Are you ready for the end of financial year?
The end of financial year can be a stressful time for small businesses. The Australian financial year ends at midnight on 30 June, and the new financial year begins on 1 July. At this time, all financial information is handed over to the ATO to determine the amount of tax you have payable, or refundable. The Australian tax season runs from 1 July through until 31 October, and tax agents have until 31 March to lodge all returns and information required.
Important information that should be included to assess your business obligations at the end of financial year are your profit and loss (P&L) statement, which shows your business revenue and expenses for the year, and your balance sheet, which shows a summary of all assets and liabilities for your business. At tax time, you need to account for every dollar that goes into, or out of your business. A business income return will need to be filled out, along with any deductions that need o be claimed, and any GST that has been collected and/or paid throughout the year must be claimed.
Changes for business returns this end of financial year
There have been a number of changes that have been made to business returns for the 2017 financial year, which are as follows:
$20,000 INSTANT ASSET WRITE-OFF
There have been recent changes to the Australian tax process, namely with the introduction of the $20,000 instant asset write-off. Under the 2017 Federal Budget, businesses with an annual turnover of less than $10 million are able to claim expenses of up to $20,000 worth of depreciating assets in a single write-off every financial year. For this asset to be written-off however, it must have been first used or installed in the 2016/17 financial year (i.e., from 1 July, 2016). Any asset that costs more than $20,000 cannot be immediately deducted, and will continue to be depreciated in the business asset pool. This asset write-off will be continued until 30 June 2018.
REPORTING REQUIREMENTS FOR SMALL BUSINESS RESTRUCTURE ROLL-OVER RELIEF (SBRR)
There are a number of factors that might effect the structure one chooses to initially start up their business, however, these structures might not always be appropriate or effective in meeting business needs. Restructuring is a common practice that many businesses take part in, and it generally requires a transfer of assets, which could trigger tax (including CGT) liabilities. With the introduction of the SBRR, small businesses are exempt from paying these liabilities as long as the restructure is genuine, and for an ongoing business. As well as this, the transferor and transferee/s must meet the requirements of a small business entity. Under the SBRR, the asset must not materially affect the individual who has ultimate economic ownership. It is also considered to be an active asset, and so transferees must be Australian residents, and must choose to apply the roll-over to the asset. Please note that passively held business assets may qualify, but complying funs, such as exempt entities and complying superannuation funds, are ineligible for the SBRR.
EARLY STAGE INVESTOR TAX OFFSET
Tax incentives for early stage innovation companies with high growth potential were introduced in 2015, and since then, tax offsets and CGT exemptions for investors have since been made for those who acquired newly issued shares for qualifying companies on or after 1 July 2016. Investors are ineligible for incentives if they were affiliates with the company when the shares were issued, or if they own more than 30% of the equity interests in the company. There is limited entitlement for investors which fail the sophisticated investor test. These tax incentives include a non-refundable carry forward tax offset of 20% of the total amount paid for the shares, with a maximum amount of $200,000 p.a., or $10,000 p.a. for non-sophisticated investors. As well as this, modified CGT treatment applies to shares if these are held for at least 12 months, but less than 10 years.
FOREIGN RESIDENT CAPITAL GAINS WITHHOLDING
New foreign resident capital gains withholding rules have been introduced to improve compliance, with a 10% withholding tax applying to certain property contracts entered into from 1 July 2016. This withholding tax is non-final, essentially meaning that vendors who are affected must lodge a ta return for the income year in which the CGT occurred to claim a credit for the tax withheld by the ATO under the foreign resident capital gains regime. This withholding is generally 10% of the property purchase price, and may be applied to taxable Australian real property, indirect Australian real property interests, and an option or right to acquire the two. Transactions involving any of these property purchases are a company title interest,that have a market value of less than $2 million. Please note that withholding may also apply to resident vendors, where a withholding obligation arises if the taxpayer has not provided the purchaser with documentation confirming they are not a foreign resident. Essentially, both resident and foreign vendors will be subject to a withholding from sale proceeds and will need to claim a credit for that amount in their tax return.
DISCLOSURE REQUIREMENTS FOR LIMITED RECOURSE BORROWING ARRANGEMENTS (LRBAS)
Superannuation funds or SMSFs that are generally prohibited from borrowing money to minimise risk for other assets of a fund being exposed in the event of a loan default. An exemption has been made to this rule under strict conditions. The borrowed money must be applied to the purchase of a single acquirable asset, that is held on trust, where the trustee is eligible to acquire legal ownership of the asset, and the rights of the lender against the trustee in the event of a default is limited to that particular asset. The asset must also not be subject to any charges except that of the lender. Please note that there are a number of compliance issues related to personal guarantees, and these payments may be treated as a contribution where it satisfies a liability of the fund.
IMPROVING YOUR END OF FINANCIAL YEAR
While the end of financial year might seem daunting, especially with the new changes in place for businesses, sorting out your taxes can be greatly improved through the implementation of systems which reduce the amount of work you need to do during tax time, generate an automatic audit trail, and give you a running report of your business performance. Online accounting software do just that, minimising stresses involved in keeping your documents and financial information up-to-date seamlessly throughout the financial year.