Single Touch Payroll (STP) for closely held payees

STP has applied to small employers (fewer than 20 payees) since 1 July 2019. However, until 30 June 2021, small employers have been exempt from reporting amounts paid to closely held payees through STP. This exemption recognised that, in many family-run businesses, family member payments may have been irregular and may only have been formalised after year-end. The exemption includes the usual family members as well as director-employees and trust beneficiaries of small businesses.

This exemption did not extend to arm’s length employees of small employers. In such cases, small employers are already required to report through STP.

From 1 July 2021, this exemption will no longer apply; that is, the two-year deferral will come to an end. This means that, where the payer is already reporting arm’s length employees through STP, payments to closely held payees will now also need to be reported. For those payers that have been able to enjoy the deferral completely on the basis that they only had closely held payees, they will now need to start reporting these payments through STP.

Reporting of payments must be made either on or before the date of payment or quarterly at the time the BAS is due (includes any lodgment deferrals applicable to the activity statement). It is possible to report a reasonable estimate of the amount that reflects the circumstances of the closely held payee, provided the circumstances are similar to those in the last year the employer completed a finalisation declaration for the closely held payee or last finalised a payment summary annual report (PSAR). In reporting a reasonable estimate in this case, the ATO will accept year-to-date figures being 25%, 50%, 75% and 100% of the previously reported amount for each quarter (e.g. 25% of payments in the year ended 30 June 2020 when reporting for the September 2021 quarter, 50% of payments when reporting for the December 2021 quarter etc.).

Corporate tax rate and franking rates reduce to 25%

Companies that are base rate entities will be subject to a corporate tax rate of 25% in the 2021–22 income year and future years. This is down from the rate of 26% that applied for the 2020–21 income year.

A base rate entity is a company that has an aggregated turnover of less than $50 million and no more than 80% of their assessable income is base rate entity passive income.

As mentioned in last week’s preamble, the reducing corporate tax rate can have an impact on the franking and distribution of dividends. Profits taxed at a higher rate in one year may only be able to be franked at a lower rate in a later year. So, while the reducing corporate tax rate may, at first blush, be something to think about when completing the first quarter activity statements for 2021–22, it is something to consider before 30 June 2021 in the context of dividend strategies and franking.

Superannuation changes

Superannuation Guarantee Charge (SGC) rate increase from 9.5% to 10%

While there has been much press around the debates regarding the possible deferral of increases to the rate of SGC, most practitioners will be fully aware that the increase in the SGC obligation from 9.5% to 10% applies from 1 July 2021. Nonetheless, some care may need to be taken before simply increasing superannuation contributions for every employee from 1 July 2021.

While other changes announced in the recent Federal Budget 2021–22 (e.g. the abolition of the $450 monthly minimum income threshold before SGC contributions are required) don’t apply before 1 July 2022, the requirement to make superannuation contributions is still dependent on whether the payee is an employee or otherwise covered by SGC obligations. Not all ‘contractors’ are excluded from the SGC requirement, in particular if the contract is principally for the labour of the contractor. Directors, entertainers, sportspeople and artists are also covered.

Difficulties in interpretation may emerge in determining whether someone is engaged on a superannuation-inclusive or salary plus superannuation package. In those cases, regard may need to be had to award obligations as well as the employment contract. Renegotiating the payment arrangements under the contract may be an option pre-30 June 2021.

Indexation of contributions caps

The superannuation concessional contributions cap increases from $25,000 to $27,500 with effect from 1 July 2021. Similarly, the non-concessional contributions (NCC) cap will increase from $100,000 to $110,000 from 1 July 2021.

Firstly, it is crucially important not to confuse the contribution limits for the current year when making last minute contributions prior to 30 June 2021. It is easy enough to make this mistake in the rush of year-end planning only to find that the three-year bring forward rule for NCCs has been triggered potentially limiting future non-concessional contributions. Or that an excess concessional contribution has triggered an unwanted and unplanned tax liability.

On the other hand, the increase in contribution limits may encourage some clients to defer retirement until after 1 July 2021 to take advantage of another year of (increased) contributions.

Indexation of transfer balance cap from $1.6m to $1.7m

Another superannuation limit that is increasing is the transfer balance cap (TBC). This is the amount that a member can have at commencement of a superannuation pension in their superannuation fund, the income and gains from which will be exempt from tax. For clients considering retirement, this is a good reason to defer commencing a pension until after 30 June 2021 as this will mean income and gains on an additional $100,000 of assets backing a superannuation pension can be free from tax.

