Uncertainty for small businesses as key tax changes remain in limbo

A back-log of highly-anticipated tax legislation was not passed by the Senate on Thursday, June 28, during its final sitting day ahead of the Winter recess.

This means these measures remain in limbo until Parliament resumes on Monday, August 13. This creates uncertainty for taxpayers and tax practitioners as they begin the annual process of advising on and preparing 2018 income tax returns without knowing whether the law will be amended, in some cases retrospectively.

In particular, the following key tax measures remain before the Parliament.

1. Corporate tax cuts for companies with an annual turnover of $50 million or more — from 2019–20

The federal government was not able to secure support in the Senate for extending the corporate tax cuts to companies with an annual turnover of $50 million or more from the 2019–20 income year. While this doesn’t affect preparation of 2018 tax returns, it affects the ability of companies to prepare accurate and reliable budgets and forecasts because they are unclear on what the tax rate will be two years from now.

2. Corporate tax cuts: Base rate entity — from July 1, 2017

These measures are proposed to commence on July 1, 2017, and propose to change the meaning of the term ‘Base rate entity’, which a company needs to be from July 1, 2017, to get the lower corporate tax rate of 27.5%.

These measures will tax a company at the rate of 30% if more than 80% of its assessable income is ‘passive’. These measures also affect a company’s franking rate when it pays a dividend to its shareholders. The Commissioner of Taxation’s draft ruling TR 2017/D7 on when a company ‘carries on a business’ — which is relevant to this discussion — remains in draft.

The issue is that the start date of these measures is proposed to be July 1, 2017. Companies and shareholders should lodge their 2018 tax returns on the basis of the current law, but they may need to amend their returns if the measure is enacted in its current form in the next few months or even next year with retrospective application.

3. $20,000 instant asset write-off — extended to June 30, 2019

Currently, taxpayers that are small businesses with an annual turnover of less than $10 million can write-off the cost of depreciating assets that cost less than $20,000 only until June 30, 2018.

This measure proposes to extend the instant asset write-off to June 30, 2019. However, as the Bill has not yet been passed by Parliament, small businesses have no certainty that an asset that they buy from July 1, 2018, that costs less than $20,000 can actually be written off. If the Bill is not passed, they will need to depreciate the asset under the usual rules (unless the asset costs less than $1000 in which case it can be written off under the current law).

4. Superannuation Guarantee Amnesty — from May 24, 2018 to May 23, 2019

The Superannuation Guarantee (SG) Amnesty, announced on 24 May 2018, is proposed to run from May 24, 2018 to May 23, 2019, to allow employers to come forward and do the right thing by their employees by paying any unpaid superannuation in full, with relief from penalties and the ability to claim a full deduction for the payment.

Since this measure will now be in limbo until at least mid-August, we will be three months into a 12-month amnesty without certainty that the amnesty will actually be available. In the event that the measure is not enacted, any disclosures made to the Australian Taxation Office in the meantime will be dealt with under the current law (full penalties and no deductibility).

I caution employers and their advisers/agents before making a disclosure to the ATO and suggest no disclosures should be made until the amnesty is law and employers have certainty.

5. Integrity changes to small business CGT concessions — now proposed to be from February 8, 2018

These complex measures were originally proposed to start on July 1, 2017, but are now proposed to commence in relation to CGT events that happen on or after February 8, 2018.

The new rules will apply to a taxpayer who disposes of a share in a company or an interest in a trust and impose additional conditions that must be satisfied for the taxpayer to claim the small business CGT concessions on a capital gain made in relation to those shares or interests.

6. Mandatory Single Touch Payroll reporting for small employers — from July 1, 2019

This measure proposes to extend the existing Single Touch Payroll (STP) regime — that applies to substantial employers (20 or more employees as at April 1, 2018) from July 1, 2018 — to small employers from July 1, 2019.

However, it will be another few months now before small employers have certainty, which gives them less time to prepare for STP reporting. Some other technical changes to the STP rules are proposed to apply from July 1, 2018, yet they are also yet to be enacted.

7. Main residence exemption changes for non-residents (deny MRE) — from May 9, 2017

These measures will deny non-residents the main residence exemption for CGT events (i.e. sales of homes) that happen on or after May 9, 2017, subject to a June 30, 2019, transitional rule.

These measures are particularly concerning because of the retrospective application — as far back as September 20, 1985, when the CGT regime began — to Australian expats who are non-residents for tax purposes at the time of the CGT event.

No regard will be given to the period of their Australian tax residency status or how many days they actually lived in their home. No main residence exemption will be available and the taxable capital gain will be calculated using the original cost base of the property.

There was a report that the Government would delay passage of the Bill to further consider the issues. While this is a welcome development, taxpayers currently have no certainty because passage of the Bill has been delayed, and this could affect 2018 tax returns which are now being lodged.

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