “carry forward” their unused concessional contributions (CC) cap space to future years in order to catch up on contributions later when they have the capacity to do so. Usually, an individual’s CCs are capped at $25,000 per financial year, and exceeding the cap will generally attract an excess contributions tax penalty. CCs include:

 

-compulsory superannuation guarantee (SG) contributions;

 

-additional salary-sacrifice contributions made by your employer; and

 

-personal contributions you make yourself from your after-tax income for which you claim a deduction. Anyone under the age of 75 is now entitled to claim a deduction for personal contributions.

 

The new “catch-up” scheme allows eligible individuals to carry forward unused CC cap amounts on a rolling basis over five years. This means that if you do not use up all of your cap in one financial year, the unused amount can be carried forward and utilised in a future year for up to five years, allowing you to contribute more than the annual cap without penalty.

 

Unused cap space that has not been used after five years will expire.

The 2018–2019 financial year is the first year in which individuals can accumulate and carry forward unused cap space, which means the 2019–2020 financial year will be the first year in which individuals can start to make additional catch-up contributions. To be eligible to make a catch-up contribution (ie above the usual annual CC cap), the person must have had a TSB below $500,000 just before the start of the financial year in which they wish to make the contribution (ie as at 30 June of the previous financial year).

 

How might this work in practice?

To utilise unused cap space from earlier years, an individual must have the capacity to fund the catch-up contribution. Some ways in which a person with prior unused cap space might be able to contribute more than $25,000 in a financial year include:

 

-Making additional salary-sacrifice contributions, particularly for higher income earners who have not yet accumulated $500,000 in superannuation. Once someone reaches annual earnings of $216,120 per annum (which yields around $20,531 p.a. in compulsory SG contributions), their employer is not required to make further SG contributions. However, some workers, including many who earn well under $216,000 p.a., choose to salary-sacrifice additional amounts all the way up to their CC cap of $25,000. Using any unused cap space from earlier years may be attractive to those who want to heavily salary-sacrifice beyond the usual cap.

 

-Contributing an inheritance or windfall, or some other source of surplus funds.

 

-Contributing proceeds from the sale of an asset. It is important to remember, however, that selling an asset may have immediate tax consequences, and selling the family home in particular could affect the person’s entitlement to the Age Pension.

 

Anyone considering these strategies will need to ensure the contributions make sense for their particular circumstances from a tax and financial viewpoint. Individuals aged 65 or over will also need to meet the work test in order to make voluntary CCs (subject to an exception for certain eligible recent retirees).

 

 

Start thinking ahead now

If you have fluctuating income and you would like to explore the possibility of utilising unused CC cap space in future years, talk to us today. Catch-up contributions can form part of an overall contributions strategy designed to boost your retirement savings in a tax-effective manner.

Garnishee Orders May Bring Home The Bacon

A garnish is an enhancer, something to dress up a plate – think of a sprig of parsley. A garnishee is something entirely different, although it can enhance an otherwise dire situation for a creditor and bring home the bacon. It’s a third party who is ordered by the court to release money to remedy a personal debt owed to the creditor by the debtor. This could be the debtor’s bank, their employer or their own creditor.

 

Issuing a garnishee order is a cheap and easy way to claw back some of your debt, but there are a few matters to consider first.

 

Bypass your debtor and go straight to the source of their funds

Once the court has given you a judgment against your judgment debtor, and they have failed to satisfy the judgment, you can apply to the court for a garnishee order. This allows you to bypass the recalcitrant debtor and it sets up a relationship in the form of a triangle between you as creditor, the debtor and the third party.

 

This third-party garnishee acts as a kind of proxy for the debtor and the order will require them to pay the debt to you in a lump sum or in instalments.

 

A garnishee order can be directed straight to the debtor’s bank or their employer. In the latter case, you will be able to access the debtor’s pay packet before they do. You do not have to tell the debtor you have applied for a garnishee order and they may only find out when they see their bank statement or pay slip. However, the local and district courts instruct that the amounts claimed in total under the garnishee orders must not reduce the judgment debtor’s net weekly wage or salary received to less than $500.60.

 

This is known as the weekly compensation amount and is adjusted in April and October each year. When issuing a garnishee order, it must include an instruction to the garnishee about the amount that a judgment debtor is entitled to keep.

 

Garnishee orders can also be made against those who owe money to the debtor, for example a real estate agent who is collecting the rent from the debtor’s tenanted property.

