Practice Update February 2021
25 January 2021
WHAT IS NEW IN 2021?
From January 2021, a number of new measures came into effect across government including:
- The most significant changes to Australia’s insolvency framework in 30 years, reducing costs, cutting red tape, and helping more small business recover from the pandemic. The reforms introduce a new, simplified debt restructuring process, drawing on key features of the Chapter 11 bankruptcy model in the United States. These measures apply to incorporated businesses with liabilities of less than $1million – covering around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 These measures were passed by Parliament on 10.12.2020.
- Australians will have more power to choose their own superannuation fund, instead of being forced into a fund because of enterprise bargaining agreements. ‘Your Superannuation, Your Choice’ allows around 800,000Australians to decide where their hard-earned retirement savings are invested, representing around 40 per cent of all employees covered by a current enterprise agreement.
- The successful HomeBuilder program extends to 31March The scheme is expected to support the construction or major rebuild of an additional 15,000 homes, bringing the total to around 42,000 projects across Australia. HomeBuilder continues to drive demand in the construction sector, helping to protect the jobs of the more than one million Australians it employs.
- Up to 30,000 more Australians can now study for a university degree as part of the Government’s Job-ready Graduates package, helping drive Australia’s COVID-19 recovery. Course fees are to be discounted in areas of expected future job demand, including teaching, nursing, clinical psychology, agriculture, and engineering. Regional students also have access to a $5,000 one-off scholarship to help with relocation costs.
- Major reforms to Australia’s foreign investment framework take effect, with new requirements for foreign investors. This aims to ensure Australia keeps pace with emerging risks and global developments including similar changes to foreign investment regimes in comparable countries.
$10K CASH BAN BILL KILLED IN THE SENATE
On 3.12.2020, the Senate unanimously agreed to discharge the Currency (Restrictions on the Use of Cash) Bill 2019 designated to tackle the black economy and tax evasion by banning businesses from engaging in large cash transactions.
On 3.12.2020, One Nation senator Malcolm Roberts moved that the bill be discharged.
Assistant Treasurer Michael Sukkar acknowledged the impact of COVID-19 on small businesses and the broader economy.
According to Mr Sukkar:
- As we progress through to the recovery stage, we recognise now is not the time to impose an additional burden on small business.
- The government is implementing a number of measures to tackle serious organised crime, as well as increasing the resources of the serious and organised crime program, a cross-agency program of work comprising the ATO, Commonwealth, state and territory policing, and other law enforcement agencies, working to disrupt serious organised crime in Australia.
In our view, it is very unlikely this legislation will be revived in 2021.
AAT DECISION ON BACKDATED ABNS
On 21 December 2020, the Administrative Appeals Tribunal (AAT) handed down its decision in Apted and Federal Commissioner of Taxation (Tribunal reference 2020/4562).
This case involves eligibility for the JobKeeper Allowance.
AAT decision
The AAT held that the applicant did meet the requirement to have an ABN on 12 March 2020, in circumstances where the ABR Registrar decided to reactivate a previously cancelled Australian business number (ABN) after 12 March 2020 and backdated the reactivation to have effect on or before 12 March 2020.
The ATO is currently considering the decision and its implications, including whether to appeal.
The AAT’s decision has not changed the need to satisfy all the other eligibility conditions. If your JobKeeper application was declined because you did not meet the requirement to have an ABN on 12 March 2020, and you are satisfied that you meet all other eligibility requirements, the ATO will be providing updates over the coming weeks.
The ATO will provide further information on your next steps once they have considered the AAT decision and its implications.
LOSS CARRY BACK REFUNDABLE TAX OFFSET
Loss carry back is a tax incentive and part of the government’s JobMaker Plan.
Loss carry back is a refundable tax offset for eligible corporate entities (companies, corporate limited partnerships and public trading trusts).
It allows them to carry back tax losses from the 2019–20, 2020–21 or 2021–22 income years to offset income tax liabilities in the 2018–19 income year or later.
You cannot claim the tax offset in your 2019–20 company tax return. You will be able to claim the tax offset in your 2020–21 or 2021–22 company tax return.
The ATO is updating the 2020-21 company tax return forms with additional loss carry back labels to be ready for 1 July 2021.
Currently the ATO is working through how companies that lodge their 2020–21 company tax return before 1 July 2021 can make a loss carry back claim. In the near future they will be updating their web content and give you information on how to claim.
