With 30 June 2018 fast approaching, now is a good time to ensure your year-end strategies are in place. In doing so, it is worthwhile considering the following list of ‘Business Considerations’.
Base rate entities
From 1 July 2017, the tax rate for companies that meet the definition of a “base rate entity” is 27.5%. All other companies are subject to a tax rate of 30%.
In order for a company to be a base rate entity for the 2018 income year it must:
- Have an aggregated annual turnover of less than $25 million; and
- Have no more than 80% base rate entity passive income.
Importantly, base rate entity passive income includes:
- Dividends other than non-portfolio dividends
- Franking credits on such dividends
- Non-share dividends
- Interest income, royalties and rent
- Gains on qualifying securities
- Net capital gains
- Income from trusts or partnerships, to the extent that it is referable to an amount that is otherwise base rate entity passive income.
Small business company tax rate
The lower corporate tax rate of 27.5% is scheduled to be progressively extended to all companies by the 2023/24 income year. Further rate cuts will apply over the next three income years, such that the general company tax rate will be 25% from 2026/27 onwards. The legislation giving effect to these further company tax rate reductions is currently being debated in Parliament. The government affirmed its commitment to this company tax rate program in the May 2018 Federal Budget.
Small business entities can currently claim an immediate tax deduction for depreciable asset acquisitions of $20,000 or less. This immediate deduction entitlement was scheduled to revert back to acquisitions of depreciable assets costing $1,000 or less from 1 July 2018, but it was announced in the May 2018 Federal Budget that this entitlement will be pushed forward another year until 1 July 2019.
Single Touch Payroll
For employers with 20 or more employees, Single Touch Payroll (STP) commences from 1 July 2018. STP means employers will report payments such as salaries and wages, PAYG withholding, and superannuation information to the ATO directly from their payroll solution at the same time as paying employees.
For those employers with 19 or less employees, STP will apply to these employers from 1 July 2019, subject to legislation being passed.
Research & Development Tax Incentive Changes
Significant changes to the Research and Development (R&D) Tax Incentive rules were announced in the May 2018 Federal Budget.
The R&D Tax Incentive provides a tax offset to companies that spend money on eligible research and development projects.
- Smaller companies (those with a turnover less than $20 million) can claim a refundable tax offset of 43.5% in respect of eligible expenditure.
- Larger companies (those with a turnover of $20 million or more) can claim a non-refundable tax offset of 38.5% in respect of eligible expenditures.
From 1 July 2018, it is proposed that:
- The refundable tax offset entitlements for smaller companies will be capped to a premium of 13.5 percentage points above the claimant company’s tax rate.
- The non-refundable tax offset entitlement of larger companies will depend upon the amount of eligible R&D tax Incentive expenditure of the company in comparison to its total expenditure (referred to as “R&D incremental intensity”). The new marginal R&D premium will be the claimant company’s tax rate plus:
- 4 percentage points for R&D expenditure between 0% and 2% R&D Incremental Intensity
- 5 percentage points for R&D expenditure between 2% and 5% R&D Incremental Intensity
- 9 percentage points for R&D expenditure between 5% and 10% R&D Incremental Intensity;
- 5 percentage points for R&D expenditure above 10% R&D Incremental Intensity;
In most cases, it is anticipated that the dollar value of the R&D Tax Incentive Offset to companies might be less under these revised rules.
Various Black Economy measures announced in May Federal Budget
A number of new measures were announced in the May 2018 Federal Budget intended to combat the Black Economy. Some of the key measures business operators should be aware of are:
- From 1 July 2019 employers will no longer be entitled to tax deductions for payments to employees where PAYG has not been withheld. Similarly, a business will not be entitled to a tax deduction for payments to a contractor where the contractor has not supplied an ABN and the business does not withhold PAYG.
- From 1 July 2019, the Government will extend the taxable payments reporting system (TPRS) to the following industries:
- Security providers and investigations services
- Road freight transport
- Computer system design and related services
It should be noted that as previously announced, the TPRS is to be extended to the cleaning and courier industries from 1 July 2018.
From 1 July 2019, businesses will no longer be permitted to accept cash payments for provision of goods or services for amounts of $10,000 or more. Businesses will only be able to accept payments over this threshold by way of electronic payment or cheque.
Large Business Considerations
New tax reporting obligations and tax integrity measures now apply to increase the tax transparency of large multinational corporate groups operating in Australia and to combat international profit shifting arrangements. These measures include the following:
Country by Country reporting requirements
Country by Country (CBC) reporting requirements will apply to certain multinational corporations in respect of income years commencing after 1 January 2016.
Going forward multinational corporations subject to the reporting requirements must annually report detailed information to the ATO concerning matters such as international related party dealings, revenues, profits and taxes paid by jurisdiction.
These reporting requirements apply to multinational corporate groups with an annual global income of AUD$1 billion or more. Importantly these reporting obligations extend to Australian subsidiaries or branches of foreign parent entities where the group’s global income exceeds AUD$1 billion.
Diverted Profits Tax (DPT)
A DPT has been applied as of 1 July 2017. Broadly, it imposes a 40% penalty tax on profits artificially diverted from Australia.
The DPT will only apply to “significant global entities”. These are entities with global income of AUD$1 billion or more operating in Australia where the Australian turnover is more than AUD$25 million.
Some of these tax changes for small businesses may also influence business structuring decisions. You should seek advice from your adviser concerning how your business might be affected by these changes and what opportunities these changes might present.
Partner – Tax Advisory
Alex is a Chartered Tax Adviser and member of the Tax Institute of Australia. Alex provides tax and structuring advice to clients, who range from high net worth individuals, large and small corporates, government entities and not for profits.