Flood and cyclone reconstruction levy 

While the personal income tax rates do not change for the year starting 1 July 2011, the flood and cyclone reconstruction levy will apply to certain taxpayers for the 2011/2012 income year.

A 0.5% levy will apply to individuals with taxable income of between $50,001 and $100,000 and a 1% levy applies to those with a taxable income above $100,000.  Exemptions are expected to apply to:

·         Australian Government Disaster Recovery Payment (AGDRP) recipients in 2010/2011;

·         Those affected by a disaster declared by the National Disaster Recovery and Relief Arrangements and would have qualified for an AGDRP; and

·         NZ non-protected special category visa holders who received an ex-gratia payment for a disaster that occurred in 2010/2011.

The measure is expected to apply to the 2011/2012 income year only.

The personal income tax rates for the 2012 income year including the levy are as follows (the Medicare levy is excluded):

The low income tax offset will remain at $1,500 for the year starting 1 July 2011. This means the effective tax-free threshold is $16,000 for individuals.

If you use a payroll software package to calculate the amount to withhold from salary and wages, please ensure your tax rates are updated to reflect the levy where applicable.  If you are using the ATO tax tables, ensure you have the most recent version.

Dependent spouse offset phased out

From 1 July 2011, the dependent spouse offset will be phased out for taxpayers with a dependent spouse born on or after 1 July 1971 (40 years of age or less).

Taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets are unaffected by this change.

Minors unable to access Low Income Tax Offset on unearned income

In a move designed to target income splitting between adults and children, minors will not be able to access the low income tax offset (LITO) to reduce tax payable on their unearned income, such as trust distributions, dividends, interest, rent and other income from property. 

Unearned income of minors who are orphans or disabled as well as compensation payments and inheritances received by minors will not be affected by this measure.

In response to the recent High Court decision in FCT v Anstis [2010] HCA 40, the Government will amend the tax legislation to ensure that taxpayers cannot claim deductions against government assistance payments from 1 July 2011. In the Anstis case the High Court allowed a student to claim self-education expenses against Youth Allowance.

Students in receipt of Youth Allowance (Student) will still be able to claim a deduction for self-education expenses incurred in the 2011 income year.  For each of the years 2006/07 to 2009/10, the Commissioner has previously determined that eligible taxpayers will be able to receive an automatic deduction of $550 or make higher claims if their self-education expenses can be substantiated.

New rules for company cars

The Government announced in the 2011/2012 Federal Budget that the various rates that apply when determining the taxable value of car fringe benefits using the “statutory formula” method will be replaced with a single rate of 20%. This flat rate will apply regardless of the distance travelled by the car during the FBT year. The change directly targets salary sacrificed and employer provided vehicles and will need to be taken into account when considering salary packaging options for employees.

Previously, the FBT rules rewarded employees for travelling large distances in cars that had been provided to them under a salary sacrifice arrangement regardless of whether the travel was for work purposes. The operating cost method (which requires employees to maintain a log book) remains unchanged and will become much more attractive for employees who undertake a significant amount of work related travel.

The changes are intended to apply to contracts entered into from 7.30pm AEST on 10 May 2011 and will be phased in over four years as follows:

Employers can choose to skip the transitional arrangements for a car and directly use the flat statutory rate of 20%. However, if the employee would be worse off as a result of the employer making this choice then the election will not be effective without the consent of the employee.

Compared to the current statutory rates, a single rate of 20% will:

Increase the tax concession provided for vehicles driven less than 15,000 kilometres a year;

Maintain the current tax concession provided for vehicles driven between 15,000 and 25,000 kilometres a year; and

Decrease the tax concession provided for vehicles driven more than 25,000 kilometres a year.

Please note that this change is still yet to become law and may be subject to change.

Accelerated deduction for motor vehicles

In the Budget the Government also announced plans to provide Small Business Entities (operational businesses with an aggregated turnover below $2 million) to claim up to $5,000 as an immediate tax deduction for new motor vehicles from 1 July 2012. The remainder of the motor vehicle value will be added to the general small business depreciation pool (depreciated at 15% in the first year and then 30%).

This measure is in addition to the previously announced immediate write off for new business assets worth less than $5,000 from 2012/2013.

While the start date for these concessions is more than a year away, it is worth keeping them in mind when considering new asset acquisitions, especially as 1 July 2012 gets closer. 

End of Year Tips

Last minute tax planning can be a recipe for poor decisions and you need to work through the cash flow implications on anything you decide to do. There is no point saving some tax if you create a cash flow crisis in the process. Tax planning these days’ falls into three baskets:

• Health & hygiene;
• Timing & efficiency; and
• Permanent savings.

Health & hygiene
There’s no excuse for any business, regardless of size, for not completing a health and hygiene review prior to year end. This review is about making sure that your business has attended to its tax housekeeping. Included in this are:

• Writing off any damaged or obsolete stock;
• Writing off any bad debts;
• Scrapping any obsolete plant and writing it off your asset register;
• Ensuring any loan payments necessary to satisfy Division 7A loan agreements are made; and
• Complete any inter entity management charges.

All of these actions need to be taken before June 30 and your accounts need to reflect that the actions were completed e.g., a bad debt that is written off should be reversed out of your debtors ledger before June 30.

