Land owned before CGT, but can a recent house built on it be CGT-free?

Naturally, a taxpayer will assume that when they build a house, that building will not qualify for CGT exemption until it becomes that taxpayer’s “main residence”.

There is however a section of the regulations that allows that taxpayer to extend the period of the main residence exemption so that this is initiated during the period when they are building or repairing the dwelling and not living in it. A recent Tax Determination (TD 2017/13) deals with this.

In part, this is enabled because the term “main residence” is not clinically defined in the legislation.

The ATO provides the following general guidance on the factors that may be relevant in working out whether a property is a taxpayer’s main residence:

– the length of time you live there – there is no minimum time a person has to live in a home before it is considered to be their main residence

– whether you and your family lives there

– whether you have moved your personal belongings into the home

– the address to which your mail is delivered

– your address on the electoral roll

– the connection of services (for example, phone, gas or electricity)

– your intention in occupying the dwelling.

Generally, a mere intention to construct or occupy a dwelling as the taxpayer’s main residence – without actually doing so – is not sufficient to categorise the building as the taxpayer’s main residence.

The wiggle room with regard to the extension of the CGT-free period has to do with subsection s118-150(2), and a choice that can be made under this subsection. This can allow the taxpayer to treat the property as their main residence for CGT purposes prior to moving in, while the construction or renovation work is still being completed.

 

 

Company tax reduction franking implications

The recent cut to the tax rate for incorporated businesses that turnover less than $50 million a year, while generally welcomed, can bring with it some important considerations when it comes to distributing franked dividends.

The rate change to 27.5% is to be staggered, starting with companies that turnover up to $10 million a year, with retrospective effect from July 1, 2016. It will then apply to companies turning over up to $25 million in 2017-18, and to $50 million turnover companies for 2018-19.

Note: These tax cuts only apply to companies that actively “carry on a business”.

From 2016-17, a company’s maximum franking will be based on the company’s corporate tax rate for a particular income year, worked out having regard to the company’s aggregated turnover for the previous year.

This is because a company will not know its aggregated turnover for the year in which it pays a dividend (and therefore its corporate tax rate for the year) until after the end of that year.

Note that the ATO has issued a “practical compliance guideline” on this matter. Read it here.

How this works
In the 2015-16 income year, Company ABC has an aggregated turnover of $9 million. In the 2016-17 income year, its aggregated turnover increased to $11 million.

Therefore, for the 2016-17 income year, Company ABC will have:

– a corporate tax rate of 30% (having regard to its aggregated turnover of $11 million in the 2016-17 income year)

– a corporate tax rate for imputation purposes of 27.5% (based on an aggregated turnover of $9 million in the 2015-16 income year), and

– a corporate tax gross-up rate of 2.64 — that is, (100% – 27.5%)/27.5%.

As a result, if Company ABC makes a distribution of $100 in the 2016-17 income year, the maximum franking credit that can be attached to the distribution is $37.88 — that is, $100/2.64.

Possible broader impact on shareholders
Companies will benefit from the rate cuts provided that the funds are retained. However the tax burden will be shifted to the shareholder upon distribution of a franked dividend.

Australian resident shareholders will pay more top-up tax on dividends received from companies eligible for the tax cuts as the company tax rate decreases.

Ultimately, the total tax liability on the company’s pre-tax profits will still be at the shareholder’s marginal rate, but a greater proportion of the burden will shift from the company to the shareholder over time. As the table below shows (very small amounts shown for ease of calculations) the net cash received in relation to the dividend will remain the same.

 

Company-aggregated turnover below $50m	2015	2030
Company pre-tax profit	$100	$100
Company tax rate	30%	25%
Franked dividend received	$70	$75
Franking credit (100% franked)	$30	$25
Total assessable	$100	$100
Gross tax payable (marginal rate 37%)	$37	$37
Less: franking credits	($30)	($25)
Top-up tax payable	$7	$12
Net cash received (dividend received less tax payable)	$63	$63

ATO guidance
Note that the ATO has recently issued a Practical Compliance Guideline covering small business over-franking in the 2016-17 income year because of the tax rate change initiated by the government’s Enterprise tax plan.

