COMPANY NEWSLETTER | May 2023 issue
In this edition:
Budget: The tax profession delivers its verdict
ATO crackdown focuses on rental properties, work claims & CGT
Aussie small business owners fare worse than peers overseas
How DPNs can haunt directors even when a company is defunct
Budget: The tax profession delivers its verdict
Experts from across the industry pronounce judgment on the Treasurer’s centrepiece during uncertain times.
The tax industry has been underwhelmed by a budget long on cost-of-living measures and compliance but bereft of big picture tax reform and with some devil in the detail.
CPA Australia senior policy manager Gavan Ord said the federal government had struck a balance between cost-of-living relief and not overheating the economy but had largely overlooked one vital sector.
“It’s a prudent budget but there’s no long-term vision – it’s very much a budget for addressing short-term challenges,” he said.
“The surplus has allowed the government to delay some hard decisions. It’s dealing with immediate issues. We’re still waiting for that vision from the Treasurer around how he wants to use our tax system to make Australia a more productive and successful economy.”
BDO tax technical leader Lance Cunningham said the government could afford to focus on relief and just tinker with tax at the edges.
“They’ve got a surplus, so they don’t really have to talk about increasing taxes or changing taxes too much,” he said. “So they’re kicking that can down the road till next year when they’re expecting to get back into deficit.
“I wouldn’t even be surprised if we’re not going to see a lot right through this term of government on the assumption they get back in for a second term.”
CA ANZ senior tax advocate Susan Franks said the revenue side of the budget relied heavily on enhanced compliance activity by the ATO “in the absence of any real tax reform to address ongoing structural funding problems”.
“The measures indicate the government will be working the tax system harder to extract more revenue from those the ATO considers to be non-compliant,” she said, with $9.1 billion in revenue expected to be raised through extending the personal income tax compliance program, the GST compliance program and revamping the Serious Financial and Serious Crime taskforces.
“The key question for the Treasurer is will the Albanese government have the courage to take an ambitious tax reform agenda to the next election?”
IPA general manager of technical policy Tony Greco more money for compliance meant more time spent by members dealing with the ATO.
“When there’s more money given to the ATO that means more interactions, that means more requests for information, that means more scrutiny that can lead to adjustments, and our members get caught up in that sort of process.”
“Those fishing expeditions could or could not result in adjustments but generally based on the data they have, it looks like Treasury decided it’s an easy target.
The budget papers specify two of the key targets as short-term rental properties “to ensure they are genuinely available for rent” and GST, with compliance activity expected to reap $7.6 billion over five years funded by $589 million extra to the ATO to help it “develop more sophisticated analytical tools to combat emerging risks to the GST system”.
Most observer lamented discontinued programs that help small business and Mr Ord said the sector had been largely overlooked.’
A $20,000, one-year instant asset write-off was “better than nothing” but not as good as full expensing, which ends this financial year. “It’s a temporary measure – it should be permanent,” he said.
Mr Greco said the timing would cause a stampede to qualify for the full expensing write-off before the end of the June while Mr Cunningham said both the $20,000 instant asset write-off and energy incentives for small business were “good things” but relatively modest initiatives.
Mr Cunningham also highlighted changes for the build-to-rent sector, with an increase to the capital works depreciation from 2.4 per cent to 4 per cent per year and a reduction in the withholding tax rate managed investment trusts from 30 per cent to 15 per cent, bringing the rate into line with other MITs.
Grant Thornton tax partner Vince Tropiano said two programs that merited continued support had been discontinued, and the instant asset write-off changes tightened the eligibility criteria.
“The threshold to be able to claim it has been reduced to companies with $10 million turnover or less, and that’s one that we would have liked to have seen continue for companies of all sizes, not simply for small or medium business,” he said.
“Coming out of the whole COVID market, there’s still challenges there.”
“The other one I was disappointed to see was the removal of the loss carry-back rules, that winds up being 30 June 23. That’s where companies can, if they make current year losses, claim them against other income years over the last three years.”
“I think it’s a useful one to support business.
H&R Block director of tax communications Mark Chapman said most of the budget “heavy lifting” was done on the spending side with programs to boost incomes for the lowest paid and most vulnerable.
“Increases in JobSeeker for all claimants, a package of rent assistance for those on low incomes, energy bill relief and a huge boost to Medicare will all be welcome,” he said.
“But there was no news about the Morrison government’s Stage 3 tax cuts – which remain legislated to come into effect on 1 July 2024 and which will largely benefit the most wealthy.
“There was no reprieve also for the Low and Middle-Income Tax Offset, which expired last year and leaves millions facing an effective tax increase in the current year of up to $1,500.”
ATO Crackdown focuses on rental properties, work claims & CGT
A trio of targets will get special scrutiny this year and the offices expects to issue fewer refunds.
