Practice Update January 2024

Jan 31, 2024

ATO Debt Alert

The federal government’s Mid-Year Economic and Fiscal Update (MYEFO), released in December, announced that the general interest charge (GIC) would soon no longer be deductible for individuals and businesses.

By way of background, GIC is imposed by the ATO, and it applies to unpaid tax liabilities, such as when:

  • an amount of tax, charge, levy or penalty is paid late (or is unpaid)
  • there is an excessive shortfall in an incorrectly varied or estimated income tax instalment.

GIC is calculated on a daily compounding basis on the amount outstanding.

Generally, the amount of GIC applied is notified in a:

  • statement of account
  • late payment notice
  • GIC notice.

The annual rate of GIC is 11.15%, increasing to 11.38% for the January to March 2024 quarter. With such a high-interest rate and daily compounding, it is prudent to prioritise ATO debts over other debts.

This new MYEFO measure means taxpaying entities, including individuals and small businesses, will have to face up to their GIC penalties without the prospect of a tax deduction.

The federal government states the changes will enhance incentives for all entities to self-assess their tax liabilities and pay on time correctly and level the playing field for individuals and businesses who already do so.

In effect, removing tax-deductible status will eke away at what is left of the ATO’s leniency towards overdue tax obligations.

The change is expected to result in extra tax revenues of $500 million annually from 1 July 2025.

TIP

After an extended period of leniency shown to individuals and businesses struggling through COVID-19 and its aftermath, 2022 and 2023 marked a reversion to the norm. If taxpayers fail to engage with the ATO to satisfy their outstanding debts, enforcement actions may be escalated accordingly. In that respect, the ATO has the discretion to:

  1. Issue garnishee notices and director penalty notices (‘DPNs’)
  2. Report outstanding tax debts to a Credit Reporting Bureau if action to manage the debt is not taken within 28 days of receipt of a notice of intent. This can have a crippling effect on your and your business’s ability to borrow and
  3. Otherwise, commence legal action, including issuing summons for non-lodgements, and otherwise progressing personal and caproate insolvency action, including creditors’ petitions and winding-up proceedings.

The surest way to prevent the above action from being taken is to enter into (and comply with) a payment arrangement with the ATO about your debts. Contact us if you would like us to do this on your behalf.

Christmas Shutdowns

With Christmas on our doorstep, some new rules exist around annual leave during business shutdowns.

To recap, a shutdown is when a business temporarily closes during specific periods, such as between Christmas and New Year. By contrast, a stand down is when an employer tells employees not to work because they can’t be usefully employed for reasons outside the employer’s control.

Reasons for a stand down can include:

  • equipment breakdown if the employer isn’t responsible for it.
  • industrial action, when the employer does not organise it.
  • a stoppage of work for a reason the employer can’t be held responsible, such as a natural disaster.

An employee can be directed to take annual leave during a shutdown if their award or registered agreement allows it. Suppose an Award or registered agreement does not cover an employee. In that case, they can be ordered to take annual leave if it is reasonable in the circumstances and their employment instrument (such as a contract) does not prohibit it.

From 1 May 2023, many awards have updated the rules on taking annual leave during a shutdown. The new rules mean:

  • employers may require employees to take paid annual leave during a temporary shutdown.
  • employers must provide at least 28 days written notice of the temporary shutdown period to all impacted employees.
  • the requirement to take annual leave must be reasonable.
  • the notice period can be reduced through an agreement between the employer and most impacted employees.
  • an employee who doesn’t have enough paid annual leave to cover the whole period can form an agreement with their employer for other options for the days not covered, such as:
  • using accrued time off.
  • annual leave in advance, or
  • leave without pay.

Note that during shutdowns, the employee must be paid for any public holidays during the shutdown period that fall on days they would typically work. These new rules apply to employees and employers covered by one of the affected awards.

Fair Work has updated its website with directions to take annual leave during a shutdown. This includes popular awards and industries like:

  • building and construction
  • hair and beauty
  • hospitality (including fast food and restaurants)
  • real estate.

Access your industry from Fair Work’s Direction to take annual leave during a shutdown page. Just select your industry from the drop-down menu to get award-specific information.