The guideline (read it here) sets out a practical compliance approach that corporate tax entities may choose to use to inform shareholders of the correct amount of franking credit attached to their distribution. “The approach may reduce compliance costs for corporate tax entities by providing an alternative to seeking an exercise of the Commissioner’s discretion to allow amendment of distribution statements,” the ATO says.

 

 

Are you withholding enough for car allowances?

Employers need to remember that if they pay staff a car allowance, they need to withhold tax on any amount they pay that is more than 66 cents per kilometre (from July 1, 2015). If they haven’t been doing this, it may be an idea to start now to avoid their employees being saddled with a tax debt.

Even though the 66 cents amount was legislated in September 2015, the amount applies retrospectively from July 1, 2015.

Businesses should also be reminded that they may need to consider pre-existing car allowance arrangements that have remained unchanged for this financial year.  Employers may be best advised to enquire with relevant employees whether they would prefer to increase the withholding amount for the remainder of the financial year to cover any possible shortfall.

Of course the government abolished quite a while ago the one-third of actual expenses method and 12% of original value method, leaving the cents per kilometre method (still with a 5,000km cap) and the logbook method (with unlimited kms).

There is no change to the principle that work related car expenses are deductible, and no impact on salary packaged cars. For more on withholding for employee payments, see this ATO web page. And for help and guidance on varying the amounts withheld, see here.

 

 

Have you heard of Manage ABN Connections? If not, you soon will

Manage ABN Connections is a new way for business to access government online services using their myGov login. It can be used from mobile devices, but does not provide additional services to business nor change the levels of access.  It is a new secure login alternative for government online services. Here is a list provided by the Australian Business Register.

Government online services you can access via myGov
Department	Online service
Business.gov.au	Business.gov.au Self-Service Authorisation Portal A whole-of-government service that allows you to set authorisation attributes that define what users are allowed to do at participating websites.
Australian Business Register (ABR)	Australian Business Register Credential Manager Users can manage their AUSkey. Administrator AUSkey holders can manage other AUSkeys for the business.
Australian Taxation Office	Access Manager Enables administrators to set up access and permissions to the ATO’s portals and SBR services.
Australian Taxation Office	Business Portal A gateway to ATO’s online services for business.
Australian Taxation Office	Departing Australia Superannuation Payments (DASP) online system Superannuation industry funds, self-managed super funds and Retirement Savings Account (RSA) providers and their administrators can access online applications submitted by their members or lodge applications on their members’ behalf.
Department of Education and Training	Unique Student Identifier (USI) Organisation Portal Used by registered training and education organisations, and related bodies to create, verify, find, and update unique student identifiers.
Australian Financial Security Authority (AFSA)	Australian Financial Security Authority Online Services Creditors can log in to apply for, submit and track bankruptcy notices.
Department of Health, Australian Government	Hearing Services Program Access an online portal that supports the voucher component of the Australian Government Hearing Services Program.
Australian Trade and Investment Commission (AUStrade)	Export Market Development Grants (EMDG) Online Application (AUStrade) An Australian Government financial assistance program for current and aspiring exporters.
Australian Prudential Regulation Authority (APRA)	Australian Prudential Regulation Authority (APRA) Extranet Logon Page A portal for regulated institutions to report data to the Australian Prudential Regulation Authority.
Australia Communications and Media Authority (ACMA)	Broadcasting Licence Fees ePort Login Holders of commercial radio and commercial television broadcasting licences can lodge their broadcasting licence fee return to ACMA online.
Department of Health, Australian Government	Forms Administration Portal Access services such as the Aged Care Benchmarking System and Online Form Submission from a central location.
Department of Industry, Innovation and Science	Automotive Transformation Scheme (ATS), AusIndustry The Automotive Transformation Scheme aims to encourage competitive investment and innovation in the Australian automotive industry.
Department of Industry, NSW Government	Education and Communities NSW Government, Training Services NSW Login STS Online is a secure portal for Registered Training Organisations to do business with State Training Services. ANP is not accessible using myGov or AUSkey, and is accessible only by authorised government agencies.
State Revenue Offices
NSW Office of State Revenue	OSR Payroll tax online services
RevenueSA, Government of South Australia	RevNet (RevenueSA online services, Government of South Australia)
Western Australian State Revenue Office	WA Revenue Online
Tasmanian State Revenue Office	Tasmanian Revenue Online (TRO)

 

 

 

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