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Tax Practice Update changes
starting AUGUST 2023
🟠 Why Tax Refunds Might Be Smaller This Year
Many Australians usually expect sizeable tax refunds, but this time around, things might change, leading to potentially reduced refunds. Wondering why?
🟠 Understanding the Refund Mindset
Tax refunds have a psychological significance that governments have been cautious about altering. Australia heavily relies on personal and corporate income taxes, where personal income tax, including capital gains tax, contributes 40% of revenue, notably higher than the 24% OECD average. Given the taxes paid, Australians naturally anticipate a kind of reward.
🟠 The Reward System
This reward comes through tax deductions that shrink the income assessed for tax purposes, and tax offsets that lessen tax liability, possibly resulting in refunds. Tax refunds even positively influence tax adherence.
🟠 Past Attempts at Tax Changes
To create a fairer individual income tax system, the prior government introduced a temporary "low and middle income tax offset." Its lifespan was extended twice, partly due to the COVID-19 response. This offset brought individuals up to $1,080 between 2018-19 and 2020-21, and up to $1,500 in 2021-22 for earnings up to $126,000.
🟠 Impact of Changes
While this offset provided a substantial boost during tax time for many, the party is ending as it concludes. This could lead to significantly smaller tax refunds for the 2023 income year for numerous individuals, compared to previous years.
🟠 Changes to Deductions for the 2023 Income Year
Small business owners working from home or using a vehicle for business need to be aware of deductions changes this tax season. Here's what to know:
🟠 Cents-per-kilometre Method for Car Expenses
If you use the cents-per-kilometre method to claim car expenses, note that the rate has gone up from 72 cents to 78 cents per kilometre for the 2023 income year. This new rate covers all your vehicle running costs, like registration, fuel, servicing, insurance, and depreciation. Remember, you can't separately claim these individual costs.
🟠 Increased Car Limit for Business Owners
For business owners, the car limit has risen to $64,741 for the 2023 income year. This limit helps you calculate the depreciation of passenger vehicles (excluding motorcycles or similar) designed to carry less than one tonne and fewer than nine passengers.
🟠 Work from Home Business Expenses
If you operate your business from home, the "fixed rate method" has also changed. For the 2023 income year, it's increased from 52 cents to 67 cents per hour worked from home. Moreover, you're no longer required to have a dedicated home office space.
The fixed rate method covers electricity, gas, stationery, computer supplies, internet, and phone usage. But remember, you can still claim separate deductions for expenses not covered by this hourly rate, such as the depreciation of assets like laptops or office furniture.
🟠 Claiming GST Credits for Employee Expense Reimbursements
Employers might be able to get GST input tax credits when they reimburse employees for expenses directly related to business activities.
When an employer pays an employee back for a work-related purchase, it's called a "reimbursement."
However, employers can't claim a GST input tax credit if they give their employees an allowance or pay them based on an estimated expense, like a cents-per-kilometre payment, travel, or meal allowance.
An "allowance" is when an employer gives an employee money for an estimated expense without asking for any extra back.
To support their claim, taxpayers should have enough evidence, like a tax invoice for the purchase being reimbursed.
🟠 Reporting Taxable Payments Annually
The ATO wants to remind everyone to check if their business is required to submit a Taxable Payments Annual Report (TPAR) for payments made to contractors offering these services:
Building and construction
Cleaning
Courier and road freight
Information technology
Security, investigation, or surveillance
Make sure to complete TPARs by August 28th each year, as there might be penalties for late submissions. To make it easier, keep records of all payments to contractors. If you don't need to file a TPAR this year, you can let the ATO know using a TPAR non-lodgment advice form to prevent unnecessary follow-ups.
For more details about TPARs, including who needs to report and how to submit, visit the ATO's website.
🟠 Extension of Eligibility for Downsizer Contribution Measure
The option for older Australians to make extra contributions to their superannuation fund after selling their eligible dwelling has been extended.
The downsizer contribution concession allows qualified individuals to add up to $300,000 (or up to $600,000 for couples) to their super fund from the sale of their main residence.
This concession is appealing since it doesn't count towards the usual contribution caps and isn't part of assessable income for the receiving fund. The total superannuation balance restriction also doesn't apply, so eligible individuals can contribute regardless of their super balance.
Starting January 1, 2023, the eligibility for this concession has been expanded. The minimum age requirement has been lowered from 60 to 55. This means individuals aged 55 to 59, previously ineligible due to age, can now take advantage of downsizer contributions if they meet the criteria.
Keep in mind that certain eligibility conditions must be met, and it's wise to seek professional advice for guidance.
Denial of Excess Concessional Contribution Reallocation in Recent Tax Case
The Administrative Appeals Tribunal (AAT) has decided that there were no exceptional circumstances when it comes to a taxpayer who made more concessional contributions than allowed in a financial year.
This meant the Australian Taxation Office (ATO) couldn't move some of those contributions to the previous financial year.
