Tax Rambling

By now most of us have heard that the European Commission has ordered Apple to pay 13 billion Euros. But the money does not go to the EU, but rather the order is that Ireland has to collect the amount from Apple… But Ireland does not want to. Ireland has argued that Apple have paid the right amount of tax, at the right time, exactly as the Irish law states. The Irish Tax Commissioner has confirmed Apple has been totally transparent and met all its obligations

So what is going on here???

The European Commission does not like the Irish tax system as it encourages businesses to invest through Ireland (rather than the other European countries that have higher tax rates). Therefore it has stated that Ireland granted undue tax benefits to Apple which it claims is illegal under EU state aid rules. SO it is not Apple that has done anything wrong according to the EU (as shown by the fact that it clearly states there is no penalty on Apple), but rather the EU thinks Ireland has been naughty by having low tax rates.

So it appears that even though Apple complied with all of Ireland’s tax laws, and Ireland does not want the additional tax from Apple, the EU are requiring Ireland to get the additional tax from Apple.

That’s easy to understand?!?!?!

Sorry about not blogging for a while. But nothing has happened… almost.

But now we have a parliament again, tax policy has started and I promise to keep up. So here are what the Government has provided in the last week…

Treasury Laws Amendment (Income Tax Relief) Bill 2016

Boring… In this Bill the threshold at which the 37% individual tax rates starts increases on 1 July 2016 from $80,001 to $87,000.

The Commissioner has also released new PAYG withholding tax schedules that employers must be using by 1 October 2016. But if the employers forget, employees who don’t understand the withholding system will be happy at tax return time as they get a larger refund. I have always wondered if a varied a taxpayer’s withholding to 100% if they would finally work out a tax refund when you lodge your return is because you made an interest free loan to the Government???

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

This is huge as it increases the turnover threshold for a small business entity from $2 million to $10 million (the SBCGT threshold stays at $2 million… Darn). This means more entities can use the small business Rollover or the $20,000 instant asset write off. Awesome!

This Bill also reduces the company tax rate over a series of years. from July 2016 the company tax rate for all small business entities is 27.5%. But note that it is not just a turnover test, the company needs to be carrying on a business.

And this is the mistake in the law. Each year going forward the turnover test for accessing the 27.5% rate increases. For example, the turnover test is under $1 billion in the 2022/23 year. BUT THE BUSINESS TEST IS RETAINED.

This means if your listed company has turnover of $900 million in 2022/23 your tax rate is 27.5% but if my small investing company with seven woolworth shares only that my Dad gave me is taxed at 30% as it is not carrying on a business. What were they thinking?

Franking is a bit weird as well. All franking is at 27.5% unless in the turnover in the prior year is greater than the current year threshold. If this is the case you can frank at 30%. Effectively, the operation of imputation system for corporate tax entities will be based on the company’s corporate tax rate for a particular income year, worked out having regard to the entity’s aggregated turnover for the previous income year.

The Bill also changes the rate of the small business income tax offset to take into account of the reduction in the company tax rate. From 1 July 2016 the rate of this offset increases to 8%. But by 2026/27 the rate of the offset is 16%. This is ridiculous when you realise the offset is capped at $1,000. So if I am a sole trader and I earn more than $6,250 from my business (a massive amount), 16% of this is more than $1,000 and the cap limited the benefit of the offset.

Budget Savings (Omnibus) Bill 2016

This Bill reduces the rate of the R&D Tax Incentive by 1.5%. As a result, for large companies (greater than $20m turnover) the benefit of the offset is only 8.5% of the R&D expenditure. At its worst the R&D Tax Concession was worth 7.5% (125% x 30%) but you could claim so much more then

The second change in the Bill is “Single Touch Payroll”. this will require you, from 2018, to tell the Commissioner:

• Withholding amounts on payments to these employees on or before the day by which the amount is required to be withheld;
• Salaries and ordinary time earnings amount on or before the day on which the amount is paid; and
• Superannuation contribution information on or before the day on which the contribution is paid.

When this information is provided the employer will not need to report these amounts, or summaries of these amount, at any other time of the year.

This Bill also will allow employees to make choice of superannuation fund or request a TFN on the ATO website, and the ATO will inform the employer – Excellent.

When I was interviewed for a job with the Labor party  I was asked whether I had ever voted for John Howard. It was a joke question and they did not expect me to answer, but I did.

