MONTHLY TAX UPDATE – DECEMBER 2017
What’s new for small business
Tax concession rules for small businesses have changed. The changes are effective from 1 July 2016, and will apply from your 2017 tax return.
When we say ‘turnover’, we mean aggregated turnover.
Lower company tax rate changes
2016–17 income year
For the 2016–17 income year, the lower company tax rate decreased to 27.5%. Companies are eligible for this rate if they are a small business that:
- has a turnover less than $10 million, and
- operates a business for all or part of the income year. See Draft Taxation Ruling 2017/D7 for what it means for a company to be ‘carrying on a business’.
The maximum franking credit that can be allocated to a frankable distribution has also been reduced to 27.5% for these companies – in line with the company tax rate.
2017–18 income year
From the 2017–18 income year, a base rate entity is eligible for the lower 27.5% company tax rate. However, you still need to be a small business to be eligible for other small business tax concessions.
A base rate entity is a company that:
- has a turnover less than the turnover threshold – which is $25 million (increased from $10 million) for the 2017–18 income year, and
- operates a business for all or part of the income year – See Draft Taxation Ruling 2017/D7 for what it means for a company to be ‘carrying on a business’.
To work out the rate you use when franking your distributions you need to assume your aggregated turnover will be the same as the previous income year.
The lower 27.5% company tax rate will progressively apply to base rate entities with a turnover less than $50 million by the 2018–19 income year. From 2024–25, the lower company tax rate will reduce each year until it is 25% by 2026–27.
- A Bill was tabled on 18 October 2017 proposing to change the definition of a base rate entity from the 2017–18 income year. Under the proposed law, the carrying on a business test will be replaced with an 80% passive income test.
- A Bill was tabled on 11 May 2017 to gradually extend the lower company tax rate to all companies.
Simplified depreciation rules – instant asset write-off
The $20,000 instant asset write-off threshold has been extended until 30 June 2018.
If you are a small business, you can immediately deduct the business portion of most assets that cost less than $20,000 each if they were purchased:
- from 1 July 2016 to 30 June 2018, and your turnover is less than $10 million
- from 7.30pm on 12 May 2015 to 30 June 2016, and your turnover is less than 2 million.
This deduction is used for each asset that costs less than $20,000, whether new or second-hand. You claim the deduction through your tax return, in the year the asset was first used or installed ready for use.
Expanded access to small business concessions
More businesses are now eligible for most small business tax concessions.
From 1 July 2016, a range of small business tax concessions became available to all businesses with turnover less than $10 million (the turnover threshold). Previously the turnover threshold was $2 million.
The $10 million turnover threshold applies to most concessions, except for:
- the small business income tax offset, which has a $5 million turnover threshold from 1 July 2016
- capital gains tax (CGT) concessions, which continue to have a 2 million turnover threshold.
The turnover threshold for fringe benefits tax (FBT) concessions increased to $10 million from 1 April 2017.
Increased small business income tax offset
You can claim the small business income tax offset if you are a small business sole trader, or have a share of net small business income from a partnership or trust.
From the 2016–17 income year, the small business income tax offset:
- increased to 8%, with a limit of $1,000 each year
- applies to small businesses with turnover less than $5 million.
The tax offset increases to 10% in 2024–25, to 13% in 2025–26 and to 16% from the 2026–27 income year.
ATO works out your offset based on amounts shown in your tax return.
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- Rental properties – travel expenses
Residential rental property travel expenses
From 1 July 2017, travel expenses relating to a residential investment property are not deductible.
A residential premise (property) is land or a building that is:
- occupied as a residence or for residential accommodation
- intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.
Under the new legislation, you are no longer able to claim any deductions for the cost of travel you incur relating to a residential rental property unless you are carrying on a business of property investing or are an excluded entity.
As with prior years, the travel expenditure cannot be included in the cost base for calculating your capital gain or capital loss when you sell the property.
In the business of property investing
Generally, owning one or several rental properties will not be considered being in the business of rental properties.
The receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.
An excluded entity is a:
- corporate tax entity
- superannuation plan that is not a self-managed superannuation fund
- public unit trust
- managed investment trust
- unit trust or a partnership, all of the members of which are entities of a type listed above.
Example: An individual with residential investment property in 2017-18
Sarah rented out her residential rental property 2017-18. She travelled to the property to repair damages caused by tenants during the year.