 

Benefits galore of a garnishee order

One of the benefits of a garnishee order is that there is no filing fee, although a service fee may be payable. There is also no extensive research on the debtor required before the order is issued, the debtor’s name may be enough. And if the order fails to recover all or some of the money, the order can be reissued on the same garnishee several times.

There is also little the garnishee can do to stop the order unless they apply to the court or they repay the debt.

 

Guidance on garnishing

If you have received a judgment and have an outstanding debt you are trying to recover from your judgment debtor, we can help take the lead on it for you and take you straight to the debtor’s funds.

 

 

Corporate Tax Rates: Recent Changes Give Certainty

 

There’s finally some certainty about the corporate tax rate(s). Legislation has recently passed Parliament and the fate of other proposed changes has also been finalised. The law is settled, so it’s a good time to remind ourselves what the final state of play is concerning the dual rates of 27.5% and 30%.

 

There are two categories of companies when it comes to the corporate tax rate. The two categories are determined by turnover and business activity.The rate of 27.5% applies to corporate tax entities known as “base rate entities”. What is a base rate entity? Put simply, it is a company which carries on a business and has an aggregated turnover of less than $50 million. This is up from $25 million in the last financial year (ie 2017-18), but will stay at $50 million until 2023-24. The ALP has confirmed that it will not change the rules for base rate entities if elected – so there we have our first certainty.

 

The rate for base rate entities is locked in at 27.5% until 2023-24. The tax rate for all other companies remains at 30%, ie the standard corporate tax rate. This will not change.

 

There had been legislation before Parliament that proposed to progressively extend the 27.5% corporate tax rate to all companies regardless of turnover. However, the legislation did not make it through the Senate and the Government has since announced that it would not proceed with this proposal. This provides us with our second certainty – there will be no changes to the standard corporate tax rate.

 

The tax rate for base rate entities is scheduled to reduce after 2023-24, as this has already been legislated. It is reasonable to state this as the third certainty – that the tax rate for base rate entities will decline progressively to 25% by 2026-27.

 

Now, this is all perfectly straightforward if your company is carrying on what may be termed a trading business, eg providing services, buying and selling trading stock, importing/exporting etc. But if the activities of the company wholly or partly consist of receiving returns on investments – such as rent, interest and dividends (which are termed “passive income”) – then it can get a bit tricky.

 

The Government never intended that companies receiving passive income should benefit from the lower tax rate. It recently changed the rules for base rate entities to ensure this does not happen.

 

A base rate entity will only qualify for the lower 27.5% rate for a particular year if its passive income is less than 80% of its assessable income (and of course its aggregated turnover is less than $50m). Put the other way, companies that receive more than 80% of their income in passive forms will pay tax at the standard corporate tax rate, regardless of turnover.

 

The passive income is termed “base rate entity passive income” in the amending legislation. And what qualifies? Well, dividends and the associated franking credits to start with. Interest (or a payment in the nature of interest) also qualifies – but not if the entity is a financier – as well as royalties and rent. Another key area that qualifies as base rate entity passive income is net capital gains. This could be important for smaller companies – in that the sale of a substantial asset could shake the income mix and possibly put access to the lower rate at risk.

 

Does your company derive investment income?

If you are not sure of the implications of the new company tax rates, we can help. For example, if your business operates via a company, it may be worthwhile using the CGT rollover provisions to transfer assets into a separate entity, to ensure that the 80% rule is not breached. The split 27.5% / 30% rate also has implications for the imputation system and franking credits, which we would be happy to discuss.

Working-From-Home Deductions For Employees

More people are working from home than ever before. Employees who work from home may be able to deduct some of the expenses they incur in running a home office or for phone and internet usage. The key to claiming these deductions is to understand when expenses are deductible and what taxpayers must do to support their claim.

 

If you are an employee and you sometimes work from home, you may be able to claim deductions for some of the expenses you incur, provided you are not reimbursed by your employer. Here, we consider two common types of expenses that employees may claim and how you must substantiate your deductions.

 

Home office running expenses

Running expenses such as heating, cooling and lighting costs are only deductible if you exclusively use these services while performing work at home.

 

For example, the ATO says that you would not be able to claim deductions for these expenses if you work on your laptop while sitting next to your partner who is watching TV.

 

 

However, if you perform work in a room when others are not present, or in a separate room dedicated to work activities, you may be able to claim some running expenses. This is because you are entitled to a deduction when you incur additional running expenses as a result of your income-producing activities (ie above what you incur for domestic or private use).

