Small business concessions under the spotlight
The CGT concessions for small business are important for qualifying businesses in that they can defer, reduce or remove liability to CGT.
The government announced last year that it intended to tighten the eligibility factors for the CGT concessions that are generally available to small businesses, and it has just initiated the formal review of the concessions.
Chaired by Dr Mark Pizzacalla from the Board of Taxation, the review is being conducted independently and is “self-initiated”. Dubbed a “consultation guide”, the Board of Taxation says it will draw on previous work it has undertaken into small business tax, other similar work undertaken by Treasury, as well as international experiences. (Get a copy of the guide here.)
In addition, a reference group of small business, professional and academic stakeholders have also generously volunteered their time and expertise to assist Dr Pizzacalla with his review. The results of the consultation process should be available by the end of October this year.
The concessions for small businesses are many and varied, and include lower tax rates, the CGT concessions as mentioned, the $20,000 instant asset write-off (which has been extended for a year but will revert to $1,000 if nothing changes), simplified trading stock rules and more.
There are other incentives for the small business sector, such as “early-stage” innovation company investors getting a tax offset of 20%.
Of course one of the bugbears for many in the small business arena is the inconsistent definition of what constitutes the true definition of a small business for tax purposes. Dr Pizzacalla confirmed on a LinkedIn thread that this is indeed one of the key consultation questions that the review intends to answer. The core questions before the review are stated as:
- What tax issues are of particular concern for small businesses?
- What do you regard as the most useful or effective small business tax concessions? Why?
- What opportunities do you see for improving existing small business concessions?
- Which current small business concessions are not working and/or should be removed? Why?
- What ideas do you have for new concessions that could help small businesses?
The Board of Taxation will also be holding public forums/meetings to get further engagement with the small business community as well as advisers to small business. Refer to www.taxboard.gov.au for times and locations.
Looking to buy a home? You may soon need to withhold and remit GST
With the end of the financial year in sight, there is one more thing you will need to be aware of regarding changes to the tax landscape — especially those thinking of purchasing a residential property.
From 1 July this year, buyers of new residential premises (or “potential residential land”) will be required to withhold an amount from the contract price for GST and remit this directly to the ATO on or before settlement.
The sorts of property transactions involved are those where a taxable supply is made (for example by sale, or supply by way of a long-term lease) of new residential premises or potential residential land where the contract is entered into on or after 1 July.
Generally the amounts to be withheld will be one-eleventh of the unadjusted GST-inclusive contract price, however this amount can be 7% if a margin scheme applies.
Why the change?
The incumbent GST law requires a buyer to pay GST to the seller (or developer) as part of the purchase price on property transactions where there is a taxable supply. The seller is subsequently required to remit that GST amount to the ATO with their next business activity statement.
The problem that the change is attempting to fix has to do with tax evasion and an erosion of GST revenue from some property transactions. It was found that some developers/sellers, having collected GST on the sale of a property, were not forwarding this GST revenue on to the ATO — either dissolving the business and in some cases creating a new one (a “phoenix” entity) or through insolvency.
These GST law changes were originally announced in the May 2017 Federal Budget. The law companion ruling LCR 2018/D1 describes the application of the new law, and the bill itself, which received royal assent on 29 March 2018, can be found here.
The new rules are prospective and only apply on or after 1 July 2018. They do not apply to contracts entered into before then, as long as the transaction settles before 1 July 2020.
It is important to remind clients as well that the new law does not mean that an additional payment, on top of the contract price, is required. The GST withholding amount is taken from the purchase contract price (the price of supply).
Some property transactions are excluded from the new measure, such as:
- commercial residential premises (for example hotels and motels)
- new residential premises created by “substantial renovations”
- potential residential land included in a property subdivision plan that contains a building that is currently in use for a commercial purpose – for example, a factory or shop being operated in an area where local zoning permits mixed use
- taxable supplies of potential residential land between GST registered businesses where the purchaser acquires the property for a creditable purpose.
Other types of property transactions are not included in the new measure as the ATO considers these to not be new residential premises or potential residential land. For example:
- sales of commercial premises, for example office units, factories and retail shops where land is zoned commercial use only
- industrial land or farm land where zoning prevents residential development
Checklist of business deductions
This non-exhaustive checklist of business deductions is designed to provide an easy reference guide to the types of deductions that might be claimed by businesses. Note that these deductions may not necessarily be available, and before deciding on the deductibility of an outgoing, the business’s particular circumstances should be taken into account. Ask us for guidance.
All businesses are required to maintain records of every transaction that relate to their income and expenditure as well as CGT transactions, GST, FBT and other requirements. If there is any private use element, that should also be noted in the records. Car and travel expenses must be substantiated.
Note: All section and division references are to the Income Tax Assessment Act 1997 (ITAA97) unless otherwise stated. These may be helpful for us should you ask that these particular deductions be claimed in your tax return.
- Accident insurance premiums.
- Accounting fees. Preparation of income tax and FBT returns etc (s25-5) including costs relating to investigations, objections and appeals.
- Advertising expenses.
- Agent’s commission. Collection of rent.
- Annual leave. If actually paid by the employer (but not on accruing liabilities).
- Audit fees.
- Bad debts.
- Bank charges. Including debits tax.
- Borrowing expenses. Claim in full if $100 or less, otherwise over the period of the loan or one fifth each year if five years is shorter commencing from the date finance is acquired.
- Business trips.
- Business-related cost. If applicable, business related costs of a capital nature that can be written-off in equal amounts over five years commencing from the first day in the income year that the expense was incurred.
- Capital works. On buildings and structural improvements.