Any income or gains on amounts in excess of this limit in the fund at the commencement of the pension will continue to be subject to tax at the 15% superannuation rate (subject to any CGT discount that may apply). Source: Tax Institute

1. TS 1: Salary Packaging Private Motor Vehicles
   Makes private motor vehicles tax deductible (average $3,000 tax saving pa).
2. TS 12: Concessional Super Contributions
   $25,000 deductible contributions cap (per taxpayer).
3. TS 32: Change Ownership of Assets
   Can create upfront or ongoing tax deductions (or both).
4. TS 85: $30,000 Asset Write-Off
   Upfront deduction for depreciating assets.
5. TS 86: Employee Meal Expenses on Business Premises
   Makes private meals tax deductible (average $5,000 pa).
6. TS 101: Reducing Super Guarantee Payments
   Eliminates super guarantee payments to contractors (saving the 9.5%).
7. TS 114: Share Buybacks
   Enables shareholders to access companies paid up capital and retained earnings.
8. TS 131: Companies
   27.5% company tax rate (and reducing to 25%).
9. TS 146: Transferring Business Premises into SMSF
   Provides asset protection benefits plus tax savings on rental payments made.
10. TS 190: Utilise Business Goodwill to Pay Out Your Private Mortgage
    Saves the average business owner $10,000 pa in tax.

Profit Improver Strategy | Raise Your Prices 10%

Raising your selling prices will increase sales when your product or service has an inelastic demand curve i.e. when you raise prices and there is minimal or no change in volume sold. This is a profitable strategy when higher prices produce greater gross profits due to increased profit per unit, even if volume has fallen.

Additional benefits of increasing prices include:

• Raising your prices can move you to a more upmarket clientele.
• Allows you to distinguish yourself from your competition.
• Increases the perception of quality so can actually lead to increased sales volumes (in some cases).
• Eliminates low quality price sensitive customers.
• Allows you to sustain your desired profit margins.
• Price increases may position your product or service as a ‘premium product’.

Factors to consider:

• Determine whether your product or service has an inelastic demand curve – there is no point increasing your selling prices if it results in a substantial decrease in volume sold.
• Find out what your competitors are offering and their current pricing.
• Determine your objective in increasing prices – i.e. to increase sales, increase gross profits, increase the perception of quality, etc.
• Calculate the financial effect of higher prices and lower volumes on your gross profit and net profit.
• Increasing selling prices often requires the business to increase their service levels at the same time.
• Consider the effect of increasing prices on business reputation, brand quality, and credibility.

Case Study | Small Business Saves $8,108 Tax

Peter is a small business owner who wants to save tax and reduce his child maintenance payments.

Facts:  

• Peter’s business has a taxable income of $77,000 and is growing (taxable income is expected to double next year).
• Peter is divorced and pays child support of $12,000 per year.

Accountant’s Advice:

• Tax Strategy 2: Home office occupancy costs – business operated from home (seeing clients, administration, etc.).
• Tax Strategy 105: Rollover from sole trader to company – Move to company structure for asset protection purposes and to take advantage of the 27.5% company tax rate.
• Tax Strategy 123: General pool balance less than $30,000 – Write-off the $30,000 general pool balance.
• Tax Strategy 161 – Gift to clients.

Results:

• Peter saves $8,108 tax (taxable income reduced by $23,501).
• Child support payments are reduced by $6,000 pa.
• Accountant receives tax planning fees of $1,700 (20% of the tax saved).

If you would like to reduce the amount of tax you are paying, please give us a call. 90% of the time, we can legally reduce your tax liability.

Tax Savings Strategy 221 | Employee Remuneration Trusts

An Employee Remuneration Trust (ERT) arrangement involves a trust being established to facilitate the provision of payments and/or other benefits to employees of an employer. The trustees provide the benefits at the direction of the employer. This strategy is useful to retain and reward employees that are critical and important to the business’s success.

A contribution is deductible to an employer where:

• It is an irrevocable payment of cash.
• The employer reasonably expects their business to benefit from the contribution via an improvement in employee performance, morale, efficiency or loyalty, and
• The contribution is intended to be entirely dissipated in remunerating employees of the business within a relatively short period of time (less than 5 years).

The contributions to an ERT will not be deductible when the contribution is applied for the benefit of owners, controllers or shareholders or when the contribution is capital in nature. The prepayment provisions also need to be considered.

Business Structure Strategy | Limited Partnership

A limited partnership is one where the liability of one or more partners for the debts and obligations of the business is limited. A limited partnership consists of one or more general partners (whose liability is unlimited) and one or more limited partners.

In a limited partnership:

• The general partners manage the business and have the power to enter binding agreements on behalf of the partnership; their liability for the debts and obligations of the limited partnership is unlimited.
• The limited partners are passive investors; they must not manage the business and their liability for its debts and obligations is limited in proportion to the amount they have agreed to contribute to the partnership.

