Tax & ATO News Australia

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Retrospective Changes to Small Business Concessions

 My last rant measured expression of my opinion was only one small voice amongst many people criticising the Federal Opposition attach on franking credit refunds. Now it is time to show I have no political bias and turn the same criticism on the Federal Government for their proposed small business changes, which are arguably far worse, particular for individual small business owners who have just sold their business, or are about to do so.


Every so often something arises that has a less obvious impact but potentially poses far greater damage for individuals. That is currently demonstrated as the proposed changes to small business concessions which were announced in February.


The issue is that for a number of years various generous concessions for selling small businesses have been available as compensation for business owners not having been able to save for their retirement. To qualify (and this is grossly over-simplifying) they must have net assets of less than $6mil or turnover under $2mil.


In May 2017 the govt announced it would be cracking down on aggressive strategies with an integrity measure to ensure the small business concessions were appropriately applied. However, the February 2018 draft legislation proposed retrospective measures that went far beyond the scope of the previous announcement. These issues will affect future and past business sales in ways no ever realised and we sincerely hope it won’t become legislation. The restrospectivity of these changes means that they operate for businesses that were sold after 1 July 2017 – some 9 months before the legislation was drafted.


The proposed legislation includes 4 new criteria to be satisfied, the draft legislation repeals s 152-10(2) of the Income Tax Assessment Act 1997 (the ITAA 1997). In substitution, it inserts a new s 152-10(2). The conditions of the new subsection are:

 

  1. a stricter active asset test
  2. if a taxpayer relies on the CGT small business entity test to qualify for the SB concessions, they must be carrying on a business just before the relevant CGT event
  3. the company or trust in which the shares or units are being sold (the object entity) must be carrying on a business just before the CGT event, and
  4. the object entity must itself either satisfy the CGT small business entity test or a modified $6m maximum net asset value test.


Whilst some of the changes are sensible, such as preventing a person from using the small business concessions to shield a capital gain on shares or units by becoming a CGT small business entity (ie by starting a new, unrelated business) later in that income year. Others are very concerning, in particular the changes that will have retrospective application to periods prior to 1 July 2017, by virtue of the application of the modified active asset test (which looks back at the history of ownership of the relevant shares or units).


In circumstances where the ATO can, and has, applied Part IVA to the real mischief that this proposed legislation targets, it really is unclear why it was needed, and why it went so far, and why it applies retrospectively.


Both Vincees of Government must do better than this. It leads to far too much uncertainty and a serious lack of confidence.

 


 

Posted in: Tax & ATO News Australia at 20 March 18

Franking Credit Proposed Changes

Politicians just cannot help mucking around with tax laws. I am not the first person to talk about this, and right now I am obviously not the only person, as the Federal Opposition’s latest thought bubble on refunding franking credits is roundly and rightly criticised.


In the interests of fairness and balance, I want to talk about another ill-thought out and retrospective proposed change which the current Federal Government is planning to make to small business concessions. But before I do that, just one quick comment in relation to the Opposition’s franking credit problem that I have not seen anyone make. Bear with me – this is a bit mathsy:


The Opposition’s proposal is that the government will stop drawing cheques to people who receive franking credits in excess of their taxable income. Practically, as has dominated the press in recent days, this targets self funded retirees who received franked dividends from companies, but do not have large taxable incomes because they are receiving tax-free superannuation pensions. The theory apparently being, well hey, they are not going to vote ALP anyway. So far, so cynical. And to someone who doesn’t understand how franking credits work, it kind of makes sense: why should the Government be sending out cheques to all of these wealthy old people?


But here’s the rub – there is absolutely zero difference to the budget bottom line whether a rebate is represented by a payment from the government or a reduction in tax payable by a tax payer. In either case, this is money that government does not have.


To give you the example, take two people: Vince a self funded retiree with a self managed superannuation fund with $1,000,000 of Australian blue chip shares in it, and a Federal Politician with a randomly selected salary of $375,588 per annum and the same number of shares. We’ll call him Bill. Let’s ignore Bill’s perks and any other tax breaks – I have never acted for a Federal politician in a tax matter, and frankly I’m happy to keep it that way.


Vince receives fully franked dividends of $50,000 per annum. The way franking credits work is that is cash of $35,000 and franking credits of $15,000. Vince therefore has pension income of $50,000, from which he is exempt from tax. Under the current system the franking credits are refunded to him, so he gets $15,000 from the Federal Govt. This is what the Opposition wants to stop.


Bill on the otherhand is on the top marginal tax rate. He pays lots of tax – if you ignore his fully franked dividend of $50,000 (same as Vince’s) he pays $142,246.60 in tax (before medicare levy). But watch how Bill’s full franked dividend of $50,000 is treated. He gets the same amount of cash - $35,000. But as a result of the franking credit, his tax bill only increases to $149,746.60. If he didn’t get the franking credit, his tax would have been $164,746.60.


In other words, Bill gets the full use of the Franking Credit, because he pays $15,000 less tax than he otherwise would, whereas Vince misses out on the benefit completely. Put in reverse, the Federal coffers pick up $15,000 from Vince, the pensioner on $35k per annum, but don’t get the $15,000 from Bill, the politician on $275,746, after tax.

 

Not very fair is it?


My good intentions of providing balance must be sacrificed on the altar of brevity. I have already gone on too long. I will criticise the Government in Part 2.
 

Posted in: Tax & ATO News Australia at 19 March 18

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Author: David Hughes

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