 

In practice the ATO accepts two methods for calculating your deduction:

-A simple rate of 52 cents per hour worked (effective from 1 July 2018), which covers all the running expenses you can claim (including decline in value of home office items such as furniture). To substantiate your deduction, you only need to record how many hours you worked from home in the income year. If your hours are regular and constant throughout the year, the ATO will accept a diary of a representative four-week period as sufficient record-keeping.

-Alternatively, you can claim the work-related proportion of actual expenses incurred by maintaining thorough records and evidence. This is a more complex method suitable for taxpayers who would be entitled to claim more than the 52 cents per hour rate would allow. You should seek advice about this method to ensure your evidence will meet ATO requirements.

 

Phone and internet usage expenses

You can claim up to $50 in total for all work-related device usage charges (phone calls, text messages and internet) with basic documentation only. The ATO accepts these methods of calculation:
-Home phone: 25 cents per work call
-Mobile phone: 75 cents per work call and 10 cents per work-related text message.
-Internet data: basic records reflecting time spent or data used for work purposes.

However, if you need to deduct more than $50, you must maintain detailed written evidence to substantiate the work-related proportion of your expenses. The ATO has some guidelines about apportionment, taking into account complexities such as bundled phone and internet plans, and itemised versus non-itemised phone bills. The key is to use a “reasonable” basis for your apportionment.

 

Deductions for electronic devices are calculated separately. If you purchase these items to help you earn income, you may be entitled to an immediate deduction for items costing $300 or less, or a deduction for decline in value for more expensive items.

 

What can’t employees claim?

Occupancy expenses such as rent, mortgage interest, council and water rates, land taxes and insurance premiums are usually not deductible for employees who work from home.

The ATO also says that casual employees cannot claim deductions for telephone rental expenses. This is because they are not “at call” and do not derive assessable income until they commence duties at their place of employment.

 

Check your expenses

If you work from home as an employee, talk to us today to check whether you are claiming all of the expenses you are entitled to. We can also help you ensure that you are keeping adequate records and evidence to protect you in the event of an ATO audit.

Extra 44,000 Taxpayers Hit With Div 293 Super Tax

An extra 44,000 taxpayers have been hit with an additional 15% Division 293 tax on their superannuation contributions for 2017-18. The ATO has issued these Div 293 tax assessments to a further 90,000 taxpayers after an initial run in late 2018. Of these, around 44,000 taxpayers will receive their first Div 293 assessments following the reduction in the income threshold to $250,000 for 2017-18 (previously $300,000). And with Labor proposing to further reduce the income threshold to $200,000, even taxpayers who didn’t receive a Div 293 assessment this year should start planning now.

 

Individuals with income and super contributions above $250,000 are subject to an additional 15% Div 293 tax on their “low tax contributions” (ie concessional contributions). Concessional contributions include all employer contributions, such as the 9.5% super guarantee and salary sacrifice contributions, and personal contributions for which a deduction has been claimed.

 

As a result of this Div 293 tax, the effective contributions tax is doubled from 15% to 30% for certain concessional contributions (up to the concessional cap).

 

 

The maximum Div 293 tax payable is $3,750 ($25,000 x 15%). Despite this extra 15% tax, there is still an effective tax concession of 15% (ie the top marginal rate – excluding the Medicare levy – less 30%) on concessional contributions.

 

An extra 44,000 taxpayers have been hit with the additional 15% Division 293 tax for the first time on their superannuation contributions for 2017-18. This follows the reduction in the Div 293 income threshold to $250,000 for 2017-18 (previously $300,000). The income threshold of $250,000 uses a broad tax definition and also includes the low tax contributions (up to $25,000). This means that the Div 293 tax can be triggered for taxpayers with incomes below $250,000 (although the additional tax only applies to amounts above the threshold).

 

A taxpayer has the option of paying the Div 293 tax liability using their own money, or by electing to release an amount from an existing super balance by completing a Div 293 election form. If a taxpayer makes such an election, the ATO will direct the nominated super fund to release the amount elected to the ATO. Although the election can be made within 60 days using the ATO approved form, a taxpayer still needs to pay the additional tax by the due date to avoid interest charges.

 

Negative gearing and many salary packaging arrangements generally will not assist in bringing a taxpayer under the $250,000 income threshold. However, astute taxpayers should be aware of the following:

 

-A person who expects to exceed the high-income threshold may wish to consider scaling back their super contributions to only the mandatory 9.5% super guarantee contributions (which are still subject to the Div 293 tax).