Implementation process:

1. Depending upon the state, limited partnerships are either regulated by the relevant state’s Partnership Act or Limited Partnership Act. Where a Limited Partnership Act applies then limited partnerships generally only come into existence when the partnership is registered with the state government body (and the applicable fee paid).
2. Limited partnership agreements should be drafted by a solicitor.

Profit Improver Strategy | Upselling

Upselling can involve marketing more profitable services or products, or just exposing the customer to other options that were not considered. Upselling is more successful when the up-sellers know more about the individual customer and understand what the customer values and wants. This information includes the customer’s background, budget, preferences, interests, and previous buyer history.

Research shows that approximately 25% of customers will purchase the recommended upsell product or service. Most companies teach their employees to upsell products and services and to offer incentives and bonuses to the most successful personnel. Care must be taken with upselling as a poorly trained employee can offend a regular and loyal customer and damage their trust and credibility. Also, with some businesses, such as car sales, the customer’s perception of the attempted upsell can be viewed negatively and impact on the desired result.

The secret to successful upselling is:

• Make the upsell after the original purchase.
• Make the upsell relevant to the customers original purchase.
• Limit upselling recommendations. i.e. only one or two.
• Discount the products/services in the upsell.
• Successful upselling begins with a solution to the customer’s problems – always add value.
• Never try and upsell items that are more than 25% of the original order.

If you would like to reduce the amount of tax you are paying, please give us a call. 90% of the time, we can legally reduce your tax liability. 

Smartwatches are wearable computers in the form of wristwatches. Their functionality is similar to smartphones and includes:

• Mobile apps.
• Mobile operating systems.
• Wi-Fi/Bluetooth connectivity.
• Portable media players, with FM
  radio and playback of digital audio and video files.
• Making and receiving phone calls.
• Sending and receiving emails.
• Digital cameras.
• Heart rate monitors.
• MicroSD cards (which are recognised as storage
  devices by many other kinds of computers).

The ATO deems smartphones to be portable electronic devices and as such they are an exempt fringe benefit when used primarily for the employee’s employment. Businesses can provide these devices to employees under salary sacrifice arrangements.

Even when employees salary sacrifice the cost of the items with their employers, they still benefit from saving the GST and having an upfront tax saving (instead of purchasing the item and depreciating it over several years in their tax return).

Business Structures Strategy | Limited Company (Limited by Shares)

Proprietary limited companies are the most common company structure in Australia and account for 98.5% of all companies. Generally, they are the most appropriate company structure for small businesses.

A proprietary limited company (also known as a Pty Ltd company), cannot raise capital from the public, and is restricted to a maximum of 50 non-employee shareholders.  Shareholders personal assets are protected due to the companies limited liability status.

The advantages of operating a business through a proprietary limited company include:

• 30% tax rate (standard company tax rate).
• 27.5% tax rate for companies with a turnover less than $50m pa (falling to 25% in 2021/22).
• Limited liability – this ensures shareholder liability is limited to the capital invested in the company.
• Ability for investors to pool their investment funds together.
• Ability to introduce new shareholders, and change current shareholders.
• Easier succession planning (as companies have perpetual succession).
• Extra tax saving opportunities/strategies. For example, the owners’ private motor vehicles can be salary packaged by a company, but not a sole trader.
• Privacy – the ability to keep the company’s owners (shareholders) secret.

The main disadvantages of operating through a company are:

• It doesn’t receive the 50% general capital gain discount like individuals.
• Extra compliance and regulatory costs (i.e. annual ASIC fee of $263).
• Directors legal obligations and duties need to be considered.

Profit Improver Strategy | Lower Your Prices by 10%

Lowering your selling prices will increase sales when your product or service has an elastic demand curve i.e. when you slightly lower your prices, volume goes up substantially. This will be a profitable strategy if lower prices produce greater gross profits due to increased sales volume even though the profit per unit has fallen.

Additional benefits of lowering prices include:

• Pricing lower than your competition demonstrates to customers seeking value and affordability that you are a bargain.
• If you have a large share of the market and can survive on low margins, lowering your price makes it more difficult for your competitors to compete.
• Prevents new competitors from entering the market, as they will have start-up costs that increase their overheads and lower their profit margins at a time when they have low sales volumes.
• Attracting new customers without a large marketing plan.

Implementation process:

1. Determine whether your product or service has an elastic demand curve – there is no point lowering your selling price unless it substantially increases volume sold.
2. Find out what your competitors are offering and their current pricing.
3. Determine your objective in lower prices – i.e. to increase sales, increase gross profits, wipe out the competition, prevent new competitors entering the market, etc.
4. Calculate the financial effect of lower prices and higher volumes on your gross profit and net profit.
5. Lowering selling prices often requires the business to reduce costs at the same time.
6. Consider whether reducing prices will reduce the business’s reputation, brand quality, or credibility.

Limit the initial selling price reduction to 10%, and monitor the effect on sales, gross profits, and net profit.