An ATO crackdown this year will focus on three areas where mistakes are “common”, and it expects to issue fewer refunds and leave more taxpayers in debt.
Rental property deductions, work-related expenses and CGT have moved to the top of the ATO hitlist and it warns accountants that landlords, those working from home and investors will be subject to extra scrutiny.
“Within these areas we have identified common mistakes and are particularly focused on addressing these and supporting taxpayers and registered tax agents to get their claims right this year,” ATO Assistant Commissioner Tim Loh said.
“We expect fewer people will receive a refund or may receive smaller refunds than they were expecting, and more may have tax debts to manage.”
Mr Loh said nine out of 10 rental property owners were getting their returns wrong with errors such as omitting rental income, overclaiming expenses or claiming for improvements to private properties.
With 87 per cent of landlords using tax agents to prepare their returns, the ATO said its analytics systems could now highlight residential property loans along with other rental data.
“We encourage rental property owners and their registered tax agents to take extra care this tax time and review their records before lodging their return,” Mr Loh said.
The ATO was especially concerned to ensure rental property owners understood how to correctly apportion loan interest expenses where part of the loan was used for private purposes.
“You can only claim interest on a loan used to purchase a rental property to earn rental income,” Mr Loh said. “If your loan also includes a private expense, such as for a new car or a trip to Bali, you can only claim an interest deduction for the portion relating to producing your rental income.”
On work-from-expenses, the ATO abolished the shortcut method of claiming last July and introduced a fixed-rate method with a 67c-an-hour deduction in a revised regime with more stringent record-keeping requirements. The alternative remains the actual cost method.
But the changes, which involve keeping daily logs of hours worked at home from 1 March, came mid-way through the tax year and are expected to blindside many who claimed during the pandemic.
Mr Loh said more people were now back in offices and taxpayers should avoid the temptation to cut and paste claims from previous years. Complying with the eligibility and record-keeping requirements was essential.
“We continue to see shifts in the way Aussies are working and it’s important to consider whether your claims reflect your working arrangements this year,” he said. “We know a lot of people are working back in the office more compared to last year.”
“Keeping good records will give you flexibility to choose the right method that suits your circumstances and gives you the best deduction.”
Last year’s tax crackdown on crypto has morphed into a broader concern over CGT events for a wide range of assets.
The ATO said CGT applied to any disposal of shares, managed investments, properties and, of course, crypto.
“To ensure you are meeting your obligations and paying the right amount of tax, you need to calculate a capital gain or capital loss for each asset you dispose of unless an exemption applies,” the ATO said.
Mr Loh said main residences were generally exempt unless “you have used your home to produce income, such as renting out all or part of it through the sharing economy, for example Airbnb or Stayz, or running a business from home”.
Taxpayers were required to keep records of the income-producing periods and the portion of the property used to produce income to calculate capital gains.
“Don’t fall into the trap of thinking we won’t notice if you sell an asset for a gain and don’t declare it,” Mr Loh said.
Aussie small business owners fare worse than peers overseas
Local entrepreneurs report lower overall life satisfaction than comparable nations, a Xero survey reveals.
Australia’s small business owners fare worse than their counterparts overseas when it comes to wellbeing, research by Xero finds.
Its survey showed small business owners in the US, Canada, New Zealand, Singapore and South Africa had higher levels of life satisfaction than those in Australia, who came above only the UK respondents.
This was despite just one in six Australian small business owners experiencing financial stress – a figure lower than most of the other countries surveyed.
Xero Australia country manager Will Buckley said the research showed Australian small businesses owners needed more support.
“The stress on business owners to manage different challenges is taking its toll on individuals so we should be continually looking at ways to ease some of the burdens in order to help small businesses thrive,” he said.
The research also highlighted differences between younger and older small business owners, with all seven countries showing those under 30 were more likely to be experiencing financial distress and concern over their employees' wellbeing.
Other contributors to small business owner wellbeing included work stress spilling over into personal lives; the ability of a small business owner to take time to rest and recover; undertaking fulfilling work; and access to affordable counselling or peer support.
The chair of small business organisation COSBOA, Matthew Addison, welcomed the report as shining a light on the pressures his members faced during “years of uncertainty and an increasingly volatile operating environment”.
“The demands placed on small businesses have increased significantly and it is important to understand the toll on their health and wellbeing,” he said.
“For small businesses to have the best chance to thrive, governments and policy-makers must prioritise changes that make doing business seamless and easy, to reduce the load on small business owners.”
The chief community officer at welfare organisation Beyond Blue, Patrice O’Brien, urged owners who were struggling to seek support.
“Running a business can be stressful at times and we see all too often the pressures it can put on small business owners and their families,” she said.