- Car expenses. Applies to employees, partners and self employed persons.
- Car parking. In certain circumstances.
- Cleaning expenses.
- Clothing. In certain circumstances.
- Conference expenses.
- Copyrights, patents and designs. See Capital allowance provisions (Division 40). Also consider the R&D concessions for companies.
- Cultural bequests. If made to Australian fund, public art gallery museum or library.
- Decline in value (depreciation). Of plant or articles used in business.
- Directors’ fees.
- Discharge of mortgage expenses. Where loan money used to derive assessable income (s25-30).
- Distributions by co-operatives. To members.
- Donations of property to deductible gift recipient. If market value is greater than $5,000.
- Education expenses. If paid for employees, but FBT may apply.
- Electricity connection costs. To business premises. Beware capital allowance provisions (Division 40).
- Entertainment of employees. But FBT payable.
- Environmental impact studies. Pooled and treated under the uniform capital allowance system (decline in value).
- Environment protection expenditure.
- Equipment service fees.
- Exploration or prospecting. For minerals (including petroleum) and quarry materials.
- Film investment. 100% deduction for investment in certain Australian made films.
- Freight costs.
- Fringe benefits tax.
- Fuel and oil.
- Gifts of $2 or more. To certain prescribed or approved organisations.
- Gifts to clients, etc. But not if entertainment.
- Gratuities to employees. Recognition of past services.
- GST. Claims should be GST exclusive for those businesses that are registered for GST. The GST-inclusive price is deductible for those taxpayers not registered or required to be registered for GST.
- Home office expenses. Apportionment of interest, rates, etc. only if a business is carried out on the premises and where an area is set aside exclusively for that purpose.
- Insurance premiums. Accident insurance paid by employees, and other insurance paid in relation to a business or some income-producing property. This is subject to the prepayment rules.
- Interest paid.
- Internet and data access costs. Share investing and business websites. Also beware capital expenditure.
- Land tax. Business or rental premises. Deductible when incurred. The ATO has released guidance specifying that land tax is incurred in the year to which it refers, not when it is paid (see ATO ID 2010/192).
- Lease payments.
- Lease preparation, registration or stamping expenses. Paid by either the landlord or (a business) tenant (s25-20).
- Leave payments. Paid by employer (but not on accruing liabilities).
- Legal expenses. Unless capital expenditure, including discharge of a mortgage (s25-30) or relating to borrowing expenses (s26-40). The nexus with ordinary activities of the business in producing assessable income will determine deductibility.
- Licenses to operate business. Prepayment rules may apply.
- Losses, current year. Loss claims by companies may be limited in certain situations (Division 165), (s170-10). Losses by trusts are subject to trust loss provisions.
- Losses, previous years. Company losses brought forward may be limited unless the company can pass the continuity of ownership test (s165-12) or the ‘same business’ test (s160-10); no time limit for losses incurred after 30 June 1989 (s36-10). Losses by trusts are subject to trust loss provisions.
- Loss (book loss) on disposal of depreciable assets.
- Loss on sale of property. If acquired before 20/09/85 for resale at a profit (s25-40); if property is sold in the ordinary course of business the loss will be on revenue account (see TR 92/3), otherwise a capital loss arises pursuant to Part 3 of ITAA97.
- Loss through misappropriation by employees, or by theft (s25-45).
- Maintenance expenses (s8-1).
- Management expenses. Annual fees but not the capital cost of subscribing to some income-earning investments.
- Managing tax affairs. Costs of travel, accommodation, advice, booklets, seminars etc, depreciation on computers, software and other capital expenditure is deductible if incurred in managing tax affairs.
- Mortgage protection insurance (s8-1).
- Moving trading stock.
- Newspapers for employees. Depends on occupation. Share traders (and maybe investors) can claim.
- Overseas travel expenses. Substantiation rules apply.
- Payroll tax.
- Petrol and oil. Not subject to substantiation rules.
- Petroleum resource rent tax.
- Postage. For investors or businesses.
- Power, lighting and heating.
- Printing and stationery.
- Professional or business association subscriptions and fees. Prepayment rules may apply.
- Project expenditure. To be written-off over life of project.
- Protective clothing.
- Rates and taxes. On income-producing or business properties.
- Rebates and discounts. Given to customers.
- Rent of business premises. Including part of the costs for a home used for a business (say, trading stock is stored in an area set aside exclusively for that purpose); but with a home office (or a study) rent cannot be apportioned, but some associated costs are claimable.
- Repairs to cars, equipment, or to an income-producing property (s25-10).
- Research & Development costs.
- Retiring allowances. Paid to ex-employee (or their dependent) for past services
- Royalties. Paid for use of equipment etc – withholding tax may apply.
- Salaries and wages paid to employees.
- Self-education expenses. Only if related to employment/business.
- Seminars. In certain circumstances.
- Sickness/accident premiums. In some cases.
- Solicitor’s fees. In some cases.
- Storage expenses.
- Structural improvements. In some cases.
- Subcontractors. May be considered employees and subject to the superannuation guarantee provisions in certain circumstances.
- Superannuation contributions.
- Support payments to a subsidiary.
- Tax agents fees. Preparation of income tax, fringe benefits tax returns, GST etc. (s25-5) including costs relating to investigations, objections and appeals.
- Telephone expenses.
- Telephone line installation.
- Tool replacement. Depreciation.
- Trade journals.
- Trading stock purchases.
- Travelling expenses. Domestic and overseas, but note the substantiation provisions.
- Traveller accommodation buildings.
- Workcover/workers compensation premium.
- Worker entitlement funds. Only if fund approved under regulations.