As the investment is a residential property, Sarah cannot claim travel expense.
Example: An excluded entity in 2017-18
Terry’s Tyres incurred travel expenses in 2017-18 when the property manager was tasked with inspecting a residential property investment that is currently tenanted. Terry’s Tyres is a corporate tax entity and can claim a deduction for rental travel costs.
- Changes to company tax rates
Company tax rates apply to:
- corporate unit trusts
- public trading trusts.
The full company tax rate is 30% and applies to all companies that are not eligible for the lower company tax rate. Eligibility for the lower company tax rate depends on whether you are a:
- base rate entity from the 2017–18 income year
- Small business for the 2015–16 and 2016–17 income years.
From the 2016–17 income year, the company tax rate has also changed slightly for:
- not-for-profit companies
- retirement savings account providers
- pooled development funds.
For 2014–15 and prior income years, the company tax rate is 30%.
Lodging your 2017 company tax return
When lodging your 2017 company tax return:
- if you’re a small business, use the lower 27.5% rate
- if your turnover is $10 million or more, use the 30% rate.
Base rate entity company tax rate
From the 2017–18 income year, companies that are base rate entities must apply the lower 27.5% company tax rate.
A base rate entity is a company that:
- has an aggregated turnover less than the turnover threshold – which is $25 million for the 2017–18 income year, and
- is carrying on a business.
For more information about what it means for a company to be carrying on a business, see Draft Taxation Ruling 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?
Future year company tax rates
The lower company tax rate will apply to base rate entities with a turnover less than $50 million in the 2018–19 income year. The rate will then reduce to 25% by the 2026–27 income year.
Table 1: Progressive changes to the company tax rate
|Income year||Turnover threshold||Tax rate for base rate entities under the threshold||Tax rate for all other companies|
|2018–19 to 2023–24||$50m||27.5%||30.0%|
Proposed law changes
Bills were tabled on:
- 18 October 2017, proposing to change the definition of a base rate entity from the 2017–18 income year. Under the proposed law, the carrying on a business test will be replaced with an 80% passive income test
- 11 May 2017, proposing to gradually extend the lower company tax rate to all companies.
Lodging your 2018 company tax return early
Use the existing law if you need to frank your 2017–18 distributions or lodge your 2018 company tax return early. If the proposed changes come into effect, you may need to amend your company tax return or distribution statements.
Small business company tax rate
For the 2016–17 income year, the lower company tax rate is 27.5%. This lower rate must be applied by small businesses that:
- have an aggregated turnover of less than $10 million, and
- are carrying on a business.
For the 2015–16 income year, the lower company tax rate was 28.5% for small businesses with an aggregated turnover less than $2 million.
Maximum franking credits
To work out the company tax rate you use when franking your distributions you need to assume the aggregated turnover will be the same as the previous income year.
For the 2017–18 income year, your company tax rate will be 27.5% if either:
- the aggregated turnover is less than $25 million, and you are carrying on a business
- this is the first year you are in business.
Otherwise, the company tax rate you will use when franking your distributions will be 30%.
2016–17 distributions issued using incorrect rate
If you are a small business and have already issued your 2016–17 distributions based on the 30% company tax rate, you need to notify your members of the correct dividend and franking credit amounts based on the 27.5% company tax rate.
You can do this by sending a letter or email to your members, or a revised distribution statement. You also need to ensure the correct amounts are reflected in your franking account. For more information about this, see PCG 2017/D7 Enterprise Tax Plan: Small business over-franking in 2016–17 income year because of tax rate change.
For the 2015–16 and previous income years, the maximum franking credit that can be allocated to a frankable distribution for all companies was 30%. This included small businesses, even though their company tax rate was 28.5%.
- Industry assistance payments to taxi licence holders
If you hold a taxi licence (including a hire car licence) and you receive an industry assistance payment from your State Government in relation to the licence (excluding a licence surrender payment), it’s probably not a capital receipt. It’s more likely to be ordinary income. There are no GST consequences.
We want to help you to understand your tax obligations by providing guidance on what to look out for and where to go for help.
Taxi industry assistance payments
In response to the arrival of new ride-sourcing arrangements (including Ingogo, GoCatch, and UberX), State Governments have announced reforms to the regulation of their taxi and ride-sourcing industries.
Some of these reforms, which differ across states, include industry assistance payments to taxi licence holders. These are to help offset the impacts of new regulatory regimes and help taxi licence holders compete under new industry arrangements.
Depending on the state, some industry assistance payments to eligible taxi licence holders include:
- one-off transitional assistance payments to help transition to the new regulatory arrangements
- recurring hardship or income support payments (that are means-tested in some states).
Some states have further announced that their industry assistance payments are to be funded through the introduction of a passenger movement levy on metropolitan taxi and ride-sourcing trips.
Tax treatment of industry assistance payments
The transitional assistance and hardship payments are generally not capital receipts, but are income. Where a government payment is made to an industry to assist businesses within that industry to continue operating or to compensate for loss of income, the payment is assessable income of the recipient. The payment is not capital in nature because the payments do not require licence holders to give up or sell their taxi licence plate or otherwise bring their business or income-earning activity to an end.
On this basis:
- the transitional assistance and hardship payments will generally be assessable as ordinary income to the licence holder
- the licence holders are required to include the full amount of the payment in their assessable income.
The nature of a payment is objectively determined by the character of the payment in the hands of the recipient. Where a licence holder has permanently and completely exited the taxi industry, or has evidence that they have undertaken a process to permanently and completely exit the taxi industry, at the time of receiving the transitional assistance or hardship payment, the payment may be included in the calculation of the capital gain or capital loss that is made by that holder on the surrender, sale or disposal of the taxi licence(s) of that holder. These outcomes also apply to equivalent State Government payments made to hire car and limousine licence holders.
You can claim a tax deduction for costs you incur for seeking legal or professional tax advice in relation to the taxation of the payment.
Generally, there are no GST consequences in relation to the receipt of transitional assistance and hardship payments. GST only applies when the licence holder supplies something for the payment. If the licence holder need only meet eligibility criteria, and does not do or refrain from doing anything for the payment, no GST applies.
Passenger movement levies
In states or territories that are introducing passenger movement levies to fund industry assistance packages, additional income tax and GST issues arise.
In some states the levy is imposed on the umbrella taxi network and levied on each metropolitan trip they coordinate and at a specified flat rate (for example, $1 per leviable trip under the NSW scheme). To recoup the levy the taxi network may charge an equivalent fee to taxi operators with the possibility that the fee will be further on-charged to passengers as part of their total taxi fare.
If you are a taxi operator:
- include the amount of the fee charged to passengers in your assessable income in that income year
- you can claim an income tax deduction for the fee the taxi network charged you in that income year.
The same tax outcomes apply to the taxi network: the fee that flows to them from taxi operators is assessable income, and the levy returned to the State Government is deductible.
As a passenger movement levy is an Australian tax, the payment of the levy does not attract GST.
However, if the taxi network or operator chooses to on-charge the levy to passengers, it is treated solely as an increase in price for the supply between those parties. For example, the on-charged amount will form part of the fare paid by a passenger for the taxi services. The GST to be remitted is calculated as 1/11th of the increased price.
The taxi operator may be entitled to a GST credit for the GST payable on the supply between the parties, including the increased price as a result of the on-charge of the levy. This will depend on whether the supply is a creditable acquisition to the taxi operator.
Pay as you go (PAYG) instalments
Where a payment is considered as taxable income, there may be implications for PAYG instalments as it would be considered as instalment income.
For current PAYG instalment clients:
- If you pay using the rate method, you will need to include this payment on the relevant activity statement within your instalment income. If you have forgotten to put it in a past activity statement, you can amend the instalment income for that statement prior to lodging your tax return.
- If you pay using amount method, you can continue to pay the normal amount, but remember to set money aside to pay at the time of your income tax return.
- This payment will be included in the calculation of your next year’s instalments after you lodge your tax return. If the amount or rate is too high as you won’t be receiving more payments you can vary the instalment rate or amount you pay. If you are not currently required to pay PAYG instalments, this payment may bring you into instalments after you lodge your tax return. If this occurs, you will receive information notifying you of your options.
Labels to use in your tax return
For annual income tax returns, individuals should include the payment in the same label that you have previously used to declare your income from holding your taxi licence (for example, Item 15 Net income or loss from business or Item 24 Label Y Other income). In the case of companies, the payment should be included in Label 6 Q Assessable government industry payments.
Source: ATO website