 

-Reconsider making additional contributions for a financial year if also anticipating a large one-off amount of taxable income during an income year. For example, an employment termination payment or a large net capital gain (eg from the sale of an investment property) will flow through into the taxpayer’s taxable income and may push them above the high-income threshold and trigger the Div 293 tax for that income year.

 

-Taxpayers that only exceed the $250,000 income threshold due to their investment income (especially franked dividends) should consider transferring such investments into another structure, such as a bucket company, rather than in their personal capacity, so that this additional income (grossed up for franking credits) is not counted towards their Div 293 income threshold. Such a structure would have its own additional costs, CGT implications and reduced flexibility but could nevertheless save an impacted taxpayer up to $3,750 per year in Div 293 tax.

 

-Labor, if elected, has proposed to further reduce the Div 293 income threshold to $200,000 and drag more taxpayers into the Div 293 net.

 

Need more guidance?

If you are one of these unlucky taxpayers to be hit with Div 293 tax, talk to us today about your options to pay the tax personally or withdraw an amount from your super fund. Likewise, we can discuss your income tax and superannuation situation to investigate strategies to stay under the Div 293 threshold or minimise the amount of tax payable.

Director Identification Numbers Coming Soon

As a part of anti-phoenixing measures, the government is seeking to introduce a “director identification number” (DIN), a permanent and unique identifier to track directors’ relationships across companies. It will apply to any individual appointed as a director of registered body (ie a company, registered foreign company, registered Australian body, or an Aboriginal and Torres Strait Islander corporation) under the Corporations Act (or the CATSI Act).

 

Being a director of a company comes with many responsibilities, this could soon increase with a government proposal to introduce a “director identification number” (DIN), a unique identifier for each person who consents to being a director. The DIN will permanently be associated with a particular individual even if the directorship with a particular company ceases. Regulators will use the DIN to trace a director’s relationships across companies which will make investigating a director’s potential involvement in repeated unlawful activity easier.

 

Although this initiative was conceived as a part of the anti-phoenixing measures, the introduction of the DIN will also provide other benefits. For example, under the current system, only directors’ details are required to be lodged with ASIC and no verification of identify of directors are carried out. The DIN will improve data integrity and security, as well as improving efficiency in any insolvency process.

 

At this stage, it is proposed that any individual appointed as a director of a registered body (ie a company, registered foreign company, registered Australian body, or an Aboriginal and Torres Strait Islander corporation) under the Corporations Act (or the CATSI Act) must apply to the registrar for a DIN within 28 days from the date they are appointed.

 

Existing directors have 15 months to apply for DINs from the date the new requirement starts. Directors that fail to apply for a DIN within the applicable timeframe will be liable for civil and criminal penalties.

 

In addition to the penalties for failing to apply for a DIN, there are also civil and criminal penalties which apply to conduct that undermines the requirement. For example, criminal penalties apply for deliberately providing false identity information to the registrar, intentionally providing a false DIN to a government body or relevant body corporate, or internationally applying for multiple DINs.

 

The proposal initially applies only to appointed directors and acting alternate directors, it does not extend to de facto or shadow directors. However, the definition of “eligible officer” may be extended by regulation to any other officers of a registered body as appropriate. This will provide the flexibility to ensure the DIN’s effectiveness going forward. Just as the definition of eligible officer may be extended, the registrar also has the power to exempt an individual from being an eligible officer to avoid unintended consequences.

 

Recently, there have been cases in the media where individuals have unknowingly or unwittingly become directors of sham companies for various nefarious purposes. The DIN proposal inserts a defence for directors appointed without their knowledge, due to either identify theft or forgery. However, it notes that the defendant will carry the evidential burden to adduce or point to evidence that suggests a reasonable possibility that the defence exists, and once that’s done the prosecution bears the burden of proof. The government notes that the evidential burden has been reversed because it is significantly more costly for the prosecution to disprove than for the defence to establish.

 

Where to now?

Apart from ensuring that your identity is safe, we can help if you think you may inadvertently be a director of a company and no longer wish to be. Otherwise, if you’re the director and want to understand more about this potential change including the timeline, contact us today.

Are You Getting the Most from Your Investment Property?

 

Whether it’s a story about rising prices, interest rates or the housing affordability crisis, the property market dominates our media, particularly for those of us who live in major cities. Even with talk of bubbles bursting and budget-time reforms, property remains a popular choice for investors. An investment property can bring more savings at tax time through property depreciation deductions than many people – particularly new investors – realise.

