Hello, I’m Julie Abdalla, Senior Tax Counsel at The Tax Institute and welcome to Tax Time 2023. In this session we will cover some of the key changes and often overlooked provisions practitioners will need to consider this tax time.
This year, The Tax Institute has also prepared a handy Company Tax Return checklist. This checklist does not cover every single issue that you may encounter but serves as a guide to a range of issues that should be considered when preparing company tax returns.
Before we dive into some of the details, we wanted to highlight that this will be the last year for some key measures, such as the loss carry back tax offset, temporary full expensing method and the technology investment boost. We will discuss these when covering temporary business expense measures.
Australian Government Disaster Recovery Payment
Businesses that receive an Australian Government Disaster recovery payment need to understand what type of payment it is and how it affects your tax liability.
Where government grants and payments such as disaster recovery payments are included in a company’s assessable income, they should be reported at label 6Q ‘Assessable government industry payments’.
Where non-assessable non-exempt amounts have been recognised as income in the company’s accounts, these amounts should be included at label 6R ‘Other gross income’ and reversed as a subtraction adjustment at label 7Q ‘Other income not included in assessable income’.
Division 7A
Many of you may tightly mange your client’s affairs by making sure that all money taken out of your client’s company is a dividend or remuneration. However, many tax practitioners will also have clients who will access company funds in other ways. This may give rise to potential Division 7A issues that need to be managed.
Let’s have a look at some new developments and key changes of which you should be aware.
New ATO guidance
After many years, the ATO revised its position on how Division 7A applies to unpaid present entitlements or UPEs. The ATO’s view is set out in Taxation Determination TD 2022/11. Broadly, a UPE of a corporate beneficiary will be treated as a loan made to the trust for tax purposes in most cases.
The ATO position is a departure from its 2010 position. As a result, the ATO’s revised view applies on a prospective basis from 1 July 2022.
The ATO has also extended its administrative approach relating to sub-trust arrangements in Practical Compliance Guideline PCG 2017/13. The new compliance approach will permit existing sub-trust arrangements to run their full term until maturity.
Further, the ATO has confirmed that if the principal amount of the sub-trust arrangement is not paid out on maturity, rather than becoming a deemed dividend, the outstanding amount can be converted into a Division 7A compliant loan, and can be managed on a principal and interest repayment basis for a further 7 years. So, Option 1 arrangements, which are existing 7-year arrangements, will be extended to 2037 at the latest, while Option 2 arrangements which are existing 10-year arrangements, will be extended to 2040 at the latest.
Loans to shareholders and their associates
If:
- the company is a private company or a closely held corporate limited partnership;
- has a loan to a shareholder or their associate that has a debit balance at the end of the income year; and
- the recipient of the loan was a natural person, partnership or trust;
you will need to complete label N ‘loans to shareholders and their associates’ at question 8 of the company tax return. When completing the label, be sure to include the relevant code to correctly identify whether the Division 7A loans were made before December 1997, after that date, or are a mixture of both.
Division 7A discretions
As many businesses found out during the COVID pandemic, there can be circumstances that make meeting Division 7A repayment requirements difficult. With the economic outlook being uncertain, with potentially difficult times ahead, your clients may face difficulties managing their Division 7A loans.
If this occurs, taxpayers can seek the Commissioner’s discretion under either:
- section 109RD to extend the period to make the minimum yearly repayment; or
- section 109RB to disregard the operation of Division 7A or treat the deemed dividend as a franked dividend.
Conclusion
Unfortunately, the long awaited and long announced changes to Division 7A have not yet been implemented. We hope this occurs soon as Division 7A is in dire need of reform to simplify its operation and ensure more equitable treatment for private groups.
Division 7A is a complex area and it is easy to overlook potential Division 7A issues. It is very important to make sure that you thoroughly review dealings between a company and its shareholders and associates, to make sure you can correctly identify and manage any potential Division 7A issues.
Remember to check your client’s relevant dates, ensure the repayments are made, and do not overlook interposed entities. Refer to The Tax Institute’s company tax time checklist for further information.
Business expenses
Temporary business expense measures
Loss carry-back tax offset
The loss carry-back rules allow eligible companies with an aggregated turnover of less than $5 billion to receive a refundable tax offset by carrying back losses made between the 2020–21 through to the 2022–23 income year to offset tax paid in earlier income years. The offset represents the amount of tax the company would have saved if it were able to deduct those losses in the earlier income years.
The amount of the loss carry-back tax offset is limited to the lesser of either:
- the tax liability for each year the company carries the loss back to; or
- the surplus in the company’s account on the last day of the 2022–23 income year.
If the company has claimed a loss carry-back tax offset during the income year, the amount of the offset should be included in:
- Label S of question 13; and
- Label E ‘Refundable tax offsets’ in the Calculation statement.
The ATO have provided a tool to help companies work out their eligibility to claim the offset and to determine the maximum amount of the offset. The ATO tool can be found in our Company Tax Time checklist.
Temporary full expensing
The temporary full expensing regime is currently legislated to end on 30 June 2023. While in effect, it supersedes the instant asset write-off rules in section 328-180 and section 40-82 of the Income Tax Assessment Act 1997 until 1 July 2023.
To fully expense a depreciating asset in the 2022–23 income year, the asset must be first held by 30 June 2023 and also be first used or installed ready for use by the same date. If either of these events occurs after 30 June 2023, the asset will not be eligible for temporary full expensing.
If the taxpayer’s aggregated turnover is $5 billion or more, the alternative income test may enable the taxpayer to use temporary full expensing. Further information on the alternative income test can be found on the ATO website.
Small Business Entities or SBEs using the simplified depreciation rules only need to complete the following items under Label X of Question 6:
- 9S Temporary full expensing deductions — this is the total amount of temporary full expensing deductions claimed at label 5K depreciation expenses; and
- 9T Number of assets you are claiming for — this is the total number of assets for which the taxpayer has claimed temporary full expensing.
Taxpayers who inadvertently enter an incorrect amount at labels S and T will not be penalised where they have made their best attempt to determine the amounts they are claiming.
Opting out of Temporary Full Expensing
Businesses, not using the simplified depreciation rules, are able to opt out of the temporary full expensing regime for an income year on an asset by asset basis.
Where a business has not applied the temporary full expensing rules for an asset in an income year they must notify the ATO:
- in the approved form; or
- in the 2023 tax return by completing the relevant labels.
Once a taxpayer has made the choice to opt out, it cannot be revoked.
Technology investment boost
The small business technology investment boost will allow SBEs with an annual turnover of less than $50 million to deduct an additional 20% of the expenditure incurred on expenses and depreciating assets for the purposes of the business’ digital operations or digitising their operations.
To be eligible for the bonus deduction, the following conditions must be met:
- the expenditure must be eligible for a deduction under another provision of the tax law;
- the expenditure must be incurred between 7:30pm AEST on 29 March 2022 and 30 June 2023; and
- if the item is a depreciating asset, it must be first used or installed ready for use by 30 June 2023.
Examples of eligible expenditure includes:
- digital enabling items such as computer hardware, software, and internet costs;
- digital media and marketing expenses including audio and/or visual content and web page design;
- e-commerce expenditure such as portable payment devices, platforms that enable online transactions, subscriptions to cloud-based services, and digital inventory management; and
- cyber security expenses.
Certain expenses, such as salary and wages, financing costs and training and education costs, are not eligible for the bonus deduction.
There is a limit to the bonus deduction of $20,000 per income year.
Entities must claim the bonus for both the 2021-22 and 2022-23 income years in the 2022-23 income tax return.
Skills and training boost
Eligible SBEs with an annual turnover of less than $50 million will also be able to deduct an additional 20% of the expenditure incurred on external training for employees under the skills and training boost.
To be eligible for the bonus deduction, the following conditions must be met:
- the expenditure must be for training employees, either in-person in Australia, or online;
- expenditure must be charged, directly or indirectly, by a registered training provider and be for training within the scope of the provider’s registration;
- the registered training provider must not be the small business or an associate of the small business;
- the expenditure must already be deductible under the taxation law;
- the expenditure must be incurred between 7:30pm AEST on 29 March 2022 and 30 June 2024; and
- the expenditure must be for the provision of training, where the enrolment or arrangement for the provision of the training occurs at or after 7.30pm AEST on 29 March 2022.