“Of course”, I said confidently, “he has had a better tax policy for some time.”

This Saturday I will vote based on tax policy. Sounds a bit strange. I think that if you fix the revenue side of the income statement, the expenditure side will fix itself (I hope). If you have a simple, efficient, adequate and equitable tax system, you will have the money to pay for what is important, and you won’t have the money to pay for what is not important so soon enough people will stop borrowing to pay for unimportant things (I hope).

So what do we have for this election. Lets summarise the tax policies of the two real options.

What they both agree on…

• All the Super changes in the recent budget.

Yes, while they won’t admit it, the Labor party have taken all the savings in the recent budget made from the super changes… Every single dollar. They say they “might” vary them but only if they raise the same amount of money. So you could vote on who is more likely to back down and remove the retrospective nature of the $500,000 lifetime cap but I am unsure who that would be.

• Company tax cuts for businesses under $2 million.
• Reducing the R&D tax offset by 1.5%
• Minor changes to the personal tax rates at $80k
• Employing more ATO officers to go after multinationals

What Labor is offering…

• Negative gearing (offsetting the interest losses against slurry and wage income – not other income) gone for all new assets unless they are new residential property.

Yes that means if you borrow, buy shares and the shares pay no dividends in a year you can’t claim the interest as a deduction.

• 50% discount become a 25% discount

What I love about the Labor policy to limit negative gearing and the 50% discount is they say it will fix housing affordability and is not just a money grab. So how will reducing the 50% discount on shares and stopping negative gearing on shares fix housing prices? This is just a money grab.

• Keeping the temporary deficit levy so that the highest marginal rate remains at 49%

Lets hope they keep the name so we have a “temporary” deficit levy for many decades to come.

• Capping of tax deductions for managing tax affairs

What the Coalition is offering…

• Company Tax rate changes

But don’t trust any promise more than 3 years away as there will be another election before then. However, the Coalitions company tax rate changes will mean small businesses with less than $10 million turnover benefit, rather than $2 million for Labor.

• Change to SBE definition to $10 million

Not for the Small Business CGT Concessions but this will increase who can get the $20,000 instant asset deduction for one year.

• Div 7A changes

This will be amazing but won’t happen till 1 July 2018 (10 year loans, repayments and interest only due at 3,7 and 10th year, UPEs not loans…)

• GST on all low value imported goods
• Simplified BAS for small businesses (just two labels)

Summary

So almost no difference at all other than the discount and negative gearing changes. But I am tempted to vote for the Coalition just on the Division 7A changes, but this is more an administration issue rather than fixing the revenue side of the income statement.

So I might just buy a sausage sandwich before I go in to vote and see where the tomato sauce lands…

In the 2014/15 Budget the Government announced they would reduce the tax offset rate for the R&D Tax Incentive by 1.5%. This Bill was introduced in 2015 and has since been blocked by Labor and the cross benchers in the Senate.

But, over two years later, Labor has just announced if it wins the election it will pass this reduction to the rate of the offset.

And a timeline…

• When I first claimed the R&D concessions it was a 150% deduction for R&D expenditure – which at a 30% company tax rate is a 15% return on any R&D expenditure.
• It then got reduced to a 125% deduction for R&D expenditure – which at a 30% company tax rate is a 7.5% return on any R&D expenditure.
• It then got changes to, for the big end of town, a 40% tax offset, which at a 30% tax rate is a 10% return on any R&D expenditure.
• It then got capped to only $100 million of R&D expenditure per group per year.
• And now, irrespective of who wins the election, for the big end of town it will be a 38.5% tax offset, which at a 30% tax rate is an 8.5% return on R&D expenditure.

But it is worth remembering the policy for the 1.5% reduction in the 2014/15 budget was due to the company tax rate dropping by 1.5% to 28.5% for small businesses (which happened on 1 July 2015). If the Coalition wins the company tax rate for small businesses from 1 July 2016 will be 27.5%. So it is likely a coalition government will reduce the offset rate to by another 1%.

At its worst, the R&D Tax Concession was an uncapped 7.5% return of R&D expenditure. Soon it will be a capped 8.5% return on R&D expenditure, and there is a good chance it will drop again to a capped 7.5% return on R&D expenditure…

Around in circles we go.

FYI, for the small end of town, for companies with a turnover of less than $20 million, the current rate is an offset of 45% but this will reduce to 43.5%.