 

Property depreciation claims
Just as with other assets linked to income-producing activities, you can claim depreciation on your investment property through low value asset pooling. Depreciation works to lower your taxable income, meaning that you pay less tax, which can help boost your return.

 

What are depreciable assets?
Depreciable assets for an investment property include both items within the building, classed as “plant and equipment”, and the “building” itself. Plant and equipment covers items such as ovens, air-conditioners and carpets, and building includes construction costs for items such as brickwork and concrete. Common property, for example stairways and gardens, can also be included as part of the building.

 

How to determine asset values
Before we can help you assess your claim, you will need to have your property valued by a qualified quantity surveyor. As construction and property depreciation is a specialised field, accountants are unable to make estimates on construction costs.

 

As part of the valuation, the surveyor will need to conduct a site inspection and photograph and log all items in a report. The optimum time to do this inspection is after settlement, and before your tenant moves in. Note, too, that it may take a couple of weeks for the surveyor to prepare the report.

 

The surveyor’s report will allow us to work out the depreciation type and schedule. The good news is that surveyor fees are tax deductible too!

 

Even with talk of bubbles bursting and budget-time reforms, property remains a popular choice for investors. An investment property can bring more savings at tax time through property depreciation deductions than many people – particularly new investors – realise.

 

 

Factors to consider for the depreciation schedule
Age of building
How old is the building? This will determine which costs can be included in your depreciation schedule. If it was built post-1985, then plant and equipment and building costs can be depreciated. If it was built before 1985, then you can only claim for plant and equipment.

 

Property purchase date
Did you buy the property a few years ago? This doesn’t mean you have to miss out on the depreciation savings – if deductions are available, we can go back and amend your previous tax returns.

 

Renovations and repairs
Renovation expenses can be included, but we’ll need to know the amount of these costs. You’re also entitled to claim depreciation even if the renovations were completed by the previous owner. But as with the primary valuation, if you don’t know the cost of the renovations, then a quantity surveyor will need to make that estimation.

 

Keep in mind that repairs and improvements made to the property before it is leased can’t be claimed in the depreciation schedule, because the costs are incurred before the property is generating income.

 

Also, some items which you might think are fixtures, such as cupboards, are actually classified as part of the building, and so the expense of replacing them can’t be claimed as a depreciable asset under Div 40 of the Income Tax Assessment Act 1997. However, a percentage of the cost of installation by a tradesperson can be claimed as capital expenditure. The claimable amount will be influenced by the tradeperson’s profit margin.

 

Contact us
If you own an investment property or are in the process of purchasing – speak to us and let’s make sure we are getting the most for you at tax time.

Deemed Dividends: Changes Are Coming

Div 7A or deemed dividend payments may be familiar to you if you’re the shareholder or associate of a private company. It generally applies to treat a benefit provided by a private company to the shareholder or associate as a deemed dividend, which is then taxed at the recipients’ marginal tax rates. The government has now proposed to make changes to Div 7A after a review found the rules may be too complex and place an unnecessary administrative burden on taxpayers.

 

If you own a private company, deemed dividend payments or Div 7A may be familiar to you. In short, it is designed to ensure that income is not inappropriately sheltered in corporate structures at the corporate tax rate. It usually applies when a private company provides a benefit to a shareholder (or their associate), and treats the benefit as a dividend paid by the company, which is then taxed at marginal tax rates in the hands of the recipient.

 

There are a number of exceptions to the deemed dividend rule, most notably, Div 7A will not apply to a loan on commercial terms (eg adheres to maximum loan terms, minimum interest rates, minimum annual yearly repayments of principal and interest) or is fully repaid within a required timeframe (ie a complying loan). A review into Div 7A found that the rules may be too complex and place an unnecessary administrative burden on taxpayers.

 

To that end, the government has now proposed to enhance Div 7A by making a number of changes including simplifying loan rules, implementing a self-correcting mechanism and safe harbour rules, as well as clarifying that unpaid present entitlements (UPE) come within the scope of Div 7A.

 

Simplifying loan rules involve the consolidation of the current 7-year and 25-year loan models with a single 10-year maximum term loan model. The annual benchmark interest rate used will be the small business variable overdraft indicator lending rate published by the RBA. While there will be no requirement for a formal written loan agreement, there must be evidence to show that the loan was entered into by the lodgement date of the company tax return.

 

Further, the principal component is a series of equal annual payments over the term of the loan and the interest component is the interest calculated on the opening balance of the loan each year using the benchmark interest rate. If the minimum yearly repayment has not been made in full, the shortfall will be the deemed dividend for the year. For those companies with current 7-year or 25-year loans, the proposal provides transitional measures.