Tax practitioners should note that the bonus deduction is not available for the training of non-employee business owners such as sole traders, partners in a partnership and independent contractors.
Entities must claim the bonus for both the 2021-22 and 2022-23 income years in the 2022-23 income tax return.
Like the small business technology investment boost, at the time of filming, the skills and training boost has not been legislated. Once again, it is important for the boost to commence before 30 June 2023 so taxpayers are able to claim the deductions and the ATO can make any necessary changes to their tax form and surrounding guidance.
Business expenses
Now let’s discuss some other business deductions for companies that aren’t temporary measures.
Bad debts
For a debt to be written off as bad, the debt must be declared bad before the end of the financial year. This requires a decision to made, in writing, before the end of the income year, that the debt has been written off.
A decision also needs to be made that the debt is in fact ‘bad’ at the time it is written off, and not merely ‘doubtful’. For a debt to be bad, it needs to be determined that the debt is unlikely to be recovered through reasonable and commercial attempts. Although recovery attempts do not require formal proceedings to have commenced, taxpayers will need sufficient evidence to demonstrate that reasonable attempts to recover have been made.
Deductions for bad debts are recorded at label E of question 6 in the company’s tax return.
Taxpayers using an accruals basis may also be able to claim a decreasing GST adjustment for a bad debt if:
- a taxable sale was made and GST was paid in relation to that sale;
- consideration in whole or in part was not received for the taxable sale; and
- the debt has been overdue for 12 months or more, and has been written off as bad.
It should also be noted that there are special bad debt deductions for:
- tax consolidated groups and multiple entry consolidated groups or MEC groups;
- trusts; and
- circumstances where the TOFA rules apply.
Further ATO guidance about how these requirements are to be satisfied can be found Taxation Ruling TR 1999/9, LCR 2019/1 and GST Ruling GSTR 2000/2.
Repairs and maintenance
Costs of repairs to property, plant, machinery or equipment used solely for producing assessable income or in carrying on a business are deductible.
However, costs incurred to remedy defects, damage or deterioration in existence at the time of acquisition of an asset are considered to be capital in nature and are not able to be immediately deducted. Similarly, expenditure incurred to improve or alter an asset is of a capital nature and is not deductible.
It is important that taxpayers retain records showing full details of the nature of the expense incurred and the cost of the repairs.
Legal expenses
When determining whether a legal expense is deductible, or if it needs to be capitalised and claimed over a number of years, it is necessary to examine the nature and purpose of the expense incurred.
Broadly, legal expenses are immediately deductible where they are incurred in the course of, or as a consequence of, the taxpayer’s income-earning activities. The legal expenses must have more than a peripheral connection with the taxpayer’s income-earning activities. A common example can include legal fees incurred when negotiating and drafting contacts and/or leases for business activities. Other examples may include legal fees associated with resolving some disputes with employees, such as contractual negotiations, or claims of wrongful dismissals.
Legal expenses will be capital in nature and deductible over a period of 5 years under the black hole expenses provision contained in section 40-880 of the 97 Act if they have a tenuous connection with the taxpayer’s income-earning activities. Legal expenses are also capital in nature when they are incurred in relation to the structure of the business. Examples of legal expenses that are capital in nature include legal fees relating to a restructure of the business, or amending the company’s constitution.
Superannuation
From 1 July 2022, the superannuation guarantee rate rose from 10% to 10.5%. The rate will increase by another 0.5% to 11% from 1 July 2023, and another 0.5% each year until it reaches 12% from 1 July 2025.
Employers can claim a deduction for some superannuation contributions made on behalf of employees. These include:
- Super Guarantee contributions paid by the quarterly due date to an employee’s nominated super fund;
- Mandatory contributions under an industrial award or determination, or a notional agreement preserving a state award;
- Non-mandatory employer contributions and contributions made under an effective salary sacrifice arrangement; and
- Carry-forward late payments made for a superannuation contribution obligation in a future quarter.