Loss carry back is intended to interact with the temporary full expensing measure. If you are an eligible corporate entity and you make a tax loss in the 2019–20, 2020–21 or 2021–22 income years as a result of claiming an immediate deduction under the temporary full expensing measure, you can still claim a refundable tax offset.
We will keep you informed on developments.
TAX CONCESSIONS AND IMPROVEMENTS FROM 2020/21
Temporary full expensing of depreciating assets
Eligible businesses with an aggregated turnover of less than $5 billion can deduct the business portion of the cost of eligible new depreciating assets.
These assets must be first held and first used, or installed ready for use for a taxable purpose, between 7.30pm (AEDT) on 6 October 2020 until 30 June 2022.
For small and medium sized businesses (aggregated turnover of less than $50 million), temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.
Businesses can also apply temporary full expensing to the business portion of the cost of improvements made to eligible depreciating assets. This applies even if those assets were acquired before 7.30pm (AEDT) on 6 October 2020.
Under temporary full expensing, small businesses also deduct the balance of their small business pool at the end of the income years ending between 6 October 2020 and 30 June 2022.
Small businesses will need to apply the simplified depreciation rules to claim temporary full expensing. From 7.30pm (AEST) 12 May 2015 to 30 June 2022, the ‘lock out’ rules are suspended to allow small businesses that choose to stop using the simplified depreciation rules to take advantage of temporary full expensing and the instant asset write-off.
Instant asset write-off
There have been changes to the instant asset write-off.
From 12 March 2020, the instant asset write-off:
- threshold amount for each asset is $150,000 (up from $30,000)
- allows businesses until 30 June 2021 to first use or install the asset ready for use, provided the asset is purchased by 31 December 2020.
- eligibility was expanded to cover businesses with an aggregated turnover of less than $500million (up from $50 million).
Lower company tax rate changes
From the 2017–18 to 2019–20 income years, companies that are base rate entities must apply the lower 27.5% company tax rate.
The lower company tax rate for base rate entities will reduce to 26% in 2020–21 and to 25% from the 2021–22 income year.
A base rate entity is a company that both:
- Has an aggregated turnover less than the aggregated turnover threshold – which is $25 million for the 2017–18 income year and $50 million for the 2018–19 to 2021–22 income years.
- 80% or less of their assessable income is base rate entity passive income (such as interest, dividends, rent, royalties, and net capital gain) – this replaces the requirement to be carrying on a business.
When working out the rate to use when franking your distributions, you need to assume that your aggregated turnover, assessable income, and base rate passive income will be the same as the previous year.
Increased small business income tax offset
You can claim the small business income tax offset if you either:
- are a small business sole trader
- 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
The tax offset increases to 13% in 2020–21 and to 16% from the 2021–22 income year.
The ATO will work out your offset based on amounts shown in your tax return.
Expanded access to small business concessions
More businesses may now be 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 of 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 $5million turnover threshold from 1 July 2016.
- Capital gains tax (CGT) concessions, which continue to have a $2million turnover threshold.
The turnover threshold for fringe benefits tax (FBT) concessions increased to $10 million from 1 April 2017 and will increase to $50 million from 1 April 2021.
From 1 July 2020, businesses that are not small businesses because their turnover is $10 million or more but less than $50 million can also access an immediate deduction for certain start-up expenses and for prepaid expenditure.
From 1 July 2021, businesses that are not small businesses because their turnover is $10 million or more but less than $50 million can also access these small business concessions:
- simplified trading stock rules
- PAYG instalments concession
- a two-year amendment period
- excise concession.
PRACTICAL COMPLIANCE GUIDELINE PCG 2020/3
Claiming deductions for additional running expenses incurred whilst working from home due to COVID-19 has been recently updated by the ATO.
While the changes are not substantive, we re-visit examples which provide valuable guidance, contained in PCG 2020/3 as this is the first full (hopefully last!) financial year we live with COVID-19.
Example 1 – not working from home
Abed’s employer has requested staff take leave while the business is suffering a downturn due to COVID-19. Abed takes four weeks annual leave. During that period, he occasionally checks his email to see if there is anything he needs to keep abreast of while he is on leave. His employer also sends him text messages to keep him up to date on changes to the business.
This would not qualify as working from home as Abed is on leave and not actively working; he is just occasionally checking in. As such, Abed cannot rely on this Guideline.