I am working in Honiara for the Solomon Island government and I was asked to look at the Sales Tax Act.

It states there is Sales tax of 50 cents a movie ticket… Except there are no movie theatres in the Solomon Islands. 

There are only 17 “prescribed goods and services” in the Sales Tax Act, and one does not exist…

There are concerns about the “backpackers tax”. This was a change announced in the 2015/16 Budget that would deem people working in Australia on holiday visas to be non residents for tax. As a result they would be taxed at 32.5% from the first dollar they earned, rather than being able to apply the tax free threshold of $18,200.

But what no one seems to want to engage with is that these backpackers have been, are already, and will be tomorrow, non resident under the current law. Without any change in the law almost everyone of these backpackers should already be paying tax like a non resident.

Back in early 2015 there were three test cases that considered if backpackers on working holiday visas were tax residents. As they don’t have a domicle in Australia and have no long lasting connection with Australia, the only hope for these taxpayers was that they could pass the “183 day” test of residency.

In all three cases the AAT found they were not residents (Clemens and Commissioner of Taxation [2015] AATA 124, Jaczenko and Commissioner of Taxation [2015] AATA 125, Koustrup and Commissioner of Taxation [2015] AATA 126)

Each stayed for more than 183 days but as none had a “usual place of abode in Australia” as required in the 183 day test (which of course they did not as they were backpacker), they were not residents and were subject to the non resident tax rates of 32.5% from the first dollar with no tax free threshold.

Therefore, there is no need to introduce a backpackers test. The Commissioner should apply the law as interpreted by the Courts and start taxing backpackers on working holiday visas as non residents! Yes I know the AAT is not a Court so maybe they should fund an appeal to the Federal Court but I understand why he did not fund an appeal as the Government had just announced they were going to remove any doubt by changing the law. I guarantee the Federal Court will uphold the decision of the AAT (note that the decision in the AAT was made by Professor R Deutsch, who probably wrote the tax textbook you have sitting on your shelf… What do you mean you don’t have tax textbooks on your shelf?)

Once again, journalist just accepting the word of lobbyists…

There are a number of changes that are going to make advising high wealth/income clients to use super very hard.

Lets start with transition to retirement pensions. People have been recommending staring these TTR pensions as soon as you turn 55 but make sure you salary package the amount back to your super fund. You end up with the same income (pension replaces salary packaged super) but you pay less tax (marginal rate vs 15%). But from 1 July 2017 TTR pension income will be taxed at 15%.  This means it is now marginal rates vs 15%+15%. Still a benefit, but if the client has income over $250,000 we also get the Division 293 tax – so it is marginal rates vs 15%+15%+15% or 49% vs 45%. Almost no benefit at all in this!

Many high wealth/income individuals will have already put $500k of non concessional contributions away. So the new lifetime cap will mean this is no longer an option. And if they have not done $500k of non concessional contributions yet, this will often be just a once only contribution.

Salary packaging super will also be limited with a $25,000 concessional cap limit from 1 July 2017. If the high wealth/income client has a salary of $200k, their employer will have already put away $19k in SGC. That just leaves them $6,000 to salary package into super to stay under the cap. So packaging them to the $25,000 cap will save $2k in tax, and this reduces to $1k if they are subjected to Division 293 tax (greater than $250k income).

Division 293 tax applying from $250k rather than $300k will mean (a few) more taxpayers will have an effective contribution tax of 30%. But this won’t make much of a difference.

And finally, the change that will really cause problems. From 1 July 2017 the total amount of superannuation that can be transferred into retirement phase will be capped at $1.6 million. If you build up more than that in super, you have to keep it in accumulation (taxed at 15%) or take the amount out as a lump sum (which if you invest will be taxed at marginal rates).

But maybe you can advise lower income/wealth clients.

From 1 July 2017 taxpayers with balances under $500k in super can use up any unused concessional contribution caps in the prior 5 years. This could mean you could salary package lots in a year for someone who has a low super balance.

Also, it was announced that from 1 July 2017, the current 18% tax offset of up to $540 for low income super balances will be available for any individual, whether married or defacto, contributing to the super account of a spouse whose income is up to $37,000. So you might advise spouse contributions – but for a $500 benefit only?

In the end, the current advice of salary package super (limited and less benefit), lots of  non concessional contributions (very limited), use a TTR (very limited benefit) and at the end a tax free income source (limited as well) is all changed.

A brave new world for super advisors…