Timing & efficiency
Managing timing and efficiency is about causing your tax liability to fall at the best time for you. You do this by bringing forward expenses or deferring income. The efficiency part is about ensuring that tax is being paid by the entities or people where you can enjoy preferential tax rates. Think about the following:

• Declaring bonuses before June 30, even though they may not be paid until after that time;
• Declaring director’s fees;
• Ensuring June quarter Superannuation Guarantee Charge (SGC) payments for employees are made before June 30;
• If you are a Small Business Entity (SBE), prepaying some of your expenses before June 30;
• Paying dividends;
• Committing to necessary consumable expenses pre June 30;
• Making Trustee resolutions to distribute trust income;
• Deferring income until after June 30, where possible;
Some of these strategies revolve around deferring income to the following year and bringing forward expenses and tax deductions into the current year. Don’t always accept this as the right strategy. If you are in a start-up business and not generating a profit yet, you may not want to defer your taxing point. While saving tax always seems like a good idea consider the rate of the tax saving. It will be a mix of personal and possibly company tax rates. Saving a tax dollar this year where the benefit may only be 20 cents in the dollar, is poor economy if next year you will pay 46 cents on the same tax dollar. Tax timing requires you to have a view about your current year position and any differential position for the following year.

Permanent savings
Permanent savings always sound attractive but you need to have the cash flow to manage them and be comfortable with both the short and long term outcomes. These strategies include:

• Maximising your superannuation contributions;
• Donations; and
• Consider holding your life insurance through your superannuation fund.

We’ll look at some other opportunities before year end but this gives you something to start working on. Keep your cash flow position in mind. You need to work out the cash flow effect of any decisions you might take. The more available cash you have, the easier it will be to make all of this work. So, perhaps now is the time to start following up your debtors and chasing some of those old accounts.


ATO Benchmarks - What You Need To Know

The ATO use industry benchmarks to assess business performance and will take a closer look at businesses that fall outside of these benchmarks. But what happens if you have a niche business or have unusual trading conditions that mean you will almost never fall within these benchmarks?

This is the major problem with the current benchmarking approach. The ATO has a huge data base of information on business performance. When you lodge your business income tax return your accountant needs to include an industry code that is the closest match to your business. It is through the matching of data against common industry codes that the ATO builds it benchmark information and is able to statistically establish ranges for what is normal. With a lot of businesses however, there is no such thing as normal.

If you operate in a niche area then the industry code applied for your business may be the closest general match but you could have very different business characteristics to other businesses identified under the same code. Where this occurs it may throw you outside of the normal range. Even where you operate a business that is relatively homogenous and similar to a lot of other industry participants you may have multiple revenue streams within the business that cause differences. So, whether or not your business is within the normal range for your industry code can be irrelevant. You should not be trying to work to any pre determined performance range. Drive your business to produce the very best results possible.

Knowing that the ATO may compare your business to others in your sector you may want to ask your accountant to test your key numbers against the performance benchmarks the ATO publish. A good starting point is to see how you measure against the ATO information. More importantly, your accounting systems and record keeping should establish the accuracy of the tax information you are reporting. Your risk position increases significantly if you are outside of the benchmark range and your accounting and information systems are substandard and there are gaps in substantiating your information. Even where you are doing everything correctly you need to be capable of demonstrating that accuracy of your information from your information systems. There is also a higher focus on benchmarks if you are in a business sector that has a higher level of cash sales. From an ATO point of view, you are a higher risk candidate.

If you are concerned about the benchmarks we can complete a review of your position and make recommendations on your accounting and information systems (a mini tax audit on your business to see what the ATO would see). If there are any surprises, it is better to hear it from a friendly source. This would also allow you to fix up any system gaps that exist and be better prepared if the ATO comes calling.

Free Superannuation Clearing House For Small Business

The government, through Medicare Australia is offering a free super clearing house service to small businesses with less than 20 employees.  The clearing house allows an employer to pay their employees superannuation contributions to a single location. The clearing house then distributes the superannuation contributions to the relevant funds. It is easy to use and reduces the amount of paperwork involved in making multiple payments to different superannuation funds.   This service is optional and is designed to reduce red tape and compliance costs for small businesses when meeting their super guarantee obligations.  There are a few tricks (and traps) in using this service so please contact Nortons for more information.  You can also visit www.medicareaustralia.gov.au/super or phone 1300 660 048.

Reminder - Paying Quarterly Superannuation Guarantee Contributions

Super contributions are due on the 28th day following the end of each quarter. If you do not meet your super obligations, you must lodge a Superannuation guarantee charge statement – quarterly form and pay the super guarantee charge to the ATO rather than superannuation contributions to your employees. The super guarantee charge must be paid if you:
1. do not pay enough super (9%) to your employee's super fund;
2. miss the quarterly payment cut-off date (28th day following the end of the quarter)
3. do not pay super to your eligible employee's chosen fund.
But remember the downside of not meeting your quarterly superannuation obligation - any super contributions you make are tax deductible. However, the super guarantee charge is not.
For more information about your super obligations, contact Nortons or visit www.ato.gov.au/employersuper

Paying Super For Contractors

If you are an employer, you may have to pay super for contractors - even if the contractor quotes an Australian business number (ABN).  Employers need to pay super contributions for contractors they pay under a contract that is wholly or principally for the contractor's labour, even if the contractor quotes their ABN. This is because they are considered employees under superannuation guarantee law.  For more information, visit SG Contributions Calculator. 

For more information about your super obligations, see www.ato.gov.au/employersuper.  To help determine if your contractors are eligible for super, visit Employee/contractor decision tool.  For employers in the building and construction industry, see Bulding and Constructions industry - employee/contractor decision tool.
For more information about your super obligations, contact Nortons or visit www.ato.gov.au/employersuper