On June 26, 2019, the taxpayer arranged for contributions of nearly $25,000 to be sent to their superannuation fund via a bank account direct debit to a clearing house used by the fund.
However, the superannuation fund received the relevant contribution on July 1, 2019. The taxpayer then added more contributions close to $25,000 to the fund on August 5, 2019, resulting in them exceeding concessional contributions for the 2020 financial year.
The AAT upheld the ATO's decision that the circumstances didn't warrant moving the contributions made on June 26, 2019 to the previous financial year. In simpler terms, there weren't any 'special circumstances' as required by the law that would allow the ATO to change the allocation.
Although the AAT recognized that the taxpayer indeed meant for the contribution to reach the superannuation fund by June 30, 2019, they shouldn't have waited until June 26, 2019 to make the contribution.
The AAT stated that there was nothing unusual about the time it took to process the payment made on June 26, 2019.
Moreover, concerning various events and actions of third parties that the taxpayer claimed were 'special circumstances,' the AAT pointed out that an error made by a third party alone doesn't qualify as special circumstances.
Exploring Succession Planning for Passing Your Business to the Next Generation
What lies ahead for your business in the long run? Succession planning isn't only relevant for big companies and wealthy families; it's about effectively transitioning your business while maximizing its overall value for you as the owner.
When dealing with the transfer of a family business to the next generation, several key aspects come into play:
Succession of the business itself.
Succession of business ownership.
Mapping out the succession plan and pathway.
Transitioning from being a business-oriented family to an investment-focused one.
To ensure the success of generational succession, whether it involves passing on the business or selling it and managing the sale proceeds for the family's benefit, clear and open communication is crucial.
Often, failed generational succession happens because the planning wasn't formalized until a significant event or retirement planning came into play.
Generational succession typically entails transferring a share or stake in the business to the next generation of the family, usually the younger members. It's more than just a family business; it's a family engaged in business.
There are diverse options for how this transfer of ownership interest can take place. It often revolves around transferring some or all of the ownership equity over a defined period or at a specific point in time.
This process usually involves compensation for the transferred equity. Alternatively, a portion of the equity transfer might be managed through estate arrangements.
Generational succession brings its own set of challenges that require attention:
Assessing the Next Generation's Capability and Willingness
An important step is to realistically evaluate if the business can continue to thrive after the transition. Sometimes, the older generation seeks generational succession to preserve the family legacy, maintain business ownership, or ensure a stable future for the next generation. While these goals are sensible, they only succeed when the next generation is capable and willing. Clear communication of expectations is key.
Managing Capital Transfer
Consider how much capital the current generation needs to extract from the business during the transition. The more capital required, the greater the pressure on the business and its equity stakeholders.
Often, the incoming generation lacks sufficient capital to buy out the exiting one. This might lead to the need for ongoing investment from the exiting owners or increased debt for the business. The sustainability of these scenarios needs careful evaluation at both the business and shareholder levels. In some cases, exiting owners will gradually transition ownership within an agreed timeframe.
Effective Remuneration Management
In many small and medium-sized businesses, owners arrange their compensation based on personal needs, which might not align with reasonable compensation for their roles.
This can result in either overpayment or underpayment by the business. During generational succession, formalizing compensation becomes more crucial. Compensation should match roles, and if there are performance incentives, they should be clearly defined.
Clarifying Operational Management and Control
Transferring control can be a sensitive matter. It's vital to establish and agree beforehand on how operational and management control will be upheld and transitioned. This is essential not only for the generational stakeholders but also for the business itself. Often, exiting owners have strong opinions on how the business should be run.
Uncertainty in management and decision-making can lead to confusion or gaps, impacting the business's ongoing success. Tensions may arise due to:
The next generation wanting decision-making freedom and the chance to shape the business.
A perception that without operational control, they're only nominal managers.
The exiting generation believing their experience is essential and warrants continued involvement.
A belief that significant capital investment should equate to ultimate operating control.
Uncertainty from either or both generations about their ongoing roles.
Agreeing on the transition of control in advance, with a set timeline, can significantly reduce the risk of tensions surfacing.
Transitioning Over Time and Setting Expectations
Generational succession isn't just a single event; it's a gradual process. This longer timeframe calls for active management to ensure that everyone's expectations align, preventing frustration from derailing the process.
The older generation might want to step back from the business gradually and bring in other family members to take over. This doesn't necessarily mean a complete withdrawal. Extended transition periods are quite common and can actually aid the business in adapting to the changes. This approach also helps manage income and capital withdrawal needs.
Emphasizing Formality and Structured Management
Many small and medium-sized businesses face a risk of blurring roles between the Board, shareholders, and management. This tendency can intensify during generational succession. Establishing formal structures is crucial. Clear role definitions and expectations are vital. For instance, deciding who should be a director and outlining their responsibilities is important.
Some businesses manage family roles through a family constitution – a set of agreed-upon rules. Others might seek guidance from an external advisory group to ensure unbiased expertise is part of the process.
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