She said Beyond Blue’s NewAccess for Small Business Owners program was run by mental health coaches with a small business background who understood the unique challenges.
“The program helps equip Australians with tools and healthy coping strategies to manage the everyday stressors of running a small business,” she said.
The survey quizzed 4,600 small business owners, including 900 from Australia, from November 2022 to February 2023 and used the World Health Organisation’s Five Well-Being Index framework. The survey encompassed Australia, Canada, New Zealand, Singapore, South Africa, the UK and the US.
How DPNs can haunt Directors
ASIC might have deregistered the business, but its tax debt remains on the radar of the ATO.
“How can the ATO issue a director penalty notice for a deregistered company?" That was the question a perturbed former company director asked me.
The background to this conversation was as follows:
The company ceased trading a few years ago.
It had no assets.
There was legacy ATO debt of approximately $180,000 relating to unpaid BAS, SGC, penalties and interest.
The annual ASIC review fee had not been paid for several years.
ASIC subsequently took steps under section 601AB(1A) and (1B) of the Corporations Act 2001 to deregister the company. A year after the company was deregistered, the ATO issued the DPN.
The practical effect of a non-lockdown DPN is to give notice of the personal liability of the directors for certain company tax debts incurred and owing (eg, GST, SGC, PAYG). Personal liability is only remitted if, within 21 days of its issuance, the directors cause the company to pay the debt, the directors pay the debt personally, or they place the company into external administration (ie, liquidation, voluntary administration or small business restructuring).
In this instance, due to at least one year’s annual review fees remaining unpaid for over 12 months, ASIC took steps to deregister the company. The effect of deregistration is that a company no longer exists as a legal entity, and any property held immediately prior to deregistration vests in ASIC or, if held on trust, such property vests in the Commonwealth.
When the directors ceased trading the company some years back, they paid all debts except (and as is often the case) the outstanding ATO debt. Upon ASIC’s notice to deregister the company, the directors naively believed that once the company was deregistered the debt would not be owed as the company would no longer exist. Because of this, they willfully ignored the ASIC review fee requests.
What the directors were unaware of was that the ATO reference tax debts to an entity’s ABN. Company deregistration has no effect on an ABN status (nor the deregistered company’s underlying debt, which remains due and payable). ABN holders must apply to the ATO to cancel an ABN, and the ATO will not oblige when tax debts are owing. In this case the ATO, through its debt collection process, issued the DPN in relation to tax debts incurred prior to company deregistration.
Options available to the directors
First, paying the tax debt was ideal; however, $180,000 was not within their financial means.
Second, they could appoint an external administrator, however as the company was no longer registered, this was not possible.
Third, they could apply to ASIC to reinstate the company, so it is taken to have continued in existence as if it had not been deregistered and is subject to all of the Corporations Act requirements. This is referenced in ASIC Regulatory Guide 83, which includes the following:
ASIC may reinstate a company’s registration under section 601AH(1) of the Corporations Act if satisfied that the company should not have been deregistered.
ASIC may also reinstate a company’s registration under section 601AH(1A) if the company was deregistered under section 601AB(1B) and ASIC receive an application for reinstatement and payment of the company’s outstanding fees and related penalties.
A person who was a director, secretary or member of a company at the time of deregistration, or a third party, may apply to ASIC for reinstatement of a deregistered company. Reasons and supporting documentation must be provided to support the view that the company should not have been deregistered.
Fourth, they could apply to the court for the reinstatement of the company, Regulatory Guide 83 states: “Regardless of whether ASIC can reinstate a company, an application may be made to a court for reinstatement. This is referred to as a ‘court reinstatement’.”
Finally, they could do nothing and allow the DPN to “crystalise” thereby crystalising their personal liability of $180,000 (on a joint and several basis).
In considering the above options, the concern was less about whether ASIC would reinstate, but more so on the timing. The DPN’s 21-day deadline made it highly unlikely that ASIC would reinstate the company within this time frame. Several days had already been lost in seeking advice on this matter.
The more certain, but significantly more costly route, was as an urgent application to court for the company’s reinstatement, coupled with a request to appoint a liquidator. The downside of course was the legal costs which ran into many thousands of dollars – exacerbated by the fact that the application was urgent. Of course, not to mention the personal stress involved.
Take-home
DPNs are the poison chalice used by the ATO as part of its debt collection strategy. As illustrated above, clients who live in a space of denial will pay a far greater price in the end.
If a company is insolvent, particularly where the ATO is a creditor, serious consideration should be given to appointing a liquidator to wind up the company’s affairs and address the directors’ personal exposure to the ATO, at least in respect to non-lockdown DPN liabilities.
This real-life example is good reason for thinking carefully before allowing a company to be deregistered by ASIC.
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