To be eligible to claim a tax deduction, the superannuation guarantee contribution payment must be made to the employee’s complying superannuation fund account by the quarterly due date. Remember, contributions are considered to be paid on the date the fund receives it, not the date the clearing house receives it from the employer, unless the employer is a small business using the Small Business Superannuation Clearing House.
Superannuation amounts that are not able to be deducted include:
- superannuation guarantee charge payments (which are amounts required to be paid if a superannuation contribution is not paid by the due date);
- ineffective salary sacrifice arrangements, such as arrangements that include salary and wages, leave entitlements, or bonuses and commissions;
- contributions to a non-complying superannuation fund; and
- amounts that are the employee’s personal or non-concessional contributions that the employee asks their employer to pay on their behalf.
Non-deductible expenses
There are a number of other expenses that are not deductible. Examples include:
- fines and penalties such as those that may be imposed on a company by a regulator;
- expenses incurred for entertaining clients;
- gifts, if they are related to entertainment or not reasonably expected to generate future earnings;
- the GST component of expenses;
- private expenses; and
- the amount of an expense that relates to personal use of a business item.
Non-deductible expenses can often be misunderstood by your clients who may need further guidance on this point. It is important to remind your clients of expenses that cannot be deducted, and ensure that they have not mistakenly included them as a deductible business expenses.
Employee contractor
The ATO has released draft taxation ruling TR 2022/D3 and draft practical compliance guideline PCG 2022/D5 concerning the Commissioner’s view on the employee-contractor distinction in light of the recent High Court decisions in the Jamsek and CFMEU cases.
The cases were seen by many in the industry as landmark cases that have shifted the relevant test from a consideration of the totality of the relationship between an employer and a worker, to a sole consideration of the terms of the contract where the contract is comprehensive.
Now is a good time to explore with your clients how the ATO will allocate compliance resources when looking at the employee-contractor relationship. Broadly, there are proposed to be four risk zones:
- The very low risk zone – where the ATO will not dedicate compliance resources;
- The low risk zone – where compliance resources may be applied to test whether the worker meets the extended definition of employee under the Superannuation Guarantee (Administration) Act
- The medium risk zone – where compliance resources may be applied to test the correct worker classification, but with a lower priority; and
- The high risk zone – where the ATO will dedicate compliance resources to test the worker’s classification.
Employers should note that the very low, low and medium risk zones will require them to seek advice on the worker’s classification. Although this can be done for each group of like workers, it is a potential extra compliance cost that may need to be taken for employers who want greater certainty that their arrangements with independent contractors fall into a lower risk zone.
Employers will also need to retain relevant evidence to demonstrate the worker’s classification, as the ATO may check to ensure that the requirements for their risk zones are satisfied.
Salary and wages
The amount reported at Label 8D ‘Total salary and wage expenses’ should reflect the amount of salary and wage expenses disclosed in the Income Statement (that is, Item 6 of the tax return forms).
Label 8D includes the following amounts:
- Salary and wages;
- Remuneration to directors;
- Salary and wage components of any expenses reported at Label 6A ‘Cost of Sales’, being:
- Allowances;
- Bonuses;
- Payments to casual staff;
- Retainers and commissions to people on a retainer;
- Workers’ compensation paid through payroll;
- Direct and indirect labour costs;
- Annual, long service leave and sick leave;
- Lump sum payments
- Other employee benefits; and
- Overtime pay
If the company is a private company, any relevant amounts paid to a current shareholder, director or an associate of such a person, should be reported at this Label, as well as Label 8Q ‘Payments to associated persons’.
The following amounts should not be included at Label 8D:
- Agency fees;
- Contract and subcontract payments;
- Service fees;
- Employer superannuation contributions;
- Reimbursements or allowances for travel;
- Management fees;
- Consultant fees; and
- Wages or salaries reimbursed under a Government program
Conclusion
The topics that we have covered in this session and the accompanying checklist are not an exhaustive list of tax provisions that you will encounter with all your clients. The checklists and this recording serve as a reminder of some of the traps that practitioners and taxpayers may encounter when preparing the 2023 company tax return.
For further tips, tools and resources to help you to assist your clients, please visit the Tax Institute’s website.