 

In relation to the self-correcting mechanism, the proposed changes will allow qualifying taxpayers to self-assess eligibility for relief, by converting the benefit into a complying loan agreement and make catch-up payments of principal and interest. In certain cases, the concept of self-correctly may also include other appropriate action considered “reasonable” by the Commissioner based on the circumstances.

 

The introduction of the safe-harbour rules will establish a formula for calculating the arm’s length value for the use of the asset by the shareholder (or their associate). A deemed dividend can be avoided where the arm’s length amount for usage is paid. This formula can generally be used for the exclusive use of all assets excluding motor vehicles.

 

In addition to all the above, the proposed changes will also make it clear where an UPE remains unpaid on the lodgement of the company’s tax return, it will be a deemed dividend. This situation only applies where a trust makes a private company entitled to a share of its income/profits for the year and does not actually pay the amount. The change will ensure the deemed dividend will be assessable at the marginal tax rate of the beneficiaries of the trust or the top marginal tax rate (if assessable to the trustee).

 

All too complicated?

If you’re a shareholder or an associate of a private company and currently have Div 7A loans in place, we can help you figure out the transitional measures which may need to be implemented in the future. If you’re unsure whether the private company benefits provided to you currently fall under Div 7A, we can help you work that out. Contact us today for more information on these potential changes.

ATO Continues Its Blitz On The Sharing Economy

The sharing economy is booming in Australia with a large proportion of the population either making it their full-time job or making a little extra money on the side. However, with the boom comes the all-seeing-eye of the ATO which is now firmly focused on the sharing economy. Its latest target are those people who rent/hire their car out in car sharing arrangements, but this is by no means its only focus, and comes on the back of a data-matching program on online accommodation platforms.

 

The sharing economy has become a big disrupter in the Australian market, particularly in the areas of accommodation, transport, food delivery, or car sharing. It seems like everyone is getting in on the action of making a little extra money on the side whether it be renting out a spare room, driving for a ride sharing service, or even sharing their cars. It is no surprise then that the ATO is keeping a close eye on the participants in this sector.

 

In the latest round of salvos against people in the sharing economy that may be flouting tax laws, the ATO is turning its attention to car sharing platforms. This interest has been prompted by the growing popularity of third party services such as Car Next Door, Carhood and DriveMyCar Rentals.

 

If you receive income from sharing your car, no matter how little, you need to include it in your tax return, and cannot avoid tax by calling it a hobby.

 

However, the flip-side is that you are entitled to claim deductions directly related to renting, hiring or sharing of your car. These expenses can include: platform membership fees, availability fees, cleaning fees, and car running expenses. The deductions you can claim depends on the car sharing agreement you have. For example, different agreements require either the car borrower or car owner to bear the costs of refuelling the car. Therefore, you can only claim expenses if you actually paid for them.  Another thing to keep in mind is keeping accurate records and retaining all your receipts to back up any expense claims should the ATO come knocking.

 

If you participate in car sharing arrangements you should also be aware that deductions for running expenses may differ depending on the vehicle that’s being shared. Cars designed to carry a load of less than one tonne can use the cents-per-kilometre method or the logbook method, but motorbikes and vehicles designed to carry more than one tonne or more than 8 passengers cannot use the cents-per-kilometre method.

 

Other pitfalls of car sharing include situations where you jointly own a car, in which case, all income and deductions need to be apportioned based on your share of ownership. In addition, if your car sharing activities amount to more than occasionally renting out your own car (ie you’re considered to have an “enterprise” of renting or hiring your car), you may be required to register for GST. In those instances, you will have to pay GST on the payments you receive, but will be able to claim GST credits provided you use them in carrying on your “enterprise”.

 

This focus on car sharing comes on the back of an ongoing data-matching program on online accommodation platforms which will collect data to identify people providing accommodation through online platforms during the 2016-17 to 2019-20 income years. Details collected from this data-matching program include: listing owner and property details (name, residential address, phone number, date of birth, rental property address etc), financial transactions per listing (bank details of owner, gross rental income, nights books etc), property activities (listing date, conversion rate, host/owner block out dates, price per night etc). The program will also obtain various information from financial institutions of the platform providers.

 

Need more information?

Contact us if you would like more information on the ATO’s blitz on car sharing, online accommodation or the sharing economy in general. We have the expertise to help you get it right whether you’re renting out your home or car occasionally, or whether you’re running an enterprise.

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