Christmas Tips for Retail Businesses

Here are some tips to employ this holiday season for businesses operating in the retail sector as follows:

  1. Last-minute adjustments to inventory.

Executive director for the Australian Retailers Association says now is an ideal time to ensure you have the right balance of stock on hand to meet your customers’ needs:

“Whether you’re a single shopfront or a nationwide chain, you probably should have planned your inventory up to five or six months in advance.

But now is a great time to make tweaks to your inventory.”

  1. Carefully balance foot traffic, wages, and opening hours

Retailers in shopping centres generally must play by the facility’s rules; otherwise, every retailer should try to assess their opening hours according to their needs.

Everyone knows to expect extended shopping hours generally begin in December, but that doesn’t mean every business should attempt to match those hours.

Wages increase by up to 25% after 6 pm, and there’s no point paying those extra wages if you won’t realise a proportional increase in foot traffic.

Christmas is also the ideal time to trial new and junior staff members who can help with odd jobs like stacking and packing.

  1. Make the most out of digital marketing

Modern marketing techniques like email direct marketing, search engine marketing and social media can all achieve great results – even if you’re not selling online.

Social media is how to get advertising out there at a minimal price.

All retailers should ensure they’re present and active on their local community Facebook page to promote their offerings, hours and any special events they might have come up with.

  1. Review your pricing strategy – it’s not always about the most significant discount

With the likes of Amazon in the market, many retailers are responding by dropping their prices – but that’s not always the best approach.

For example, suppose you are looking to buy a nice shirt. In that case, you may be happy to pay a little extra at your local store if it can offer free alterations with the purchase, which is generally better value than spending a little less at one of the more prominent brands that don’t provide this service.

People are likely to look at different products for different reasons, which must be considered when determining how to price your products.

Most importantly, retailers must know the consumer law around advertising discounts.

The ubiquitous “WAS $X, NOW $Y” is something that can catch retailers out because the ‘was’ price must be proven to be offered in the store or at some point sold at that price; otherwise, you may get stung by the Australian Consumer and Competition Commission (ACCC).

  1. Share the Festive Cheer – Especially With your best customers

It’s an age-old retail tenet, and it’s as accurate today as it ever has been, it’s much cheaper to retain an existing customer than to acquire new ones.

Christmas is the ideal time to celebrate the people who support you, and it doesn’t have to be a costly exercise.

Rather than offering special customer discounts, consider adding something to your regular customers’ basket at no cost.

The customer may see an extra 10 dollars of retail value in their basket, but that item probably only cost your business five dollars – and the more thought you’ve put into the gift, the more they’ll appreciate you for it.

Other Festive Season Tips

  • From a tax standpoint, keep good records of your work Christmas party – receipts, cost per head, who attended, the venue, etc. This will significantly assist your accountant in determining the party’s tax deductible and any potential fringe benefits tax (FBT) liability, including any applicable exemptions.
  • Notify critical customers and suppliers of the dates of any shutdown period that your business may have.
  • All staff should set up automatic, out-of-office replies on their email, notifying recipients of their leave dates over Christmas and noting that the leave period may differ between employees.
  • Make a mental note of your computer passwords. These are easy to forget if you are away for a few weeks. However, please don’t make a handwritten note and leave it on your desk ready for your return!
  • Use your phone mainly just for texting and calling over the holidays – allowing you to give your full attention to the family and friends you are with over the break. In other words, reconnect!