Example 2 – working from home
Bianca is a sole trader who works as a copy writer and editor. She usually works out of a shared workspace in the central business district as it is easier to meet with her clients face-to-face. Bianca decides to work from home as a result of COVID-19 and replaces her face-to-face meetings with online video conferencing. Bianca continues to operate her business and would meet the criteria for working from home. As such, Bianca can rely on this Guideline to claim her additional running expenses.
Example 3 – additional running expenses incurred – existing arrangement
Duyen is an employee of an online trading business. Up until the end of February, Duyen spent two days working from home and three days working at the office of her employer. As a result of COVID-19, she starts working from home five days per week from 1 March 2020. For the period from 1 July 2019 to 29 February 2020, Duyen uses the current fixed rate of 52 cents per hour to calculate her additional running expenses including electricity expenses, cleaning expenses and the decline in value and repair of her office furniture. She also calculates her work-related phone and internet expenses using the itemised phone bill for one month on which she has marked her work-related phone calls and the four-week representative diary of internet usage that she kept.
As Duyen is working from home she can rely on this Guideline to claim her additional running expenses for the period from 1 March 2020.
Duyen ends up working from home for five days per week until 30 June 2020 as a result of COVID-19. Rather than continuing to use the current fixed rate and working out the actual expenses she incurred on her phone and internet expenses from 1 March 2020 to 30 June 2020, Duyen decides, for simplicity, to calculate all her running expenses using the shortcut rate. Duyen uses the timesheets she is required to provide to her employer to calculate the number of hours she works from home in the period from 1 March 2020 to 30 June 2020 and keeps those timesheets as evidence of her claim.
Example 4 – additional running expenses incurred – business owner
Elizabeth runs a small business selling art and framing pictures. She has a store with a workshop to display the art and frames. She also does all her bookkeeping and administrative tasks in the office at the store. As a result of the downturn in people coming into her store due to COVID-19, Elizabeth decides to close her store and continue running her business online from home. As Elizabeth continues to run her business from home due to COVID-19, she can rely on this Guideline to claim her additional running expenses.
The shortcut rate
The shortcut rate is 80 cents per hour. This rate can be claimed for every hour that is worked at home. The hourly rate covers all additional running expenses, namely:
- electricity (lighting, cooling/heating and electronic items used for work, for example a computer) and gas (heating) expenses
- the decline in value and repair of capital items such as home office furniture and furnishings
- cleaning expenses
- phone expenses including the decline in value of a phone handset
- internet expenses
- computer consumables
- stationery, and
- the decline in value of a computer, laptop, or similar device.
If a taxpayer uses the shortcut rate to claim a deduction for their additional running expenses, they cannot claim a further deduction for any of the expenses listed in this Guideline.
Example 5 – calculating additional running expenses using shortcut rate
Ephrem is an employee and as a result of COVID-19 he is working from his home office. In order to work from home, Ephrem purchases a computer on 15 March 2020 for $1,299. He intends to use the shortcut rate to claim his additional running expenses.
During the entire period he is working from home as a result of COVID-19, Ephrem notes in the calendar on his computer, when he starts and finishes each day along with a note about any breaks he has and how long those breaks were.
When it comes to lodging his 2019-20 tax return, Ephrem works out that during the period he worked from home as a result of COVID-19, he worked a total of 456 hours.
Ephrem calculates his deduction for the 2019-20 income year for additional running expenses as:
456 hours × 80 cents per hour = $364.80
As Ephrem has claimed his additional running expenses using the shortcut rate, he cannot claim a separate deduction for the decline in value of his computer. Ephrem keeps a record of the calendar entries he has made to demonstrate how he calculated the number of hours he worked from home. Ephrem also keeps the receipts for his computer purchase in case he will need to claim depreciation in future.
Strategies for individuals before June 30, 2025
A foreign entrepreneur’s guide to starting a business in Australia Starting a business as a foreign entrepreneur can be an exhilarating way to access new markets, diversify investment portfolios, and create fresh opportunities. Many countries around the globe provide pathways for non-residents and foreign nationals to register businesses. However, understanding different countries’ legal requirements, procedures, and opportunities is crucial for success. In this issue, we will navigate the process of establishing a business in Australia to help foreign entrepreneurs looking to register a company in Australia. Key takeaways Foreign entrepreneurs can fully own Australian businesses with no restrictions on ownership. Registered office and resident director requirements are key legal considerations. ABN and ACN are essential for business registration. The application process can be done online, simplifying the process for foreign entrepreneurs. Why register a business as a foreign entrepreneur? There are various reasons why a foreigner may want to register a company in another country. These reasons include expanding into a foreign market, taking advantage of favourable tax laws, leveraging local resources, or benefiting from business-friendly regulatory environments. Before registering, conducting thorough market research to assess whether establishing a business abroad aligns with your objectives is essential. Understanding the country’s political and economic climate, legal framework, and tax system will help ensure the success of your venture. The general process for registering a business as a foreign entrepreneur While the exact requirements may differ from country to country, some common steps apply to most jurisdictions when registering a company as a foreign entrepreneur: Choosing the business structure The first step is deciding on the appropriate business structure. The structure determines liability, taxation, and governance. Common types of business structure include: Sole proprietorship: A single-owner business where the entrepreneur has complete control and entire liability. Limited Liability Company (LLC): Offers liability protection to the owners, meaning their assets are not at risk. Corporation (Inc.): A more complex structure that can issue shares and offers limited liability to its shareholders. Different countries have varying rules regarding foreign ownership, so understanding the options available is essential before registering a company. Registering with local authorities Regardless of the jurisdiction, most countries require you to register your company with the relevant local authorities. This process typically includes submitting documents such as: Company name and business activities: You need to choose a unique company name that adheres to local naming regulations. Articles of incorporation: This document outlines the company’s structure, activities, and bylaws. Proof of identity : As a foreign entrepreneur, you will likely need to provide a passport and other identification documents. Proof of address: Many countries require a physical address for the business, which may be the address of a registered agent or office. Tax Identification Number (TIN) and bank accounts After registering the company, you will typically need to apply for a tax identification number (TIN), employer identification number (EIN), or equivalent, depending on the jurisdiction. This number is used for tax filing and reporting purposes. Opening a business bank account is another critical step. Some countries require a local bank account for business transactions, and you may need to visit the bank in person or appoint a local representative to help with the process. Complying with local regulations Depending on the type of business, specific licenses and permits may be required to operate legally. For example, food service, healthcare, or transportation companies may need specific licenses. Compliance with local labour laws and intellectual property protections may also be necessary. Appoint directors and shareholders To register a company, you’ll need to appoint at least one director who resides in Australia. The director will be responsible for ensuring the company meets its legal obligations. You will also need to appoint shareholders, who can be either individuals or corporations. For foreign entrepreneurs, the requirement for a resident director is one of the key challenges. If you don’t have a trusted individual in Australia to act as the director, you can engage a professional service to fulfil this role. This ensures your business remains compliant with local regulations. Choose a company name Next, you need to choose a company name. The name should reflect your business but must be unique and available for registration. You can check the availability of a name through the Australian Securities & Investments Commission (ASIC) website. Remember that the name must meet legal requirements and cannot be similar to an existing registered company. If you’re unsure, seeking professional advice is always a good move. Apply for an Australian Business Number (ABN) and Australian Company Number (ACN) Once you’ve selected your business structure and appointed your directors, it’s time to apply for an Australian Business Number (ABN) and an Australian Company Number (ACN). These are essential for running your business in Australia. ABN: This unique 11-digit number allows your business to interact with the Australian Taxation Office (ATO) and other government agencies. ACN: This 9-digit number is allocated to your company upon registration with ASIC and serves as your business’s unique identifier. You can easily apply for both numbers online through the Australian Business Register (ABR) and the ASIC websites. Register for Goods and Services Tax (GST) If your business expects to earn more than $75,000 in revenue annually, you must register for GST. This means your business will charge customers an additional 10% on goods and services. The GST registration threshold for non-profit organisations is higher at $150,000 annually. If your company is below these thresholds, registering for GST is optional, but registration becomes mandatory once it exceeds the limit. Set up a registered office Every Australian company must have a registered office in Australia. This is where all official government documents, including legal notices, are sent. You can use your premises or hire a foreign company registration service to provide a virtual office address. Common challenges for foreign entrepreneurs While the process is relatively simple, there are a few hurdles that foreign entrepreneurs may encounter when registering a company in Australia: Resident director requirement: You’ll need a director residing in Australia. If you don’t have one, you’ll need to engage a service provider to fulfil this role. Understanding local tax laws: Australia has a corporate tax rate of 25% for small businesses with annual turnovers of less than $50 million. However, larger companies with turnovers exceeding $50 million are subject to a standard corporate tax rate of 30%. Foreign entrepreneurs must also understand the implications of the Goods and Services Tax (GST) and payroll tax. Compliance with Australian regulations: Navigating Australia’s various regulations and compliance requirements can be time-consuming. An accountant or adviser can help you in this regard. FAQs Can I register a company in Australia as a foreigner? Yes, foreign entrepreneurs can register a company in Australia. The only requirement is to have a resident director. Do I need to be in Australia to register a company? No, you can complete the registration process online. However, you must appoint a resident director. Do I need an Australian bank account to start a business in Australia? You will need an Australian bank account to handle your business’s finances and transactions. Can I operate my Australian company from abroad? Yes, you can operate your company remotely, but you must comply with all local tax laws and regulations.
Do bucket companies help build wealth at retirement? Bucket companies are familiar with wealth-building strategies, particularly as individuals approach retirement. By distributing profits to a bucket company, individuals can benefit from reduced tax liabilities and enhanced investment growth opportunities. This essay explores how bucket companies influence wealth building at retirement, their impact on age pension eligibility and tax positions, and strategies to maximise economic outcomes. Understanding bucket companies A bucket company is used to receive distributions from a family trust. Instead of distributing profits directly to individuals, which may attract high marginal tax rates, the trust distributes income to the bucket company, which is taxed at the corporate tax rate (currently 30% or 25% for base rate entities). The company can then retain the after-tax profits for reinvestment or distribution. Impact on wealth building at retirement Tax efficiency and compounding growth Using a bucket company can result in significant tax savings compared to personal marginal tax rates, reaching up to 47% (including the Medicare levy). Retained earnings within the bucket company are taxed lower, allowing more capital to compound over time. Example of Tax Efficiency: Income DistributedPersonal Marginal Tax (47%)Bucket Company Tax (25%)Savings $100,000$47,000$25,000$22,000 Over 20 years, if the tax savings of $22,000 per year are reinvested at an annual return of 7%, they would accumulate to approximately $1,012,000. Age pension and means testing The age pension is subject to both an income test and an assets test. Holding wealth in a bucket company can impact these tests: Income Test: Distributions to individuals count as assessable income. Retained profits within the company do not. Assets Test: The value of the bucket company shares is counted as an asset, which may affect pension eligibility. Strategic use of the company can help individuals control their assessable income, potentially increasing their age pension entitlement. Strategies to maximise economic outcomes Timing of Distributions By deferring distributions from the bucket company until retirement, individuals can benefit from lower marginal tax rates or effectively use franking credits. Dividend Streaming Using franking credits from company-paid tax can reduce personal tax liabilities when distributed dividends. Investment within the Company Reinvesting retained earnings within the bucket company in diversified assets can enhance compounding returns. Family Trust Distribution Planning Strategically distributing income to lower-income family members before reaching the bucket company can reduce overall tax. Winding Up or Selling the Company Carefully planning an exit strategy to wind up the b ucket company or sell its assets can minimise capital gains tax liabilities. Example of a retirement strategy with a bucket company Assume that John and Mary, aged 65, have distributed $100,000 annually from their family trust to their bucket company over 20 years. Corporate tax paid: 25% Annual return on reinvestment: 7% After-tax reinvested earnings annually: $75,000 YearAnnual ReinvestmentTotal Accumulated Amount (7% p.a.)5$75,000$435,30010$75,000$1,068,91420$75,000$3,867,854 At retirement, they can distribute dividends with franking credits to minimise personal tax and supplement their income while potentially qualifying for some age pension benefits due to strategic income timing. FAQ What is a bucket company? A bucket company is a corporate entity that receives trust distributions, taxed at the corporate rate rather than personal marginal rates. How does a bucket company impact my age pension eligibility? While retained earnings do not affect the income test, the value of the company shares is considered an asset under the assets test. Can bucket companies help reduce tax during retirement? Yes, by using franking credits and strategic distribution timing, bucket companies can minimise tax liabilities. Are there risks associated with using bucket companies for retirement planning? Yes, risks include changes in tax laws, corporate compliance costs, and potential capital gains tax upon winding up the company. Should I consult a professional before using a bucket company? Absolutely. Professional advice is essential to ensure compliance with tax laws and optimise wealth-building strategies.