Practice Update November 2020

3 November 2020

JOBMAKER PLAN – BRINGING FORWARD THE PERSONAL INCOME TAX PLAN

The Government has announced that stage 2 of its Personal Income Tax Plan will be brought forward and apply for the 2020–21 income year.

The low- and middle-income tax offset will continue to be available for the 2020–21 income year but will not apply for the 2021–22 income year and later years.

Threshold changes

If enacted the measure will:

increase the low-income tax offset (LITO) from $445 to $700 and adjust the phase out rules
increase the top threshold of the 19% personal income tax bracket from $37,000 to $45,000, and
increase the top threshold of the 32.5% personal income tax bracket from $90,000 to $120,000.

These changes will result in the following tax rates for the 2020–21 income year for individuals who are Australian residents.

Resident tax rates for 2020–21

Taxable income Tax on this income

0 to $18,200 Nil

$18,201 to $45,000 19 cents for each $1 over $18,200

$45,001 to $120,000 $5,092 plus 32.5cents for each $1 over $45,000

$120,001 to $180,000 $29,467 plus 37cents for each $1 over $120,000

$180,001 and over $51,667 plus 45 cents for each $1 over $180,000

Note: Changes are also proposed for the thresholds of foreign resident individual taxpayers and working holiday makers. If enacted the new tax rates will be as shown in the table below.

Foreign resident tax rates for 2020–21

Taxable income Tax on this income

$0 – $120,000 32.5cents for each $1

$120,001 – $180,000 $39,000 plus 37cents for each $1 over $120,000

$180,001 and over $61,200 plus 45cents for each $1 over $180,000

Working holiday maker tax rates 2020–21

Taxable income Tax on this income

0 to $45,000 15%

$45,001 to $120,000 $6,750 plus 32.5cents for each $1 over $45,000

$120,001 to $180,000 $31,125 plus 37cents for each $1 over $120,000

$180,001 and over $53,325 plus 45cents for each $1 over $180,000

There are also changes proposed to the phase out rules.

Proposed phase out rules

Taxable income Tax on this income

$37,500 or less $700

Between $37,501 and $45,000 $700 minus 5cents for every dollar above $37,500

Between $45,001 and $66,667 $325 minus 1.5cents for every dollar above $45,000

Low income tax offset

The proposal would also increase the low-income tax offset (LITO) from a maximum amount of $455 to $700 per annum for the 2020–21 income year and future years.

As a non-refundable offset, any unused low-income tax offset cannot be refunded. The low-income tax offset will directly reduce the amount of tax payable but does not reduce the Medicare levy. If not all the offset is used to reduce the tax payable, there is no refund of any unused portion.

Low- and middle-income tax offset

Under the previous legislation, the low- and middle-income tax offset (LMITO) was to be repealed when the relevant threshold changes came into effect and the LITO was increased. Under the Government’s announcement, LMITO will continue to be available for the 2020–21 income year then removed for the 2021–22 income year and later years.

There are no changes to the amount of LMITO or the eligibility thresholds and as such LMITO is applied as outlined in the following table:

Low and middle tax offset

Taxable income Offset

$37,000 or less $255

Between $37,001 and $48,000 $255 plus 7.5cents for every dollar above $37,000, up to a maximum of $1,080

Between $48,001 and $90,000 $1,080

Between $90,001 and $126,000 $1,080 minus 3cents for every dollar of the amount above $90,000

As a non-refundable offset, any unused low- and middle-income tax offset cannot be refunded. The low- and middle-income tax offset will directly reduce the amount of tax payable but does not reduce the Medicare levy. If all of the offset is not used to reduce the tax payable, there is no refund of any unused portion.

2020–21 administrative treatment

PAYG Withholding

The ATO has published updated tax withholding schedules after the amendments passing Parliament

This has allowed the tax cuts to be reflected in people’s take-home pay.

The ATO has published updated tax withholding schedules at ato.gov.au/taxtables.

The ATO has continued to work closely with providers of payroll software and employers to ensure that the reduced withholding associated with the threshold changes and the increase of LITO is reflected in software.

PAYG instalments

The proposed changes to thresholds have not been included when calculating PAYG Instalment shown on the September quarter Activity Statements. The changes will be reflected in the December Activity statements if the legislation is enacted or if there is clear bipartisan support for the measure. In most cases this will result in a wash-up of any over payments that occurred for earlier periods.

Vary your PAYG instalments

In line with their current position, if you chose to vary your PAYG instalments for the 2020–21 income year to reflect the proposed tax cuts the ATO will not apply penalties or charge interest for excessive variations if you have made your best attempt to estimate your end of year tax liability. General interest charges may apply to outstanding PAYG instalment balances.

You should review your tax position regularly throughout the year and vary your PAYG instalments as your situation changes.

BUDGET CHECKLIST

The 2020-21 Federal Budget was handed down on 6.10.2020 and our detailed analysis was made available to you following day.

How Are You Able to Benefit from The Changes?

The amended income tax rates and changes to tax offsets are included in this edition. Depending on your earnings, you could have an additional $50-$60 a week in your pocket. Subject to the $25k contribution limit, if you salary sacrifice this amount into superannuation you will benefit in retirement.

There is temporary full expensing for the purchase of capital assets between 6.10.2020 and 30.6.2020. If your business has a genuine need for new equipment, you could directly benefit from this. Business with aggregated annual turnover below the relevant threshold will be able to deduct the full cost eligible capital asset acquired from 7:30pm AEDT on 6.10.2020 and first used or installed by 30.6.2022.

Full expensing in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets for businesses with aggregated annual turnover of less than $5 billion.

Full expensing also applies to second-hand assets for small and medium-sized businesses with aggregated annual turnover of less than $50 million.

Full expensing does not apply to second-hand assets for businesses with aggregated annual turnover of $50 million or more.

If your company incurred losses in the year ended 30.6.2020, you may be delaying getting your tax done. In the event your company had a tax liability for the FY 2019, it may be worth seeing your accountant sooner than later. This is because of the temporary loss carry-back effective 1.7.2019 which could result in a “clawback” of the company tax paid for FY 2019.Under the existing rules, companies are required to carry losses forward to offset profits in future years.The Government has announced that it will allow companies with aggregated annual turnover of less than $5 billion to carry back tax losses from 2019-20, 2020-21- or 2021-22-income years to offset previously taxed profits in the 2018-19 or later income years.Eligible corporate tax entities can elect to apply tax losses against taxed profit in a previous year, generating a refundable tax offset in the year in which the loss is made. The tax refund is limited by requiring that the amount carried back is not more than the earlier taxed profit and cannot result in a franking account deficit.The tax refund will be available on election by eligible companies when they lodge their 2020-21 and 2021-22 tax returns.

Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.

Consider taking advantage of the Jobmaker hiring credit. From 7.10.2020, the Government will pay a hiring credit for up to 12 months for each new job. This is available from 7 October to employers who hire eligible employees age 16 to 35.The credit will be paid quarterly in arrears at the rate of $200 per week for those age 16 to 29, and $100 per week for those age 30 to 35. Eligible employees are required to work a minimum of 20 hours per week and receive the JobSeeker Payment, Youth Allowance or Parenting Payment for at least one month out of three months prior to when they are hired.To be eligible, employers will need to demonstrate an increase in overall employee headcount and payroll for each additional new position created.

If applicable consider taking advantage of the apprenticeship’s wages subsidy. From 5.10.2020 to 30.9.2021, employers will be able to claim a new Boosting Apprentices Wage Subsidy for new apprentices of trainees who commence during this period.Eligible businesses will be reimbursed up to 50% of an apprentice or trainee’s wages worth up to $7,000 per quarter, capped at 100,000 places.

Make family members aware of the first home loan deposit scheme. As part of the Government’s economic recovery plan, an additional 10,000 first home buyers will be able to purchase a new home sooner under our First Home Loan Deposit Scheme.The First Home Loan Deposit Scheme has already helped almost 20,000 first home buyers purchase a home this year with a deposit as low as 5 per cent.An additional 10,000 places will be provided from 6 October 2020 to support the purchase of a new home or a newly built home.The Government recognises that saving a deposit has become a more significant barrier to entering the housing market than the ability to service a home loan.Under the existing First Home Loan Deposit Scheme, eligible first home buyers can purchase a modest home with a deposit of as little as 5 per cent.Building on the success of the existing scheme, an additional 10,000 first home buyers will be able to obtain a loan to build a new home or purchase a newly built home with a deposit of as little as 5 per cent.The additional guarantees will be available until 30 June 2021 and will drive more construction and support jobs as part of the Economic Recovery Plan.

Eligible first home buyers will also be able to take advantage of the Government’s First Home Super Saver Scheme and HomeBuilder, and first home buyers may also be eligible for state and territory grants and concessions.

Give your staff retraining without having to pay fringe benefits tax (FBT). The Government will provide an exemption from Fringe Benefits Tax (FBT) for employer-provided retraining and reskilling, for employees who are redeployed to a different role in the business. The exemption will apply from 2.10.2020.Removing costly barriers to training as the economy rebuilds is essential to ensure Australian employees have the opportunity to reskill or retrain for the jobs that will come back as the economy reopens.Currently, FBT is payable if an employer provides training to its employees that is not sufficiently connected to their current employment. For example, a business that retrains their sales assistant in web design to redeploy them to an online marketing role in the business can get hit with FBT. By removing FBT, employers will be encouraged to help workers transition to new employment opportunities within or outside their business.The exemption will not extend to retraining acquired by way of a salary packaging arrangement or training provided through Commonwealth supported places at universities, which already receive a benefit.

In addition, the Government will consult on potential changes to the current arrangements for workers that undertake training at their own expense. The current rules, which limit deductions to training related to current employment, may act as a disincentive for Australians to retrain and reskill to support their future employment needs.

These changes will provide further support for training, building on the $1 billion JobTrainer program which will provide up to an additional 340,700 training places across the country for school leavers as well as provide opportunities for job seekers to upskill and reskill and get back to work as quickly as possible.

If you genuinely engage in research and development (R+D), take advantage of the enhanced R+D tax offset.The Government announced further enhancements to the Research and Development Tax Incentive. The changes will apply for income years starting on or after 1.7.2021:

for companies with an aggregated turnover below $20 million, the refundable R&D tax offset rate will be increased to a 18.5% premium to the company’s corporate tax rate. Note the previously proposed cap on $4 million annual cash refunds will not proceed
for companies with aggregated turnover of $20 million or more, the number of R&D intensity tiers (which measures the company’s R&D expenditure as a proportion of total expenses for the year) will be reduced from three to two, and the non-refundable R&D tax offset will be increased as follows:

R&D intensity Non-refundable R&D tax offset

0-2% Corporate tax rate + 8.5%

>2% Corporate tax rate + 16.5%

Reforms from the 2019-20 MYEFO announcement will be retained, including the proposal to increase the limit for R&D expenditure which is eligible for the R&D tax incentive from $100 million to $150 million per annum.

Consolidate your superannuation into one account safe in the knowledge you will never have the hassle of dealing with multiple accounts.

This is because commencing 1.7.2021, the Your Future, Your Super package will improve the superannuation system by:

Having your superannuation follow you: preventing the creation of unintended multiple superannuation accounts when employees change jobs.

Making it easier to choose a better fund: members will have access to a new interactive online YourSuper comparison tool which will encourage funds to compete harder for members’ savings.

Holding funds to account for underperformance: to protect members from poor outcomes and encourage funds to lower costs the Government will require superannuation products to meet an annual objective performance test. Those that fail will be required to inform members. Persistently underperforming products will be prevented from taking on new members.

Increasing transparency and accountability: The Government will increase trustee accountability by strengthening their obligations to ensure trustees only act in the best financial interests of members. The Government will also require superannuation funds to provide better information regarding how they manage and spend members’ money in advance of Annual Members’ Meetings

If you are a medium sized business with a turnover of between $10 million and $50 million, for the first time you will have access to up to ten small business tax concessions. The changes are estimated to support an additional 20,000 businesses and their employees.The expanded concessions, as part of the 2020-21 Budget will apply in three phases:From 1 July 2020, eligible businesses will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.From 1 April 2021, eligible businesses will be exempt from the 47 per cent fringe benefits tax on car parking and multiple work-related portable electronic devices, such as phones or laptops, provided to employees.

From 1 July 2021, eligible businesses will be able to access the simplified trading stock rules, remit pay as you go (PAYG) instalments based on GDP adjusted notional tax, and settle excise duty and excise-equivalent customs duty monthly on eligible goods. Eligible businesses will also have a two-year amendment period apply to income tax assessments for income years starting from 1 July 2021.

In addition, from 1 July 2021, the Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the $50 million aggregated annual turnover threshold.

COVID-19 AND FBT

A range of potential fringe benefits tax (FBT) issues have arisen from changing work conditions and support provided by employers to employees in the current COVID-19 environment. In view of this, the ATO has issued guidance which addresses the FBT consequences which may apply if employers provide benefits relating to working from home arrangements or health-related support.

APRA CLARIFIES ‘WORK TEST’ FOR SUPERANNUATION CONTRIBUTIONS

In October, the Australian Prudential Regulation Authority (APRA) confirmed individuals whose incomes are subsidised by the JobKeeper scheme will be considered by registrable superannuation entities (RSE) to be ‘gainfully employed’ for the purpose of the ‘work test’, and can therefore make personal superannuation contributions.

This was contained within an updated set of frequently asked questions for superannuation on their response to COVID-9.

According to APRA, RSE licensees need not distinguish between individual members who are working reduced hours or those who have been stood down, and can assume that all members whose incomes are subsided by the JobKeeper scheme satisfy the ‘work test’ for the purpose of voluntary superannuation contributions.

ATO UPDATE: JOBKEEPER 80-HOUR TRESHOLD FOR EMPLOYEES

The ATO recently updated guidance on the 80-hour test for higher rate of JobKeeper payment.

This provides more information on the treatment of leave.

An employee will satisfy the 80-hour threshold, if in their 28-day reference period, the total of the following is 80 hours or more:

actual hours they worked

hours they were on paid leave

hours they were paid for absence on a public holiday.

According to the ATO, if an eligible employee satisfies the 80-hour threshold, the employer can claim the tier 1 (higher) payment rate for them.

If they do not meet the 80-hour threshold, the employer can only claim the tier 2 (lower) payment rate for them.

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Practice Update May 2025

7 May 2025

Strategies for individuals before June 30, 2025

Practice Update April 2025

31 March 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.

Practice Update March 2025

5 March 2025

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.