Practice Update May 2024

06 May, 2024
Business valuation

Practice Update April 2024

08 Apr, 2024
How do Bucket Companies work? What is a Bucket Company? Ensuring a business remains profitable is one of the most important responsibilities of a business owner. So, if the business starts to generate a healthy profit, there needs to be a plan. While maximising deductions has its place in any tax planning strategy, a tax minimisation strategy that solely relies on deductions can result in sacrificing profit to lower tax when other options are available. With you and your family relying on the profits generated by your business to fund your lifestyle, it’s essential to understand the most tax-effective manner for distributing income and the best business structures that allow you to do so. Consider how a bucket company might fit into your overall tax planning strategy. Uses of Bucket Companies A bucket company (otherwise known as a corporate beneficiary) is a company set up as a trust beneficiary. This arrangement allows any income the trust distributes to the bucket company to be payable at the company tax rate, currently 25% (only if it is a base-rate entity), as opposed to the individual marginal tax rate (the top tax rate for individuals for 2023-2024 is proposed to be 47%, including the Medicare levy). They’re called bucket companies because they sit below a trust like a bucket and are used to distribute income to it. It is important to remember that there are rules around family trusts and structures within a family group. Otherwise, family trust distributions tax may apply. How do Bucket Companies work? There are generally three elements present for a bucket company: There is usually a trust with surplus income to distribute. The corporate beneficiary must fall within the definition of ‘beneficiary’ under the trust deed. Consider whether the bucket company is part of a family group. Who should hold the company’s shares? One of the main reasons bucket companies are used is to access the tax benefits they provide, and you should keep this in mind when deciding who holds the company’s shares. If an individual holds the shares, there is less flexibility in how the dividends can be distributed; they will need to be distributed according to the shareholder percentage. However, if another kind of trust holds the shares, the excess profits may be distributed, allowing for less total tax paid. Tax rates of bucket companies The bucket company pays the corporate tax rate, which could be 25% or 30%, depending on the type of company. If the company is a base rate entity, a company tax rate of 25% will apply; however, if it is not, the company tax rate will likely be 30%. Taxing trust income The general principle is that a trust’s net income is taxed by its beneficiaries; individuals and company beneficiaries pay tax on their portion of the trust’s income at the rates that apply to them. The highest marginal tax rate for individuals (not including the Medicare levy) at the time of writing this article is 45% for people with taxable income of $180,000 or more. There is a flat tax rate of 30% for non-base rate entity companies. Due to the discrepancy between the highest marginal tax rate for individuals and the company tax rate, there is at least a 15% savings potential. To illustrate, on an income distribution of $100,000, a corporate beneficiary would pay at least $15,000 less tax. Commit to distributions You must ensure that when you distribute to the bucket company for the financial year, you also distribute the same amount to the company’s bank account before lodging the tax return. In particular, trusts must distribute to corporate beneficiaries; otherwise, the Unpaid Present Entitlement (UPE) rules may be triggered. What can be done with the money in the Bucket Company? So far, in this article, we have looked at how bucket companies can help individuals save tax by paying out dividends at company tax rates. However, this is not the only bucket company strategy available. A bucket company can also hold long-term investments, such as shares, properties, or investments. In this regard, the bucket company becomes an investment company that can generate another source of income for the owner. Companies cannot access the 50% Capital Gains Tax discount, but other compelling reasons exist to use a company structure. Getting money out of the Bucket Company As has been established, the trust distributes the income to the bucket company, which begs the question: How do you get money from a bucket company? There are three ways to extract money from a bucket company: Pay dividends to the shareholders. Because the dividend has been taxed at the company rate, the shareholder will receive a franking credit to the extent that the tax has already been paid. An individual will include the dividend income as taxable income. Any excess franking credits are refundable, or top-up tax may be required depending on the shareholder’s marginal tax rate. A loan from the bucket company. As with any other loan, you must pay back the principal and interest to the bucket company. The loan is a special type called a Division 7a Loan, with requirements you will need to be mindful of. A separate discretionary trust structure can receive the dividends. Whereas the first method requires profits to be distributed according to shareholding and the second method incurs interest, this last method distributes profits according to the Trust deed. For example, using a discretionary trust as a shareholder of the bucket company allows you to make the largest distribution to an individual with the lowest marginal tax rate. Note that there may be other rules to satisfy or consider, such as Section 100A. Will a family trust structure allow a Bucket Company? To function as intended, a bucket company must be an eligible beneficiary of a family trust. As a result, you must read the trust deed to ensure the bucket company falls within the general class of beneficiaries. Additionally, a Family Trust Election may be needed depending on the structure. Consider the family group, which may define or impact who the beneficiaries are. Appropriate bucket Company strategy While bucket companies are generally useful for investors and business owners, and there is no doubt that they can be one of the most tax-effective strategies, they may not be ideal for your unique situation. A bucket company strategy may be of benefit if you are any of the following: A business owner who wants to build a nest egg for their family. A business owner who experiences significant fluctuations in income from one financial year to the next. For business owners coming up to retirement or looking to sell their business and who won’t be earning as much business income moving forward as a result Using a bucket company will not work if caught under the Personal Services Income (PSI) rules. These rules prevent individuals from reducing or deferring their income tax by diverting income they receive from their personal services through companies, partnerships, or trusts. We encourage you to seek professional advice when deciding whether a bucket company suits you.

Practice Update March 2024

04 Mar, 2024
Practice Update March 2024
Share by: