Can smaller businesses get a better tax deal?...& more on our 2014 October News Update14-Oct-2014
Are big companies getting a better tax deal than you? And how you can fight back
Hauled in before a Senate enquiry, media mogul Kerry Packer famously said, “Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!”
The Tax Justice Network - Australia, recently created headlines when they released a report into the practices of the top 200 ASX listed entities ahead of the G20 summit. The report revealed that:
• Nearly 1/3 have an average effective tax rate of less than 10%
• 57% have subsidiaries in tax havens or low taxing jurisdictions
• 60% report debt levels in excess of 75% of equity.
What this equates to is that 29% of ASX listed entities have an effective average annual tax rate of 10% or less and 14%, including James Hardie, have an effective tax rate of 0%.
21st Century Fox has a reported 117 subsidiaries in tax havens or low taxing jurisdictions. Responding to the headlines Mr Murdoch tweeted “NO tax avoidance by News, Fox or any Murdochs in Australia. Courts ruled, so move on!”
Tax is like any other cost in your business. It should be managed effectively so you don’t pay any more than you need to.
But here’s the problem, a company has to make a profit to pay company tax. Coming out of the GFC where jobs were shed and investments shelved, it was a bit harder to do than the boom times – particularly if you weren’t in the resources or banking sectors whose buoyancy made Australia’s headline economic figures look a whole lot better than they felt for the rest of the economy. Plus, if you are investing in and growing a business, this consumes profit. Unless you look below the surface, the tax paid is an ineffective measure of the contribution a company makes.
So the question is, is it likely that the biggest companies are paying a lot less tax than the average Australian business? The answer is yes, of course. The reason is simple, tax is a local jurisdiction issue and international corporations have the capacity to look across the tax minimisation opportunities globally, not just locally. As long as everyone operates within the local laws, they are not doing anything illegal by minimising tax. Plus, Government’s often offer tax incentives for large entities to establish in their region for the stimulus and job opportunities they provide.
The issue for Government’s across the board is what happens when it’s no longer minimisation but evasion - transparency is one issue.
The recent G20 endorsed a common reporting standard for the automatic exchange of information. The new reporting standard will be introduced in Australia in 2017 with the first exchange a year later.
It’s a debate that is playing out globally and anyone with a business with international connections, should take the time to review their current position across different entities in different locations and ensure that they are not at risk of being drawn into a widening net.
Got international connections? How to avoid problems
Whether you’re in business or an individual taxpayer, if you have funds flowing between countries, the tax office is going to be interested in you. For individuals, Project Do It provides an opportunity to voluntarily disclose unreported foreign income and assets before the tax office discovers them.
For business, trigger points include:
• Excessive debt levels in Australia. The thin capitalisation rules place a limit on the level of interest and other debt deductions that can be claimed in Australia when Australian operations are heavily funded by debt rather than by equity. Legislation recently passed by Parliament retrospectively tightens these rules further for entities with very large debt deductions ($2m and above).
• Excessive costs paid by local subsidiaries. The Government is particularly concerned with arrangements where Australian entities transfer intellectual property to a low tax jurisdiction for a relatively small amount of money and then pay considerable sums for the use of those assets on an ongoing basis. Large management fees paid by Australian entities are another trigger for the ATO.
• Use of tax havens or low taxing jurisdictions.
Can smaller businesses get a better tax deal?
The answer is ‘sometimes’ but you need to be proactive. Larger companies tend to spend more on advice to not only identify current opportunities but to understand the tax impact when acquiring new businesses, selling assets, structuring or restructuring. We’ve seen many scenarios where businesses seek advice on tax issues once contracts have been signed – at the tidy up stage. It’s too late at this stage to improve the tax position or unwind a problem.
• Understand what’s available to you. Concessions exist for small business entities and other entities if you know where to look. Often business just doesn’t have the time or feel the need to invest to explore anything beyond the compliance basics.
• Get your structures right. A lot of companies fall into the trap of looking at their structure once they have achieved a certain level of growth or decide it’s time to make significant changes – like bringing
in investors or selling part of the business. By this time the cost of changing structure is prohibitive. If you put a structure in place at the start that creates flexibility and tax efficiency, yes it will cost a few more dollars but you will enjoy the tax benefits as you grow plus your structure will accommodate change as your business builds out.
• Ensure that income and profits flow effectively. This is a follow on from structure. Once you have the right structure you can optimise the tax efficiency of how income flows to you providing you plan this in advance.
Can individuals get a better tax deal?
Individuals have fewer choices when it comes to minimising tax but there are still opportunities depending on your circumstances. Salary and wage earners will have limited flexibility over direction of their income. Salary packaging can provide some tax benefits. Beyond that however it will be more a matter of how you structure your other investments to optimise your tax outcome. This applies at both an income and capital gains level. The use of trust structures, appropriate negative gearing, and maximising the benefits of franking credits can all assist in reducing your tax exposure.
Business owners and the self-employed have greater flexibility over how they receive their income and you should take advantage of this. Smart tax planning causes income to fall in the right places and maximises the use of lower marginal tax rates.
All of this requires some focus and attention early in the process. Don’t wait until your tax liability is ‘hurting’ you. Take advice early and have a tax plan to ensure that your tax outcomes are as efficient as possible.
What happened to all of those Budget cutbacks?
If you’re confused about what happened to all of those announced Budget cutbacks then you’re not alone. Many of the Government’s initiatives are stalled in the Senate awaiting final negotiation. Here’s a quick summary of where everything is up to:
• 2% debt tax on high income earners from 1 July 2014 (and FBT rate increase from 1 April 2015)
• Superannuation guarantee rephased - now SG will remain at 9.5% until 1 July 2021
• Mining tax repealed
• The company loss carry back rules abolished
• The instant asset write off threshold of $6,500 for small business entities under the simplified depreciation rules has reduced back to $1,000 from 1 January 2014
• The accelerated deduction of $5,000 for motor vehicles has been removed from 1 January 2014
• Schoolkids bonus repeal - moved to 31 December 2016 and a means test applied until the repeal date• Low income superannuation contribution repeal delayed until the 2017/2018 financial year onwards• Income support bonus repeal delayed until 31 December 2016
What’s still up for debate?
• Co-payments for visiting a doctor• Fuel excise increase• Retirement age increase to 70• Changes to pension indexation• Tightening of access to family tax benefits• Removal of add-on family tax benefit for additional children• Cuts to R&D incentive• 6 month wait for employment benefits• Deregulation of University fees
The Treasurer has flagged that he will seek savings elsewhere – so watch this space.
Contact us now to see how our accounting experts can help.